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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): OCTOBER 29, 1999
COMMISSION FILE NUMBER- 0-29768
24/7 MEDIA, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-3995672
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1250 BROADWAY 10001
NEW YORK, NY (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 231-7100
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Item 2. Acquisition or Disposition of Assets
On March 8, 1999, the Registrant, 24/7 Media, Inc., a Delaware corporation
("24/7 Media"), acquired all of the issued and outstanding shares of capital
stock of Sift, Inc., a privately-held California corporation ("Sift"), in a
merger transaction whereby Sift was merged with and into Factor K Acquisition
Corporation, a wholly-owned Delaware subsidiary corporation of 24/7 Media
("Factor K"). All of the outstanding options to purchase Sift stock were assumed
by 24/7 Media and converted into options to purchase 24/7 Media common stock.
Each share of Sift stock was converted into 0.054753537 shares of 24/7 Media
Common Stock. The conversion ratio was determined through arm's length
negotiations. The Agreement and Plan of Merger ("Merger Agreement") dated March
8, 1999 among 24/7 Media, Sift and Factor K is incorporated herein by reference
from 24/7's Registration Statement on Form S-1, File No. 333-70857. A copy of
the press release announcing the effectiveness of the merger is incorporated
herein by reference to Exhibit 99 to 24/7 Media's current report on Form 8-K
filed on March 22, 1999.
Pursuant to the Merger Agreement, 24/7 Media exchanged approximately 763,000
shares of its common stock, par value $.01 per share (the "24/7 Media Common
Stock"), for all of the outstanding shares of capital stock and outstanding
stock options of Sift. The merger was accounted for under the
pooling-of-interests method of accounting, and accordingly, the accompanying
consolidated financial statements and footnotes have been restated to include
the operations of Sift for all periods presented. Sift historical results have
been recast to conform to 24/7 Media's December 31 year end.
In this Current Report on Form 8-K, 24/7 Media is presenting its consolidated
financial statements and footnotes to include the restatement for the merger
of Sift into 24/7 Media. For a more complete understanding of 24/7 Media's
financial results presented herein, refer to 24/7 Media's Annual Report on
Form 10-K for the year ended December 31, 1998. For additional information,
refer to 24/7 Media's Quarterly Reports on Form 10-Q previously on record for
the periods ended March 31, 1999 and June 30, 1999. For additional
information on the Sift merger, refer to Note 1(b) of the Notes to
Supplemental Consolidated Financial Statements incorporated herein.
Item 7. Financial Statements and Exhibits
(a) Financial Statements of Businesses Acquired
Not applicable
(b) Not applicable
(c) Exhibits
2.1 Agreement and Plan of Merger, dated March 8, 1999, among 24/7 Media, Inc.,
Sift, Inc. and Factor K Acquisition Corporation. (incorporated herein by
reference to Exhibit 2.1 to 24/7 Media, Inc.'s Registration Statement on
Form S-1 File No. 333-70857.)
23.1 Consent of Independent Auditors
99.1 Press Release dated March 10, 1999 (incorporated herein by reference to
Exhibit 99.1 to 24/7 Media Inc.'s current report on Form 8-K dated
March 22, 1999)
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SUPPLEMENTAL SELECTED CONSOLIDATED FINANCIAL DATA.
The supplemental selected consolidated financial data as of and for each of
the years in the three-year period ended December 31, 1998 have been derived
from our audited supplemental consolidated financial statements, which are
included elsewhere herein. The supplemental selected consolidated financial
data as of December 31, 1994, 1995, and 1996 and for the period from
September 1994 through December 31, 1994 and the year ended December 31, 1995
have been derived from the financial statements of Interactive Imaginations,
which are not included herein, and our accounting records. We believe that
due to the acquisitions in 1998, the period to period comparisons are not
meaningful and should not be relied upon as indicative of future performance.
You should read the supplemental selected consolidated financial data stated
below in conjunction with the "Supplemental Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the
Supplemental Consolidated Financial Statements and the related Notes thereto
included elsewhere herein.
<TABLE>
<CAPTION>
Through December 31,
---------------------------------------------------------------------------------
1994 1995 1996 1997 1998
--------- ----------- ------------ ------------ ------------
(In thousands, except for share and per share amounts)
<S> <C> <C> <C> <C> <C>
Supplemental Consolidated Statements of
Operations Data:
Revenues:
Advertising ............................... $ -- $ 152 $ 1,111 $ 1,536 $ 20,747
Consulting and license fees ............... -- -- 436 1,681 119
--------- ----------- ------------ ------------ ------------
Total revenues ........................... -- 152 1,547 3,217 20,866
Cost of revenues ........................... -- 198 1,596 1,669 16,149
--------- ----------- ------------ ------------ ------------
Gross profit (loss) ....................... -- (46) (49) 1,548 4,717
Operating expenses:
Sales and marketing ....................... -- 115 2,364 1,857 8,235
General and administrative ................ 35 679 3,414 3,258 9,396
Product development ....................... -- 426 1,617 1,603 2,097
Other expenses ............................ -- -- -- 989 --
Write-off of acquired in-process technology -- -- -- -- 5,000
Amortization of goodwill .................. -- -- -- -- 5,722
--------- ----------- ------------ ------------ ------------
Total operating expenses ................. 35 1,220 7,395 7,707 30,450
--------- ----------- ------------ ------------ ------------
Operating loss ............................. (35) (1,266) (7,444) (6,159) (25,733)
Interest (expense) income, net ............. -- -- (38) (154) 576
--------- ----------- ------------ ------------ ------------
Net loss ................................... (35) (1,266) (7,482) (6,313) (25,157)
Cumulative dividends on mandatorily
convertible preferred stock ............... -- -- -- -- (276)
--------- ----------- ------------ ------------ ------------
Net loss attributable to common stockholders $ (35) $ (1,266) $ (7,482) $ (6,313) $ (25,433)
--------- ----------- ------------ ------------ ------------
--------- ----------- ------------ ------------ ------------
Basic and diluted net loss per share ....... $ (0.14) $ (1.22) $ (4.24) $ (3.50) $ (2.48)
--------- ----------- ------------ ------------ ------------
--------- ----------- ------------ ------------ ------------
Weighted average shares outstanding ........ 250,000 1,036,634 1,765,053 1,802,235 10,248,677
</TABLE>
<TABLE>
<CAPTION>
As of December 31,
-------------------------------------------------------------
1994 1995 1996 1997 1998
-------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C>
Supplemental Consolidated Balance Sheet Data:
Cash and cash equivalents ..................................... $ 11 $ 216 $ 1,847 $ 121 $34,049
Working capital (deficit) ..................................... (9) (235) (232) (1,058) 31,290
Goodwill, net ................................................. -- -- -- -- 10,935
Total assets .................................................. 29 713 4,687 1,463 63,108
Long-term debt ................................................ -- -- -- 2,317 --
Obligations under capital leases, excluding
current installments ......................................... -- -- -- 80 34
Total stockholders' equity (deficit) .......................... 9 462 1,883 2,947 51,087
</TABLE>
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SUPPLEMENTAL MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
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:
- 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.
- 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 our 24/7 Network
into channels of Web sites with similar content.
- Interactive Imaginations, Inc., which contributed the ContentZone, a
network that offers advertising solutions for small to medium-sized
Web sites.
We subsequently acquired Intelligent Interactions, a developer of ad serving and
targeting technology, and CliqNow!, a network of over 75 medium to large Web
sites. We believe that the combination of these predecessor entities has enabled
us to offer advertisers and Web publishers comprehensive advertising solutions
and to pursue our objective of becoming the leading Internet advertising and
direct marketing firm.
We generate substantially all of our revenues by delivering advertisements and
promotions to Affiliated 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, San Francisco, Seattle and the
Washington, D.C. area and 12 offices in Europe.
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 the entire 24/7
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 significant 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 Affiliated
Web sites a service fee 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
Affiliated Web sites on our networks.
We recently started to sell sponsorship advertising, which involves a greater
degree of coordination among us, the advertiser and Affiliated 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.
One of our key strategies is to aggressively recruit Web sites of all sizes
for our networks in order to extend our reach and to provide advertisers with
a broad base of page views and online content. We added a number of
high-profile Web sites during the third and fourth quarters of 1998,
including cars.com, Cybershop, New York Mets, Real Cities, Reuters Health,
San Francisco Giants, Server.com, and Sports Network.com. For the year ended
December 31, 1998, approximately 47% of the 24/7 Network's and CliqNow
Network's advertising revenues were derived from advertisements on our top
ten Affiliated Web sites. For the year ended December 31, 1998, our
Affiliated Web site accounted for approximately 14% of our total advertising
revenue.
In addition, for the year ended December 31, 1998, our top ten advertisers
and ad agencies accounted for an aggregate of approximately 38% of the 24/7
Network's and CliqNow Network's advertising revenues.
On December 29, 1998, we acquired an initial 67% interest, on an as converted
basis, in CardSecure, a company which provides eCommerce enabling technology as
well as Web site hosting services. In January 1999, we acquired a 60%
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interest in 24/7 Media Europe Ltd., formerly known as InterAd Holdings Limited,
which operates the 24/7 Media Europe Network. Finally, in March 1999, we
acquired Sift, Inc., a full-service e-mail management company.
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 in
order to expand our sales and marketing organization and to develop, integrate
and scale our Profilz technology.
Supplemental Results of Operations
Supplemental Quarterly Results of Operations--Unaudited
Our 1998 supplemental results of operations were significantly affected by
inclusion of acquired companies activities, as well as our growth. The
following table presents our supplemental quarterly results of operations for
1998. We believe that all necessary adjustments, consisting of normal
recurring adjustments, have been included in the amounts stated below.
<TABLE>
<CAPTION>
March 31, June 30, Sept. 30, Dec. 31,
1998 1998 1998 1998
---------- ----------- ----------- ------------
(In thousands)
<S> <C> <C> <C> <C>
Supplemental Consolidated Statements of Operations
Data:
Revenues:
Advertising ......................................... $ 1,204 $ 3,931 $ 5,741 $ 9,871
Consulting and license fees ......................... -- 40 66 13
-------- -------- -------- --------
Total revenues ..................................... 1,204 3,971 5,807 9,884
Cost of revenues ..................................... 952 3,156 4,653 7,388
-------- -------- -------- --------
Gross profit ....................................... 252 815 1,154 2,496
-------- -------- -------- --------
Operating expenses:
Sales and marketing ................................. 699 1,704 2,589 3,243
General and administrative .......................... 1,412 1,988 2,357 3,639
Product development ................................. 30 564 546 957
Write-off of acquired in-process technology ......... -- 5,000 -- --
Amortization of goodwill ............................ 335 1,531 1,883 1,973
-------- -------- -------- --------
Total operating expenses ........................... 2,476 10,787 7,375 9,812
-------- -------- -------- --------
Operating loss ...................................... (2,224) (9,972) (6,221) (7,316)
Interest (expense) income:
Interest income ................................... 26 50 250 560
Interest expense ................................... (214) (39) (31) (26)
-------- -------- -------- --------
Total interest (expense) income ..................... (188) 11 219 534
-------- -------- -------- --------
Net loss ............................................ $ (2,412) $ (9,961) $ (6,002) $ (6,782)
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
REVENUES. Our revenues increased each quarter primarily due to an increase in
advertising revenue on the 24/7 Network. In particular, this increase in revenue
was due to increases in the number of Web sites on the 24/7 Network, the number
of advertisers using our advertising solutions and the number of advertisements
delivered to the 24/7 Network. We expect the 24/7 Network to continue to account
for a significant portion of our total advertising revenue.
In addition to advertising revenues, we generated revenues through consulting
and license fees from licensing the Adfinity system to third parties. This
revenue represented less than 2% of our total revenues in any quarter, and for
the full year. We no longer offer new licenses for Adfinity to third parties and
we do not currently expect to recognize any meaningful revenues from the
licensing of Adfinity in the future.
COST OF REVENUES AND GROSS PROFIT. Cost of revenues consists 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 and Internet
access costs. Gross profit in dollars increased during the four quarters of
1998. However, gross margin, which is gross profit as a percent of total
revenues, declined through the first three quarters before improving slightly in
the fourth quarter. The fluctuation in gross margin over the periods presented
was caused by:
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- the significant growth in advertising revenue generated by the 24/7
Network, which typically pays higher fees to Affiliated Web sites, at
the same time that advertising revenue generated by the ContentZone
remained relatively flat;
- an increase in third party ad serving costs related to the growth of
the 24/7 Network; and
- the increased rates paid by us for third party ad serving costs which
began late in the first quarter of 1998 in connection with the
transition to a single ad serving technology. Until we complete the
transition to a single ad serving technology, we expect to continue to
incur high ad serving costs.
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. Through all quarters of 1998,
sales and marketing expenses increased as a result of the growth of our business
and the resulting additions to sales staff as well as increased marketing
expenses. 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.
General and Administrative Expenses. General and administrative expenses consist
primarily of compensation, facilities expenses and other overhead expenses
incurred to support the growth of our business. Through all quarters of 1998,
general and administrative expenses increased as a result of the growth of our
business, the addition of new personnel and increased operating expenses. We
expect general and administrative expenses to continue to increase due to the
additional personnel and other expenses required to support our anticipated
business growth.
Product Development Expenses. Product development expenses consist primarily of
compensation and related costs incurred to further develop our ad serving
capabilities. Product development expenses increased beginning in the second
quarter of 1998 primarily as a result of our Adfinity development efforts as
well as initial development of our Profilz database initiative. Costs further
increased in the fourth quarter due to our retention of several technology
consultants to support and accelerate our development of Adfinity and Profilz.
We believe that continued investment in product development, particularly for
our technology initiatives, is critical to our strategy of providing excellent
service, and we expect to increase the future amounts spent on product
development.
Years Ended December 31, 1996, 1997 and 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
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 $232,000 in legal costs, unfavorable publicity to
Interactive Imaginations, a significant diversion of management resources, and
difficulty in obtaining financing to continue its operations.
For the fiscal year ended December 31, 1998, our historical results of
operations reflect the acquisitions of Petry, Advercomm, CliqNow!, Intelligent
Interactions and CardSecure from their respective dates of acquisition.
Interactive Imaginations, our then parent, was merged into us on April 9, 1998
in a manner similar to a pooling-of-interests. As a result, our historical
results of operations for the fiscal years ended December 31, 1996 and 1997
represent the results of Interactive Imaginations and do not reflect any of the
operating results of Petry, Advercomm, CliqNow!, Intelligent Interactions or
CardSecure.
We do not believe that the historical revenues or expenses for the years 1996
and 1997 as discussed below are reliable or accurate indicators of the future
performance of the combined company.
Revenues. Total revenues were $1.5 million, $3.2 million and $20.9 million for
the years ended December 31, 1996, 1997 and 1998, respectively. The increase in
1998 was caused primarily by the inclusion of the acquired companies' activities
and a significant increase in advertising revenue, offset by a decline in
revenues caused by the cessation of a license agreement with SegaSoft in 1997.
Growth in revenues from 1996 to 1997 resulted from increases in advertising
revenue generated by the ContentZone and Riddler.com, our online games site, and
consulting and license fees derived from the SegaSoft agreement. We do not
expect to realize meaningful revenues from the SegaSoft agreement in the future.
Cost of Revenues and Gross Profit (Loss). Cost of revenues was $1.6 million,
$1.7 million and $16.1 million for the years ended December 31, 1996, 1997
and 1998, respectively. The increase in 1998 was primarily related to
increased payments to our Affiliated Web sites which were caused by growth in
advertising revenue and the temporary increase in rates in connection with
our transition to a single ad serving technology. This increase was offset by
reduced ContentZone ad serving costs. The increase in cost of revenues from
1996 to 1997 was due to the related growth in
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advertising revenue on the ContentZone. 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 entail payment of
fees to Affiliated Web sites. 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 $7.4 million, $7.7
million and $30.4 million for the years ended December 31, 1996, 1997 and 1998,
respectively. The increase from 1997 to 1998 was caused by:
- higher sales and marketing and general and administrative expenses
resulting from the acquisitions we completed in 1998;
- additional operating expenses incurred in anticipation of future
growth, particularly in the number of employees, offices, and other
operating expenses to support expanded U.S. operations;
- amortization of goodwill resulting from the acquisitions we completed
in 1998; and
- acquired in-process technology of approximately $5.0 million from the
acquisition of Intelligent Interactions which was immediately charged
to operations in April 1998. The value of the acquired in-process
technology was determined using a combination of a risk-adjusted
income approach and an independent valuation. The acquired in-process
technology had not reached the stage of technological feasibility at
the date of acquisition and had no alternative future use.
The decrease in operating expenses from 1996 to 1997 was primarily due to the
consolidation of the Interactive Imaginations business, offset by $989,000 in
other expenses recorded in 1997. Other expenses in 1997 included $232,000 of
legal costs associated with the successful defense of a class-action lawsuit
filed by certain Affiliated Web sites on the ContentZone, as well as a net
write-off of $757,000 of property and equipment that was deemed to have no
future economic value.
Liquidity and Capital Resources
Historically, 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 an initial public offering of our common stock
pursuant to which we realized net proceeds of approximately $44.8 million. As of
December 31, 1998, we had cash and cash equivalents of $34.0 million.
In addition to funding on-going operations, our principal commitments consist of
various obligations under operating and capital leases. Total lease expense,
excluding rent, was $50,000 for the twelve-month period ended December 31, 1997,
as compared to $380,000 for the twelve-month period ended December 31, 1998.
During the second and third quarters of 1998, we entered into a series of
operating leases with Sun Microsystems Finance for computer equipment and
software related to our Adfinity system, with a combined fair market value of
$849,000. These operating leases, as amended, require monthly payments and
expire in December 2001. 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 December 1998, total obligations under this lease line
of credit were approximately $600,000. Total rent expense for currently
outstanding leases is expected to be approximately $130,000 per quarter.
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 $5.5 million, $5.2 million and $14.9
million for the years ended December 31, 1996, 1997 and 1998, respectively. Net
cash used in operating activities resulted from our net operating losses,
adjusted for certain non-cash items, including:
- significant increases in accounts receivable, accounts payable and
accrued liabilities in 1998, resulting from the significant increase
in advertising revenues and related expenses in the fourth quarter of
1998 compared to 1997;
- the write-off of acquired in-process technology in the second quarter
of 1998;
- the amortization of goodwill in 1998 related to the acquisitions we
completed in 1998;
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- the write-off of property and equipment in 1997; and
- a significant advance by SegaSoft in late 1996 for revenues that were
primarily recognized during 1997.
Net cash used in investing activities was $1.9 million, $76,000 and $6.0
million for the years ended December 31, 1996, 1997 and 1998, respectively.
Net cash used in investing activities resulted primarily from capital
expenditures relating to computer equipment, the cash portion of the purchase
of CliqNow!, and the cash portion of our minority equity investment in
China.com Corporation. To the extent that we purchase significant ad serving
hardware or make cash investments in other businesses in the future, net cash
used in investing activities could increase.
Net cash provided by financing activities was $9.1 million, $3.6 million and
$54.8 million for the years ended December 31, 1996, 1997 and 1998,
respectively. Net cash provided by financing activities during these periods
included issuances of convertible notes, convertible preferred stock, common
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 $33.1 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,
management believes that we have 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 carry forward may be limited. Due to this
limitation, and the uncertainty regarding the ultimate utilization of the net
operating loss carry forward, 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 carry
forwards.
Through September 30, 1999 we made an additional investment in China.com of $9
million, acquired an 18% investment in TechWave, Inc. and a 5.9% investment in
Naviant Technology Solutions, Inc.
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%. During the third quarter of 1999 we
advanced 24/7 Media Europe approximately $3.8 million in an interest bearing
loan due on June 1, 2001. On September 22, 1999 we further advanced them
approximately $1.2 million.
During the third quarter, we also acquired Clickthrough Interactive Inc. and
Music Marketing Network, Inc. (d/b/a 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.
SUPPLEMENTAL RISK FACTOR
We anticipate continued losses and we may never be profitable
We incurred net losses of $6.3 million and $25.4 million for the years ended
December 31, 1997 and 1998, respectively, and 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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24/7 MEDIA, INC.
(SUCCESSOR COMPANY TO INTERACTIVE IMAGINATIONS, INC.)
INDEX TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report................................................ 10
Supplemental Consolidated Balance Sheets.................................... 11
Supplemental Consolidated Statements of Operations.......................... 12
Supplemental Consolidated Statements of Stockholders'
Equity (Deficit).......................................................... 13
Supplemental Consolidated Statements of Cash Flows.......................... 15
Notes to Supplemental Consolidated Financial Statements..................... 16
Supplemental Financial Statement Schedules--Valuation and
Qualifying Accounts--Allowance for Doubtful Accounts...................... S-1
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SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
INDEPENDANT AUDITORS' REPORT
The Board of Directors and Stockholders
24/7 Media, Inc.
We have audited the accompanying supplemental consolidated balance sheets of
24/7 Media, Inc. and subsidiaries as of December 31, 1998 and 1997, and the
related supplemental consolidated statements of operations, stockholders' equity
(deficit), and cash flows for each of the years in the three-year period ended
December 31, 1998. In connection with our audits of the supplemental
consolidated financial statements, we have also audited the supplemental
financial statement schedule as listed in the accompanying index. These
supplemental consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
supplemental consolidated 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.
The supplemental consolidated financial statements give retroactive effect to
the merger of 24/7 Media, Inc. and Sift, Inc. on March 8, 1998, which has been
accounted for as a pooling-of-interests as described in Note 1(b) to the
supplemental consolidated financial statements. Generally accepted accounting
principles proscribe giving effect to a consummated business combination
accounted for by the pooling-of-interests method in financial statements that do
not include the date of consummation. These financial statements do not extend
through the date of consummation. However, they will become the historical
consolidated financial statements of 24/7 Media, Inc. and subsidiaries after
financial statements covering the date of consummation of the business
combination are issued.
In our opinion, the supplemental consolidated financial statements referred to
above present fairly, in all material respects, the financial position of 24/7
Media, Inc. and subsidiaries as of December 31, 1998 and 1997, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1998, in conformity with generally accepted accounting
principles applicable after financial statements are issued for a period which
includes the date of consummation of the business combination. Also in our
opinion, the related supplemental financial statement schedule, when considered
in relation to the basic supplemental consolidated financial statements take as
a whole, present fairly, in all material respects, the information set forth
therein.
/s/ KPMG LLP
New York, New York
October 25, 1999
10
<PAGE>
24/7 MEDIA, INC.
(Successor Company to Interactive Imaginations, Inc.)
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-------------------------------
1997 1998
------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ................................................. $ 121,000 $ 34,049,000
Accounts receivable, net of allowance for doubtful
accounts of $64,000 and $268,000, respectively ............................ 195,000 8,678,000
Prepaid expenses and other current assets ................................. 29,000 550,000
Total current assets .................................................. 345,000 43,277,000.
Property and equipment, net .................................................. 955,000 2,099,000
Goodwill, net ................................................................ -- 10,935,000
Investment in affiliated company ............................................. -- 6,566,000
Deferred offering costs ...................................................... 111,000 --
Intangible assets, net ....................................................... 3,000 16,000
Other Assets ................................................................. 49,000 215,000
------------- ------------
Total assets .......................................................... $ 1,463,000 $ 63,108,000
------------- ------------
------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable .......................................................... 919,000 5,797,000
Accrued liabilities ....................................................... 475,000 5,201,000
Loan Payable- related party ............................................... 433,000 593,000
Credit Line ............................................................... -- 180,000
Current installments of obligations under capital leases .................. 90,000 82,000
Deferred revenue .......................................................... 96,000 134,000
------------- ------------
Total current liabilities ............................................. $ 2,013,000 $ 11,987,000
------------- ------------
Senior convertible notes payable--related parties, net of debt
discount of $158,000 ......................................................... 2,317,000 --
Obligations under capital leases, excluding current installments ............. 80,000 34,000
Stockholders' equity (deficit):
Convertible preferred stock, $.01 par value; 10,000,000 shares authorized;
158,144 and no shares issued and outstanding, respectively; with aggregate
liquidation preference of $4,539,000 at December 31, 1997 ................ 2,000 --
Common stock, $.01 par value; 70,000,000 shares authorized; 1,864,383 and
16,434,494 shares issued and outstanding, respectively ................... 18,000 164,000
Additional paid-in capital ............................................... 12,129,000 92,003,000
Deferred stock compensation .............................................. -- (345,000)
Accumulated deficit ...................................................... (15,096,000) (40,735,000)
------------- ------------
Total stockholders' equity (deficit) ................................. (2,947,000) 51,087,000
------------- ------------
Commitments and contingencies
------------- ------------
Total liabilities and stockholders' equity (deficit) .................. $ 1,463,000 $ 63,108,000
------------- ------------
------------- ------------
</TABLE>
See accompanying notes to supplemental consolidated financial statements.
11
<PAGE>
24/7 MEDIA, INC.
(Successor Company to Interactive Imaginations, Inc.)
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years ended December 31,
1996 1997 1998
------------ ------------ -------------
<S> <C> <C> <C>
Revenues:
Advertising ............................... $ 1,111,000 $ 1,536,000 $ 20,747,000
Consulting and license fees ............... 436,000 1,681,000 119,000
------------ ------------ -------------
Total revenues ........................ 1,547,000 3,217,000 20,866,000
Cost of revenues ............................. 1,596,000 1,669,000 16,149,000
------------ ------------ -------------
Gross profit (loss) ................... (49,000) 1,548,000 4,717,000
Operating expenses:
Sales and marketing ....................... 2,364,000 1,857,000 8,235,000
General and administrative ................ 3,414,000 3,258,000 9,396,000
Product development ....................... 1,617,000 1,603,000 2,097,000
Write-off of property and equipment ....... -- 757,000 --
Legal costs in connection with claim ...... -- 232,000 --
Write-off of acquired in-process technology -- -- 5,000,000
Amortization of goodwill .................. -- -- 5,722,000
------------ ------------ -------------
Total operating expenses .............. 7,395,000 7,707,000 30,450,000
------------ ------------ -------------
Loss from operations .................. (7,444,000) (6,159,000) (25,733,000)
Interest income .............................. 24,000 18,000 886,000
Interest expense ............................. (62,000) (172,000) (310,000)
Net loss .............................. (7,482,000) (6,313,000) (25,157,000)
Cumulative dividends on mandatorily
convertible preferred stock ................. -- -- (276,000)
------------ ------------ -------------
Net loss attributable to common stockholders . $ (7,482,000) $ (6,313,000) $(25,433,000)
------------ ------------ -------------
------------ ------------ -------------
Net loss per share--basic and diluted ........ $ (4.24) $ (3.50) $ (2.48)
------------ ------------ -------------
------------ ------------ -------------
Weighted average shares outstanding .......... 1,765,053 1,802,235 10,248,677
------------ ------------ -------------
------------ ------------ -------------
</TABLE>
See accompanying notes to supplemental consolidated financial statements.
12
<PAGE>
24/7 MEDIA, INC.
(Successor Company to Interactive Imaginations, Inc.)
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Years Ended December 31, 1996, 1997 and 1998
Stockholders' Equity (Deficit)
------------------- --------------------- -------------------
Convertible Common Stock Common Stock
Preffered Stock Voting Class A
------------------- --------------------- -------------------
Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Balance as of December 31, 1995 ...................... -- $ -- 434,800 $ 4,000 73,333 $ 1,000
Issuance of Class A common stock, net of $39,000
issuance costs ...................................... -- -- -- -- 34,371 --
Common stock Class A converted ....................... -. -- 1,077,033 11,000 (107,704) (1,000)
Issuance of common stock to officer .................. -- -- 2,083 -- -- --
Issuance of warrants in connection
with mandatory conversion subordinated notes ........ -- -- -- -- -- --
Notes converted to preferred stock ................... 52,262 1,000 -- -- -- --
Issuance of preferred stock, net of $237,000
issuance costs ...................................... 88,460 1,000 -- -- -- --
Exercise of stock options ............................ -- -- 75,197 1,000 -- --
Issuance of common stock ............................. -- -- 99,516 1,000 -- --
Net loss ............................................. -- -- -- -- -- --
--------- ---------- ----------- -------- ---------- ---------
Balance as of December 31, 1996 ...................... 140,722 2,000 1,688,629 17,000 -- --
Issuance of preferred stock .......................... 17,422 -- -- -- -- --
Issuance of common stock to officer .................. -- -- 10,462 -- -- --
Issuance of warrants in connection
with senior convertible
notes--related parties ............................... -- -- -- -- -- --
Senior convertible notes
payable--related parties
converted into common stock ......................... -- -- 59,184 -- -- --
Issuance of common stock ............................. -- -- 106,108 1,000 -- --
Net loss ............................................. -- -- -- -- -- --
--------- ---------- ----------- -------- ---------- ---------
Balance as of December 31, 1997 ...................... 158,144 2,000 1,864,383 18,000 -- --
Issuance of warrants in connection
with senior convertible notes payable--related parties -- -- -- -- -- --
Issuance of warrants to former officer ............... -- -- -- -- -- --
Issuance of warrants to consultant ................... -- -- -- -- -- --
Issuance of common stock for acquired businesses ..... -- -- 5,278,167 53,000 -- --
Issuance of stock options to employees ............... -- -- -- -- -- --
Issuance of common stock to officer .................. -- -- 56,250 1,000 -- --
Amortization of deferred stock compensation .......... -- -- -- -- -- --
Issuance of common stock to consultants .............. -- -- 5,909 -- -- --
Offering costs in connection with mandatorily
redeemable convertible preferred stock .............. -- -- -- -- -- --
Senior convertible notes
payable--related parties
converted into common stock ......................... -- -- 828,036 8,000 -- --
Convertible preferred stock converted into
common stock ........................................ (158,144) (2,000) 542,908 5,000 -- --
Conversion of warrants into common stock ............. -- -- 191,349 2,000 -- --
Imputed interest on loans payable--related parties ... -- -- -- -- -- --
Accrual of cumulative dividends on mandatorily
redeemable convertible preferred stock .............. -- -- -- -- -- --
Issuance of common stock in initial public
offering, net ....................................... -- -- 3,550,000 36,000 -- --
Conversion of mandatorily redeemable
convertible preferred stock into common stock ....... -- -- 3,807,533 38,000 -- --
Exercise of stock options ............................ -- -- 106,108 1,000 -- --
Issuance of common stock to China.Com ................ -- -- 203,851 2,000 -- --
Pooling Adjustment (see note 1(b)) ................... -- -- -- -- -- --
Net loss for the period .............................. -- -- -- -- -- --
--------- ---------- ----------- -------- ---------- ---------
Balance as of December 31, 1998 ...................... -- $ -- 16,434,494 164,000 $ -- $ --
--------- ---------- ----------- -------- ---------- ---------
--------- ---------- ----------- -------- ---------- ---------
</TABLE>
See accompanying note to supplemental consolidated financial statements
13
<PAGE>
24/7 MEDIA, INC.
(Successor Company to Interactive Imaginations, Inc.)
SUPPLEMENTAL CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Total
Additional Deferred stockholders'
paid-in stock Accumulated equity
capital compensation deficit (deficit)
------------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
Balance as of December 31, 1995 ........................ $ 1,758,000 -- (1,301,000) $ 462,000
------------- ------------- ------------ -------------
Issuance of Class A common stock, net
of $39,000 issuance costs .............................. 4,486,000 -- -- 4,486,000
Common stock Class A converted ......................... (10,000) -- -- --
Issuance of common stock to officer .................... 37,000 -- -- 37,000
Issuance of warrants in connection
with mandatory conversion subordinated notes .......... 18,000 -- -- 18,000
Notes converted to preferred stock ..................... 1,499,000 -- -- 1,500,000
Issuance of preferred stock, net of $237,000
issuance costs ........................................ 2,301,000 -- -- 2,302,000
Exercise of stock options .............................. 240,000 -- -- 241,000
Issuance of common stock ............................... 323,000 -- -- 324,000
Net loss ............................................... -- -- (7,482,000) (7,482,000)
------------- ------------- ------------ -------------
Balance as of December 31, 1996 ........................ 10,652,000 -- (8,783,000) 1,888,000
Issuance of preferred stock ............................ 500,000 -- -- 500,000
Issuance of common stock to officer .................... 32,000 -- -- 32,000
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 ........................... 94,000 -- -- 94,000
Issuance of common stock ............................... 650,000 -- -- 651,000
Net loss ............................................... -- -- (6,313,000) (6,313,000)
------------- ------------- ------------ -------------
Balance as of December 31, 1997 ........................ 12,129,000 -- (15,096,000) (2,947,000)
Issuance of warrants in connection with senior
convertible notes payable--related parties ............ 12,000 -- -- 12,000
Issuance of warrants to former officer ................. 450,000 -- -- 450,000
Issuance of warrants to consultant ..................... 20,000 -- -- 20,000
Issuance of common stock for acquired businesses ....... 10,769,000 -- -- 10,822,000
Issuance of stock options to employees ................. 332,000 (332,000) -- --
Issuance of common stock to officer .................... 89,000 (90,000) -- --
Amortization of deferred stock compensation ............ -- 77,000 -- 77,000
Issuance of common stock to consultants ................ 22,000 -- -- 22,000
Offering costs in connection with mandatorily
redeemable convertible preferred stock ................ (229,000) -- -- (229,000)
Senior convertible notes payable--related parties
converted into common stock ........................... 2,666,000 -- -- 2,674,000
Convertible preferred stock converted into common stock (3,000) -- -- --
Conversion of warrants into common stock ............... (2,000) -- -- --
Imputed interest on loans payable--related parties ..... 9,000 -- -- 9,000
Accrual of cumulative dividends on mandatorily
redeemable convertible preferred stock ................ -- -- (276,000) (276,000)
Issuance of common stock in initia public
offering, net ......................................... 44,735,000 -- -- 44,771,000
Conversion of mandatorily redeemable convertible
preferred stock into common stock ..................... 17,169,000 -- -- 17,207,000
Exercise of stock options .............................. 271,000 -- -- 272,000
Issuance of common stock to China.Com .................. 3,564,000 -- -- 3,566,000
Pooling Adjustment (see note 1(b)) ..................... -- -- (206,000) (206,000)
Net loss for the period ................................ -- -- (25,157,000) (25,157,000)
------------- ------------- ------------ -------------
Balance as of December 31, 1998 ........................ $ 92,003,000 (345,000) (40,735,000) $ 51,087,000
------------- ------------- ------------ -------------
------------- ------------- ------------ -------------
</TABLE>
See accompanying notes to supplemental consolidated financial statements.
14
<PAGE>
24/7 MEDIA, INC.
(Successor Company to Interactive Imaginations, Inc.)
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended December 31,
----------------------------------------------
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss ..................................................... $ (7,482,000) $ (6,313,000) $(25,157,000)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization ................................ 430,000 587,000 672,000
Amortization of debt discount ................................ 18,000 43,000 158,000
Write-off of property and equipment .......................... -- 757,000 --
Write-off of acquired in-process technology .................. -- -- 5,000,000
Accrued interest on senior convertible
notes--related parties ....................................... -- 69,000 15,000
Imputed interest on note payable--related party .............. -- -- 9,000
Provision for doubtful accounts .............................. 66,000 -- 347,000
Amortization of intangible assets ............................ -- -- 5,722,000
Non-cash compensation ........................................ 37,000 32,000 569,000
Pooling adjustments (see note 1(b)) .......................... -- -- (206,000)
Changes in operating assets and liabilities, net of
effect of acquisitions:
Accounts receivable ...................................... (279,000) 77,000 (6,426,000)
Prepaid assets and other current assets .................. (282,000) 253,000 (439,000)
Deposits ................................................. (45,000) 12,000 (166,000)
Accounts payable ......................................... 14,000 767,000 1,489,000
Accrued liabilities ...................................... 446,000 (51,000) 3,487,000
Deferred revenue ......................................... 1,550,000 (1,454,000) 38,000
------------ ------------ ------------
Net cash used in operating activities ............ (5,527,000) (5,221,000) (14,888,000)
------------ ------------ ------------
Cash flows from investing activities:
Increase in intangible assets ................................ (41,000) -- (13,000)
Cash paid for acquisitions, net .............................. -- -- (1,491,000)
Purchases of property and equipment .......................... (1,887,000) (76,000) (1,486,000)
Cash paid for investment in affiliated company ............... -- -- (3,000,000)
------------ ------------ ------------
Net cash used in investing activities ........................ (1,928,000) (76,000) (5,990,000)
------------ ------------ ------------
Cash flows from financing activities:
Net proceeds from issuance of Mandatorily Redeemable Series A
Preferred Stock .............................................. -- -- 10,060,000
Deferred offering costs ...................................... -- (111,000) (321,000)
Proceeds from senior convertible notes payable-related parties -- 2,500,000 150,000
Proceeds from notes payable-related parties .................. -- -- --
Repayment of notes payable-related parties ................... (87,000) -- (296,000)
Proceeds from exercise of stock options ...................... 241,000 -- 272,000
Proceeds from mandatory conversion subordinated notes
payable ...................................................... 1,500,000 -- --
Proceeds from issuance of common stock, net .................. 4,810,000 526,000 44,771,000
Proceeds from issuance of convertible preferred stock, net ... 2,302,000 500,000 --
Payment of capital lease obligations ......................... -- (77,000) (170,000)
Proceeds from short term borrowing ........................... 320,000 233,000 340,000
------------ ------------ ------------
Net cash provided by financing activities ........... 9,086,000 3,571,000 54,806,000
Net change in cash and cash equivalents ............. 1,631,000 (1,726,000) 33,928,000
Cash and cash equivalents at beginning of period ............. 216,000 1,847,000 121,000
------------ ------------ ------------
Cash and cash equivalents at end of period ................... $ 1,847,000 $ 121,000 $ 34,049,000
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
See accompanying notes to supplemental consolidated financial statements.
15
<PAGE>
24/7 MEDIA, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
(1) Summary of Operations and Significant Accounting Policies
(a) Summary of Operations
24/7 Media, Inc. ("24/7 Media" or the "Company") operates 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. The Company generates revenues by delivering advertisements and
promotions to Web sites affiliated with the Company. The Company's network
properties include The 24/7 Network, The 24/7 Media Europe Network, commencing
January 29, 1999 (see note 13), and The ContentZone, which are networks of Web
sites to which advertisements and promotions are served.
24/7 Media was incorporated in Delaware on January 23, 1998 as a wholly owned
subsidiary of Interactive Imaginations, Inc. ("Interactive Imaginations") to
consolidate three Internet advertising companies: (i) Petry Interactive, Inc.
("Petry"), which sold advertising for Web sites organized in a network, (ii)
Advercomm, Inc. ("Advercomm"), a newly formed corporation which brought a number
of high profile Web sites to The 24/7 Network, and (iii) Interactive
Imaginations. Interactive Imaginations had been incorporated in the State of New
York in September 1994 and first recognized revenue in June 1995.
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 $10.0 million by certain third party investors as
well as with an existing investor of Interactive Imaginations, the "Initial
Merger"). Effective February 25, 1998, 24/7 Media commenced operation of The
24/7 Network, a network of high profile Web sites to which advertisements are
served. 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.
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 Company's President and Chief Executive Officer),
for the sale and issuance of preferred shares and warrants in a private
placement for total proceeds of $10,060,002, of which the preferred shares
automatically converted into 2,641,849 shares of Common Stock at a conversion
price of approximately $3.81 per share upon consummation of the Company's
initial public offering in August 1998 (the "IPO"). For each $10,000 invested,
the investors received 10,000 shares of Series A Preferred Stock, 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. 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 was
terminated in its entirety upon the consummation of the IPO. In connection with
the Initial Merger, certain shareholders of the Company were granted
registration rights with respect to their shares of Common Stock.
15
<PAGE>
24/7 MEDIA, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1997
(1) Summary of Operations and Significant Accounting Policies --Continued
On April 13, 1998, the Company acquired Intelligent Interactions Corporation
("Intelligent Interactions"), a corporation that developed and licensed ad
serving technology and e-commerce software. As of June 1, 1998, the Company
acquired CliqNow!, a network of Web sites ("CliqNow!") which were subsequently
folded into The 24/7 Network. On December 29, 1998, the Company acquired a 67%
interest in CardSecure, Inc. ("CardSecure"). On December 30, 1998, the Company
acquired a 10% common equity interest in China.com Corporation ("China.com").
Inherent in the Company's business are various risks and uncertainties,
including its limited operating history, unproven business model and the limited
history of electronic 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.
(b) Principles of Consolidation
The Company's supplemental consolidated financial statements as of December
31, 1998 and for the year ended December 31, 1998 include the accounts of the
Company and its majority-owned and controlled subsidiaries from their
respective dates of acquisition (i) Petry and Advercomm from February 25,
1998, (ii) Intelligent Interactions from April 13, 1998, (iii) CliqNow! from
June 1, 1998 (collectively, the "Acquisitions"), and CardSecure, Inc.
("CardSecure") from December 29, 1998. The Company's audited supplemental
consolidated financial statements as of December 31, 1997 and for each of the
years in the two-year period ended December 31, 1997 include the historical
results of Interactive Imaginations (see note 2). All significant
intercompany transactions and balances have been eliminated in consolidation.
In connection with the Initial Merger, no single former shareholder group
obtained more than 50 percent of the outstanding shares of the Company. 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.
On March 8, 1999 the Company acquired Sift, Inc. ("Sift") a provider of e-mail
based direct marketing services, exchanging approximately 763,000 shares of the
Company's Common Stock for all the outstanding common stock of Sift. The
acquisition of Sift has been accounted for as a pooling-of-interests and,
accordingly, the Company's historical consolidated financial statements have
been restated to include the accounts and results of operations of Sift. The
assets, liabilities and stockholders' equity of Sift, were combined with the
Company's respective accounts at their recorded values. Prior period financial
statements have been restated to give effect to the acquisition.
Prior to the acquisition, Sift reported on an August 31st fiscal year end.
Sift's fiscal years ended August 31, 1996 and 1997 have been reflected in the
Company's restated December 31, 1996 and 1997 consolidated results of
operations, respectively. Sift's twelve months ended December 31, 1998 was used
in the Company's restated December 31, 1998 consolidated results of operations.
The Company has restated the consolidated balance sheet as of December 31, 1998
to include the Company's 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 the
Company and Sift prior to the combination. Sift's revenues for the years ended
August 31, 1996 and 1997, and December 31, 1998 were $5,000, $69,000 and $1.0
million, respectively. Sift's net loss for the years ended August 31, 1996 and
1997, and December 31, 1998 was $686,000, $1.0 million and $434,000,
respectively.
Equity investments of the Company in which significant influence is not
exercised are carried under the cost method.
(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.
16
<PAGE>
24/7 MEDIA, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1997
(1) Summary of Operations and Significant Accounting Policies --Continued
(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,
1997 and 1998 were $0 and $32,810,000 respectively, which consisted principally
of money market accounts.
(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. Leased property meeting certain criteria is
capitalized and the present value of the
Related lease payments is recorded as a liability. Amortization of capitalized
leased assets is computed on the straight-line method over the term of the
leases.
(f) Intangible Assets
Intangible assets including trademarks and licenses are amortized using the
straight-line method over the estimated useful lives of 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 to
three years.
(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 prepaid advertising fees, although the majority of
the Company's advertising customers generally pay after the services have been
provided. As of December 31, 1997 and 1998, the Company had deferred revenue of
$96,000 and $134,000, 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 Web sites comprising The
24/7 Network, The 24/7 Media Europe Network and The ContentZone, and to a lesser
extent its Riddler.com Web site. In addition to advertising revenues, a portion
of the Company's revenues are derived from e-mail services and other services
that are provided to Web sites and advertisers.
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, the Company's cash
advertising revenue related solely to The ContentZone and to a lesser extent its
Riddler.com Web site.
17
<PAGE>
24/7 MEDIA, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1997
(1) Summary of Operations and Significant Accounting Policies--Continued
Third party Web sites which register Web pages with the Company's networks and
display advertising banners on those pages are commonly referred to as
"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." The Company pays its Affiliated
Web sites a service fee for providing advertising space to the Company's
networks. The Company becomes obligated to make payments to such Affiliated Web
sites, 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 revenue is derived principally from software licensing
fees 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 1998, accounts receivable included approximately
$56,000 and $3,510,000, respectively, of unbilled receivables, which are a
normal part of the Company's business, as receivables are generally invoiced
only after the revenue has been earned. The increase in unbilled receivables
from 1997 to 1998 resulted from the increase in advertising revenues generated
by the Company during the fourth quarter of 1998. The terms of the related
advertising contracts typically require billing at the end of each month. All
unbilled receivables as of December 31, 1998 have been subsequently billed.
(j) Barter Transactions
The Company historically traded 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 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 $55,000, $83,000 and $0 for the years ended
1996, 1997 and 1998, respectively.
The Company historically received payment for its advertising services in the
form of goods that were used as prizes for the Riddler game site. Prize revenue
and the corresponding prize expense were recorded at the estimated fair market
value of the prizes received. Advertising prize revenues were approximately
$196,000, $86,000 and $0 for the years ended 1996, 1997 and 1998, respectively.
The Company expects that barter revenue will continue to represent only a small
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 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. 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.
(l) Deferred Offering Costs
At December 31, 1997, specific incremental costs directly attributable to the
issuance of mandatorily redeemable convertible preferred stock were deferred.
These 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 first quarter of 1998.
18
<PAGE>
24/7 MEDIA, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1997
(1) Summary of Operations and Significant Accounting Policies--Continued
(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.
(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 $515,000, $181,000 and $1,394,000 for the years ended
December 31, 1996, 1997 and 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, 1997 and
1998, 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 money
market accounts and other highly-liquid instruments. 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 customers (excluding
barter) are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Customer(1)
A....................... $ -- $ -- $2,771,000
B....................... 212,000 326,000 --
C....................... 178,000 157,000 --
</TABLE>
For the year ended December 31, 1998, one Affiliated Web site accounted for
approximately 14% of the Company's total revenues.
19
<PAGE>
24/7 MEDIA, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1997
(1) Summary of Operations and Significant Accounting Policies--Continued
Accounts receivable regarding significant advertising customers are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Customer(1)
D ................. $94,000 $ -- $ --
E ................. 41,000 -- --
F ................. -- 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, management believes that such losses have been adequately reserved
for and within expectations.
(q) 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 years ended December 31, 1996, 1997
and 1998 does not include the effects of options to purchase 115,939, 423,421
and 1,674,002 shares of common stock, respectively; 6,533, 180,228, and
3,802,985 common stock warrants, respectively; 351,805, 395,360, and 0 shares of
convertible preferred stock on an "as if" converted basis, respectively; 0,
767,575, and 0 shares of senior convertible notes payable 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 year ended December 31, 1998
has been increased to give effect to $276,000 of cumulative dividends on
mandatorily redeemable convertible preferred stock through the date of its
conversion into Common Stock in connection with the Company's IPO (see note 6).
(r) 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
20
<PAGE>
24/7 MEDIA, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1997
(1) Summary of Operations and Significant Accounting Policies--Continued
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.
(s) Reclassifications
Certain reclassifications have been made to prior year's consolidated financial
statements to conform to the current year's presentation.
(2) Acquisitions and Investment in Affiliated Company
Petry and Advercomm Acquisitions
On February 25, 1998, in connection with the Initial Merger, 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 $4,198,000 and
$2,729,000, 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.
The Petry and Advercomm 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
on the basis of their fair values on the acquisition date. The aggregate
purchase price of the Petry and Advercomm acquisitions were $7,084,000. Of this,
$(1,549,000) 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 $8,633,000 was allocated to goodwill
and is being amortized over its estimated useful life of two years from the date
of acquisition.
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.
Intelligent Interactions Acquisition
During April 1998, the Company entered into an Agreement and Plan of Merger (the
"II Merger") to acquire all of the outstanding stock of Intelligent
Interactions.
Upon consummation of the II 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
21
<PAGE>
24/7 MEDIA, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1997
(2) Acquisitions and Investment in Affiliated Company--Continued
Warrants of the Company. Therefore, the Company issued 949,242 shares of Common
Stock, 265,212 of Class A Warrants, 265,212 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.
Each share of Preferred Stock, Series A Preferred Stock, Series AA Preferred
Stock or Series AAA Preferred Stock of Intelligent Interactions was converted
into 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 converted into
0.2626 shares of the Company's Common Stock, or 935,269 shares of Common Stock
in connection with the Company's IPO. Each shareholder of record of the
Mandatorily Redeemable Convertible Shares had the right to cause the Company to
redeem at the option of the shareholder all 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.
Additionally, the Company assumed 212,804 stock options for the purchase of
Common Stock in accordance with the II Merger. The stock options have exercise
prices ranging from $0.16 to $0.48, as defined in the II Merger Agreement, and
expire in no more than 10 years.
The acquisition has been accounted for using the purchase method of accounting,
and accordingly, the total purchase price of $7,671,000 has been allocated to
the tangible and identifiable intangible assets acquired and liabilities assumed
on the basis of their fair values on the acquisition date. Approximately
$(154,000) 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 fair value
of the purchased existing technology and in-process technology were determined
by management using a risk-adjusted income valuation approach. This approach
directly measured the value of the purchased in-process technology (exclusive of
the purchased existing technology) by converting the cash flows directly
attributable to the purchased in-process technology at a rate of return adjusted
for the risks inherent in the development and ultimate technological feasibility
of such technology. Based upon an independent appraisal, which takes into
account replacement cost of assets, market multiples and present value of future
after-tax earnings attributable to the purchased in-process technology,
$5,000,000 of the purchase price was allocated to in-process technology and was
immediately charged to operations because such in-process technology had not
reached the stage of technological feasibility at the acquisition date and had
no alternative future use. The value was derived exclusive of the value of the
purchased existing technology. The purchase price in excess of the fair value of
identified tangible assets and liabilities assumed in the amount of $2,825,000
was allocated to goodwill and other intangibles and is being 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 convertible
feature of the Preferred Shares.
22
<PAGE>
24/7 MEDIA, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1997
(2) Acquisitions and Investment in Affiliated Company--Continued
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 Web sites
organized into eight topical channels, for $4,240,000, plus acquisition costs of
$96,000, with $1,240,000 payable in cash and $3,000,000 payable in Series B
Convertible Redeemable Preferred Stock (Series B). The Company issued 3,000
shares of Preferred Stock which, by its terms, automatically converted into
230,415 shares of Common Stock upon consummation of the IPO, at the IPO price
per share, net of the underwriting discount, or $13.02 per share, which was
deemed to be the fair value of the securities. Approximately $160,000 of the
aggregate purchase price was allocated to net tangible assets consisting
primarily of cash, accounts receivable, property and equipment, accounts payable
and accrued liabilities. The purchase price in excess of the fair value of
identifiable tangible and intangible assets and liabilities assumed in the
amount of $4,176,000 was allocated to goodwill and is being amortized over its
estimated useful life of two years.
CardSecure Acquisition
On December 29, 1998, the Company acquired an initial 67% ownership stake (on an
as converted basis) in CardSecure, Inc., a company which provides eCommerce
enabling technology as well as Web site hosting services, through a $500,000
cash investment. Approximately $(522,000) 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 purchase price in excess of the value of identified tangible assets and
liabilities assumed in the amount of $1,022,000 was allocated to goodwill and
other intangibles and is being amortized over its estimated useful life of three
years.
Summary
Each of the Acquisitions has been accounted for using the purchase method of
accounting, and accordingly, each purchase price has been allocated to the
tangible and identifiable intangible assets acquired and liabilities assumed on
the basis of their fair values on the acquisition dates. The historical carrying
amounts of such assets and liabilities approximated their fair values. The
following summarizes the purchase price allocation for each of the respective
acquisitions:
<TABLE>
<CAPTION>
PURCHASE PRICE ALLOCATION
NET TANGIBLE IN-PROCESS
EFFECTIVE ACQUISITION ASSETS RESEARCH AND INTANGIBLES/
ACQUIRED ENTITY DATE COSTS (LIABILITIES) DEVELOPMENT GOODWILL
- ------------------------ --------- ------------- -------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
Petry .................. 25-Feb-98 $ 4,293,000 $ (1,635,000) $ -- $ 5,928,000
Advercomm .............. 25-Feb-98 2,791,000 85,000 -- 2,706,000
Intelligent Interactions 13-Apr-98 7,671,000 (154,000) 5,000,000 2,825,000
CliqNow! ............... 1-Jun-98 4,336,000 160,000 -- 4,176,000
CardSecure ............. 29-Dec-98 500,000 (522,000) -- 1,022,000
------------ ------------- ------------ ------------
$ 19,591,000 $ (2,066,000) $ 5,000,000 $ 16,657,000
------------ ------------- ------------ ------------
------------ ------------- ------------ ------------
</TABLE>
23
<PAGE>
24/7 MEDIA, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1997
The following unaudited pro forma consolidated amounts give effect to the
Acquisitions as if they had occurred at January 1, 1997, or date of inception,
if later, by consolidating the results of operations of Petry, Advercomm,
(2) Acquisitions and Investment in Affiliated Company--Continued
Intelligent Interactions, CliqNow!, and CardSecure with the results of the
Company for years ended December 31, 1997 and 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 25, 1998 (date of acquisition).
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.
<TABLE>
<CAPTION>
Year Ended
----------------------------
December 31, December 31,
1997 1998
------------ ------------
<S> <C> <C>
Total revenues ............................. $ 5,576,000 $ 23,352,000
Net loss ................................... (18,802,000) (29,357,000)
Net loss attributable to common stockholders (19,348,000) (29,736,000)
Net loss per share--basic and diluted ...... $ (3.75) $ (2.68)
Weighted average shares used in basic and
diluted net loss pershare calculation(1) ... 5,158,674 11,085,482
</TABLE>
(1) The Company computes net loss per share in accordance with the provisions of
SFAS No. 128, "Earnings Per Share." 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 years ended December 31, 1997 and
1998, respectively, plus the Common Shares issued in connection with each of the
Acquisitions 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. In addition, diluted net loss per
share is equal to basic net loss per share as Common Stock issuable upon
exercise of employee stock options and upon exercise of outstanding warrants are
not included because they are 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.
Investment in China.com
On December 30, 1998, the Company invested $3.0 million in cash and issued
203,851 shares of Common Stock to China.com Corporation in exchange for a 10%
equity interest in China.com. The investment of $6,566,000 in China.com will be
carried under the cost method of accounting.
24
<PAGE>
24/7 MEDIA, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1997
(3) Balance Sheet Components
Prepaid Expenses and Other Current Assets
<TABLE>
<CAPTION>
December 31,
----------------------
1997 1998
--------- ---------
<S> <C> <C>
Prepaid operating lease ................... $ -- $101,000
Prepaid insurance ......................... -- 146,000
Other prepaid ............................. 29,000 303,000
--------- ---------
$ 29,000 $550,000
--------- ---------
--------- ---------
</TABLE>
Property and Equipment, Net
<TABLE>
<CAPTION>
December 31,
---------------------------
1997 1998
----------- -----------
<S> <C> <C>
Computer equipment ..................................... $ 1,648,000 $ 3,067,000
Furniture and fixtures ................................. 11,000 261,000
Leasehold improvements ................................. -- 208,000
----------- -----------
1,659,000 3,536,000
Less accumulated depreciation and amortization ......... (704,000) (1,437,000)
----------- -----------
$ 955,000 $ 2,099,000
----------- -----------
----------- -----------
</TABLE>
At December 31, 1997 and 1998, computer equipment includes equipment with a cost
of $0 and $116,000, respectively, acquired under a capital lease (see note 10).
The net book value of the related equipment at December 31, 1997 and 1998, is $0
and $105,000, respectively.
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 $757,000 of equipment purchases, net of accumulated depreciation, that could
no longer be located and has ditional controls to safeguard its fixed assets.
25
<PAGE>
24/7 MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1997
(3) Balance Sheet Components - continued
Intangible Assets
<TABLE>
<CAPTION>
December 31,
-----------------------------
1997 1998
------------- --------------
<S> <C> <C>
Goodwill ......................... $ -- $ 16,657,000
Less accumulated amortization .... -- (5,722,000)
------------- --------------
$ -- $ 10,935,000
------------- --------------
------------- --------------
Licenses ......................... -- 15,000
Trademarks ....................... 4,000 4,000
------------- --------------
4,000 19,000
Less accumulated amortization .... (1,000) (3,000)
------------- --------------
$ 3,000 $ 16,000
------------- --------------
------------- --------------
</TABLE>
Accrued Liabilities
<TABLE>
<CAPTION>
December 31,
------------------------
1997 1998
---------- ----------
<S> <C> <C>
Professional fees ......................... $ 226,000 $ 479,000
Employee commissions and expenses(1) ...... -- 2,739,000
Ad management fees ........................ -- 406,000
Affiliate royalties ....................... 81,000 464,000
Rent and lease obligations ................ -- 282,000
Other ..................................... 168,000 831,000
---------- ----------
$ 475,000 $5,201,000
---------- ----------
---------- ----------
</TABLE>
(1) Employee commissions and expenses include commissions earned by the
Company's sales staff for the most recent period, as well as out-of-pocket
expenses incurred by those employees. All such balances as of December 31,
1998 have been subsequently paid.
(4) 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, 1998, the Company had approximately $33,111,000 of
federal and state net operating loss carryforwards available to offset future
taxable income; such carryforwards expire in various years through 2018.
26
<PAGE>
24/7 MEDIA, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1997
(4) Income Taxes--Continued
As a result of various equity transactions during 1996, 1997 and 1998 (see notes
2 and 6), 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 is 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 1996, 1997 and 1998, 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 and state deferred tax assets and
deferred tax liabilities at December 31, 1997 and 1998 are presented below.
<TABLE>
<CAPTION>
1997 1998
------------ ------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards ................................... $ 6,785,000 $ 14,854,000
Deferred revenues ................................................. 43,000 23,000
Reserve for sales allowances ...................................... -- 165,000
Accounts receivable principally due to allowance for doubtful
accounts ......................................................... 29,000 121,000
Amortization of goodwill .......................................... -- 482,000
Accrued compensation .............................................. -- 290,000
Other ............................................................... 15,000 77,000
------------ ------------
Gross deferred tax assets ........................................... 6,872,000 16,012,000
Less: valuation allowance ........................................... (6,723,000) (15,831,000)
Net deferred tax assets ........................................... 149,000 181,000
Deferred tax liabilities:
Plant and equipment, principally due to differences in
depreciation ..................................................... (149,000) (181,000)
------------ ------------
Gross deferred tax liabilities .................................... (149,000) (181,000)
------------ ------------
$ -- $ --
------------ ------------
------------ ------------
</TABLE>
(5) Notes Payable
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,
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 6--Convertible Preferred Shares). All accrued
interest on these Notes, aggregating $22,000, 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 $18,000 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.
27
<PAGE>
24/7 MEDIA, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1997
(5) Notes Payable--Continued
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, were 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 was recorded
as debt discount and was 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 were 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 $1,500,000 of Notes issued prior to September 1, 1997
was $11.48 per share and for the $1,000,000 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, $94,000 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 $43,000 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 were convertible into 43,321 shares of 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 $12,000 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, $2,056,000
of the Senior Convertible Notes Payable--Related Parties, plus accrued interest
thereon, were converted into 750,586 shares of Common Stock, and approximately
$500,000 of such notes, plus accrued interest thereon, were converted into
77,450 shares of Common Stock. With regard to the $1,500,000 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 were exchanged for
99,119 shares of Common Stock. Since the Company exchanged one equity security
(common shares) for another equity security (warrants) of equivalent value it
resulted in no financial statement impact other than to record the par value of
the common stock issued by increasing common stock and reducing additional paid
in capital.
Credit Line
In May 1998, the Company secured a line of credit up to an amount of $200,000
bearing interest at the lender's reference rate which was 8.0% (payable monthly)
as of December 31, 1998. As of December 31, 1998, $180,000 was outstanding under
the line of credit. The line of credit is repayable in May 1999 and is secured
by certain of the Company's assets.
28
<PAGE>
24/7 MEDIA, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1997
(5) Notes Payable--Continued
Loan Payable - related parties
The Company had a note payable to a stockholder of $593,000 and $433,000 as of
December 31, 1998 and 1997, respectively. The loan was payable upon demand, and
interest was charged at prime plus 2% (10.5% as of December 31, 1998). The loan
was subsequently repaid in full in March 1999. In addition, the Company issued
convertible promissory note to two shareholders in aggregate of $125,000 in
1996. Interest was charged at 8% per annum. In 1997, the note was converted to
common stock.
On September 30, 1998, the Company settled all of its obligations to Petry Media
Corporation which arose in connection with the Company's acquisition of Petry in
February 1998 for a lump sum payment of $829,000. Accordingly, the difference
between the lump sum payment of $829,000 and the Company's recorded obligations
for its outstanding loan payable and accrued royalties payable in the amount of
$184,000 and $218,000, respectively, was attributed to the contingent purchase
obligation and resulted in an adjustment of $427,000 to the Petry purchase
price. Such amount increased goodwill and is being amortized over its remaining
amortization period from October 1, 1998.
Warrants
In connection with the issuance of Mandatory Conversion 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 the fair value of the warrants
as original issue debt discount.
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 Option 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 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 the fair value of the
warrants as original issue debt discount.
As of February 24, 1998, Interactive Imaginations and Michael P. Paolucci
entered into a Confidential Separation Agreement and General Release ("Release
Agreement") pursuant to which Mr. Paolucci's employment as an executive of
Interactive Imaginations was terminated. The terms of the Release 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 $450,000 of expense during the first
quarter of 1998 in connection 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 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. During January 1999, Mr. Paolucci exercised his Class
C Warrants to purchase 625,000 shares of Common Stock in exchange for 546,775
shares of Common Stock in a cashless exercise.
In February 1998, the Company issued to a consultant a warrant to purchase
28,750 shares of Common Stock at an exercise price of $3.48 per share 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 $20,000, 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.
29
<PAGE>
24/7 MEDIA, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1997
(5) Notes Payable--Continued
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 were exchanged for 99,119 shares of
Common Stock. Since the Company exchanged one equity security (common shares)
for another equity security (warrants) of equivalent value it resulted in no
financial statement impact other than to record the par value of the common
stock issued by increasing common stock and reducing additional paid in capital.
Upon consummation of the II Merger (as discussed in Note 2), 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, 265,212 of Class A Warrants, 265,212 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. 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.
During the third quarter of 1998, certain investors in the II Merger exchanged
185,159 warrants for 92,230 shares of Common Stock as provided for in the
original terms of the II Merger Agreement. The Company exchanged one equity
security (common shares) for another equity security (warrants) of equivalent
value which resulted in no financial statement impact other than to record the
par value of the common stock issued by increasing common stock and reducing
additional paid in capital.
Warrant activity during the periods indicated is as follows:
<TABLE>
<CAPTION>
Warrants Exercise
Granted Price
------------ ---------
<S> <C> <C>
Outstanding at December 31, 1995 .......... --
Granted ................................... 6,533 $ 11.48
Exercised ................................. -- --
Canceled .................................. -- --
------------ ---------
Outstanding at December 31, 1996 .......... $ 6,533 11.48
Granted ................................... 173,695 $ 3.56
Exercised ................................. -- --
Canceled .................................. -- --
------------ ---------
Outstanding at December 31, 1997 .......... 180,228 $ 3.84
Granted ................................... 3,985,595 $ 8.35
Exercised ................................. (362,838) $ 6.21
Canceled .................................. -- --
------------ ---------
Outstanding at December 31, 1998 .......... 3,802,985 $ 8.32
------------ ---------
------------ ---------
</TABLE>
All warrants are currently exercisable and have expiration dates generally five
years from the date of grant.
30
<PAGE>
24/7 MEDIA, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1997
(6) Common Stock, Convertible Preferred Shares and Mandatorily Redeemable
Convertible Preferred Stock
Stock Split
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
of common stock and to per share amounts have been restated to reflect these
changes.
Common Stock
During 1996, the Company issued 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.
In March 1996, the Company's shareholders approved a recapitalization plan which
provided for: (i) conversion of the 1,000,000 previously 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 previously authorized Class B Common Shares into 2,000,000
Preferred Shares, par value $.01 per share.
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, 1997 and
1996, the Company recorded compensation expense of $32,000 and $37,000,
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 as 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 year ended December 31, 1998, the Company recognized $25,000 in
compensation expense.
In August 1998, the Company completed an offering of 3,550,000 shares of its
Common Stock, par value $.01 per share, in an initial public offering at an
offering price of $14.00 per share. Net proceeds to the Company from this
initial public offering totaled $44.8 million, after offering costs of $1.4
million.
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 were generally
senior to the Company's Common Shares and were more fully described in the
Company's Amended Certificate of Incorporation (the "Amended Certificate").
31
<PAGE>
24/7 MEDIA, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1997
(6) Common Stock, Convertible Preferred Shares and Mandatorily Redeemable
Convertible Preferred Stock--Continued
Thereafter, the Company completed a private placement of 140,722 Preferred
Shares for an aggregate price of $4,039,000. Such consideration consisted of the
cancellation of outstanding Notes F- (described above) in the aggregate
principal amount of $1,500,000 plus $2,539,000 in cash. Each Preferred Share was
convertible into 2.5 Common Shares (subject to an 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. In January 1997, the
Company issued 17,422 shares of Preferred Stock for a payment of $500,000 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 395,360 Common Shares,
respectively. The 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, were 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 were to 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 were subject to mandatory conversion, and would
automatically convert into Common Shares, as noted above, in the event:
(i) the Company successfully consummated 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 voted in favor of or
consent to such conversion.
For as long as the Preferred Shares were outstanding, the Company could 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.
32
<PAGE>
24/7 MEDIA, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1997
(6) Common Stock, Convertible Preferred Shares and 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 to purchase Common Stock at an exercise price of $7.62 per share and
1,320,904 Class B Warrants to purchase Common Stock at an exercise price of
$11.42 per share in a private placement for total proceeds of $10,060,002. 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.
After giving effect to the Securities Purchase Agreement, including the Merger,
the capital stock of the Company consisted of: (i) 100,000,000 common shares, of
which 6,870,300 shares were issued and outstanding, 2,641,808 shares were
reserved for issuance upon conversion of issued and outstanding Mandatorily
Redeemable Convertible Preferred Stock or "Series A," 1,320,904 shares were
reserved for issuance upon exercise of issued and outstanding Class A Warrants,
1,320,904 shares were reserved for issuance upon exercise of issued and
outstanding Class B Warrants, 643,750 were reserved for issuance upon exercise
of issued and outstanding Class C Warrants, 35,609 were reserved for issuance
upon exercise of issued and outstanding unclassified warrants, 62,757 (subject
to adjustment) were reserved for issuance upon exercise of outstanding
convertible debentures, and 1,437,500 shares were reserved for issuance to key
employees, officers and directors of, and consultants to, the Company under
stock incentives that had been granted or were 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 were outstanding, all of which were designated as
Mandatorily Redeemable Convertible Preferred Stock or Series A shares, all of
which were in a private placement.
Each share of Series A was 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 Series A Shares ranked:
(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
distributions of assets and upon liquidation, dissolution or winding up of the
Company, whether voluntary or involuntary. The Series A shareholders were
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 were subsequently canceled pursuant to the Securities Purchase
Agreement because the Company consummated a qualified initial public offering
(as defined in the Securities Purchase Agreement) prior to January 31, 1999.
The Series A Shares were subject to certain anti-dilution protection, if the
Company raised funds in the future, while the Preferred Stock was still
outstanding, at a Common Stock-equivalent value which was less than the
conversion price of the Preferred Stock.
33
<PAGE>
24/7 MEDIA, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1997
(6) Common Stock, Convertible Preferred Shares and Mandatorily Redeemable
Convertible Preferred Stock--Continued
In the event the Company had 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 would 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 failed 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 would 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 had one vote for each full Common Share into which a
Series A Share would be convertible.
In connection with the Company's IPO, all of the Company's 13,621,507 Series A
Shares automatically converted into 3,577,118 shares of Common Stock. Such
amounts included: i) 10,060,002 Series A Shares issued in connection with the
Initial Merger which converted into 2,641,849 shares of Common Stock; and ii)
3,561,505 Series A Shares issued in connection with the Intelligent Interactions
acquisition which converted into 935,269 shares of Common Stock (see note 2),
each of which, by their terms, automatically converted into Common Stock in
connection with the Company's IPO. In addition, the 3,000 shares of Series B
Convertible Redeemable Preferred Stock issued in connection with the CliqNow!
acquisition, by its terms, automatically converted into 230,415 shares of Common
Stock in connection with the Company's IPO (see note 2). The total number of
common shares issued in connection with the automatic conversion of the
Company's mandatorily redeemable convertible preferred stock in connection with
the IPO was 3,807,553 shares of Common Stock.
Shares Reserved for Future Issuance
Shares reserved for future issuance as of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Common
Stock
---------
<S> <C>
Reserved for issued and outstanding Class A Warrants 1,512,494
Reserved for issued and outstanding Class B Warrants 1,512,494
Reserved for issued and outstanding Class C Warrants 742,388
Reserved for issued and outstanding unclassified warrants 35,609
Reserved for stock incentives under the 1998 Stock Incentive Plan 2,893,891
</TABLE>
(7) Stock Option Plan
During 1998, the board of directors and stockholders of the Company approved the
1998 Stock Incentive Plan as amended (the "Plan"). The following is a summary of
the material features of the Plan. This Plan replaced the 1995 Stock Option
Plan--Amended, which had been established in 1995 and amended in 1996.
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
non-discretionary award of stock options to non-employee directors of the
Company.
34
<PAGE>
24/7 MEDIA, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1997
(7) Stock Option Plan (continued)
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.
The Company applies APB Opinion No. 25 in accounting for its Plan. The Company
recorded a deferred compensation charge of approximately $332,000 in the second
quarter of 1998 in connection with the grant of 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 is presented as a reduction of stockholders'
equity (deficit) and amortized over the vesting period of the applicable
options, generally four years. The Company granted such options at a weighted
average exercise price of $5.74 per share. Amortization of deferred stock
compensation is recorded in general and administrative expense in the
consolidated statement of operations.
The per share weighted-average fair value of stock options granted during 1996,
1997 and 1998 was $9.28, $1.60 and $4.44, respectively, on the date of grant
using the Black-Scholes method with the following weighted-average assumptions:
1996--risk-free interest rate 6.18%, and an expected life of three years;
1997--risk-free interest rate 5.64%, and an expected life of two years; and
1998--risk-free interest rate 5.20%, and an expected life of 4 years. As
permitted under the provision of SFAS No. 123, and based on the historical lack
of a public market for the Company's options, no volatility was reflected in the
options pricing calculation for options granted prior to the IPO. For option
grants subsequent to the Company's August 1998 IPO, a volatility factor of 150%
was used.
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>
<S> <C> <C> <C>
Net loss:
As reported.......... $ (7,482,000) $ (6,313,000) $ (25,433,000)
Pro forma............ $ (7,525,000) $ (6,330,000) $ (25,807,000)
Net loss per share:
As reported.......... $ (4.24) $ (3.50) $ (2.48)
Pro forma............ $ (4.26) $ (3.51) $ (2.52)
</TABLE>
35
<PAGE>
24/7 MEDIA, INSC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1997
(7) Stock Option Plan--Continued
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, 1995 ...................... 67,825 $ 2.94
Granted ............................................... 143,344 4.77
Exercised ............................................. (75,197) 0.34
Canceled .............................................. (20,033) 3.67
----------
Outstanding at December 31, 1996 ...................... 115,939 6.75
Granted (a) ........................................... 330,265 1.38
Exercised ............................................. -- --
Canceled .............................................. (22,783) 6.44
----------
Outstanding at December 31, 1997 ...................... 423,421 2.58
Granted ............................................... 1,469,046 6.82
Exercised ............................................. (106,108) 2.57
Canceled .............................................. (112,357) 2.87
---------- ----------
Outstanding at December 31, 1998 ...................... 1,674,002 $ 6.28
---------- ----------
---------- ----------
Vested at December 31, 1997 ........................... 141,879
----------
----------
Vested at December 31, 1998 ........................... 224,641
----------
----------
Options available for grant at December 31, 1998 ...... 1,163,639
----------
----------
</TABLE>
(a) At December 31, 1997, the total number of options outstanding for purchase
of Common Shares under the 1995 Stock Option Plan-- Amended exceeded the options
available for issuance. Subsequent to December 31, 1997, the Company replaced
the 1995 Stock Option Plan--Amended with the 1998 Stock Incentive Plan 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, 1998:
<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>
$ 0.16-1.72 468,883 2.0 years $ 0.77 207,460 $ 0.88
$ 4.00-6.94 944,869 3.1 years $ 5.24 6,869 $ 4.58
$ 8.00-17.75 133,000 2.7 years $ 11.47 10,312 $ 10.13
$22.69-34.13 127,250 3.0 years $ 26.30 -- $ --
--------- -------
1,674,002 224,641
--------- -------
</TABLE>
36
<PAGE>
24/7 MEDIA, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1997
(8) 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 accordance with Statement of Position 91-1, "Software Revenue Recognition."
The Company received license fees of $1,800,000, of which $1,200,000 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 $1,300,000, 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, 1997 and 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 $10,000, $57,000 and $0, respectively.
During 1996, the Company entered into an agreement with SegaSoft for advertising
on The ContentZone 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
contract. For the years ended December 31, 1996, 1997 and 1998, the Company
recorded $212,000, $326,000 and $0 in revenue, respectively.
During 1996, the Company entered into an agreement with Microsoft Corporation
for advertising on The ContentZone. The term of the contract 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
contract. For the years ended December 31, 1996, 1997 and 1998, the Company
recorded $75,000, $75,000 and $0 in revenue, respectively.
(9) Supplemental Cash Flow Information
Supplemental disclosure of cash flow information:
During 1996, 1997 and 1998, the amount of cash paid for interest was $29,000,
$1,000 and $4,000, respectively.
Non-cash financing activities:
During 1996, the Company converted $1,500,000 of mandatory conversion
subordinated notes into Preferred Shares.
During 1996, the Company acquired assets by entering into capital lease
arrangements amounting to $247,000
During 1997, the Company converted $94,000 of senior convertible notes and a
$125,000 convertible promissory note into Common Stock.
During 1998, the Company issued an aggregate of 5,278,167 shares of Common
Stock, 3,561,505 Series A Shares, 3,000 Series B Shares, 265,212 Class A
Warrants, 265,212 Class B Warrants and 136,553 Class C Warrants in connection
with the Acquisitions.
37
<PAGE>
24/7 MEDIA, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1997
(9) Supplemental Cash Flow Information--Continued
During 1998, the Company converted all outstanding shares of convertible
preferred stock into 4,350,441 shares of Common Stock, converted $2,556,000 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 1998, the Company recorded imputed interest payable on loans
payable--related party of $9,000.
In February 1998, the Company issued warrants to a former officer for $450,000
(see Note 5).
In April 1998, the Company issued 5,909 shares of Common Stock to a consultant
for $22,000.
During 1998, the Company entered into a capital lease for approximately $85,000
of equipment.
In December 1998, the Company issued 203,851 shares of Common Stock in exchange
for an equity interest in China.com.
(10) Commitments
The Company leases its facilities and certain equipment under operating lease
agreements. Rental expense from operating leases amounted to $184,000, $238,000
and $775,000 for the years ended 1996, 1997 and 1998, respectively.
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 required six quarterly payments of $163,000 beginning on
June 1, 1996. In October 1997, the lease agreement was modified and as a result
the quarterly payments were adjusted to $46,000 through the extended term of the
lease, November 30, 1998. Rent expense for the operating lease was $381,000,
$612,000 and $182,000 for the years ended 1996, 1997 and 1998, 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 system, with a
combined fair market value of $849,000. The operating lease as, amended,
requires monthly payments and expires in December, 2001. Total rent expense for
currently outstanding leases is expected to be approximately $91,000 per
quarter.
In 1998, the Company entered into an operating lease agreement for space rental
at its new corporate headquarters for a period of 10 years. The Company's annual
lease expense for this office space will be approximately $1,200,000. The
Company expects to incur approximately $1.6 million in leasehold improvements in
connection with the new office space. During the fourth quarter of 1998, the
Company entered into a lease line of credit for up to $3,000,000 to finance
capital equipment. As of December 1998, total obligations under this lease line
of credit were approximately $600,000.
The Company's Adfinity ad serving software and hardware are housed at
GlobalCenter, Inc. in Herndon, Virginia. The agreement with GlobalCenter
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. Service orders in place under this agreement, which
expire in May 1999, require monthly payments of approximately $27,000.
38
<PAGE>
24/7 MEDIA, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1997
(10) Commitments--Continued
Future minimum payments under noncancelable operating leases and capital leases
at December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Operating Capital
Year ending December 31 leases leases
- ----------------------------------------------------------- ---------------- ---------
<S> <C> <C>
1999 ................................................... $ 2,050,000 $ 89,000
2000 ................................................... 2,220,000 36,000
2001 ................................................... 1,984,000 --
2002 ................................................... 1,677,000 --
2003 ................................................... 1,397,000 --
Thereafter ............................................. 4,564,000 --
---------------------------
Total minimum lease payments ........................ $ 13,892,000 125,000
-----------
-----------
Less amount representing interest ................... 9,000
---------
Present value of net minimum lease payments 116,000
Less current portion ................................ 82,000
----------
Long term portion ................................... $ 34,000
----------
----------
</TABLE>
The Company 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., and at that time a director
of the Company, 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. This
agreement was not renewed in 1999.
On December 11, 1998, the Company entered into a severance agreement with Yale
R. Brown, a former director and Executive Vice President, under which Mr. Brown
resigned as an officer and director. The Company agreed to pay Mr. Brown the sum
of $140,000 as severance, including attorneys' fees, and the Company exchanged
mutual releases of substantially all claims arising out of this employment.
(11) 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 $232,000.
39
<PAGE>
24/7 MEDIA, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1997
(12) Selected Quarterly Financial Data--Unaudited
The following is a summary of selected quarterly financial data for the
years ended December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 Quarters Ended
--------------------------------------------------------
31-Mar 30-Jun 30-Sep 31-Dec
--------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues ......................................... $ 1,204,000 $ 3,971,000 $ 5,807,000 $ 9,884,000
Operating loss(a) ................................ (2,224,000) (9,972,000) (6,221,000) (7,316,000)
Net loss ......................................... (2,412,000) (9,961,000) (6,002,000) (6,782,000)
Cumulative dividends on mandatorily redeemable
convertible preferred stock .............. (34,000) (152,000) (90,000) --
Net loss attributable to common stockholders ..... (2,446,000) (10,113,000) (6,092,000) (6,782,000)
Net loss per share attributable to common
stockholders ..................................... $ (0.64) $ (1.17) $ (0.49) $ (0.42)
</TABLE>
<TABLE>
<CAPTION>
1997 Quarters Ended
--------------------------------------------------------
31-Mar 30-Jun 30-Sep 31-Dec
-------------- ------------- ------------ -----------
<S> <C> <C> <C> <C>
Revenues ............................................. $ 1,197,000 $ 988,000 $ 561,000 $ 471,000
Operating loss ....................................... (995,000) (1,709,000) (2,656,000) (799,000)
Net loss ............................................. (993,000) (1,742,000) (2,706,000) (872,000)
Cumulative dividends on mandatorily redeemable
convertible preferred stock ................. -- -- -- --
Net loss attributable to common stockholders ......... (993,000) (1,742,000) (2,706,000) (872,000)
Net loss per share attributable to common
stockholders ......................................... $ (0.55) $ (1.97) $ (1.51) $ (0.47)
</TABLE>
(a) In April 1998, the Company acquired Intelligent Interactions in a
transaction accounted for as a purchase (see note 2). The preliminary
purchase price was allocated to the acquired assets and liabilities based on
their estimated fair values as of the date of the acquisition. This included
$5,477,000 allocated to purchased in-process technology and charged to
operations at the time of acquisition. Accordingly, the Company expensed this
amount in its originally reported June 30, 1998 operating results.
During the fourth quarter of 1998, the Company finalized the purchase price
allocation related to the purchased in-process technology and core technology
being acquired. This adjustment decreased the amount previously allocated to
in-process technology and increased goodwill by $477,000 which is being
amortized on a straight-line basis over two years. As a result, the Company
has restated the above quarterly financial information for the second and
third quarters of 1998 to reflect this change.
40
<PAGE>
24/7 MEDIA, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1997
(13) Subsequent Events--Unaudited
On January 20, 1999, the Company purchased a 60% interest in 24/7 MediaEurope,
Ltd. ("24/7 Media Europe", formerly InterAd Holdings Limited), which operates
the 24/7 Media Europe Network, for $3,900,000. On April 9, 1999, an additional
investment of $500,000 in the common stock of 24/7 Media Europe was made.
Combined with our earlier investment, this increased our total ownership
interest in 24/7 Media Europe from 60% to 63%. Through July 1999, the Company
advanced approximately $3.8 million to 24/7 Media Europe which on July 9, 1999
was converted into an interest bearing note due on July 1, 2000. On September
22, 1999 the Company advanced an additional $1.2 million.
In 1999 through September 30, 1999, the Company granted approximately 2.1
million stock options at exercise prices of $22.88 to $63.75 per share, all of
which were granted at the fair market value of the Company's Common Stock at the
time of grant. These stock options have a weighted average exercise price of
$31.36 per share.
On March 17, 1999, the Company 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, the Company 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. The Company will also jointly
provide ad sales consulting and regional representation services to more than
100 NBC stations that are currently affiliated with NBC-IN.
The Company 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 8 broadcast station
markets. In accordance with the terms of the agreement, the Company 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, the Company 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.
On April 5, 1999, the Company entered into a cross promotion agreement with
TechWave Inc. ("TechWave"). TechWave 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, the
Company will promote TechWave's services to our Web sites while TechWave will
promote our advertising representation and e-mail management services to
TechWave's clients. In addition, the Company will co-brand our Click2Buy
transactional banner service with TechWave'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. The Company
also agreed to acquire 18% of TechWave in exchange for consideration of $5.1
million in cash plus shares of our common stock with a value equal to $23.6
million. The investment in TechWave will be carried under the cost method of
accounting and, accordingly, the investment will be carried as a long-term
asset on our consolidated balance sheet.
41
<PAGE>
24/7 MEDIA, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1997
(13) Subsequent Events--Unaudited (Continued)
On April 30, 1999, the Company entered into a co-branded credit card agreement
with Fleet Credit Card Services, L.P., whereby the Company is 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 $32.0 million over a five year period subject to our
company providing a guaranteed minimum level of impressions as set forth in the
agreement.
On May 3, 1999, the Company completed an additional offering of our common
stock. In this offering, the Company 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 $100.2 million.
On May 28, 1999, the Company entered into a subscription agreement with
China.com Corporation to purchase an additional 450,000 shares for $9.0 million.
In July 1999, China.com completed its initial public offering, as a result of
which our ownership interest in China.com was diluted form 10% to 7.7%. Our
equity investment in China.com will be accounted for under the cost method of
accounting and, accordingly, the investment will be carried as a long-term asset
on our consolidated balance sheet.
On July 26, 1999, the Company 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 shares of
our common stock at the option of the holders or the Company. 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 17, 1999 the Company acquired ConsumerNet, a leading provider of email
marketing solutions. The aggregate purchase price of approximately $52.0 million
consists of approximately 1.7 million shares of our common stock and $2.0
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.
On September 13, 1999, the Company acquired a 5.9% equity interest in Naviant
Technology Solutions, Inc. ("Naviant") for approximately $5.0 million. The
Company's equity investment in Naviant will be accounted for under the cost
method of accounting and, accordingly, the investment will be carried as a
long-term asset on our consolidated balance sheet.
42
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in the city of New
York, State of New York on October 26, 1999.
24/7 MEDIA, INC.
By: /s/ C. Andrew Johns
---------------------------
C. Andrew Johns
Treasurer & Chief Financial Officer
43
<PAGE>
SUPPLEMENTAL SCHEDULE
24/7 MEDIA, INC.
VALUATION AND QUALIFYING ACCOUNTS--
ALLOWANCE FOR DOUBTFUL ACCOUNTS
<TABLE>
<CAPTION>
Balance at Additional Balance
Beginning Charged at end of
Year Ended of Period to Expense Deductions Period
- ------------------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
December 31, 1996 $10,000 $ 66,000 $ 10,000 $ 66,000
December 31, 1997 $66,000 $ - $ 2,000 $ 64,000
December 31, 1998 $64,000 $347,000 $143,000 $ 268,000
</TABLE>
S-1
<PAGE>
Exhibit 11.1
Supplemental Computation of net loss per share
Supplemental computation of net loss per share
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1997 1998
------------- ------------- -------------
<S> <C> <C> <C>
Basic:
Net Loss $ (7,482,000) $ (6,313,000) $(25,157,000)
------------- ------------- -------------
Cumulative Dividends on manditorily
convertible preferred stock -- -- (276,000)
------------- ------------- -------------
Net loss applicable to common stockholders $ (7,482,000) $ (6,313,000) $(25,433,000)
------------- ------------- -------------
------------- ------------- -------------
Basic weighted average shares outstanding 1,765,053 1,802,235 10,248,677
------------- ------------- -------------
------------- ------------- -------------
Basic net loss per common share $ (4.24) $ (3.50) $ (2.48)
------------- ------------- -------------
------------- ------------- -------------
Diluted:
Net Loss applicable to common stockholders $ (7,482,000) $ (6,313,000) $(25,433,000)
------------- ------------- -------------
------------- ------------- -------------
Basic weighted average shares outstanding 1,765,053 1,802,235 10,248,677
Neteffect of dilutive securities -- -- --
------------- ------------- -------------
Diluted weighted average shares outstanding 1,765,053 1,802,235 10,248,677
------------- ------------- -------------
------------- ------------- -------------
Diluted net loss per common share $ (4.24) $ (3.50) $ (2.48)
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
45
<PAGE>
Exhibit 23.1
Independent Auditors' Consent
The Board of Directors
24/7 Media, Inc.:
We consent to the incorporation by reference in the registration statement (No.
333-66995) on Form S-8 and in the registration statement (No. 333-83287) on Form
S-8 of our report dated October 25, 1999, with respect to the supplemental
consolidated balance sheets of 24/7 Media, Inc. and subsidiaries as of December
31, 1997 and 1998, and the related supplemental consolidated statements of
operations, shareholders' equity (deficit), and cash flows for each of the years
in the three-year ended December 31, 1998, included in its Current Report on
Form 8-K expected to be filed on October 29, 1999.
/s/ KPMG LLP
New York, New York
October 25, 1999
46
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFROMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1998 AND 1997 AND THE CONSOLIDATED
STATEMENT OF OPERATION FOR THE YEAR ENDED DECEMBER 31, 1998 AND 1997.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> DEC-31-1998 DEC-31-1997
<CASH> 34,049 121
<SECURITIES> 0 0
<RECEIVABLES> 8,946 259
<ALLOWANCES> 268 64
<INVENTORY> 0 0
<CURRENT-ASSETS> 43,277 345
<PP&E> 3,536 1,659
<DEPRECIATION> 1,437 704
<TOTAL-ASSETS> 63,108 1,463
<CURRENT-LIABILITIES> 11,987 2,013
<BONDS> 0 2,217
0 0
0 2
<COMMON> 164 18
<OTHER-SE> 50,923 (2,967)
<TOTAL-LIABILITY-AND-EQUITY> 63,108 1,463
<SALES> 20,747 1,536
<TOTAL-REVENUES> 20,866 3,217
<CGS> 16,149 1,669
<TOTAL-COSTS> 30,450 7,707
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 310 172
<INCOME-PRETAX> (25,157) (6,313)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (25,157) 6,313
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (25,157) (6,313)
<EPS-BASIC> (2.48) (3.50)
<EPS-DILUTED> (2.48) (3.50)
</TABLE>
