UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
|X| Quarterly Report Pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
For the quarterly period ended June 30, 1999
or
|_| Transitional Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from to
Commission file number 1-14355
24/7 Media, Inc.
(Exact name of registrant as specified in its charter)
Delaware 13-3995672
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
7319
(Standard Industrial Classification Code)
1250 Broadway, New York, NY 10001
(Address of principal executive offices) (Zip Code)
(212) 231-7100
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant has filed all reports required to
be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at August 11, 1999
Common Stock, par value $.01 per share 20,228,627 Shares
<PAGE>
24/7 MEDIA, INC.
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Condensed Financial Statements (unaudited)
Consolidated Condensed Balance Sheets........................................3
Consolidated Condensed Statements of Operations..............................4
Consolidated Condensed Statements of Cash Flows..............................5
Notes to Interim Consolidated Condensed Financial Statements.................6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.............................................14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.....................................................27
Item 2. Changes in Securities and Use of Proceed..............................27
Item 3. Defaults Upon Senior Securities.......................................28
Item 4. Submission of Matters to a Vote of Security Holders...................28
Item 5. Other Information.....................................................28
Item 6. Exhibits and Reports on Form 8-K......................................28
Item 7. Signatures............................................................29
2
<PAGE>
24/7 MEDIA, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------------- -------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ..................................... $ 97,116,000 $ 34,049,000
Accounts receivable, net of allowance for doubtful
accounts of $283,000 and $268,000, respectively ........... 18,061,000 8,678,000
Prepaid expenses and other current assets ..................... 1,979,000 550,000
------------- -------------
Total current assets ........................ 117,156,000 43,277,000
------------- -------------
Property and equipment, net ..................................... 9,595,000 2,099,000
Goodwill, net ................................................... 8,392,000 10,935,000
Intangible assets, net .......................................... 32,000 16,000
Investments ..................................................... 42,971,000 6,566,000
Deferred compensation to third parties .......................... 3,244,000 --
Other a ssets ................................................... 435,000 215,000
------------- -------------
Total assets .............................................. $ 181,825,000 $ 63,108,000
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .............................................. 12,687,000 5,797,000
Accrued liabilities ........................................... 2,897,000 5,201,000
Loan payable .................................................. -- 593,000
Short term credit line ........................................ -- 180,000
Current installments of obligations under capital leases ...... 22,000 82,000
Deferred revenue .............................................. 758,000 134,000
------------- -------------
Total current liabilities ................... 16,364,000 11,987,000
------------- -------------
Obligations under capital leases, excluding current installments 49,000 34,000
Stockholders' equity:
Common stock, $.01 par value; 70,000,000 shares
authorized; 20,207,800 and 16,435,494 shares
issued and outstanding, respectively ........................ 202,000 164,000
Additional paid-in capital .................................... 220,620,000 92,003,000
Deferred stock compensation ................................... (288,000) (345,000)
Accumulated other comprehensive income ........................ 20,000 --
Accumulated deficit ........................................... (55,142,000) (40,735,000)
------------- -------------
Total stockholders' equity ................................ 165,412,000 51,087,000
------------- -------------
Commitments and contingencies
Total liabilities and stockholders' equity ................ $ 181,825,000 $ 63,108,000
============= =============
</TABLE>
See accompanying notes to consolidated condensed financial statements.
3
<PAGE>
24/7 MEDIA, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
--------------------------- -------------------------
1999 1998 1999 1998
---- ---- ---- ----
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Total revenues ................................ $ 17,155,000 $ 3,971,000 $ 28,605,000 $ 5,175,000
Cost of revenues .............................. 13,062,000 3,156,000 21,858,000 4,108,000
------------ ------------ ------------ ------------
Gross profit .............. 4,093,000 815,000 6,747,000 1,067,000
Operating expenses:
Sales and marketing ....................... 4,454,000 1,704,000 7,948,000 2,403,000
General and administrative ................ 5,220,000 1,988,000 8,732,000 3,400,000
Product development ....................... 320,000 564,000 1,242,000 594,000
Write-off of acquired in-process technology -- 5,000,000 -- 5,000,000
Amortization of goodwill .................. 2,122,000 1,531,000 4,380,000 1,866,000
------------ ------------ ------------ ------------
Total operating expense ... 12,116,000 10,787,000 22,302,000 13,263,000
------------ ------------ ------------ ------------
Loss from operations ...... (8,023,000) (9,972,000) (15,555,000) (12,196,000)
Interest income ............................... 892,000 50,000 1,203,000 76,000
Interest expense .............................. (32,000) (39,000) (55,000) (253,000)
------------ ------------ ------------ ------------
Net loss .................. (7,163,000) (9,961,000) (14,407,000) (12,373,000)
Cumulative dividends on preferred stock ....... -- (152,000) -- (186,000)
------------ ------------ ------------ ------------
Net loss attributable to common stockholders .. $ (7,163,000) $(10,113,000) $(14,407,000) $(12,559,000)
============ ============ ============ ============
Net loss per share - basic and diluted ........ $ (0.37) $ (1.17) $ (0.80) $ (2.02)
============ ============ ============ ============
Weighted average shares outstanding ........... 19,360,778 8,607,872 18,053,643 6,217,004
============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated condensed financial statements.
4
<PAGE>
24/7 MEDIA, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended June 30,
1999 1998
------------- -------------
(unaudited) (unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss ................................................................. $ (14,407,000) $ (12,373,000)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization ......................................... 690,000 252,000
Amortization of debt discount ......................................... -- 154,000
Write-off of acquired in-process technology ........................... -- 5,000,000
Accrued interest on senior convertible notes-related
parties .......................................................... -- 11,000
Imputed interest on note payable-related party ........................ -- 9,000
Amortization of intangible assets ..................................... 4,834,000 1,808,000
Non-cash compensation ................................................. 57,000 508,000
Changes in operating assets and liabilities, net of effect of acquisitions
and dispositions:
Accounts receivable .................................................. (9,085,000) (2,840,000)
Prepaid expenses and other current assets ............................ (1,246,000) (199,000)
Other assets ......................................................... (223,000) (36,000)
Accounts payable ..................................................... 6,467,000 1,125,000
Accrued liabilities .................................................. (2,958,000) 818,000
Deferred revenue ..................................................... 624,000 (42,000)
------------- -------------
Net cash used in operating activities .................... (15,247,000) (5,805,000)
Cash flows from investing activities:
Increase in intangible assets ............................................ (18,000) --
Investments in China.com and ShopNow.com ................................. (11,869,000) --
Cash paid for acquisition, net ........................................... (1,155,000) (1,031,000)
Purchases of property and equipment ...................................... (8,187,000) (616,000)
------------- -------------
Net cash used in investing activities .................... (21,229,000) (1,647,000)
Cash flows from financing activities:
Repayments of loans ...................................................... (1,439,000) (13,000)
Proceeds from secondary offering, net .................................... 100,479,000 --
Proceeds from issuance of mandatorily
redeemable convertible preferred stock ................................ -- 10,060,000
Deferred offering costs .................................................. -- (435,000)
Proceeds from senior convertible notes payable -related parties .......... -- 150,000
Payment of capital lease obligations ..................................... (45,000) (34,000)
Proceeds from exercise of stock options and conversion of warrants ....... 708,000 59,000
(Payments)/proceeds of short-term borrowings ............................. (180,000) 200,000
------------- -------------
Net cash provided by financing activities .................. 99,523,000 9,987,000
------------- -------------
Net change in cash and cash equivalents ...................................... 63,047,000 2,535,000
------------- -------------
Effect of exchange rate changes on cash ...................................... 20,000 --
Cash and cash equivalents at beginning of period ............................. 34,049,000 106,000
------------- -------------
Cash and cash equivalents at end of period ................................... $ 97,116,000 $ 2,641,000
============= =============
</TABLE>
See accompanying notes to consolidated condensed financial statements.
5
<PAGE>
24/7 MEDIA, INC.
NOTES TO INTERIM CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
UNAUDITED
The terms "we" and "our company" mean 24/7 Media, Inc., our subsidiaries and
each of our predecessor entities.
(1) Summary of Operations and Significant Accounting Policies
(a) Summary of Operations
We operate networks of Web sites that enable both advertisers and Web publishers
to capitalize on the opportunities presented by Internet advertising, direct
marketing and electronic commerce. We generate revenues by delivering
advertisements and promotions to Web sites affiliated with us. Our network
properties include The 24/7 Network, The 24/7 Media Europe Network, and The
ContentZone, which are networks of Web sites to which advertisements and
promotions are served. In addition, we provide e-mail based direct marketing
services.
We were incorporated in Delaware on January 23, 1998 as a wholly owned
subsidiary of Interactive Imaginations, Inc. On February 25, 1998, pursuant to
an Agreement and Plan of Merger dated February 2, 1998, we simultaneously
completed the merger of each of Petry Interactive, Inc. and Advercomm, Inc. with
and into us (the mergers, together with a concurrent investment of approximately
$10 million by certain third party investors as well as with an existing
investor of Interactive Imaginations, are referred to as the "Initial Merger").
On April 9, 1998, Interactive Imaginations, our then parent, was merged with and
into us in a manner similar to a pooling of interests. As a result, our
historical results of operations for all periods prior to the Initial Merger
represent those of Interactive Imaginations.
On April 13, 1998, we acquired Intelligent Interactions Corporation, a
corporation that developed and licensed ad serving technology and e-commerce
software. As of June 1, 1998, we acquired CliqNow!, a network of Web sites that
were subsequently folded into The 24/7 Network. On December 29, 1998, we
acquired a 67% interest in CardSecure, Inc., which was subsequently disposed of
on June 1, 1999.
On December 30, 1998, we acquired a 10% common equity interest in China.com
Corporation for approximately $6.6 million. On May 28, 1999, we entered into a
subscription agreement to purchase an additional 450,000 shares for $9.0
million. As of June 30, 1999, $6.75 million had been paid and the remaining
$2.25 million was paid on July 16, 1999. In July 1999, China.com completed its
initial public offering, as a result of which our ownership interest in
China.com was diluted to 7.7%. Our equity investment in China.com is being
accounted for under the cost method of accounting and, accordingly, this
investment is carried as a long-term asset on our consolidated balance sheet.
On January 20, 1999, we invested $3.9 million in the aggregate to purchase a 60%
interest in 24/7 Media Europe, Ltd. (formerly InterAd Holdings Limited), which
operates The 24/7 Media Europe Network. Approximately $1.9 million was paid in
cash to acquire shares directly from 24/7 Europe. The remaining balance included
$1.2 million which was used to acquire shares from existing shareholders and
$846,000 which was subsequently used to repay a loan payable. 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 purchase price in excess of the value of identified tangible
assets and liabilities assumed, in the amount of $2.7 million, was allocated to
goodwill and other intangibles and is being amortized over its estimated useful
life of four years. On June 22, 1999, we made an additional investment of
$500,000 in the common stock of 24/7 Media Europe. Combined with our earlier
investment, this increased our total ownership interest in 24/7 Media Europe
from 60% to 63%.
6
<PAGE>
On March 8, 1999, we acquired Sift, Inc., a provider of e-mail based direct
marketing services, for approximately 763,000 shares of our common stock plus
the assumption of previously-outstanding stock options which were converted into
options to acquire approximately 100,000 shares of our common stock.
On April 5, 1999, we entered into a cross promotion agreement with ShopNow.com.
ShopNow.com provides e-commerce technology and enabling services, an online
shopping network, creative design services, and product fulfillment to more than
29,000 Web sites. Under this agreement, we will promote ShopNow.com's services
to our Web sites while ShopNow.com will promote our advertising representation
and e-mail management services to ShopNow.com's clients. In addition, we will
co-brand our Click2Buy transactional banner service with ShopNow.com's ShopNow
e-commerce Web site, an online shopping destination. Each party will receive a
share of the other party's revenues generated under the cross promotion
agreement. Pursuant to this agreement and the securities purchase agreement we
acquired approximately 18% of ShopNow.com in exchange for consideration of $5.1
million in cash, shares of our common stock with a value equal to $23.6 million
and our investment in CardSecure. As of June 30, 1999 our investment in
ShopNow.com of approximately $29.6 million is being carried under the cost
method of accounting.
The acquisitions of Petry, Advercomm, Intelligent Interactions, CliqNow!,
CardSecure and 24/7 Media Europe have been accounted for using the purchase
method of accounting and, accordingly, their respective financial statements are
included in our consolidated financial statements from their respective dates of
acquisition and, in the case of CardSecure, until its date of disposition.
The acquisition of Sift has been accounted for as a pooling-of-interests and,
accordingly, our historical consolidated financial statements have been restated
to include the accounts and results of operations of Sift. The results of
operations previously reported by the separate businesses and the combined
amounts presented in the accompanying consolidated financial statements are
presented below.
Three months Three months Six months
ended ended ended
March 31, 1999 June 30, 1998 June 30, 1998
-------------- ------------- -------------
(unaudited) (unaudited) (unaudited)
Net revenues
24/7 Media $ 11,071,000 $ 3,701,000 $ 4,777,000
Sift 379,000 270,000 398,000
------------ ------------ ------------
Combined $ 11,450,000 $ 3,971,000 $ 5,175,000
============ ============ ============
Net income (loss)
24/7 Media ($ 7,263,000) ($ 9,838,000) ($12,136,000)
Sift 19,000 (123,000) (237,000)
------------ ------------ ------------
Combined ($ 7,244,000) ($ 9,961,000) ($12,373,000)
============ ============ ============
7
<PAGE>
We have restated our results of operations for the three and six month periods
ended June 30, 1998 by combining Sift's financial statements for the three and
six month peroids ended May 28, 1998 (Sift's third quarter of fiscal 1998) with
our consolidated financial statements for the three and six month periods ended
June 30, 1998. The three and six months ended June 30, 1999 include both our
company's and Sift's results of operations for the same period. We have restated
the consolidated balance sheet as of December 31, 1998 to include our balance
sheet and Sift's balance sheet as of December 31, 1998. An adjustment has been
made to stockholders' equity as of December 31, 1998 to record Sift's results of
operations for Sift's quarter ended November 30, 1997 and one month ended
December 31, 1998. The equity accounts of the separate entities were combined.
As the common stock and additional paid in capital accounts of the combining
enterprise exceeded the par value of the common stock issued in the business
combination, the excess was added to our additional paid in capital. There were
no significant transactions between our company and Sift prior to the
combination.
On April 30, 1999, we entered into a co-branded credit card agreement with Fleet
Credit Card Services, L.P., whereby we are working jointly with Fleet to develop
and market Fleet products and services and to solicit applications from Internet
users. The agreement calls for advance payments by Fleet of approximately $32
million over a five year period subject to our company providing a guaranteed
minimum level of impressions as set forth in the agreement.
In March 1999, we signed an exclusive agreement with NBC-Interactive
Neighborhood, or NBC-IN, that allows us to sell advertising on NBC network
television stations and their associated Web sites at the local market level.
Under the terms of the agreement, we will recruit, train and staff sales and
support personnel who will operate out of the local NBC stations as well as in
our regional offices. We will also jointly provide ad sales consulting and
regional representation services to more than 100 NBC stations that are
currently affiliated with NBC-IN.
We will collaborate with NBC-IN on the development of advertising packages that
leverage the reach and brand-building strengths of NBC local television with the
direct response data collection and marketing functionality of NBC's local
station Web sites. Initial launch markets include NBC-owned and operated
stations in New York, Los Angeles, Chicago, Washington, D.C., Dallas and San
Diego with initial plans to follow in an additional 14 broadcast station
markets. In accordance with the terms of the agreement, we will recognize our
commission income only, using a sliding scale commission formula based upon the
aggregate advertising payments for both on-air and Internet advertising sold by
us, as defined in the agreement.
As part of this agreement, we issued to NBC warrants to purchase up to 150,000
shares of our common stock for $26.05 per share. These warrants shall vest and
expire as follows: (1) between March 11, 1999 and March 11, 2002, NBC shall have
the right to purchase 75,000 shares at $26.05 per share; and (2) the remaining
75,000 shares covered by this warrant will vest in eighteen increments of 4,167
shares each (except for the last increment, which will consist of 4,161 shares)
on the first day of every month beginning with October 1, 2000 and ending on
March 1, 2002 at $26.05 per share. With respect to each 4,167 share increment,
NBC's right to purchase such shares will expire three years after the vesting
date. In the event that NBC terminates the agreement, the portion of the shares
that have not vested as of such termination date shall immediately expire. The
150,000 warrants to acquire common stock that were issued to NBC were valued at
$3.6 million using a Black-Scholes pricing model, based on the following
assumptions: risk-free interest rate of 6%, dividend yield of 0%, expected life
of 5 years and volatility of 150%. The value of this contract is reflected in
our balance sheet under partner agreement and is amortized using the
straight-line method over the life of the three-year contract.
8
<PAGE>
Inherent in our business are various risks and uncertainties, including our
limited operating history, unproven business model and the limited history of
electronic commerce on the Internet. Our success may depend in part upon the
emergence of the Internet as a communications medium, prospective project
development efforts, and the acceptance of our solutions by the marketplace.
(b) Principles of Consolidation
Our unaudited consolidated condensed financial statements as of June 30, 1999
and for the three and six month periods ended June 30, 1999 and 1998 include our
accounts and those of our majority-owned and controlled subsidiaries from their
respective dates of acquisition. All historical financial statements have been
restated to reflect the acquisition of Sift using the pooling-of-interests
method. All significant intercompany transactions and balances have been
eliminated in consolidation.
The following unaudited pro forma consolidated amounts give effect to all of the
acquisitions accounted for by the purchase method of accounting and the
disposition of Cardsecure 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 the acquired entities for the three and six month periods ended
June 30, 1999 and 1998.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
--------------------------- -------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Total revenues ............................ $ 16,991,000 $ 4,491,000 $ 28,435,000 $ 7,438,000
Net loss .................................. (7,057,000) (9,485,000) (14,108,000) (15,502,000)
Net loss attributable to common stockholder (7,057,000) (9,638,000) (14,108,000) (15,791,000)
Net loss per share--basic and diluted ..... $ (0.36) $ (1.12) $ (0.78) $ (2.02)
Weighted average shares used in basic and
diluted net loss per share
calculation ............................... 19,360,778 8,607,872 18,053,643 7,832,820
</TABLE>
(c) Interim Results
The unaudited consolidated condensed financial statements as of June 30, 1999
and for the three and six month periods ended June 30, 1999 and 1998 have been
prepared by us and are unaudited. In our opinion, the unaudited consolidated
condensed 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 June 30, 1999 and the results of our operations for the three and six
month periods ended June 30, 1999 and 1998 and our cash flows for the six month
period ended June 30, 1999 and 1998. The financial data and other information
disclosed in these notes to the consolidated condensed financial statements
related to these periods are unaudited. The results for the three and six month
periods ended June 30, 1999 are not necessarily indicative of the results to be
expected for any subsequent quarter or the entire fiscal year ending December
31, 1999. The consolidated balance sheet at December 31, 1998 has been derived
from the audited financial statements at that date, adjusted to reflect the
acquisition of Sift using the pooling-of-interests method.
9
<PAGE>
(c) Interim Results (Con't)
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to the Securities and Exchange
Commission's rules and regulations. It is suggested that these unaudited
consolidated financial statements be read in conjunction with our audited
consolidated financial statements and notes thereto for the year ended December
31, 1998 as included in our report on Form 10-K.
(d) Use of Estimates
The preparation of financial statements in accordance with generally accepted
accounting principles requires us 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.
(e) Intangible Assets
Intangible assets including trademarks and licenses are amortized using the
straight-line method over their estimated useful lives of one to five years.
Goodwill resulting from the acquisition of Internet advertising businesses is
estimated by us 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 to
four years.
(f) Revenue Recognition
Our revenues are derived principally from short-term advertising agreements in
which we deliver advertising impressions for a fixed fee to third-party Web
sites comprising The 24/7 Network, The 24/7 Media Europe Network and The
ContentZone, and to a lesser extent our Riddler.com Web site. Revenues from
advertising are recognized in the period the advertising impressions are
delivered if collection of the resulting receivables is probable. In addition to
advertising revenues, a portion of our revenues are derived from e-mail services
and other services that are provided to Web sites and advertisers.
Third party Web sites that register Web pages with our networks and display
advertising banners on those pages are commonly referred to as our "Affiliated
Web sites." These third party Web sites are not "related party" relationships or
transactions as defined in Statement of Financial Accounting Standards No. 57,
"Related Party Disclosures." We pay our Affiliated Web sites a royalty for
providing advertising space to our networks. We become obligated to make
payments to such Affiliated Web sites, which have contracted with us to be part
of our networks, in the period the advertising impressions are delivered. Such
expenses are classified as cost of revenues in the consolidated statements of
operations.
10
<PAGE>
(f) Revenue Recognition (con't)
At June 30, 1999 and December 31, 1998, accounts receivable included $6,230,000
and $3,510,000, respectively, of unbilled receivables, which are a normal part
of our business, as receivables are generally invoiced only after the revenue
has been earned. The increase in unbilled receivables from December 31, 1998 to
June 30, 1999 resulted from the increase in revenues generated during the second
quarter of 1999. The terms of the related advertising contracts typically
require billing at the end of each month. All unbilled receivables as of June
30, 1999 have been subsequently billed.
(g) Product Development Costs
Product development costs and enhancements to existing products are charged to
operations as incurred. Software development costs are 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 and use.
(h) 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). 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. Diluted net loss per share is equal to basic net loss per share
since all common stock equivalents are anti-dilutive for each of the periods
presented.
Diluted net loss per common share for the three and six month periods ended June
30, 1999 and 1998 does not include the effects of options to purchase 2,225,828
and 889,491 shares of common stock, respectively; 3,291,067 and 3,988,144 common
stock warrants, respectively; and 0 and 3,577,076 shares of convertible
preferred stock on an "as if" converted basis, respectively; as the effect of
their inclusion is anti-dilutive during each period.
Net loss applicable to common stockholders for the three and six months ended
June 30, 1998 have been increased to give effect to $152,000 and $186,000
respectively of cumulative dividends on mandatorily redeemable convertible
preferred stock subsequently converted into common stock in connection with our
initial public offering in August 1998.
(i) Accumulated Other Comprehensive Income
Accumulated other comprehensive income as of June 30, 1999 is comprised of
$20,000 in foreign currency translation related to 24/7 Media Europe which we
acquired in January 1999.
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<PAGE>
(j) New Accounting Disclosures
In June 1998, Statement of Financial Accounting Standards No. 133 ("SFAS 133"),
"Accounting for Derivative Instruments and Hedging Activities", was issued. SFAS
133 established accounting and reporting standards for derivative instruments
and for hedging activities. SFAS requires that an entity recognize all
derivatives as either assets or liabilities and measure those instruments at
fair value. SFAS 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000. SFAS 133 cannot be applied retroactively to
financial statements of prior periods. At the current time we have not evaluated
the impact that SFAS 133 will have, if any.
(2) Common Stock
In March 1999, as part of the acquisition of Sift, we issued 762,621 shares of
our common stock to the shareholders of Sift.
On May 3, 1999, we completed an additional offering of our common stock. In this
offering, we sold 2,339,000 primary shares, and selling shareholders sold
1,197,895 shares. Net proceeds to our company from the sale of the primary
shares was approximately $100 million.
(3) 1998 Stock Incentive Plan
Subsequent to December 31, 1998 through June 30, 1999, we granted a total of
1,197,895 stock options under the 1998 Stock Incentive Plan: 99,845 of such were
assumed as a result of the acquisition of Sift, Inc. at exercise prices ranging
from $0.30 to $2.00 per share, and 920,300 of such were at exercise prices of
$24.88 to $50.25 per share, based on the fair market value of the underlying
common stock at the respective times of grant.
(4) Supplemental Cash Flow Information
The amount of cash paid for interest was $55,000 and $76,000 for the six month
periods ended June 30, 1999 and 1998, respectively.
Non-cash financing activities:
Warrants to purchase 625,000 shares of our common stock at $3.81 per share were
exercised in January 1999 in exchange for 546,775 shares of our common stock in
a cashless exercise of the warrants.
During the first quarter of 1998, we converted all outstanding shares of
convertible preferred stock into an aggregate of 4,350,441 shares of common
stock, converted $2,556,250 of senior convertible notes payable-related parties,
plus accrued interest, into 828,036 shares of common stock, and outstanding
warrants were converted into 191,349 shares of common stock.
During March 1999, we issued an aggregate of 762,621 shares of common stock in
connection with the acquisition of Sift.
In March 1999, we issued warrants to purchase up to 150,000 shares of common
stock to NBC-Interactive Neighborhood as part of a three-year exclusive
agreement to sell advertising on NBC Network television stations and their
associated Web sites at the local market level.
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In June 1999, we exchanged the net assets of CardSecure and issued aggregate of
476,410 shares of common stock for an investment in ShopNow.com, of
approximately $23.6 million.
(5) Subsequent Events
On July 26, 1999, we acquired ClickThrough Interactive, a leading Canadian
Internet advertising sales network. The acquisition was accomplished through the
issuance of 150,000 redeemable non-voting preferred shares of our subsidiary and
a cash payment of $750,000. The subsidiary's redeemable non-voting preferred
shares are exchangeable into an equal number of our shares of common stock at
the option of the holders or us. The aggregate purchase price of approximately
$5.7 million will be allocated to net tangible liabilities consisting primarily
of accounts receivable, property and equipment, accounts payable and accrued
liabilities. The purchase price in excess of the value of identified tangible
assets and liabilities assumed, in the amount of $5.8 million, will be allocated
to goodwill and other intangibles and will be amortized over its estimated
useful life.
On August 10, 1999 we announced the acquisition of ConsumerNet, a leading
provider of email marketing solutions. The aggregate purchase price of
approximately $52 million consists of approximately 1.8 million shares of our
common stock and $2 million in cash. The purchase price in excess of the value
of identified tangible assets and liabilities assumed will be allocated to
goodwill and other intangibles and will be amortized over its estimated useful
life.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 we believe 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 we compete 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 report.
General
We are the result of several mergers and acquisitions, and the combination of
these entities resulted in an integrated Internet advertising company with both
media sales and technology expertise. We were incorporated in January 1998 to
consolidate three Internet advertising companies:
o Petry Interactive, Inc., which established the network business model and
contributed its network of Web sites which became the foundation for the 24/7
Network.
o Advercomm, Inc., which folded several high profile Web sites into the 24/7
Network, which increased the breadth of content available on the 24/7 Network
and accelerated our ability to organize the 24/7 Network into channels of Web
sites with similar content.
o Interactive Imaginations, Inc., which contributed the ContentZone, a network
that offers advertising solutions for small to medium-sized Web sites.
We subsequently acquired in April 1998 Intelligent Interactions, a developer of
ad serving and targeting technology, and in June 1998 CliqNow!, a network of
over 75 medium to large Web sites. We believe that the combination of these
entities, in addition to the acquisitions completed in the first and second
quarters of 1999, has enabled us to offer advertisers and Web publishers
comprehensive advertising solutions and to pursue our vision of becoming the
preeminent global provider of interactive marketing solutions and services.
In December 1998, we acquired an initial 67% interest, on an as-converted basis,
in CardSecure, a company which provides e-commerce enabling technology as well
as Web site hosting services. In January 1999, we acquired a 60% interest in
24/7 Media Europe Ltd., formerly known as InterAd Holdings Limited, which
operates the 24/7 Media Europe Network. In March 1999, we acquired Sift, Inc., a
full-service e-mail management company. In July 1999, we acquired ClickThrough
Interactive, a leading Canadian advertising sales network, and in August 1999,
we acquired ConsumerNet, a leading provider of email marketing solutions.
We generate substantially all of our revenues by delivering advertisements and
promotions to the Web sites on our networks. We typically sell our
advertisements under purchase order agreements with advertisers which are
short-term in nature or subject to cancellation. We sell our products and
services through our sales and marketing staff located in New York, Atlanta,
Boston, Chicago, Dallas, Detroit, Los Angeles, Miami, San Francisco, Seattle,
Silicon Valley and the Washington, D.C. area and 12 offices in Europe.
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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 Web site, a channel of Web sites or across an entire network. We
strive to sell 100% of our inventory through the combination of advertisements
sold on a "CPM" basis, which is 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.
We recognize advertising revenues in the period that the advertisement is
delivered, provided that no obligations remain. In nearly all cases, we
recognize revenues generated from advertising sales, net of any commissions paid
to advertising agencies on behalf of their clients. We pay our Web sites a
royalty calculated as a percentage of revenues generated by advertisements run
on the Web site, which amount is included in cost of revenues. In addition, we
are generally responsible for billing and collecting for advertisements
delivered to our networks. We expect to generate the majority of our revenues
for the foreseeable future from advertisements delivered to the Web sites on our
networks.
We also sell sponsorship advertising, which involves a greater degree of
coordination among us, the advertiser and our Web sites. These sponsorships are
generally priced based on the length of time that the sponsorship runs, rather
than on a CPM basis. Revenues relating to sponsorship advertising are recognized
ratably over the sponsorship period.
We delivered an aggregate of over 2.5 billion ad impressions during the month of
June 1999, compared to 2.1 billion ad impressions during the month of March
1999, an increase of 19 percent. We added a number of marquee Web sites during
the first half of 1999, including GoTo.com, MGM SimCity, Hanson Online, Drudge
Report, Monster Book, Learn2.com, and ShopNow. According to Media Metrix, our
three networks reached 55.2%, or more than one half, of all U.S. Internet users
in June 1999. We believe that this reach figure is among the highest in the
Internet advertising industry. For the three month periods ended June 30, 1999
and 1998, approximately 43% and 44% of our revenues were derived from
advertisements on our top ten Web sites, respectively. For the three months
ended June 30, 1999, one of our Web sites accounted for approximately 9% of our
total advertising revenue. In addition, for the three months ended June 30,
1999, one advertiser accounted for approximately 8% of our revenues and the top
ten advertisers and ad agencies accounted for approximately 41% of our revenues.
The period-to-period comparisons of our historical operating results should not
be relied upon as indicative of future performance. Our 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 we have experienced revenue growth in
recent periods, we anticipate that we will incur operating losses for the
foreseeable future due to a high level of planned operating and capital
expenditures. In particular, we expect to increase our operating expenses and
capital expenditures in order to expand our sales and marketing organization and
to develop, integrate and scale our Profilz database and proprietary ad serving
technologies.
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Recent Developments
On April 5, 1999, we entered into a cross promotion agreement with ShopNow.com.
ShopNow.com provides e-commerce technology and enabling services, an online
shopping network, creative design services, and product fulfillment to more than
15,000 Web sites. Under this agreement, we will promote ShopNow.com's services
to our Web sites while ShopNow.com will promote our advertising representation
and e-mail management services to ShopNow.com's clients. In addition, we will
co-brand our Click2Buy transactional banner service with ShopNow.com's ShopNow
e-commerce Web site, an online shopping destination. Each party will receive a
share of the other party's revenues generated under the cross promotion
agreement. We also acquired an 18% interest in ShopNow.com in exchange for
consideration of $5.1 million in cash plus shares of our common stock with an
aggregate value equal to $23.6 million and the net assets of CardSecure. The
investment in ShopNow.com is be carried under the cost method of accounting.
On April 9, 1999, we made an additional investment of $500,000 into the common
stock of 24/7 Media Europe. Combined with our earlier investment, this increased
our total ownership interest in 24/7 Media Europe from 60% to 63%.
On May 3, 1999, we completed a follow-on offering of our common stock. In this
offering, we sold 2,339,000 primary shares, and selling shareholders sold
1,161,000 shares. Net proceeds to our company from the sale of the primary
shares was approximately $100 million. We expect to use the proceeds from this
offering for general corporate purposes, including working capital, expansion of
sales and marketing capabilities, capital expenditures and possible
acquisitions.
On July 26, 1999, we acquired ClickThrough Interactive, a leading Canadian
Internet advertising sales network. The acquisition was accomplished through the
issuance of 150,000 redeemable non-voting preferred shares of our Canadian
subsidiary and a cash payment of $750,000. The subsidiary's redeemable
non-voting preferred shares are exchangeable into an equal number of the
Company's common stock at the option of the holders or the Company.
On August 10, 1999 we announced the acquisition of ConsumerNet a leading
provider of email marketing solutions. The aggregate purchase price of
approximately $52 million consists of approximately 1.8 million shares of our
common stock and $2 million in cash.
Results of Operations
Revenues. Total revenues were $17.2 million and $28.6 million for the three
month and six month periods ended June 30, 1999, respectively, as compared to
$4.0 million and $5.2 million for the three month and six month periods ended
June 30, 1998. Such increases were primarily due to an increase in the number of
Web sites on the 24/7 Network, and the addition of the 24/7 Media Europe
Network, the increase in the number of advertisers utilizing our advertising
solutions, and the number of advertisements delivered to the 24/7 Network and
the 24/7 Media Europe Network. We expect the 24/7 Network to continue to account
for a significant portion of our total advertising revenue for the foreseeable
future. In addition to our advertising revenue, we generated increased revenue
from the growth of e-mail services and solutions that were delivered through
Sift.
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Cost of Revenues and Gross Profit. Cost of revenues were $13.1 million and $21.9
million for the three month and six month periods ended June 30, 1999,
respectively, as compared to $3.2 million and $4.1 million for the three month
and six month periods ended June 30, 1998. Cost of revenues consist primarily of
fees paid to Affiliated Web sites, which are calculated as a percentage of
revenues resulting from ads delivered on our networks. Cost of revenues also
includes third party ad serving costs, depreciation of our ad serving system,
Internet access costs, and direct costs of e-mail services. Gross profit for the
three month and six month periods ended June 30, 1999 were $4.1 million and $6.7
million, respectively, as compared to three month and six month periods ended
June 30, 1998 of $815,000 and $1.1 million, respectively. The increases in gross
profit in the three month and six month period from 1998 to 1999 were generated
by (1) the significant growth in advertising revenue generated by our company;
and (2) the related increased costs for affiliated Website payments, third party
ad serving costs and direct e-mail costs.
Operating Expenses. Each of sales and marketing, general and administrative,
product development and amortization of goodwill expenses increased in the three
month and six month periods from 1998 to 1999 as (1) we incurred expenses in
connection with the growth of our business; and (2) we included the operations
of the various businesses that we acquired in our results of operations.
Sales and Marketing Expenses. Sales and marketing expenses were $4.5 million and
$7.9 million for the three and six months ended June 30, 1999 as compared to
$1.7 million and $2.4 million for the three and six months ended June 30, 1998.
The increase in the 1999 periods as compared to the related 1998 periods is due
primarily to the build out of Europe as well as the US based operations. Sales
and marketing expenses consist primarily of sales force salaries and
commissions, advertising expenditures and costs of trade shows, conventions and
marketing materials. We expect sales and marketing expenses to increase as we
continue to invest in sales and marketing personnel, expand into new markets and
broaden our visibility in the marketplace. Areas of concentration for future
growth are expected to include U.S. advertising, European advertising, e-mail
services and e-Commerce initiatives.
General and Administrative Expenses. General and administrative expenses were
$5.2 million and $8.7 million for the three and six months ended June 30, 1999
as compared to $2.0 million and $3.4 million for the three and six months ended
June 30, 1998. The increase in the 1999 periods as compared to the related 1998
periods is due primarily to the build out of Europe as well as the US based
operations. General and administrative expenses consist primarily of
compensation, facilities expenses and other overhead expenses incurred to
support the growth of the business. We expect general and administrative
expenses to increase as we incur increased levels of expenses to support future
growth.
Product Development Expenses. Product development expenses were approximately
$300,000 and $1.2 million for the three and six months ended June 30, 1999 as
compared to approximately $600,000 for the three and six months ended June 30,
1998. Product development expenses consist primarily of compensation and related
costs incurred to further develop our database and ad serving capabilities. We
believe that continued investment in product development, particularly for our
Profilz database and ad serving system, is important to our strategy of
providing excellent service, and we expect to increase the future amounts spent
on product development.
Amortization of Goodwill. Amortization of goodwill was $2.1 million and $4.4
million for the three and six months ended June 30, 1999 as compared to $1.5 and
$1.9 million for the three and six months ended June 30, 1998. The increase in
the 1999 periods as compared to the related 1998 periods is due to the timing of
our acquisitions made during 1998 and in January 1999. With the subsequent
acquisitions of ClickThrough in July 1999 and ConsumerNet in August 1999 we
expect a significant increase in future periods.
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Interest Income (Expense). Interest expense was $32,000 and $55,000 for the
three and six months ended June 30, 1999 as compared to $39,000 and $253,000 for
the three and six months ended June 30, 1998. Interest expense relates primarily
relates to interest on capital lease payments. Interest income was $892,000 and
$1.2 million for the three and six months ended June 30, 1999 as compared to
$50,000 and $76,000 for the three and six months ended June 30, 1998. The
increase in interest income is generated by the increase in cash and cash
equivalents received during our secondary offering completed in May 1999.
Liquidity and Capital Resources
Prior to our initial public offering in August 1998, we financed our operations
primarily from private placements of equity and convertible debt securities.
Concurrently with the merger of Petry and Advercomm into us in February 1998, we
completed a private placement of preferred stock and warrants which resulted in
net proceeds of $9.8 million. In August 1998, we completed our initial public
offering of common stock from which we realized net proceeds of approximately
$44.8 million. In May 1999, we completed a secondary offering of common stock
from which we realized net proceeds of approximately $100 million. As of June
30, 1999, we had cash and cash equivalents of $97.1 million.
In addition to funding on-going operations, our principal commitments consist of
various obligations under operating and capital leases. During the fourth
quarter of 1998, we entered into a lease line of credit for up to $3.0 million
with Chase Manhattan Bank to finance capital equipment. As of June 30, 1999,
total obligations under this lease line of credit were approximately $600,000.
Furthermore, we incurred approximately $1.6 million in leasehold improvements
prior to moving into additional leased office space at our headquarters in New
York City, which lease runs through 2008. In the aggregate, our annual lease
expense for this office space will be approximately $1.2 million. We believe
that the expenses associated with such additional office space will not have a
material effect on our financial position.
Net cash used in operating activities was $15.3 million and $5.8 million for the
six month periods ended June 30, 1999 and 1998, respectively. Net cash used in
operating activities resulted from our net operating losses, adjusted for
certain non-cash items, including:
o The significant increases in accounts receivable, accounts payable and
accrued liabilities in 1999, resulting from the significant increase in
revenues and related expenses in the first half of 1999 compared to 1998;
and the amortization of goodwill in 1999 related to the acquisitions we
completed in 1998 and 1999.
o The significant increase in accounts receivable at June 30, 1999 is
partially attributable to the increase in unbilled receivables from $3.5
million at December 31, 1998 to $6.2 million at June 30, 1999 that also
resulted from the increase in revenues generated during the first half of
1999. Unbilled receivables, which are a normal part of our business,
represent receivables which are generally invoiced only after the revenue
has been earned. The terms of the related contracts typically require
billing at the end of each month. All unbilled receivables as of June 30,
1999 have been subsequently billed.
Net cash (used in) provided by investing activities was $21.2 million and $1.6
million for the six month periods ended June 30, 1999 and 1998, respectively.
Net cash used in investing activities resulted primarily from capital
expenditures relating to computer hardware and capitalized software, and the
cash purchase of a minority interest in ShopNow.com and China.com and a majority
interest in 24/7 Media Europe. During 1999, we expect to incur significant
capital expenditures related to the expansion of our business. In particular, we
intend to develop and enhance our proprietary ad serving technology and our
Profilz database, which may involve investments in software and hardware that in
the aggregate could total approximately $15 million. To the extent that we
invest in significant ad serving and database software and hardware or make cash
investments in other businesses in the future, net cash used in investing
activities could increase.
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Net cash provided by financing activities was $99.5 million and $10.0 million
for the six month periods ended June 30, 1999 and 1998, respectively. Net cash
provided by financing activities during the 1999 period consisted primarily net
proceeds from our secondary offering of approximately $100 million. Net cash
provided by financing activities during the 1998 period included issuances of
convertible preferred stock and warrants. Prior to December 31, 1998, all of the
previously issued convertible notes, convertible preferred stock and warrants
were converted or exercised into common stock, except for warrants to purchase
approximately 3.8 million shares of common stock with exercise prices ranging
from $3.81 to $11.42 per share.
No provision for federal or state income taxes has been recorded because we
incurred net operating losses for all periods presented. At December 31, 1998,
we had approximately $30.9 million of federal and state net operating loss
carryforwards available to offset future taxable income; such carryforwards
expire in various years through 2018. As a result of various equity transactions
during 1996, 1997 and 1998, we believe that our 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 carryforward
may be limited. Due to this limitation, and the uncertainty regarding the
ultimate utilization of the net operating loss carryforward, we have not
recorded any tax benefit for losses and a valuation allowance has been recorded
for the entire amount of the net deferred tax asset. In addition, events such as
our initial public offering and other sales of our stock may partially restrict
our ability to utilize our net operating loss carryforwards.
On January 20, 1999, we invested $3.9 million in the aggregate to purchase a 60%
interest in 24/7 Media Europe Ltd. We invested $1.9 million to acquire shares
directly from 24/7 Media Europe, acquired other shares from existing
shareholders in the amount of $1.1 million and subsequently paid off a loan of
$846,000. During the second quarter of 1999, we invested an additional $500,000
and increased our ownership from 60% to 63%.
Subsequent to June 30, 1999, we have advanced an additional $2.6 million to 24/7
Media Europe in the form of an interest bearing note due on July 1, 2000.
Subsequent to June 30, 1999, we acquired Clickthrough and ConsumerNet. We expect
to invest additional amounts of working capital in our purchased subsidiaries
and majority-owned businesses in 1999 to support their future operations.
We believe that our current cash and cash equivalent balances, will be
sufficient to fund our requirements for working capital and capital expenditures
for at least the next 12 months. To the extent that we encounter unanticipated
opportunities, we may need to raise additional funds sooner, in which case we
may sell additional equity or debt securities or borrow funds from banks or
other financial sources. Sales of additional equity or convertible debt
securities may result in additional dilution of our stockholders. We cannot be
certain that we will be able to sell additional equity or debt securities in the
future or that additional financing will be available to us when needed on
commercially reasonable terms, or at all.
Year 2000 Compliance
Beginning in the Year 2000, the date fields coded in some software products and
computer systems will need to accept four digit entries in order to distinguish
21st century dates from 20th century dates. Also, there is the need for computer
systems to recognize the year 2000 (a century year) as a leap year. As a result,
many companies' software and computer systems may need to be upgraded or
replaced in order to comply with such "Year 2000" requirements. Systems that do
not properly recognize such information could generate erroneous data or cause a
system to fail. Significant uncertainty exists in the software industry
concerning the potential effects associated with such compliance issues.
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State of Readiness. We have developed a remediation plan for our Year 2000 issue
that involves identification, assessment and testing of the equipment and
systems affected:
o We have assessed our information technology (IT) equipment and systems,
which includes our ad servers and ad serving technology.
o We have identified and assessed non-information technology (non-IT)
embedded systems such as building security, voice mail, fire prevention,
climate control and other end user developed systems.
o We have analyzed the readiness of significant third party vendors and
suppliers of services.
Our evaluation includes the following phases:
o identification of all IT equipment and systems, and non-IT systems;
o assessment of repair or replacement requirements;
o repair or replacement;
o testing;
o implementation; and
o creation of contingency plans in the event of Year 2000 failures.
We have reviewed our non-IT systems and internally developed programs, and we do
not consider them to be date sensitive to the Year 2000. Based on this
evaluation, we do not believe that our systems and programs present Year 2000
issues, and we generally believe that we will be Year 2000 compliant.
We have internally developed ad-serving systems, a newly architected ad serving
system under development, a financial system, and are using a service bureau for
ad serving and payroll. Some of our IT systems are presently sensitive to Year
2000. We have determined that none of our IT systems require replacement, but
that approximately 80% of our IT systems require minor remediation to be Year
2000 compliant (OS patches). However, our internal systems are significantly
less complex than bank or brokerage systems for achieving Year 2000 compliance.
With no legacy hardware, our late model systems require mere patches and updates
to reach compliance. We also plan to implement a Year 2000 compliant standard
software image across all corporate laptops and desktops during the third
quarter of 1999.
All of our internal systems have been inventoried and all non-compliant third
party components have been identified and are in the process of being upgraded.
Test equipment to facilitate Year 2000 testing has been installed and testing of
mission critical internal systems is in progress and will be completed in the
third quarter of 1999. Our current financial system is being replaced with a
Year 2000 compliant system in the third quarter of 1999. All mission critical
non-IT end user developed systems were identified and testing completed in
second quarter of 1999.
We have placed each of our vendors and suppliers in a priority category
according to their importance to our business. We have sent letters to all
critical third party service suppliers asking about the status of their Year
2000 program. We have received responses to these letters from all major
vendors. All vendors responding to date have asserted that their products and/or
services will be Year 2000 compliant, including all identified financial and
internet/communications providers.
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Although we believe we will be Year 2000 compliant, we use third party service
suppliers that cannot be guaranteed to be Year 2000 compliant. For these
suppliers we are unable to predict the extent to which:
o the Year 2000 issue will affect these suppliers; or
o we would be vulnerable to the suppliers' failure to remediate any Year
2000 issues on a timely basis.
The unexpected failure of such a major supplier to be Year 2000 compliant could
adversely affect our business. Even though we have received positive responses,
we are making contingency plans to continue availability of service through
alternate channels in the event any one of these key suppliers encounters
unexpected compliance problems and interruption of service.
In addition, the software and hardware products used by Web publishers,
advertisers, governmental agencies, public utilities, telecommunication
companies and others, may not be Year 2000 compliant. If these products are not
Year 2000 compliant, our customers' ability to use our products may be
disrupted. Furthermore, the purchasing patterns of advertisers may be affected
by Year 2000 issues as companies expend significant resources to become Year
2000 compliant. These expenditures may result in reduced funds available for Web
advertising or sponsorship of Web services, which could adversely affect our
business
Costs to Address Our Year 2000 Issue. To date, we have incurred only limited
material expenditures in connection with identifying and evaluating Year 2000
compliance issues. Most of our expenses have related to the opportunity cost of
time spent by our employees evaluating and testing our software, the current
versions of our products, and Year 2000 compliance matters generally. Only minor
software tool upgrades and replacements have been warranted. We do not believe
that the costs to evaluate or address Year 2000 issues will be material.
However, the full impact of the Year 2000 issues cannot be determined until all
testing has been completed. The failure by certain third parties to address
their Year 2000 issues on a timely basis could adversely affect our business.
Contingency Plan. We are completing our Year 2000-specific contingency plans. As
Year 2000 compliance issues are discovered we will continue to evaluate
individual plans relating to such issues. Even though we have received
assurances from our major services and suppliers, we are developing plans for
those key areas in which we cannot test and verify Year 2000 compliance. These
areas include service bureaus (e.g., payroll, ad serving, data center
co-location), facilities, and network service providers. Our contingency plans
include, but are not limited to, using alternative suppliers, establishing
contingent supply arrangements, and contractual warranties. We expect to have
our plans completed in the third quarter of 1999. We will also continue to
actively work with and encourage these suppliers to minimize the risks of
business disruptions resulting from Year 2000 issues.
The worst case scenario related to Year 2000 issues would involve a major
shutdown of the Internet, which would result in a total loss of revenue to us
until it were resolved. Internally, the most likely worst case scenario would be
that we would have disruption of work activities in one or more office locations
due to loss of public transportation, power, facility services or
telecommunications. This could result in delays in reporting to our Web site
affiliates, processing orders, billing our customers and preparing our financial
statements.
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Impact of Recently Issued Accounting Pronouncements
In June 1998, Statement of Financial Accounting Standards No. 133 ("SFAS 133"),
"Accounting for Derivative Instruments and Hedging Activities", was issued. SFAS
133 established accounting and reporting standards for derivative instruments
and for hedging activities. SFAS requires that an entity recognize all
derivatives as either assets or liabilities and measure those instruments at
fair value. SFAS 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000. SFAS 133 cannot be applied retroactively to
financial statements of prior periods. At the current time we have not evaluated
the impact SFAS 133 will have, if any.
Risk Factors
This report contains forward-looking statements that are based largely on our
current expectations and that are subject to a number of risks and
uncertainties, including those set forth below. Our actual results could differ
materially from the results discussed in "Risk Factors" below, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
elsewhere in this report.
We have an extremely limited operating history on which an investor can evaluate
our business. None of our predecessor companies had an operating history of more
than four years prior to acquisition or merger. We, therefore, have an extremely
limited operating history. You must consider the risks, expenses and
difficulties typically encountered by companies with limited operating
histories, particularly companies in new and rapidly expanding markets such as
Internet advertising. These risks include our ability to:
o develop new relationships and maintain existing relationships with our Web
sites, advertisers, and other third parties;
o further develop and upgrade our technology;
o respond to competitive developments;
o implement and improve operational, financial and management information
o systems; and attract, retain and motivate qualified employees.
We may be unable to successfully integrate several companies that we have
acquired. We were formed in January 1998 to consolidate three Internet
advertising companies and have since acquired five companies and majority
interests in others. In combining these entities, we have faced risks and
continue to face risks of integrating and improving our financial and management
controls, ad serving technology, reporting systems and procedures, and
expanding, training and managing our work force. This process of 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 our other
operations.
We anticipate continued losses and we may never be profitable. We incurred net
losses of $7.2 million and $10.0 million for the three month periods ended June
30, 1999 and 1998, respectively, and $14.4 million and $12.6 million for the six
months ended June 30, 1999 and 1998. Each of our predecessors had net losses in
every year of their operation. We anticipate that we will incur operating losses
for the foreseeable future due to a high level of planned operating and capital
expenditures. Although our revenue has grown rapidly in recent periods, such
growth may not continue and may not lead to profitability.
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Our future revenues and results of operations may be difficult to forecast. Our
results of operations may fluctuate significantly in the future as a result of a
variety of factors, many of which are beyond our control. These factors include:
o the addition of new or loss of current advertisers or Web sites;
o changes in fees paid by advertisers;
o changes in service fees payable by us to owners of Web sites, or ad
serving fees payable by us to third parties;
o the introduction of new Internet advertising services by us or our
competitors;
o variations in the levels of capital or operating expenditures and other
costs relating to the expansion of our operations; and
o general economic conditions.
Our future revenues and results of operations may be difficult to forecast due
to the above factors.
In addition, our expense levels are based in large part on our investment plans
and estimates of future revenues. Any increased expenses may precede or may not
be followed by increased revenues, as we may be unable to, or may elect not to,
adjust spending in a timely manner to compensate for any unexpected revenue
shortfall.
As a result, we believe that period-to-period comparisons of our results of
operations may not be meaningful. You should not rely on past periods as
indicators of future performance. In future periods, our results of operations
may fall below the expectations of securities analysts and investors, which
could adversely affect the trading price of our common stock.
Our revenues are subject to seasonal fluctuations. We believe that our revenues
are subject to seasonal fluctuations because advertisers generally place fewer
advertisements during the first and third calendar quarters of each year.
Expenditures by advertisers tend to vary in cycles that reflect overall economic
conditions as well as budgeting and buying patterns. Our revenue could be
materially reduced by a decline in the economic prospects of advertisers or the
economy in general, which could alter current or prospective advertisers'
spending priorities or budget cycles or extend our sales cycle.
Our business may not grow if the Internet advertising market does not continue
to develop. The Internet as an advertising medium has not been in existence for
a sufficient period of time to demonstrate its effectiveness. Our business would
be adversely affected if the Internet advertising market fails to continue to
develop. There are currently no widely accepted standards to measure the
effectiveness of Internet advertising. We cannot be certain that such standards
will develop to sufficiently support Internet advertising as a significant
advertising medium. Actual or perceived ineffectiveness of online advertising in
general, or inaccurate measurements or database information in particular, could
limit the long-term growth of online advertising and cause our revenue levels to
decline.
Banner advertising, from which we currently derive most of our revenues, may not
be an effective advertising method in the future. We cannot be certain that any
other forms of Internet advertising will be developed or accepted by the market.
Even if new methods are developed, we may not be able to take advantage of them.
23
<PAGE>
Growth of our business depends on the development of online direct marketing.
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, is an important part of our business model.
Intensive marketing and sales efforts may be necessary to educate prospective
advertisers regarding the uses and benefits of our products and services to
generate demand for our direct marketing services. Enterprises may be reluctant
or slow to adopt a new approach that may replace, limit, or compete with their
existing direct marketing systems. In addition, since online direct marketing is
emerging as a new and distinct market apart from online advertising, potential
adopters of online direct marketing services will increasingly demand
functionality tailored to their specific requirements. We may be unable to meet
the demands of our clients.
Loss of our major Web sites would significantly reduce our revenues. The 24/7
Network generates substantially all of our revenues and it consists of a limited
number of our Web sites that have contracted for our services under agreements
cancelable generally upon a short notice period. For the three month periods
ended June 30, 1999 and 1998, approximately 43% and 44%, respectively, of our
total revenues were derived from advertisements on our top ten Web sites. For
the three month period ended June 30, 1999, the top ten Web sites included AT&T
WorldNet Service, Mapquest, Blizzard Entertainment, Small World Sports, Netscape
Communications, Earthlink Network, Sandbox Entertainment, Netzero.net,
Multi-Player Games Network, and Treeloot. We experience turnover from time to
time among our Web sites, and we cannot be certain that the Web sites named
above remain or will remain associated with us.
Loss of our client Web sites could lower our reach levels. Our Web sites
generally measure satisfaction by acceptable revenue levels, high levels of
customer service and timely and accurate reporting. Levels of traffic on our Web
sites may not remain consistent or increase over time, and we may be unable to
replace any departed Web site with another Web site with comparable traffic
patterns and user demographics. The loss or reduction in traffic on these Web
sites may cause advertisers or Web sites to withdraw from the our networks which
in turn could lower our reach levels.
Loss of our advertisers or ad agencies would reduce our revenues. We generate
our revenues from a limited number of advertisers and ad agencies that purchase
space on our Web sites. We expect that a limited number of these entities may
continue to account for a significant percentage of our revenues for the
foreseeable future. For the three month period ended June 30, 1999, our top ten
advertisers and ad agencies accounted for an aggregate of approximately 41% of
our total revenues.
Advertisers and ad agencies typically purchase advertising under purchase order
agreements that run for a limited time. We cannot be certain that current
advertisers and ad agencies will continue to purchase advertising from us or
that we will be able to attract additional advertisers and ad agencies
successfully, or that agencies and advertisers will make timely payment of
amounts due to us.
Our development of a next generation ad serving technology may not be successful
and may cause business disruption. We are currently developing a next generation
ad serving technology that is intended to serve as our sole ad serving solution.
To complete this development, we must, among other things, ensure that this
technology will function efficiently at high volumes, interact properly with our
Profilz database, offer the functionality demanded by our customers and
assimilate our sales and reporting functions. This development effort could fail
technologically or could take more time than expected. Even if we successfully
address all these challenges, we must then work with our Web sites to transition
them to our new system, which would also create a risk of business disruption
and loss of any of our Web sites.
24
<PAGE>
Loss or failure of our third party ad serving technology could disrupt our
business. Unless and until the development of and transition to our own ad
serving technology is complete, we will be primarily dependent on AdForce, Inc.
to deliver ads to our networks and Web sites. If such service becomes
unavailable or fails to serve our ads properly or fails to produce the frequent
operational reports required, our business would be adversely affected.
Additionally, our use of multiple systems to serve ads requires us to employ
significant effort to prepare information for billing, Web site statements and
financial reporting. We are upgrading our systems to integrate a new accounting
system with our ad serving technologies to improve our accounting, control and
reporting methods. Our inability to upgrade our existing reporting systems and
streamline our procedures may cause delays in the timely reporting of financial
information.
Our failure to successfully compete may hinder our growth. The markets for
Internet advertising and related products and services are intensely competitive
and such competition is expected to increase. Our failure to successfully
compete may hinder our growth. We believe that our ability to compete depends
upon many factors both within and beyond our control, including:
o the timing and market acceptance of new products and enhancements of
existing services developed by us and our competitors;
o changing demands regarding customer service and support;
o shifts in sales and marketing efforts by us and our competitors; and
o the ease of use, performance, price and reliability of our services and
products.
Many of our competitors have longer operating histories, greater name
recognition, larger customer bases and significantly greater financial,
technical and marketing resources than ours. We cannot be certain that we will
be able to successfully compete against current or future competitors.
In addition, the Internet 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.
We may be unable to continue to successfully manage rapid growth. We have
experienced rapid growth and expansion in operations that have placed a
significant strain on our managerial, operational and financial resources. We
expect the number of employees to increase in the future. To successfully
compete in the evolving Internet industry, we must:
o continue to improve our financial and management controls;
o enhance our reporting systems and procedures;
o continue to scale our ad serving systems and upgrade their functional
o capabilities; and expand, train and manage our work force.
We cannot be certain that our systems, procedures or controls will be adequate
to support our expanding operations, or that management will be able to respond
effectively to such growth. Our future results of operations also depend on the
expansion of our sales, marketing and customer support departments.
25
<PAGE>
Acquisitions or strategic investments may divert management attention and
consumer resources. We intend to continue pursuing selective acquisitions of
businesses, technologies and product lines as a key component of our growth
strategy. 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. In addition, acquisitions involve numerous risks,
including:
o the difficulties in the integration and assimilation of the operations,
technologies, products and personnel of an acquired business;
o the diversion of management's attention from other business concerns;
o the availability of favorable acquisition financing for future
acquisitions; and
o the potential loss of key employees of any acquired business.
Our inability to successfully integrate any acquired company could adversely
affect our business.
Our international expansion may pose new legal and cultural challenges. We have
operations in a number of international markets. To date, we have limited
experience in marketing, selling and distributing our solutions internationally.
International operations are subject to other risks, including:
o changes in regulatory requirements;
o reduced protection for intellectual property rights in some countries;
o potentially adverse tax consequences;
o general import/export restrictions relating to encryption technology
and/or privacy;
o difficulties and costs of staffing and managing foreign operations;
o political and economic instability; fluctuations in currency exchange
rates; and
o seasonal reductions in business activity during the summer months in
Europe and certain other parts of the world.
In addition to these factors, due to our minority stake in the 24/7 Media Asia
Network, we are relying on China.com Corporation to conduct operations,
establish the network, aggregate Web publishers and coordinate sales and
marketing efforts. The success of the 24/7 Media Asia Network is directly
dependent on the success of China.com Corporation and its dedication of
sufficient resources to our relationship.
If we lose our CEO, principal sales managers or other senior managers we may not
be able to grow. Our success depends upon our senior management and key sales
and technical personnel, particularly David J. Moore, Chief Executive Officer,
and Jacob I. Friesel, Executive Vice President. The loss of the services of one
or more of these persons could materially adversely affect our ability to
develop our business. Our success also depends on our 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 we cannot be certain that we will be able to
retain our key personnel or that we can attract, integrate or retain other
highly qualified personnel in the future. We have 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 we have not experienced any material impact from the
difficulty in hiring and retaining qualified employees, we may be materially
impacted in the future from such hiring difficulties.
26
<PAGE>
Privacy concerns may prevent us from selling demographically targeted
advertising. We are developing our Profilz database to collect data derived from
user activity on our networks and from other sources. We cannot be certain that
any trade secret, copyright or other protection will be available for such data
or that others will not claim rights to such data. We must also keep information
regarding Web publishers confidential under our contracts with Web publishers.
Ad serving technology enables the use of identifying data, or cookies, 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 placed on the user's hard drive without the user's knowledge or consent. Any
reduction or limitation in the use of cookies could limit the effectiveness of
our sales and marketing efforts and impair our targeting capabilities. Due to
privacy concerns, some Internet commentators, advocates and governmental bodies
have suggested that the use of cookies be limited or eliminated.
Government regulation and legal uncertainties could add additional burdens to
our doing business on the Internet. Due to the increasing popularity of the Web,
laws and regulations applicable to Internet communications, commerce and
advertising are becoming more prevalent. The adoption or modification of such
laws or regulations could inhibit the growth in use of the Web and decrease the
acceptance of the Web as a communications and commercial medium.
Further, due to the global nature of the Web, governments of states or foreign
countries may attempt to regulate our Internet transmissions or levy sales or
other taxes relating to our activities. We cannot be certain that violations of
local laws will not be alleged by applicable governments or that we will not
violate such laws or new laws will not be enacted in the future. Moreover, the
applicability of existing laws governing issues such as property ownership,
libel and personal privacy is uncertain in regards to the Internet.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
We are not a party to any material legal proceedings.
Item 2. Changes in Securities and Use of Proceeds during the reporting period.
On March 8, 1999, we acquired Sift, Inc. for approximately 763,000 shares of our
common stock plus the assumption of previously-outstanding stock options which
were converted into options to acquire approximately 100,000 shares of our
common stock.
In March 1999, we signed an agreement with NBC-Interactive Neighborhood pursuant
to which we issued to NBC warrants to purchase up to 150,000 shares of our
common stock for $26.05 per share. The warrants vest and expire as follows: (1)
at any time on or after March 11, 1999 and on or before March 11, 2002, NBC
shall have the right to purchase 75,000 shares of our common stock at $26.05 per
share; and (2) the remaining 75,000 shares of our common stock will vest in
eighteen increments of 4,167 shares each (except for the last increment, which
will consist of 4,161 shares) on the first day of every month beginning with
October 1, 2000 and ending on March 1, 2002 at $26.05 per share. With respect to
each 4,167 share increment, NBC's right to purchase such shares will expire
three years after the vesting date.
On April 5, 1999 we entered into an agreement with ShopNow.com, pursuant to
which we acquired an 18% interest in ShopNow.com through the issuance of 476,410
shares of our common stock as well as the net assets of CardSecure.
27
<PAGE>
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
We held our Annual Meeting of Stockholders on June 8, 1999. Following are
descriptions of the matters voted on and the results of such meeting:
A. ELECTION OF CLASS I DIRECTORS:
Shares Withheld Broker
Nominee Shares for Authority Exceptions Nonvotes
- ------- ---------- --------- ---------- --------
R. Theodore Ammon 14,716,505 46,104 -- --
Jacob I. Friesel 14,716,055 46,554 -- --
David J. Moore 14,713,354 49,255 -- --
B. AMENDMENT AND RESTATEMENT OF 1998 STOCK INCENTIVE PLAN:
Shares for Shares Against Shares Abstained Broker Nonvotes
---------- -------------- ---------------- ---------------
7,934,301 1,947,489 208,174 4,672,645
C. RATIFICATOIN OF KPMG LLP AS AUDITORS FOR FISCAL YEAR ENDING DECEMBER 31,
1999:
Shares for Shares Against Shares Abstained Broker Nonvotes
---------- -------------- ---------------- ---------------
14,631,691 124,713 6,205 --
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K .
(a) Exhibits.
Exhibit 11.1 Calculation of Net Loss Per Share
Exhibit 27 Financial data schedule
(b) Reports on Form 8-K.
We filed a Report on Form 8-K dated April 28, 1999, reporting on items 2 and 5.
The report contained copies of the information on our acquisition of ShopNow.com
stock as well as information relating to our NBC affiliation agreement.
28
<PAGE>
Item 7. Signatures.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
24/7 MEDIA, INC.
Date: August 13, 1999 By: /s/ David J. Moore
------------------------------------
David J. Moore
President and Chief Executive
Officer
By: /s/ C. Andrew Johns
------------------------------------
C. Andrew Johns
Chief Financial Officer
29
EXHIBIT 11.1
24/7 MEDIA, INC.
CALCULATION OF NET LOSS PER SHARE
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30, 1999 Six Months Ended June 30, 1999,
-------------------------------- -------------------------------
1999 1998 1999 1998
-------------- -------------- -------------- -------------
<S> <C> <C> <C> <C>
Net Loss $ (7,163,000) $ (9,961,000) $(14,407,000) $(12,373,000)
------------ ------------ ------------ ------------
Cumulative Dividends on Mandatorily
Convertible Preferred Stock -- (152,000) -- (186,000)
------------ ------------ ------------ ------------
Net Loss Attributable to Common
Stockholders $ (7,163,000) $(10,113,000) $(14,407,000) $(12,559,000)
============ ============ ============ ============
Total weighted average
common shares outstanding 19,360,778 8,607,872 18,053,643 6,217,004
============ ============ ============ ============
Basic and diluted net loss per share $ (0.37) $ (1.17) $ (0.80) $ (2.02)
============ ============ ============ ============
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 97,116,000
<SECURITIES> 0
<RECEIVABLES> 18,469,000
<ALLOWANCES> (283,000)
<INVENTORY> 0
<CURRENT-ASSETS> 117,281,000
<PP&E> 11,717,000
<DEPRECIATION> (2,122,000)
<TOTAL-ASSETS> 181,950,000
<CURRENT-LIABILITIES> 16,489,000
<BONDS> 0
0
0
<COMMON> 202,000
<OTHER-SE> 220,352,000
<TOTAL-LIABILITY-AND-EQUITY> 181,950,000
<SALES> 17,155,000
<TOTAL-REVENUES> 17,155,000
<CGS> (13,062,000)
<TOTAL-COSTS> (13,062,000)
<OTHER-EXPENSES> (12,116,000)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 32,000
<INCOME-PRETAX> (7,163,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (7,163,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,163,000)
<EPS-BASIC> (0.37)
<EPS-DILUTED> (0.37)
</TABLE>
