<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
or
| | TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-14355
24/7 MEDIA, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-3995672
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
7319
(STANDARD INDUSTRIAL CLASSIFICATION CODE)
1250 BROADWAY, NEW YORK, NY 10001
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(212) 231-7100
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant has filed all reports required to
be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO___
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS OUTSTANDING AT NOVEMBER 11, 1999
Common Stock, par value $.01 per share 22,314,579 Shares
<PAGE>
24/7 MEDIA, INC.
INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of September 30, 1999 (unaudited) and December 31, 1998....................... 3
Consolidated Statements of Operations for the nine months ended September 30, 1999 and
1998 (unaudited)........................................................................................... 4
Consolidated Statements of Cash Flows for the nine months ended September 30, 1999 and
1998 (unaudited)........................................................................................... 5
Notes to Interim Consolidated Financial Statements (Unaudited)............................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................. 16
Item 3. Quantitative and Qualitative Disclosures about Market Risk............................................. 31
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...................................................................................... 31
Item 2. Changes in Securities and Use of Proceeds.............................................................. 31
Item 3. Defaults Upon Senior Securities........................................................................ 31
Item 4. Submission of Matters to a Vote of Security Holders.................................................... 31
Item 5. Other Information...................................................................................... 31
Item 6. Exhibits and Reports on Form 8-K....................................................................... 31
Item 7. Signatures............................................................................................. 32
</TABLE>
2
<PAGE>
24/7 MEDIA, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------------- -----------------
(unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents........................................ $ 76,806,000 $ 34,049,000
Accounts receivable, net of allowance for doubtful accounts
of $688,000 and $268,000, respectively.......................... 23,324,000 8,678,000
Prepaid expenses and other current assets........................ 1,550,000 550,000
------------- ------------
Total current assets........................... 101,680,000 43,277,000
------------- ------------
Property and equipment, net........................................ 14,010,000 2,099,000
Goodwill, net...................................................... 65,203,000 10,935,000
Intangible assets, net............................................. 31,000 16,000
Investments........................................................ 160,594,000 6,566,000
Deferred compensation to third parties............................. 2,945,000 -
Other Assets....................................................... 363,000 215,000
------------- ------------
Total assets................................... $344,826,000 $ 63,108,000
------------- ------------
------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................. 15,463,000 5,797,000
Accrued liabilities.............................................. 7,675,000 5,201,000
Loan payable..................................................... - 593,000
Short term credit line........................................... - 180,000
Current installments of obligations under capital leases......... 49,000 82,000
Deferred revenue................................................. 2,211,000 134,000
------------- ------------
Total current liabilities...................... 25,398,000 11,987,000
------------- ------------
------------- ------------
Obligations under capital leases, excluding current installments... 12,000 34,000
Deferred tax liability............................................. 33,397,000 -
Stockholders' equity:
Convertible preferred stock, $.01 par value: 10,000,000 shares
authorized; no shares issued or outstanding - -
Common stock, $.01 par value; 70,000,000 shares authorized;
22,163,289 and 16,434,494 shares issued and outstanding,
respectively.................................................... 222,000 164,000
Additional paid-in capital....................................... 276,306,000 92,003,000
Deferred stock compensation...................................... (260,000) (345,000)
Unrealized gain on investments, net of tax....................... 76,489,000 -
Foreign currency translation adjustment.......................... 72,000 -
Accumulated deficit.............................................. (66,810,000) (40,735,000)
------------- ------------
Total stockholders' equity..................... 286,019,000 51,087,000
------------- ------------
------------- ------------
Commitments and contingencies .....................................
Total liabilities and stockholders' equity...... $344,826,000 $ 63,108,000
------------- ------------
------------- ------------
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
24/7 MEDIA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------- -----------------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Network...................................... $ 21,861,000 $ 5,528,000 $ 49,468,000 $ 10,305,000
Email........................................ 2,452,000 279,000 3,450,000 677,000
------------- ------------ ------------ -------------
Total revenues............... 24,313,000 5,807,000 52,918,000 10,982,000
Cost of revenues:
Network...................................... 16,368,000 4,616,000 37,932,000 8,644,000
Email........................................ 1,379,000 37,000 1,673,000 117,000
------------- ------------ ------------ -------------
Total cost of revenues....... 17,747,000 4,653,000 39,605,000 8,761,000
Gross profit................. 6,566,000 1,154,000 13,313,000 2,221,000
Operating expenses:
Sales and marketing.......................... 6,920,000 2,589,000 14,868,000 4,992,000
General and administrative................... 7,809,000 2,357,000 16,541,000 5,757,000
Product development.......................... 327,000 546,000 1,569,000 1,140,000
Write-off of acquired in process technology.. - - - 5,000,000
Amortization of goodwill..................... 4,212,000 1,883,000 8,592,000 3,749,000
------------- ------------ ------------ -------------
------------- ------------ ------------ -------------
Total operating expenses..... 19,268,000 7,375,000 41,570,000 20,638,000
------------- ------------ ------------ -------------
Loss from operations......... (12,702,000) (6,221,000) (28,257,000) (18,417,000)
------------- ------------ ------------ -------------
Interest income.................................. 1,045,000 250,000 2,248,000 326,000
Interest expense................................. (11,000) (31,000) (66,000) (284,000)
------------- ------------ ------------ -------------
Net loss..................... (11,668,000) (6,002,000) (26,075,000) (18,375,000)
Cumulative dividends on preferred stock.......... - (90,000) - (276,000)
------------- ------------ ------------ -------------
Net loss attributable to common
stockholders.................................. $ (11,668,000) $ (6,092,000) $(26,075,000) $(18,651,000)
------------- ------------ ------------ -------------
------------- ------------ ------------ -------------
Net loss per share - basic and diluted........... $ (0.55) $ (0.49) $ (1.36) $ (2.24)
------------- ------------ ------------ -------------
------------- ------------ ------------ -------------
Weighted average shares outstanding.............. 21,103,871 12,452,876 19,202,112 8,325,812
------------- ------------ ------------ -------------
------------- ------------ ------------ -------------
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
24/7 MEDIA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended September 30,
--------------------------------------------
1999 1998
-------------------- ----------------------
(unaudited) (unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss...................................................................... $ (26,075,000) $ (18,375,000)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization................................................. 1,598,000 473,000
Amortization of debt discount................................................. - 158,000
Write-off of acquired in process technology................................... - 5,000,000
Accrued interest on senior convertible notes-related parties.................. - 15,000
Imputed interest on note payable-related party................................ - 9,000
Amortization of goodwill and other intangible assets.......................... 8,762,000 3,750,000
Amortization of deferred compensation of third parties........................ 648,000 -
Non-cash compensation......................................................... 285,000 536,000
Changes in operating assets and liabilities, net of effect of acquisitions:
Accounts receivable, net.................................................. (13,354,000) (4,368,000)
Prepaid expenses and other current assets................................. (986,000) (268,000)
Other assets.............................................................. (160,000) (157,000)
Accounts payable.......................................................... 7,882,000 2,693,000
Accrued liabilities....................................................... 1,230,000 985,000
Deferred revenue.......................................................... 1,934,000 (38,000)
-------------- --------------
Net cash used in operating activities........................ (18,236,000) (9,587,000)
-------------- --------------
Cash flows from investing activities:
Increase in intangible assets................................................. (18,000) (21,000)
Cash paid for investments..................................................... (19,619,000) -
Cash paid for acquisition, net of cash acquired............................... (6,002,000) (1,459,000)
Purchases of property and equipment........................................... (13,338,000) (1,068,000)
-------------- --------------
Net cash used in investing activities......................... (38,977,000) (2,548,000)
-------------- --------------
Cash flows from financing activities:
Repayments of loan............................................................ (1,439,000) -
Proceeds from issuance of common stock related to initial public offering, net - 44,771,000
Proceeds from secondary offering, net......................................... 100,465,000 -
Proceeds from issuance of mandatorily
redeemable convertible preferred stock..................................... - 10,060,000
Deferred offering costs....................................................... - (321,000)
Proceeds from senior convertible notes payable-related parties................ - 150,000
Payment of capital lease obligations.......................................... (55,000) (27,000)
Proceeds from exercise of stock options and conversion of warrants............ 1,107,000 129,000
(Payments of)/proceeds from short-term borrowings............................. (180,000) 47,000
-------------- --------------
Net cash provided by financing activities..................... 99,898,000 54,809,000
-------------- --------------
Net change in cash and cash equivalents....................... 42,685,000 42,674,000
Effect of exchange rate changes on cash........................................... 72,000 -
Cash and cash equivalents at beginning of period.................................. 34,049,000 121,000
-------------- --------------
Cash and cash equivalents at end of period........................................ $ 76,806,000 $ 42,795,000
-------------- --------------
-------------- --------------
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
24/7 MEDIA, INC.
NOTES TO INTERIM CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
UNAUDITED
THE TERMS "WE" AND "OUR COMPANY" MEAN 24/7 MEDIA, INC., OUR SUBSIDIARIES AND
EACH OF OUR PREDECESSOR ENTITIES.
(1) SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
(a) Summary of Operations
We operate networks of Web sites that enable both advertisers and Web publishers
to capitalize on the opportunities presented by Internet advertising, direct
marketing and electronic commerce. We generate revenues by delivering
advertisements and promotions to Web sites affiliated with us. Our network
properties include The 24/7 Network, The 24/7 Media Europe Network, and The
ContentZone, which are networks of Web sites to which advertisements and
promotions are served. In addition, we provide e-mail based direct marketing
services.
We were incorporated in Delaware on January 23, 1998 as a wholly owned
subsidiary of Interactive Imaginations, Inc. On February 25, 1998, pursuant to
an Agreement and Plan of Merger dated February 2, 1998, we simultaneously
completed the merger of each of Petry Interactive, Inc. and Advercomm, Inc. with
and into us (the mergers, together with a concurrent investment of approximately
$10 million by certain third party investors as well as with an existing
investor of Interactive Imaginations, are referred to as the "Initial Merger").
On April 9, 1998, Interactive Imaginations, our then parent, was merged with and
into us in a manner similar to a pooling of interests. As a result, our
historical results of operations for all periods prior to the Initial Merger
represent those of Interactive Imaginations.
On April 13, 1998, we acquired Intelligent Interactions Corporation, a
corporation that developed and licensed ad serving technology and e-commerce
software. As of June 1, 1998, we acquired CliqNow!, a network of Web sites that
were subsequently folded into The 24/7 Network. On December 29, 1998, we
acquired a 67% interest in CardSecure, Inc., which was subsequently disposed of
on June 1, 1999.
On December 30, 1998, we acquired a 10% common equity interest in China.com
Corporation for approximately $6.6 million. On May 28, 1999, we entered into a
subscription agreement to purchase an additional 450,000 shares for $9.0
million. In July 1999, China.com completed its initial public offering, as a
result of which our ownership interest in China.com was diluted to 7.7%. Our
equity investment in China.com is classified as an available-for-sale
security and accordingly is reflected as its fair market value and included
as a long term investment on our consolidated balance sheet.
On January 20, 1999, we invested $3.9 million in the aggregate to purchase a
60% interest in 24/7 Media Europe, Ltd. (formerly InterAd Holdings Limited),
which operates The 24/7 Media Europe Network. Approximately $1.9 million was
paid in cash to acquire shares directly from 24/7 Europe. The remaining
balance included $1.2 million which was used to acquire shares from existing
shareholders and $846,000 in cash which was subsequently used to repay a loan
payable. The aggregate purchase price was allocated to net tangible
liabilities consisting primarily of cash, accounts receivable, property and
equipment, accounts payable and accrued liabilities. The purchase price in
excess of the value of identified tangible assets and liabilities assumed, in
the amount of $2.7 million, was allocated to goodwill and other intangibles
and is being amortized over its estimated useful life of four years. On June
22, 1999, we made an additional investment of $500,000 in the common stock of
24/7 Media Europe.
6
<PAGE>
24/7 MEDIA, INC.
NOTES TO INTERIM CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
In August of 1999, 24/7 Media Europe issued shares to acquire a Finnish
Internet advertising company which diluted our investment to 58% as of
September 30, 1999. The aggregate purchase price of approximately $2.3
million was allocated to net tangible assets. The purchase price in excess of
the value of identified tangible assets and liabilities assumed in the amount
of $2.2 million was allocated to goodwill and other intangibles and is being
amortized over its estimated useful life of three years.
On March 8, 1999, we acquired Sift, Inc., a provider of e-mail based direct
marketing services, for approximately 763,000 shares of our common stock plus
the assumption of previously-outstanding stock options which were converted into
options to acquire approximately 100,000 shares of our common stock.
On April 5, 1999, we entered into a cross promotion agreement with ShopNow.com.
ShopNow.com provides e-commerce technology and enabling services, an online
shopping network, creative design services, and product fulfillment to more than
29,000 Web sites. Under this agreement, we will promote ShopNow.com's services
to our Web sites while ShopNow.com will promote our advertising representation
and e-mail management services to ShopNow.com's clients. In addition, we will
co-brand our Click2Buy transactional banner service with ShopNow.com's ShopNow
e-commerce Web site, an online shopping destination. Each party will receive a
share of the other party's revenues generated under the cross promotion
agreement. Pursuant to this agreement and the securities purchase agreement, we
acquired approximately 18% of ShopNow.com in exchange for consideration of $5.1
million in cash, shares of our common stock with a value equal to $23.6 million
and our investment in CardSecure. As of September 30, 1999 our investment in
ShopNow.com of approximately $29.6 million is being carried under the cost
method of accounting.
On July 26, 1999, the Company acquired ClickThrough Interactive
("ClickThrough"), 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 in excess of the value of identified
tangible assets and liabilities assumed, in the amount of $5.9 million, has
been allocated to goodwill and other intangibles and is being amortized over
its estimated useful life of three years.
On August 17, 1999, the Company acquired Music Marketing Network Inc. b/d/a
ConsumerNet ("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 $3.2 million in cash
(including acquisition costs of $320,000). The purchase price in excess of
the value of identified tangible assets and liabilities assumed has been
allocated to goodwill and other intangibles, in the amount of $52.9 million,
and is being amortized over its estimated useful life of four years.
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 investment in Naviant will be accounted for under the cost method
of accounting and, accordingly, the investment will be carried as a long-term
investment on our consolidated balance sheet.
7
<PAGE>
24/7 MEDIA, INC.
NOTES TO INTERIM CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
The acquisitions of Petry, Advercomm, Intelligent Interactions, CliqNow!,
CardSecure, 24/7 Media Europe, ClickThrough and ConsumerNet have been accounted
for using the purchase method of accounting and, accordingly, their respective
financial statements are included in our consolidated financial statements from
their respective dates of acquisition and, in the case of CardSecure, until its
date of disposition.
The acquisition of Sift has been accounted for as a pooling-of-interests and,
accordingly, our historical consolidated financial statements have been restated
to include the accounts and results of operations of Sift. The results of
operations previously reported by the separate businesses and the combined
amounts presented in the accompanying consolidated financial statements are
presented below.
<TABLE>
<CAPTION>
Three months Three months Nine months
ended ended ended
March 31, 1999 September 30, 1998 September 30, 1998
-------------------- ------------------------- -------------------------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C>
Net revenues
24/7 Media $11,071,000 $5,528,000 $10,305,000
Sift 379,000 279,000 677,000
------------------- ------------------------ -------------------------
Combined $11,450,000 $5,807,000 $10,982,000
==================== ========================= =========================
Net income (loss)
24/7 Media $ (7,263,000) $ (5,856,000) $ (17,992,000)
Sift 19,000 (146,000) (383,000)
------------------- ------------------------ -------------------------
Combined $ (7,244,000) $ (6,002,000) $ (18,375,000)
==================== ========================= =========================
</TABLE>
We have restated our results of operations for the three and nine month periods
ended September 30, 1998 by combining Sift's financial statements for the three
and nine month periods ended August 31, 1998 (Sift's fourth quarter of fiscal
1998) with our consolidated financial statements for the three and nine month
periods ended September 30, 1998. The three and nine months ended September 30,
1999 include both our company's and Sift's results of operations for the same
period. We have restated the consolidated balance sheet as of December 31, 1998
to include our balance sheet and Sift's balance sheet as of December 31, 1998.
An adjustment has been made to stockholders' equity as of December 31, 1998 to
record Sift's results of operations for Sift's quarter ended November 30, 1997
and one month ended December 31, 1998. The equity accounts of the separate
entities were combined. As the common stock and additional paid in capital
accounts of the combining enterprise exceeded the par value of the common stock
issued in the business combination, the excess was added to our additional paid
in capital. There were no significant transactions between our company and Sift
prior to the combination.
On April 30, 1999, we entered into a co-branded credit card agreement with
Fleet Credit Card Services, L.P. ("Fleet"), whereby we are working jointly
with Fleet to develop and market Fleet products and services and to solicit
applications from Internet users. The agreement calls for advance payments by
Fleet of approximately $32 million over a five year period subject to our
Company providing a guaranteed minimum level of impressions as set forth in
the agreement.
8
<PAGE>
24/7 MEDIA, INC.
NOTES TO INTERIM CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
In March 1999, we signed an exclusive agreement with NBC-Interactive
Neighborhood, or NBC-IN, that allows us to sell advertising on NBC network
television stations and their associated Web sites at the local market level.
Under the terms of the agreement, we will recruit, train and staff sales and
support personnel who will operate out of the local NBC stations as well as in
our regional offices. We will also jointly provide ad sales consulting and
regional representation services to more than 100 NBC stations that are
currently affiliated with NBC-IN.
We will collaborate with NBC-IN on the development of advertising packages that
leverage the reach and brand-building strengths of NBC local television with the
direct response data collection and marketing functionality of NBC's local
station Web sites. Initial launch markets include NBC-owned and operated
stations in New York, Los Angeles, Chicago, Washington, D.C., Dallas and San
Diego with initial plans to follow in an additional 14 broadcast station
markets. In accordance with the terms of the agreement, we will recognize our
commission income only, using a sliding scale commission formula based upon the
aggregate advertising payments for both on-air and Internet advertising sold by
us, as defined in the agreement.
As part of this agreement, we issued to NBC warrants to purchase up to 150,000
shares of our common stock for $26.05 per share. These warrants shall vest and
expire as follows: (1) between March 11, 1999 and March 11, 2002, NBC shall have
the right to purchase 75,000 shares at $26.05 per share; and (2) the remaining
75,000 shares covered by this warrant will vest in eighteen increments of 4,167
shares each (except for the last increment, which will consist of 4,161 shares)
on the first day of every month beginning with October 1, 2000 and ending on
March 1, 2002 at $26.05 per share. With respect to each 4,167 share increment,
NBC's right to purchase such shares will expire three years after the vesting
date. In the event that NBC terminates the agreement, the portion of the shares
that have not vested as of such termination date shall immediately expire. The
150,000 warrants to acquire common stock that were issued to NBC were valued at
$3.6 million using a Black-Scholes pricing model, based on the following
assumptions: risk-free interest rate of 6%, dividend yield of 0%, expected life
of 5 years and volatility of 150%. The value of this contract is reflected in
our balance sheet under partner agreement and is amortized using the
straight-line method over the life of the three-year contract.
Inherent in our business are various risks and uncertainties, including our
limited operating history, unproven business model and the limited history of
electronic commerce on the Internet. Our success may depend in part upon the
emergence of the Internet as a communications medium, prospective project
development efforts, and the acceptance of our solutions by the marketplace.
(b) Principles of Consolidation
Our unaudited consolidated condensed financial statements as of September 30,
1999 and for the three and nine month periods ended September 30, 1999 and 1998
include our accounts and those of our majority-owned and controlled subsidiaries
from their respective dates of acquisition. All historical financial statements
have been restated to reflect the acquisition of Sift using the
pooling-of-interests method. All significant intercompany transactions and
balances have been eliminated in consolidation.
9
<PAGE>
24/7 MEDIA, INC.
NOTES TO INTERIM CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
The following unaudited pro forma consolidated amounts give effect to all of the
acquisitions accounted for by the purchase method of accounting and the
disposition of Cardsecure as if they had occurred at the beginning of the
respective periods, or date of inception, if later, by consolidating the results
of operations of the acquired entities for the three and nine month periods
ended September 30, 1999 and 1998.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPT. 30, NINE MONTHS ENDED SEPT. 30,
--------------------------------- ---------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Total revenues ...................... $ 25,851,000 $ 7,014,000 $ 55,647,000 $ 15,977,000
Net loss ............................ (15,595,000) (11,138,000) (39,083,000) (36,617,000)
Net loss attributable to common
stockholder ......................... (15,595,000) (11,228,000) (39,083,000) (36,996,000)
Net loss per share--basic and diluted $ (0.68) $ (0.79) $ (1.87) $ (3.32)
Weighted average shares outstanding.. 22,842,201 14,191,206 20,940,442 11,142,793
</TABLE>
(c) Interim Results
The unaudited consolidated condensed financial statements as of September 30,
1999 and for the three and nine month periods ended September 30, 1999 and 1998
have been prepared by us and are unaudited. In our opinion, the unaudited
consolidated condensed financial statements have been prepared on the same basis
as the annual financial statements and reflect all adjustments, which include
only normal recurring adjustments, necessary to present fairly the financial
position as of September 30, 1999 and the results of our operations for the
three and nine month periods ended September 30, 1999 and 1998 and our cash
flows for the nine month period ended September 30, 1999 and 1998. The financial
data and other information disclosed in these notes to the consolidated
condensed financial statements related to these periods are unaudited. The
results for the three and nine month periods ended September 30, 1999 are not
necessarily indicative of the results to be expected for any subsequent quarter
or the entire fiscal year ending December 31, 1999. The consolidated balance
sheet at December 31, 1998 has been derived from the audited financial
statements at that date, adjusted to reflect the acquisition of Sift using the
pooling-of-interests method.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to the Securities and Exchange
Commission's rules and regulations. It is suggested that these unaudited
consolidated financial statements be read in conjunction with our audited
consolidated financial statements and notes thereto for the year ended December
31, 1998 as included in our report on Form 10-K and supplemental information as
filed on Form 8-K on October 29, 1999.
10
<PAGE>
24/7 MEDIA, INC.
NOTES TO INTERIM CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(d) Use of Estimates
The preparation of financial statements in accordance with generally accepted
accounting principles requires us to make estimates and assumptions that affect
the reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
(e) Intangible Assets
Intangible assets including trademarks and licenses are amortized using the
straight-line method over their estimated useful lives of one to five years.
Goodwill resulting from the acquisition of Internet advertising and email
businesses is estimated by us to be primarily associated with the acquired
workforce, contracts and technological know how. As a result of the rapid
technological changes occuring 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 range from two to four years.
(f) Investments
The Company accounts for certain investments in equity securities in accordance
with statements of Financial Accounting Standards No. 115 ("SFAS 115"),
"Accounting for Certain Investments in Debt and Equity securities." The
Company's investments in China.com and Shopnow.com are classified as
available-for-sale under SFAS 115. As a result, the Company has recorded an
unrealized gain on investments as a separate component of stockholders'
equity related to these investments. The net unrealized after tax gain of
$76.5 million is based on the quoted market values of the investments as of
September 30, 1999 as reported on NASDAQ.
<TABLE>
<CAPTION>
--------------------------------------------------
Gross
Unrealized
Cost Gain Total
--------------------------------------------------
<S> <C> <C> <C>
Available-for-sale securities $ 45,208,000 $109,886,000 $155,094,000
Other investments ........... 5,500,000 -- 5,500,000
--------------------------------------------------
Total investments ........... $ 50,708,000 $109,886,000 $160,594,000
--------------------------------------------------
--------------------------------------------------
</TABLE>
(g) Revenue Recognition
Our revenues are derived principally from short-term advertising agreements in
which we deliver advertising impressions for a fixed fee to third-party Web
sites comprising The 24/7 Network, The 24/7 Media Europe Network and The
ContentZone, and to a lesser extent our Riddler.com Web site. Revenues from
advertising are recognized in the period the advertising impressions are
delivered if collection of the resulting receivables is probable. In addition to
advertising revenues, a portion of our revenues are derived from e-mail services
and other services that are provided to Web sites and advertisers. Revenues
from email services are recognized as delivered.
11
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24/7 MEDIA, INC.
NOTES TO INTERIM CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(g) Revenue Recognition (con't)
Third party Web sites that register Web pages with our networks and display
advertising banners on those pages are commonly referred to as our "Affiliated
Web sites." These third party Web sites are not "related party" relationships or
transactions as defined in Statement of Financial Accounting Standards No. 57,
"Related Party Disclosures." We pay our Affiliated Web sites a royalty for
providing advertising space to our networks. We become obligated to make
payments to such Affiliated Web sites, which have contracted with us to be part
of our networks, in the period the advertising impressions are delivered. Such
expenses are classified as cost of revenues in the consolidated statements of
operations.
At September 30, 1999 and December 31, 1998, accounts receivable included
$4,728,000 and $3,510,000, respectively, of unbilled receivables, which are a
normal part of our business, as receivables are generally invoiced only after
the revenue has been earned. The increase in unbilled receivables from December
31, 1998 to September 30, 1999 resulted from the increase in revenues generated
during the third quarter of 1999. The terms of the related advertising contracts
typically require billing at the end of each month. All unbilled receivables as
of September 30, 1999 have been subsequently billed.
(h) 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.
(i) Loss Per Share
Loss per share is presented in accordance with the provisions of Statement of
Financial Accounting Standards No. 128, Earnings Per Share (SFAS 128). Basic EPS
excludes dilution for common stock equivalents and is computed by dividing
income or loss available to common shareholders by the weighted average number
of common shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock and resulted in the issuance of
common stock. Diluted net loss per share is equal to basic net loss per share
since all common stock equivalents are anti-dilutive for each of the periods
presented.
Diluted net loss per common share for the three and nine month periods ended
September 30, 1999 and 1998 does not include the effects of options to purchase
3,216,377 and 1,190,999 shares of common stock, respectively; 3,156,681 and
3,802,985 common stock warrants, respectively; as the effect of their inclusion
is anti-dilutive during each period.
Net loss applicable to common stockholders for the three and nine months ended
September 30, 1998 have been increased to give effect to $90,000 and $276,000
respectively of cumulative dividends on mandatorily redeemable convertible
preferred stock subsequently converted into common stock in connection with our
initial public offering in August 1998.
12
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24/7 MEDIA, INC.
NOTES TO INTERIM CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(j) Accumulated Other Comprehensive Income
Accumulated other comprehensive income as of September 30, 1999 amounted to
approximately $9.8 million which is comprised of $72,000 in foreign currency
translation gain related to 24/7 Media Europe and 24/7 Canada, unrealized
gain on investments net of taxes of approximately $76.5 million on our
available-for-sale securities and accumulated deficit of $66.8 million.
(k) New Accounting Disclosures
In June 1998, Statement of Financial Accounting Standards No. 133 ("SFAS 133"),
"Accounting for Derivative Instruments and Hedging Activities", was issued. SFAS
133 established accounting and reporting standards for derivative instruments
and for hedging activities. SFAS 133 requires that an entity recognize all
derivatives as either assets or liabilities and measure those instruments at
fair value. SFAS 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000. SFAS 133 cannot be applied retroactively to
financial statements of prior periods. At the current time we have not evaluated
the impact that SFAS 133 will have, if any.
(2) COMMON STOCK
In March 1999, as part of the acquisition of Sift, we issued 762,621 shares of
our common stock to the shareholders of Sift.
In April of 1999, we issued 476,410 shares of our common stock in exchange for
our investment in Shopnow.com.
On May 3, 1999, we completed a secondary offering of our common stock. In this
offering, we sold 2,339,000 primary shares, and selling shareholders sold
1,161,000 shares. Net proceeds to our Company from the sale of the primary
shares was approximately $100 million.
On July 26, 1999 we issued shares of a wholly owned subsidiary's common stock
in order to acquire ClickThrough Interactive. These shares are convertible into
150,000 shares of our common stock at the option of the holder.
On August 17, 1999, as part of our acquisition of ConsumerNet, we issued
1,738,330 shares of our common stock.
In August 1999, we issued 41,667 shares of our common stock to acquire a
Finnish Internet company.
(3) 1998 STOCK INCENTIVE PLAN
For the nine month period ended September 30, 1999, we granted approximately
2.3 million stock options under the 1998 Stock Incentive Plan: 99,845 of such
were assumed as a result of the acquisition of Sift, Inc. at exercise prices
ranging from $0.30 to $2.00 per share, 75,134 were assumed as a result of the
acquisition of ConsumerNet at exercise prices ranging from $0.95 to $22.72
and 2.2 million of such were at exercise prices of $22.88 to $50.25 per
share, based on the fair market value of the underlying common stock at the
respective times of grant.
13
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24/7 MEDIA, INC.
NOTES TO INTERIM CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(4) SEGMENT INFORMATION
The Company's business is comprised of network sales and email services. The
network sales segment generates substantially all of its revenues by delivering
advertisements and promotions to the web sites. The revenue related to the email
segment of the business is comprised of e-mail service bureau, newsletters, and
marketing services to target online users compiled by lists management. The
company's management reviews corporate assets and overhead expenses within its
network segment.
The summarized segment information, as of and for the three and nine months
ended September 30, 1999, is as follows:
<TABLE>
<CAPTION>
Three months ended September 30,
1999 1998
--------------------------------------------- ---------------------------------------------
Network Mail Total Network Mail Total
-------------- --------------- -------------- -------------- --------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Revenues ........... $ 21,861,000 $ 2,542,000 $ 24,313,000 $ 5,528,000 $ 279,000 $ 5,807,000
Cost of revenues ... 16,368,000 1,379,000 17,747,000 4,616,000 37,000 4,653,000
Loss from operations (11,088,000) (1,614,000) (12,702,000) (6,101,000) (120,000) (6,221,000)
------------- ------------- ------------- ------------- ------------- -------------
<CAPTION>
Nine months ended September 30,
1999 1998
--------------------------------------------- ---------------------------------------------
Network Mail Total Network Mail Total
-------------- --------------- -------------- -------------- --------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Revenues ........... $ 49,468,000 $ 3,450,000 $ 52,918,000 $ 10,305,000 $ 677,000 $ 10,982,000
Cost of revenues ... 37,932,000 1,673,000 39,605,000 8,644,000 117,000 8,761,000
Loss from operations (26,857,000) (1,672,000) (28,257,000) (18,105,000) (312,000) (18,417,000)
------------- ------------- ------------- ------------- ------------- -------------
Total assets:
December 31, 1998 62,716,000 392,000 63,108,000
September 30, 1999 289,998,000 54,816,000 344,814,000
</TABLE>
(5) SUPPLEMENTAL CASH FLOW INFORMATION
The amount of cash paid for interest was $66,000 and $117,000 for the nine
month periods ended September 30, 1999 and 1998, respectively. Non-cash
financing activities:
Warrants to purchase 625,000 shares of our common stock at $3.81 per share were
exercised in January 1999 in exchange for 546,775 shares of our common stock in
a cashless exercise of the warrants. During September 1999, warrants to
purchase 134,382 shares of our common stock at prices ranging from $3.81 to
$11.42 were exchanged in a cashless exercise for 101,074 shares of our common
stock.
During the first quarter of 1998, we converted all outstanding shares of
convertible preferred stock into an aggregate of 4,350,441 shares of common
stock, converted $2,556,250 of senior convertible notes payable-related parties,
plus accrued interest, into 828,036 shares of common stock, and outstanding
warrants were converted into 191,349 shares of common stock.
During March, 1999, we issued an aggregate of 762,621 shares of common stock in
connection with the acquisition of Sift.
14
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24/7 MEDIA, INC.
NOTES TO INTERIM CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(5) SUPPLEMENTAL CASH FLOW INFORMATION (Continued)
In March 1999, we issued warrants to purchase up to 150,000 shares of common
stock to NBC-Interactive Neighborhood as part of a three-year exclusive
agreement to sell advertising on NBC Network television stations and their
associated Web sites at the local market level.
In June 1999, we exchanged the net assets of CardSecure and issued aggregate of
476,410 shares of our common stock for an investment in ShopNow.com, of
approximately $23.6 million.
In July 1999, we exchanged a subsidiary's stock which is convertible into our
common stock at a value of $5.0 million in connection with our acquisition of
ClickThrough Interactive.
In August 1999, we acquired ConsumerNet through the exchange of 1.7 million
shares of our common stock and assumption of all the outstanding options of
ConsumerNet.
Also during August 1999, 24/7 Media Europe acquired a Finnish Internet
advertising company through the issuance of our common stock valued at $1.5
million.
(6) SUBSEQUENT EVENTS
On November 4, 1999, we advanced 24/7 Media Europe $1.5 million.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING
OF FEDERAL SECURITIES LAW. SUCH STATEMENTS CAN BE IDENTIFIED BY THE USE OF
FORWARD-LOOKING TERMINOLOGY SUCH AS "MAY," "WILL," "EXPECT," "ANTICIPATE,"
"ESTIMATE," "CONTINUE" OR OTHER SIMILAR WORDS. THESE STATEMENTS DISCUSS FUTURE
EXPECTATIONS, CONTAIN PROJECTIONS OF RESULTS OF OPERATIONS OR OF FINANCIAL
CONDITION OR STATE OTHER "FORWARD-LOOKING" INFORMATION. ALTHOUGH WE BELIEVE THAT
THE EXPECTATIONS REFLECTED IN SUCH FORWARD-LOOKING STATEMENTS ARE BASED ON
REASONABLE ASSUMPTIONS, CERTAIN FACTORS SUCH AS RAPID CHANGES IN THE MARKETS IN
WHICH WE COMPETE OR GENERAL ECONOMIC CONDITIONS MIGHT CAUSE A DIFFERENCE BETWEEN
ACTUAL RESULTS AND SUCH FORWARD-LOOKING STATEMENTS. WHEN CONSIDERING SUCH
FORWARD-LOOKING STATEMENTS, PROSPECTIVE INVESTORS SHOULD CONSIDER THE "RISK
FACTORS" AND OTHER CAUTIONARY STATEMENTS IN THIS REPORT.
GENERAL
We are the result of several mergers and acquisitions, and the combination of
these entities resulted in an integrated Internet advertising company with both
media sales and technology expertise. We were incorporated in January 1998 to
consolidate three Internet advertising companies:
- - 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 the 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 in April 1998 Intelligent Interactions, a developer of
ad serving and targeting technology, and in June 1998 CliqNow!, a network of
over 75 medium to large Web sites. In January 1999, we acquired a majority
ownership interest in 24/7 Media Europe Ltd., formerly known as InterAd Holdings
Limited, which operates the 24/7 Media Europe Network. In March 1999, we
acquired Sift, Inc., a full-service e-mail management company. In July 1999, we
acquired ClickThrough Interactive, a leading Canadian advertising sales network,
and in August 1999, we acquired ConsumerNet, a leading provider of email
marketing solutions.
We believe that the combination of these entities has enabled us to offer
advertisers, Web publishers and email list providers comprehensive advertising
solutions and to pursue our vision of becoming the preeminent global provider of
interactive marketing solutions and services.
To date, we have generated our revenues primarily by delivering advertisements
and promotions to the Web sites on our networks. We typically sell our
advertisements under purchase order agreements with advertisers which are
short-term in nature or subject to cancellation. Network revenues represented
90% and 93% of total revenues for the three and nine months ended September 30,
1999, respectively. This compares to 95% and 94% for the comparable periods
during the prior year.
16
<PAGE>
The pricing of ads is based on a variety of factors, including the gross dollar
amount spent on the advertising campaign and whether the campaign is delivered
on a specific Web site, a channel of Web sites or across an entire network. We
strive to sell 100% of our inventory through the combination of advertisements
sold on a "CPM" basis, which is the cost to the advertiser to run 1,000 ads, and
a "cost-per-action" basis whereby revenues are generated if the user responds to
the ad with an action, such as an inquiry or a purchase of the product
advertised.
We recognize advertising revenues and email revenues in the period that the
advertisement or email is delivered, provided that no obligations remain. In
nearly all cases, we recognize revenues generated from advertising sales, net
of any commissions paid to advertising agencies on behalf of their clients.
We pay our Web sites a royalty calculated as a percentage of revenues
generated by advertisements run on the Web site, which amount is included in
cost of revenues. In addition, we are generally responsible for billing and
collecting for advertisements delivered to our networks. We expect to
generate the majority of our revenues for the foreseeable future from
advertisements delivered to the Web sites on our networks.
We also sell sponsorship advertising, which involves a greater degree of
coordination among us, the advertiser and our Web sites. These sponsorships are
generally priced based on the length of time that the sponsorship runs, rather
than on a CPM basis. Revenues relating to sponsorship advertising are recognized
ratably over the sponsorship period.
We delivered an aggregate of over 2.5 billion ad impressions during the month of
September 1999. We added a number of marquee Web sites during the three months
ended September 30, 1999, including DirectHit.com, Havas Interactive,
StreetAdvisor.com, Onelist.com and 2v2.com, Inc., Lbnet.com and Won.net.
According to Media Metrix, our three networks reached 55.5%, or more than one
half, of all U.S. Internet users in September 1999. We believe that this reach
figure is among the highest in the Internet advertising industry. For the three
month periods ended September 30, 1999 and 1998, approximately 38% and 40% of
our revenues were derived from advertisements on our top ten Web sites,
respectively. For the three months ended September 30, 1999, one of our Web
sites accounted for approximately 6% of our total advertising revenue. In
addition, for the three months ended September 30, 1999, one advertiser
accounted for approximately 5% of our revenues and the top ten advertisers and
ad agencies accounted for approximately 33% of our revenues.
Email revenues are derived through our suite of email services including list
management, list brokerage, the 24/7 Alliance, and our newsletter network. List
management involves the management of email lists to which we sell advertising
and other revenue-generating opportunities. List brokerage includes the rental
of lists to third parties. The 24/7 Alliance is a co-op database whereby list
managers or owners contribute their lists in order to achieve scale in
developing revenue sources. The newsletter network is a service bureau business
in which we send out newsletters on a periodic basis (for example, weekly) on
behalf of our clients. We have over 13 million opt-in email addresses in the
24/7 Mail database. We believe that this is one of the largest opt-in email
databases in the industry.
We sell our products and services through our sales and marketing staff located
in New York, Atlanta, Boston, Chicago, Dallas, Detroit, Houston, Los Angeles,
Miami, San Francisco, Seattle, Silicon Valley, Toronto and the Washington, D.C.
area and 18 offices in Europe and Latin America.
17
<PAGE>
The period-to-period comparisons of our historical operating results should not
be relied upon as indicative of future performance. Our prospects should be
considered in light of the risks, expenses and difficulties encountered by
companies in the early stages of development, particularly companies in the
rapidly evolving Internet market. Although we have experienced revenue growth in
recent periods, we anticipate that we will incur operating losses for the
foreseeable future due to a high level of planned operating and capital
expenditures. In particular, we expect to increase our operating expenses and
capital expenditures in order to expand our sales and marketing organization and
to develop, integrate and scale our Profilz database and proprietary ad serving
technologies.
RECENT DEVELOPMENTS
On July 26, 1999, the Company acquired ClickThrough Interactive
("ClickThrough"), 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 was
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 $5.9 million, was allocated to goodwill
and other intangibles and is being amortized over its estimated useful life
of three years.
On August 17, 1999, the Company acquired Music Marketing Network, Inc. d/b/a/
ConsumerNet ("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 $3.2 million in cash
(including acquisition costs of $320,000). The purchase price in excess of
the value of identified tangible assets and liabilities assumed in the amount
of $52.9 million was allocated to goodwill and other intangibles and is being
amortized over its estimated useful life of four years.
In August of 1999, 24/7 Media Europe issued shares to acquire a Finnish
Internet advertising company which diluted our investment of 58% as of
September 30, 1999. The aggregate purchase price in excess of the value of
tangible assets and liabilities assumed in the amount of $2.2 million was
allocated to goodwill and other intangibles and is being amortized over its
estimated useful life of three years.
On September 13, 1999, the Company acquired a 5.9% interest in Naviant
Technology Solutions, Inc. ("Naviant") for approximately $5.0 million. The
Company's equity investment in Naviant is accounted for under the cost method of
accounting and, accordingly, the investment is being carried as a long-term
asset on our consolidated balance sheet.
RESULTS OF OPERATIONS
REVENUES. Total revenues were $24.3 million and $52.9 million for the three
month and nine month periods ended September 30, 1999, respectively, as compared
to $5.8 million and $11.0 million for the three month and nine month periods
ended September 30, 1998. Such increases were primarily due to an increase in
the number of Web sites on the 24/7 Network, the addition of the 24/7 Media
Europe Network, the increase in the number of advertisers utilizing our
advertising solutions, and the number of advertisements delivered to the 24/7
Network and the 24/7 Media Europe Network. Network revenue was $21.9 million and
$49.5 million for the three month and nine month periods ended September 30,
1999, respectively, compared to $5.5 million and $10.3 million for the
corresponding periods in 1998. We expect the 24/7 Network to continue to account
for a significant portion of our total advertising revenue for the foreseeable
future
18
<PAGE>
In addition to our network revenue, we generated increased revenue from the
growth of email services and solutions that were delivered through 24/7 Mail,
our email division which was formed as the result of the acquisitions of Sift
and ConsumerNet. Email revenue accounted for $2.5 million and $3.5 million for
the three month and nine month periods ended September 30, 1999, compared to
$0.3 million and $0.7 million for the corresponding periods in 1998.
COST OF REVENUES AND GROSS PROFIT. Cost of revenues were $17.7 million and $39.6
million for the three month and nine month periods ended September 30, 1999,
respectively, as compared to $4.7 million and $8.8 million for the corresponding
periods in 1998. Cost of network revenues consist primarily of fees paid to
Affiliated Web sites, which are calculated as a percentage of revenues resulting
from ads delivered on our networks. Cost of network revenues also includes third
party ad serving costs, depreciation of our ad serving system, and Internet
access costs. Cost of email services consist primarily of fees paid to list
providers, and also includes delivery costs. Cost of network revenue was $16.4
million and $37.9 million for the three month and nine month periods ended
September 30, 1999, compared to $4.6 million and $8.6 million for the
corresponding periods in 1998. Cost of email revenue was $1.4 million and $1.7
million for the three month and nine month periods ended September 30, 1999,
compared to $37,000 and $117,000 for the corresponding periods in 1998. Gross
profit for the three month and nine month periods ended September 30, 1999 were
$6.6 million and $13.3 million, respectively, as compared to $1.2 million and
$2.2 million for the corresponding periods in 1998. The increases in gross
profit in the three month and nine month period from 1998 to 1999 were generated
by (1) the significant growth in network revenue generated by our company, both
domestically and internationally; (2) the expansion of our company into the
email business, through the acquisition and subsequent growth of Sift and
ConsumerNet; and (3) the related increased costs for affiliated Website
payments, third party ad serving costs and direct e-mail costs.
OPERATING EXPENSES. Each of sales and marketing, general and administrative,
product development and amortization of goodwill expenses increased in the three
month and nine month periods from 1998 to 1999 as (1) we incurred expenses in
connection with the growth of our business; and (2) we included the operations
of the various businesses that we acquired in our results of operations.
SALES AND MARKETING EXPENSES. Sales and marketing expenses were $6.9 million and
$14.9 million for the three and nine month periods ended September 30, 1999 as
compared to $2.6 million and $5.0 million for the corresponding periods in 1998.
The increase in the 1999 periods as compared to the related 1998 periods is due
primarily to continued expansion of the U.S. network operations, the build out
of the European network operations, and the entry into and further growth of
email services. Sales and marketing expenses consist primarily of sales force
salaries and commissions, advertising expenditures and costs of trade shows,
conventions and marketing materials. We expect sales and marketing expenses to
increase across all of our lines of business as we continue to invest in sales
and marketing personnel, expand into new markets and broaden our visibility in
the marketplace.
19
<PAGE>
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses were
$7.8 million and $16.5 million for the three and nine month periods ended
September 30, 1999 as compared to $2.4 million and $5.8 million for the
corresponding periods in 1998. The increase in the 1999 periods as compared to
the related 1998 periods is due primarily to continued expansion of the U.S.
network operations, the build out of the European network operations, and the
entry into and further growth of email services. General and administrative
expenses consist primarily of compensation, facilities expenses and other
overhead expenses incurred to support the growth of the business. We expect
general and administrative expenses to increase across all of our lines of
business as we incur increased levels of expenses to support future growth.
PRODUCT DEVELOPMENT EXPENSES. Product development expenses were approximately
$0.3 million and $1.6 million for the three and nine month periods ended
September 30, 1999 as compared to approximately $0.5 million and $1.1 million
for the corresponding periods in 1998. Product development expenses consist
primarily of compensation and related costs incurred to further develop our
database and ad serving capabilities. We believe that continued investment in
product development, particularly for our Profilz database and ad serving
system, is important to our strategy of providing excellent service, and we
expect to increase the future amounts spent on product development.
AMORTIZATION OF GOODWILL. Amortization of goodwill was $4.2 million and $8.6
million for the three and nine month periods ended September 30, 1999 as
compared to $1.9 million and $3.7 million for the corresponding periods in 1998.
The increase in the 1999 periods as compared to the related 1998 periods is due
to the timing of our acquisitions made during 1998 and 1999. With the
acquisitions of ClickThrough in July 1999 and ConsumerNet in August 1999, we
expect a significant increase in future periods.
INTEREST INCOME (EXPENSE). Interest expense was $11,000 and $66,000 for the
three and nine months ended September 30, 1999 as compared to $31,000 and
$284,000 for the three and nine months ended September 30, 1998. Interest
expense relates primarily to interest on capital lease payments. Interest
income was $1.0 million and $2.2 million for the three and nine-month ended
September 30, 1999 as compared to $250,000 and $326,000 for the three and
nine months ended September 30, 1998. The increase in interest income is
generated by the increase in cash and cash equivalents received during our
secondary offering completed in May 1999.
LIQUIDITY AND CAPITAL RESOURCES. Prior to our initial public offering in
August 1998, we financed our operations primarily from private placements of
equity and convertible debt securities. Concurrently with the merger of Petry
and Advercomm into us in February 1998, we completed a private placement of
preferred stock and warrants which resulted in net proceeds of $9.8 million.
In August 1998, we completed our initial public offering of common stock from
which we realized net proceeds of approximately $44.8 million. In May 1999,
we completed a secondary offering of common stock from which we realized net
proceeds of approximately $100 million. As of September 30, 1999, we had cash
and cash equivalents of $76.8 million.
In addition to funding on-going operations, our principal commitments consist of
various obligations under operating and capital leases. During the fourth
quarter of 1998, we entered into a lease line of credit for up to $3.0 million
with Chase Manhattan Bank to finance capital equipment. As of September 30,
1999, total obligations under this lease line of credit were approximately
$600,000.
Furthermore, we incurred approximately $1.9 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 is 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.
20
<PAGE>
Net cash used in operating activities was $18.2 million and $9.6 million for the
nine month periods ended September 30, 1999 and 1998, respectively. Net cash
used in operating activities resulted from our net operating losses, adjusted
for certain non-cash items, including:
- - The significant increases in accounts receivable, accounts payable and
accrued liabilities in 1999, resulting from the significant increase in
revenues and related expenses in 1999 period as compared to 1998; and the
amortization of goodwill in 1999 related to the acquisitions we completed in
1998 and 1999.
- - The significant increase in accounts receivable at September 30, 1999 is in
most part attributable to the increase in revenues during quarter ended
September 30, 1999 versus the quarter ended December 31, 1999 and partially
attributable to the increase in unbilled receivables from $3.5 million at
December 31, 1998 to $4.7 million at September 30, 1999 that also resulted
from the increase in revenues generated during the 1999 period. Unbilled
receivables, which are a normal part of our business, represent receivables
which are generally invoiced only after the revenue has been earned. The
terms of the related contracts typically require billing at the end of each
month. All unbilled receivables as of September 30, 1999 have been
subsequently billed.
Net cash used in investing activities was $39.0 million and $2.5 million for
the nine month periods ended September 30, 1999 and 1998, respectively. Net
cash used in investing activities resulted primarily from capital
expenditures relating to computer hardware and capitalized software, and the
cash purchase of a minority interest in ShopNow.com, China.com and Naviant
and a majority interest in 24/7 Media Europe, ConsumerNet and ClickThrough.
During 1999, we expect to incur significant capital expenditures related to
the expansion of our business. In particular, we intend to develop and
enhance our proprietary ad serving technology and our Profilz database, which
may involve investments in software and hardware that in the aggregate could
total approximately $15 million. To the extent that we invest in significant
ad serving and database software and hardware or make cash investments in
other businesses in the future, net cash used in investing activities could
increase.
Net cash provided by financing activities was $99.9 million and $54.8 million
for the nine month periods ended September 30, 1999 and 1998, respectively. Net
cash provided by financing activities during the 1999 period consisted primarily
net proceeds from our secondary offering of approximately $100 million. Net cash
provided by financing activities during the 1998 period included our initial
public offering which amounted to approximately $44.8 million and issuances of
convertible preferred stock and warrants amounting to approximately $10.1
million. Prior to December 31, 1998, all of the previously issued convertible
notes, convertible preferred stock and warrants were converted or exercised into
common stock, except for warrants to purchase approximately 3.8 million shares
of common stock with exercise prices ranging from $3.81 to $11.42 per share.
No provision for federal or state income taxes has been recorded because we
incurred net operating losses for all periods presented. At December 31,
1998, we had approximately $30.9 million of federal and state net operating
loss carryforwards available to offset future taxable income; such
carryforwards expire in various years through 2018. As a result of various
equity transactions during 1996, 1997 and 1998, we believe that our company
has undergone an "ownership change" as defined by section 382 of the Internal
Revenue Code. Accordingly, the utilization of $19.6 million of the net
operating loss carryforward may be limited. Due to this limitation, and the
uncertainty regarding the ultimate utilization of the net operating loss
carryforward, we have not recorded any tax benefit for losses and a valuation
allowance has been recorded for the entire amount of the net deferred tax
asset. In connection with the unrealized gain on the China.com and
ShopNow.com investments reflected as separate components of stockholders
equity pursuant to SFAS 115, it is considered more likely than not that $11.3
million of the net operating loss carryforward at December 31, 1998 will be
realized. As a result, the portion of the valuation allowance relating to the
net deferred tax asset associated with this amount has been released, with
the effects netted against the SFAS 115 gain. Similarly, a deferred tax asset
was recognized for a $10.7 million net operating loss incurred in 1999, with
the benefit netted against the SFAS 115 gain.
21
<PAGE>
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. On June 22, 1999, we made an additional investment of $500,000 in the
common stock of 24/7 Media Europe. In August of 1999, 24/7 Media Europe issued
shares to acquire a Finnish Internet advertising company which diluted our
investment in 24/7 Media Europe to 58% as of September 30, 1999.
As of September 30, 1999, we have advanced an additional $3.8 million to 24/7
Media Europe in the form of an interest bearing note due on July 1, 2000.
Subsequent to September 30, 1999 we have advanced 24/7 Media Europe $1.5 million
in cash.
On July 26, 1999, the Company acquired ClickThrough, 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.
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 $3.2 million in cash.
We expect to invest additional amounts of working capital in our purchased
subsidiaries and majority-owned businesses in 1999 to support their future
operations.
We believe that our current cash and cash equivalent balances, will be
sufficient to fund our requirements for working capital and capital expenditures
for at least the next 12 months. To the extent that we encounter unanticipated
opportunities, we may need to raise additional funds sooner, in which case we
may sell additional equity or debt securities or borrow funds from banks or
other financial sources. Sales of additional equity or convertible debt
securities may result in additional dilution of our stockholders. We cannot be
certain that we will be able to sell additional equity or debt securities in the
future or that additional financing will be available to us when needed on
commercially reasonable terms, or at all.
YEAR 2000 COMPLIANCE
Beginning in the Year 2000, the date fields coded in some software products and
computer systems will need to accept four digit entries in order to distinguish
21st century dates from 20th century dates. Also, there is the need for computer
systems to recognize the year 2000 (a century year) as a leap year. As a result,
many companies' software and computer systems may need to be upgraded or
replaced in order to comply with such "Year 2000" requirements. Systems that do
not properly recognize such information could generate erroneous data or cause a
system to fail. Significant uncertainty exists in the software industry
concerning the potential effects associated with such compliance issues.
22
<PAGE>
STATE OF READINESS. We have developed a remediation plan for our Year 2000 issue
that involves identification, assessment and testing of the equipment and
systems affected:
- - We have assessed our information technology (IT) equipment and systems, which
includes our ad servers and ad serving technology.
- - We have identified and assessed non-information technology (non-IT) embedded
systems such as building security, voice mail, fire prevention, climate
control and other end user developed systems.
- - We have analyzed the readiness of significant third party vendors and
suppliers of services.
Our evaluation includes the following phases:
- - identification of significant IT equipment and systems, and non-IT systems;
- - assessment of repair or replacement requirements;
- - repair or replacement;
- - testing;
- - implementation; and
- - creation of contingency plans in the event of Year 2000 failures.
We have reviewed our non-IT systems and internally developed programs, and we do
not consider them to be date sensitive to the Year 2000. This evaluation
indicates our systems and programs present no Year 2000 issues, and we will be
Year 2000 compliant.
We have internally developed ad-serving systems, a newly architected ad serving
system under development, a financial system, and are using a service bureau for
ad serving and payroll. Our IT systems are Year 2000 compliant as well as our
corporate laptops and desktops, upgraded with standard Year 2000 software
images.
Our internal systems and development environments have been inventoried and
non-compliant third party components have been identified and upgraded where
necessary. Test equipment to facilitate Year 2000 testing has been installed:
testing of mission critical internal systems is in progress and will be
completed in the fourth quarter of 1999. Our current financial system was
replaced with a Year 2000 compliant system in the third quarter of 1999. Our
mission critical non-IT end user developed systems were identified and testing
was completed in the second quarter of 1999.
We have placed each of our vendors, providers and suppliers in a priority
category according to their importance to our business. These mission critical
third parties have been contacted with a survey/questionnaire requesting
assessments in their Year 2000 compliance programs. The response from those
questionnaires, as well as follow-up communiques and reviews of 10-Q disclosure,
indicate their products and/or services will be Year 2000 compliant, including
those identified financial and internet/communications providers.
The Year 2000 readiness efforts of companies acquired in the second quarter of
1999 were examined and reassessed. These on-going programs similarly involve the
same degree of software and third party inventories, MIS upgrades, establishment
of compliant environments, internal code inspections and financial system
upgrades. These efforts will be completed in the fourth quarter of 1999.
Preliminary assessments indicate these strategic acquisitions will also be Year
2000 compliant.
23
<PAGE>
Although our preliminary testing and analysis gives every indication we will be
Year 2000 compliant, we use third party service suppliers that cannot be
guaranteed to be Year 2000 compliant. For these suppliers we are unable to
predict the extent to which:
- - the Year 2000 issue will affect these suppliers; or
- - we would be vulnerable to the suppliers' failure to remediate any Year 2000
issues on a timely basis.
The unexpected failure of such a major supplier to be Year 2000 compliant could
adversely affect our business. Even though we have received positive responses,
we are making contingency plans to continue availability of service through
alternate channels in the event any one of these key suppliers encounters
unexpected compliance problems and interruption of service.
In addition, the software and hardware products used by Web publishers,
advertisers, governmental agencies, public utilities, telecommunication
companies and others, may not be Year 2000 compliant. If these products are not
Year 2000 compliant, our customers' ability to use our products may be
disrupted. Furthermore, the purchasing patterns of advertisers may be affected
by Year 2000 issues as companies expend significant resources to become Year
2000 compliant. These expenditures may result in reduced funds available for Web
advertising or sponsorship of Web services, which could adversely affect our
business
COSTS TO ADDRESS OUR YEAR 2000 ISSUE. To date, we have incurred only limited
material expenditures in connection with identifying and evaluating Year 2000
compliance issues. Most of our expenses have related to the opportunity cost of
time spent by our employees evaluating and testing our software, the current
versions of our products, and Year 2000 compliance matters generally. Only minor
software tool upgrades and replacements have been warranted. Initial assessments
show that the costs to evaluate or address Year 2000 issues will not be
material. However, the full impact of the Year 2000 issues cannot be determined
until all testing has been completed. The failure by certain third parties to
address their Year 2000 issues on a timely basis could adversely affect our
business.
CONTINGENCY PLAN. We are formalizing our Year 2000-specific contingency plans.
As Year 2000 compliance issues are discovered we will continue to evaluate
individual plans relating to such issues. Even though we have received
assurances from our major services and suppliers, we are developing plans for
those key areas in which we cannot test and verify Year 2000 compliance. These
areas include service bureaus (e.g., payroll, ad serving, data center
co-location), facilities, and network service providers. Our contingency plans
include, but are not limited to, using alternative suppliers, establishing
contingent supply arrangements, and contractual warranties. These plans will be
formalized in the 4th quarter of 1999. We will also continue to actively work
with and encourage these suppliers to minimize the risks of business disruptions
resulting from Year 2000 issues.
The worst case scenario related to Year 2000 issues would involve (1) the
inability to serve ads due to internal system anomalies and (2) the disruption
of work activities in one or more office locations due to loss of public
transportation, power, facility services or telecommunications. This could
result in possible revenue impairments from customers seeking services
elsewhere, delays in reporting to our Web site affiliates, processing orders,
billing our customers and preparing our financial statements.
24
<PAGE>
IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, Statement of Financial Accounting Standards No. 133 ("SFAS 133"),
"Accounting for Derivative Instruments and Hedging Activities", was issued. SFAS
133 established accounting and reporting standards for derivative instruments
and for hedging activities. SFAS requires that an entity recognize all
derivatives as either assets or liabilities and measure those instruments at
fair value. SFAS 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000. SFAS 133 cannot be applied retroactively to
financial statements of prior periods. At the current time we have not evaluated
the impact SFAS 133 will have, if any.
RISK FACTORS
This report contains forward-looking statements that are based largely on our
current expectations and that are subject to a number of risks and
uncertainties, including those set forth below. Our actual results could differ
materially from the results discussed in "Risk Factors" below, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
elsewhere in this report.
WE HAVE AN EXTREMELY LIMITED OPERATING HISTORY ON WHICH AN INVESTOR CAN EVALUATE
OUR BUSINESS. None of our predecessor companies had an operating history of more
than four years prior to acquisition or merger. We, therefore, have an extremely
limited operating history. You must consider the risks, expenses and
difficulties typically encountered by companies with limited operating
histories, particularly companies in new and rapidly expanding markets such as
Internet advertising. These risks include our ability to:
- - develop new relationships and maintain existing relationships with our Web
sites, advertisers, and other third parties;
- - further develop and upgrade our technology;
- - respond to competitive developments;
- - implement and improve operational, financial and management information
systems; and
- - attract, retain and motivate qualified employees.
WE MAY BE UNABLE TO SUCCESSFULLY INTEGRATE SEVERAL COMPANIES THAT WE HAVE
ACQUIRED. We were formed in January 1998 to consolidate three Internet
advertising companies and have since acquired five companies and majority
interests in others. In combining these entities, we have faced risks and
continue to face risks of integrating and improving our financial and management
controls, ad serving technology, reporting systems and procedures, and
expanding, training and managing our work force. This process of integration may
take a significant period of time and will require the dedication of management
and other resources, which may distract management's attention from our other
operations.
WE ANTICIPATE CONTINUED LOSSES AND WE MAY NEVER BE PROFITABLE. We incurred
net losses of $11.7 million and $6.0 million for the three month periods
ended September 30, 1999 and 1998, respectively, and $26.1 million and $18.4
million for the nine months ended September 30, 1999 and 1998. Each of our
predecessors had net losses in every year of their operation. We anticipate
that we will incur operating losses for the foreseeable future due to a high
level of planned operating and capital expenditures. Although our revenue has
grown rapidly in recent periods, such growth may not continue and may not
lead to profitability.
25
<PAGE>
OUR FUTURE REVENUES AND RESULTS OF OPERATIONS MAY BE DIFFICULT TO FORECAST. Our
results of operations may fluctuate significantly in the future as a result of a
variety of factors, many of which are beyond our control.
These factors include:
- - the addition of new or loss of current advertisers or Web sites;
- - changes in fees paid by advertisers;
- - changes in service fees payable by us to owners of Web sites, or ad
serving fees payable by us to third parties;
- - the introduction of new Internet advertising services by us or our
competitors;
- - variations in the levels of capital or operating expenditures and other
costs relating to the expansion of our operations; and
- - general economic conditions.
Our future revenues and results of operations may be difficult to forecast due
to the above factors.
In addition, our expense levels are based in large part on our investment plans
and estimates of future revenues. Any increased expenses may precede or may not
be followed by increased revenues, as we may be unable to, or may elect not to,
adjust spending in a timely manner to compensate for any unexpected revenue
shortfall.
As a result, we believe that period-to-period comparisons of our results of
operations may not be meaningful. You should not rely on past periods as
indicators of future performance. In future periods, our results of operations
may fall below the expectations of securities analysts and investors, which
could adversely affect the trading price of our common stock.
OUR REVENUES ARE SUBJECT TO SEASONAL FLUCTUATIONS. We believe that our revenues
are subject to seasonal fluctuations because advertisers generally place fewer
advertisements during the first and third calendar quarters of each year.
Expenditures by advertisers tend to vary in cycles that reflect overall economic
conditions as well as budgeting and buying patterns. Our revenue could be
materially reduced by a decline in the economic prospects of advertisers or the
economy in general, which could alter current or prospective advertisers'
spending priorities or budget cycles or extend our sales cycle.
OUR BUSINESS MAY NOT GROW IF THE INTERNET ADVERTISING MARKET DOES NOT CONTINUE
TO DEVELOP. The Internet as an advertising medium has not been in existence for
a sufficient period of time to demonstrate its effectiveness. Our business would
be adversely affected if the Internet advertising market fails to continue to
develop. There are currently no widely accepted standards to measure the
effectiveness of Internet advertising. We cannot be certain that such standards
will develop to sufficiently support Internet advertising as a significant
advertising medium. Actual or perceived ineffectiveness of online advertising in
general, or inaccurate measurements or database information in particular, could
limit the long-term growth of online advertising and cause our revenue levels to
decline.
BANNER ADVERTISING, FROM WHICH WE CURRENTLY DERIVE MOST OF OUR REVENUES, MAY NOT
BE AN EFFECTIVE ADVERTISING METHOD IN THE FUTURE. We cannot be certain that any
other forms of Internet advertising will be developed or accepted by the market.
Even if new methods are developed, we may not be able to take advantage of them.
26
<PAGE>
GROWTH OF OUR BUSINESS DEPENDS ON THE DEVELOPMENT OF ONLINE DIRECT MARKETING.
Adoption of online direct marketing, particularly by those entities that have
historically relied upon traditional means of direct marketing, such as
telemarketing and direct mail, is an important part of our business model.
Intensive marketing and sales efforts may be necessary to educate prospective
advertisers regarding the uses and benefits of our products and services to
generate demand for our direct marketing services. Enterprises may be reluctant
or slow to adopt a new approach that may replace, limit, or compete with their
existing direct marketing systems. In addition, since online direct marketing is
emerging as a new and distinct market apart from online advertising, potential
adopters of online direct marketing services will increasingly demand
functionality tailored to their specific requirements. We may be unable to meet
the demands of our clients.
LOSS OF OUR MAJOR WEB SITES WOULD SIGNIFICANTLY REDUCE OUR REVENUES. The 24/7
Network generates substantially all of our revenues and it consists of a limited
number of our Web sites that have contracted for our services under agreements
cancelable generally upon a short notice period. For the three month periods
ended September 30, 1999 and 1998, approximately 38% and 40%, respectively, of
our total revenues were derived from advertisements on our top ten Web sites.
For the three month period ended September 30, 1999, the top ten Web sites
included AT&T WorldNet Service, Havas Interactive, Goto.com, World Gaming Corp.,
Mapquest.com, Netscape Communications c/o AOL, Sandbox Entertainment, Earthlink
Network, Sharper Services, and Multi-Player Games Network. We experience
turnover from time to time among our Web sites, and we cannot be certain that
the Web sites named above remain or will remain associated with us.
LOSS OF OUR CLIENT WEB SITES COULD LOWER OUR REACH LEVELS. Our Web sites
generally measure satisfaction by acceptable revenue levels, high levels of
customer service and timely and accurate reporting. Levels of traffic on our Web
sites may not remain consistent or increase over time, and we may be unable to
replace any departed Web site with another Web site with comparable traffic
patterns and user demographics. The loss or reduction in traffic on these Web
sites may cause advertisers or Web sites to withdraw from the our networks which
in turn could lower our reach levels.
LOSS OF OUR ADVERTISERS OR AD AGENCIES WOULD REDUCE OUR REVENUES. We generate
our revenues from a limited number of advertisers and ad agencies that purchase
space on our Web sites. We expect that a limited number of these entities may
continue to account for a significant percentage of our revenues for the
foreseeable future. For the three month period ended September 30, 1999, our top
ten advertisers and ad agencies accounted for an aggregate of approximately 33%
of our total revenues.
ADVERTISERS AND AD AGENCIES TYPICALLY PURCHASE ADVERTISING UNDER PURCHASE ORDER
AGREEMENTS THAT RUN FOR A LIMITED TIME. We cannot be certain that current
advertisers and ad agencies will continue to purchase advertising from us or
that we will be able to attract additional advertisers and ad agencies
successfully, or that agencies and advertisers will make timely payment of
amounts due to us.
OUR DEVELOPMENT OF A NEXT GENERATION AD SERVING TECHNOLOGY MAY NOT BE SUCCESSFUL
AND MAY CAUSE BUSINESS disruption. We are currently developing a next generation
ad serving technology that is intended to serve as our sole ad serving solution.
To complete this development, we must, among other things, ensure that this
technology will function efficiently at high volumes, interact properly with our
Profilz database, offer the functionality demanded by our customers and
assimilate our sales and reporting functions. This development effort could fail
technologically or could take more time than expected. Even if we successfully
address all these challenges, we must then work with our Web sites to transition
them to our new system, which would also create a risk of business disruption
and loss of any of our Web sites.
27
<PAGE>
LOSS OR FAILURE OF OUR THIRD PARTY AD SERVING TECHNOLOGY COULD DISRUPT OUR
BUSINESS. Unless and until the development of and transition to our own ad
serving technology is complete, we will be primarily dependent on AdForce, Inc.
to deliver ads to our networks and Web sites. If such service becomes
unavailable or fails to serve our ads properly or fails to produce the frequent
operational reports required, our business would be adversely affected.
Additionally, our use of multiple systems to serve ads requires us to employ
significant effort to prepare information for billing, Web site statements and
financial reporting. We are upgrading our systems to integrate a new accounting
system with our ad serving technologies to improve our accounting, control and
reporting methods. Our inability to upgrade our existing reporting systems and
streamline our procedures may cause delays in the timely reporting of financial
information.
OUR FAILURE TO SUCCESSFULLY COMPETE MAY HINDER OUR GROWTH. The markets for
Internet advertising and related products and services are intensely competitive
and such competition is expected to increase. Our failure to successfully
compete may hinder our growth. We believe that our ability to compete depends
upon many factors both within and beyond our control, including:
- - the timing and market acceptance of new products and enhancements of
existing services developed by us and our competitors;
- - changing demands regarding customer service and support;
- - shifts in sales and marketing efforts by us and our competitors; and
- - the ease of use, performance, price and reliability of our services and
products.
Many of our competitors have longer operating histories, greater name
recognition, larger customer bases and significantly greater financial,
technical and marketing resources than ours. We cannot be certain that we will
be able to successfully compete against current or future competitors.
In addition, the Internet must compete for a share of advertisers' total budgets
with traditional advertising media, such as television, radio, cable and print.
To the extent that the Internet is perceived to be a limited or ineffective
advertising medium, advertisers may be reluctant to devote a significant portion
of their advertising budgets to Internet advertising, which could limit the
growth of Internet advertising.
WE MAY BE UNABLE TO CONTINUE TO SUCCESSFULLY MANAGE RAPID GROWTH. We have
experienced rapid growth and expansion in operations that have placed a
significant strain on our managerial, operational and financial resources. We
expect the number of employees to increase in the future. To successfully
compete in the evolving Internet industry, we must:
- - continue to improve our financial and management controls;
- - enhance our reporting systems and procedures;
- - continue to scale our ad serving systems and upgrade their functional
capabilities; and
- - expand, train and manage our work force.
We cannot be certain that our systems, procedures or controls will be adequate
to support our expanding operations, or that management will be able to respond
effectively to such growth. Our future results of operations also depend on the
expansion of our sales, marketing and customer support departments.
28
<PAGE>
ACQUISITIONS OR STRATEGIC INVESTMENTS MAY DIVERT MANAGEMENT ATTENTION AND
CONSUMER RESOURCES. We intend to continue pursuing selective acquisitions of
businesses, technologies and product lines as a key component of our growth
strategy. Any future acquisition or investment may result in the use of
significant amounts of cash, potentially dilutive issuances of equity
securities, incurrence of debt and amortization expenses related to goodwill and
other intangible assets. In addition, acquisitions involve numerous risks,
including:
- - the difficulties in the integration and assimilation of the operations,
technologies, products and personnel of an acquired business;
- - the diversion of management's attention from other business concerns;
the availability of favorable acquisition financing for future acquisitions;
and
- - the potential loss of key employees of any acquired business.
Our inability to successfully integrate any acquired company could adversely
affect our business.
OUR INTERNATIONAL EXPANSION MAY POSE NEW LEGAL AND CULTURAL CHALLENGES. We have
operations in a number of international markets. To date, we have limited
experience in marketing, selling and distributing our solutions internationally.
International operations are subject to other risks, including:
- - changes in regulatory requirements;
- - reduced protection for intellectual property rights in some countries;
- - potentially adverse tax consequences;
- - general import/export restrictions relating to encryption technology and/or
privacy;
- - difficulties and costs of staffing and managing foreign operations;
- - political and economic instability;
- - fluctuations in currency exchange rates; and
- - seasonal reductions in business activity during the summer months in Europe
and certain other parts of the world.
In addition to these factors, due to our minority stake in the 24/7 Media Asia
Network, we are relying on China.com Corporation to conduct operations,
establish the network, aggregate Web publishers and coordinate sales and
marketing efforts. The success of the 24/7 Media Asia Network is directly
dependent on the success of China.com Corporation and its dedication of
sufficient resources to our relationship.
IF WE LOSE OUR CEO, PRINCIPAL SALES MANAGERS OR OTHER SENIOR MANAGERS WE MAY NOT
BE ABLE TO GROW. Our success depends upon our senior management and key sales
and technical personnel, particularly David J. Moore, Chief Executive Officer,
and Jacob I. Friesel, Executive Vice President. The loss of the services of one
or more of these persons could materially adversely affect our ability to
develop our business. Our success also depends on our ability to attract and
retain qualified technical, sales and marketing, customer support, financial and
accounting, and managerial personnel. Competition for such personnel in the
Internet industry is intense, and we cannot be certain that we will be able to
retain our key personnel or that we can attract, integrate or retain other
highly qualified personnel in the future. We have experienced in the past, and
may continue to experience in the future, difficulty in hiring and retaining
candidates with appropriate qualifications, especially in sales and marketing
positions. Although we have not experienced any material impact from the
difficulty in hiring and retaining qualified employees, we may be materially
impacted in the future from such hiring difficulties.
29
<PAGE>
PRIVACY CONCERNS MAY PREVENT US FROM SELLING DEMOGRAPHICALLY TARGETED
ADVERTISING. We are developing our Profilz database to collect data derived from
user activity on our networks and from other sources. We cannot be certain that
any trade secret, copyright or other protection will be available for such data
or that others will not claim rights to such data. We must also keep information
regarding Web publishers confidential under our contracts with Web publishers.
Ad serving technology enables the use of identifying data, or cookies, to
deliver targeted advertising, to help compile demographic information, and to
limit the frequency with which an advertisement is shown to the user. Cookies
are placed on the user's hard drive without the user's knowledge or consent. Any
reduction or limitation in the use of cookies could limit the effectiveness of
our sales and marketing efforts and impair our targeting capabilities. Due to
privacy concerns, some Internet commentators, advocates and governmental bodies
have suggested that the use of cookies be limited or eliminated.
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES COULD ADD ADDITIONAL BURDENS TO
OUR DOING BUSINESS ON THE INTERNET. Due to the increasing popularity of the Web,
laws and regulations applicable to Internet communications, commerce and
advertising are becoming more prevalent. The adoption or modification of such
laws or regulations could inhibit the growth in use of the Web and decrease the
acceptance of the Web as a communications and commercial medium.
Further, due to the global nature of the Web, governments of states or foreign
countries may attempt to regulate our Internet transmissions or levy sales or
other taxes relating to our activities. We cannot be certain that violations of
local laws will not be alleged by applicable governments or that we will not
violate such laws or new laws will not be enacted in the future. Moreover, the
applicability of existing laws governing issues such as property ownership,
libel and personal privacy is uncertain in regards to the Internet.
30
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
CURRENCY RATE FLUCTUATIONS. 24/7 Media's results of operations,
financial position and cash flows are not materially affected by changes in
the relative values of non-U.S. currencies to the U.S. dollar. 24/7 Media
does not use derivative financial instruments to limit its foreign currency
risk exposure.
MARKET RISK. 24/7 Media's accounts receivables are subject, in the
normal course of business, to collection risks. 24/7 Media regularly assesses
these risks and has established policies and business practices to protect
against the adverse effects of collection risks. As a result, 24/7 Media does
not anticipate any material losses in this area.
INTEREST RATE RISK. 24/7 Media's investments are classified as cash and
cash equivalents with original maturities of three months or less. Therefore,
changes in the market's interest rates do not affect the value of the
investments as recorded by 24/7 Media.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
We are not a party to any material legal proceedings.
Item 2. Changes in Securities and Use of Proceeds during the reporting period.
On July 26, 1999 we acquired Clickthrough Interactive through the issuance of
150,000 redeemable non-voting preferred shares of our subsidiary. These shares
are convertible into 150,000 shares of our common stock at the option of the
holder.
On August 17, 1999 we acquired ConsumerNet for approximately 1.7 million shares
of our common stock plus the assumption of previously outstanding stock options
which were converted into options to acquire approximately 75,000 shares of our
common stock.
On August 26, 1999 we advanced 24/7 Media Europe approximately 42,000 shares of
our stock which they subsequently used to acquire a Finnish internet advertising
company.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K .
(a) Exhibits.
Exhibit 11.1 Calculation of net loss per share
Exhibit 27 Financial data schedule
(b) Reports on Form 8-K.
We filed a Report on Form 8-K dated September 1, 1999, reporting on item 2.
31
<PAGE>
Item 7. Signatures.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
24/7 MEDIA, INC.
Date: November 15, 1999 By: /S/ DAVID J. MOORE
------------------
David J. Moore
President and Chief Executive Officer
By: /S/ C. ANDREW JOHNS
C. Andrew Johns
Chief Financial Officer
32
<PAGE>
Exhibit 11.1
24/7 MEDIA, INC.
Calculation of net loss per share
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended September 30 Nine Months Ended September 30
------------------------------------- ----------------------------------
1999 1998 1999 1998
------------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C>
Net Loss ............................ $(11,668,000) $ (6,002,000) $(26,075,000) $(18,375,000)
Cumulative Dividends on manditorily
convertible preferred stock ......... -- (90,000) -- (276,000)
------------ ------------ ------------ ------------
Net loss applicable to common
stockholders .............. $(11,668,000) $ (6,092,000) $(26,075,000) $(18,651,000)
============ ============ ============ ============
Total weighted average shares
outstanding ............... 21,103,871 12,452,876 19,202,112 8,325,812
============ ============ ============ ============
Basic and diluted net loss per share $ (0.55) $ (0.49) $ (1.36) $ (2.24)
============ ============ ============ ============
</TABLE>
33
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0001062195
<NAME> 24/7 MEDIA, INC.
<CURRENCY> U.S. DOLLARDS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1
<CASH> 76,806,000
<SECURITIES> 0
<RECEIVABLES> 24,012,000
<ALLOWANCES> (688,000)
<INVENTORY> 0
<CURRENT-ASSETS> 101,680,000
<PP&E> 17,097,000
<DEPRECIATION> (3,088,000)
<TOTAL-ASSETS> 344,826,000
<CURRENT-LIABILITIES> 25,398,000
<BONDS> 0
0
0
<COMMON> 222,000
<OTHER-SE> 285,797,000
<TOTAL-LIABILITY-AND-EQUITY> 344,826,000
<SALES> 52,918,000
<TOTAL-REVENUES> 52,918,000
<CGS> 39,605,000
<TOTAL-COSTS> 41,570,000
<OTHER-EXPENSES> 41,570,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 66,000
<INCOME-PRETAX> (26,075,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (26,075,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (26,075,000)
<EPS-BASIC> (1.36)
<EPS-DILUTED> (1.36)
</TABLE>
