<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Date of Report (Date of Earliest Event Reported):
MARCH 27, 2000
Commission File Number- 0-29768
24/7 MEDIA, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-3995672
(State or other jurisdiction of (I.R.S. Employer
Identification No.)
incorporation or organization)
1250 BROADWAY
28TH FLOOR
NEW YORK, NEW YORK
10001
(Address of principal executive offices)
Registrant's number, including area code:
(212) 231-7100
<PAGE>
ITEM 2. ACQUISITION OF ASSETS
This Form 8-K/A amends the Current Report of 24/7 Media, Inc. on Form 8-K
filed on January 13, 2000 to incorporate Item 7 (a), the Financial Statements of
Business Acquired.
On January 10, 2000, 24/7 Media, Inc. (the "24/7 Media" or the
"Company") announced the acquisition of IMAKE Software and Media Divisions
("IMAKE"), a privately-held Maryland close corporation for approximately
$29.3 million, excluding contingent considerations of approximately $41.0
million. IMAKE is a provider of technology products that facilitate the
convergence of Internet technologies with broadband video programming. On
January 13, 2000, we acquired all of the issued and outstanding shares of
capital stock of IMAKE in a merger transaction whereby a subsidiary of 24/7
Media was merged with and into IMAKE. 24/7 Media also assumed all of the
outstanding stock options of IMAKE under our 1998 stock incentive plan.
Pursuant to the Agreement and Plan of Merger dated as of December 31,
1999 among 24/7 Media, Mercury Holding Company, IMAKE, IMAKE Consulting,
Inc., Mark Schaszberger and Trami Tran (the "Merger Agreement"), in exchange
for all of the outstanding shares of IMAKE, 24/7 Media exchanged
approximately 400,000 shares of its common stock, par value $.01 per share
(the "24/7 Common Stock"). An additional 880,000 shares are expected to be
distributed based on the achievement of certain revenue targets, as defined.
In addition, for separate consideration, the Company awarded grants of
134,000 shares of restricted stock to the employees of IMAKE. An additional
26,000 restricted shares are expected to be issued upon the achievement of
those same revenue targets. 24/7 Media also assumed all of the outstanding
stock options of IMAKE employees valued at approximately $9.9 million. In the
transaction, 24/7 Media assumed net liabilities of approximately $335,000.
24/7 Media also incurred transaction costs of approximately $750,000. For
accounting purposes the effective date of the merger is January 1, 2000.
The consideration payable by 24/7 Media pursuant to the Merger Agreement
was determined as a result of negotiations by and between 24/7 Media and
IMAKE. The net liabilities of IMAKE assumed by 24/7 Media as a result of the
meger transaction consisted primarily of equipment other physical property
and short term liabilities. The assets are used in connection with the
operation of IMAKE's technology services. 24/7 Media intends to operate the
business and use the assets as previously operated and used by IMAKE,
provided that changing business conditions or strategic plans may lead to
changes in IMAKE's operations in the future.
The Agreement and Plan of Merger dated as of December 31, 1999 among 24/7
Media, Mercury Holding Company, IMAKE, IMAKE Consulting, Inc., Mark Schaszberger
and Trami Tran was filed with the Current Report on Form 8-K on January 13, 2000
as Exhibit 2.1 and is incorporated herein by reference.
The press release dated January 10, 2000 was filed with the Current Report
on Form 8-K on January 13, 2000 as Exhibit 99.1 and is incorporated herein by
reference.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Reference is made to the audited financial statements of IMAKE required by
this Form 8-K/A as listed under the heading Financial Statements of IMAKE.
<PAGE>
(b) Reference is made to the pro forma financial statements of 24/7 Media, Inc.
required by this Form 8-K/A as listed under the heading Unaudited Pro Forma
Combined Financial Statements.
(c) EXHIBITS.
2.1 Agreement and Plan of Merger dated as of December 31, 1999 among 24/7
Media, Mercury Holding Company, IMAKE, IMAKE Consulting, Inc., Mark
Schaszberger and Trami Tran. (filed as Exhibit 2.1to 24/7 Media,
Inc.'s Current Report on Form 8-K for an event dated January 10, 2000
and incorporated herein by reference)
23.1 Consent of KPMG LLP
99.1 Press Release, dated January 10, 2000, regarding IMAKE (filed as
Exhibit 99.1 to 24/7 Media, Inc.'s Current Report on Form 8-K for an
event dated January 10, 2000 and incorporated herein by reference)
<PAGE>
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 hereunto duly authorized.
24/7 MEDIA, INC.
Date: March 28, 2000 By: /s/ Mark E. Moran
------------------
Name: Mark E. Moran
Title: Senior Vice President and General Counsel
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Number Description
- -------------- -----------
<S> <C>
2.1 Agreement and Plan of Merger, dated December 31, 1999, among
24/7 Media, Mercury Holding Company, IMAKE, IMAKE
Consulting, Inc., Mark Schaszberger, and Trami Tran.
(incorporated herein by reference to the Current Report on
Form 8K)
23.1 Consent of KPMG LLP
99.1 Press Release, dated January 10, 2000, regarding IMAKE.
(incorporated herein by reference to the Current Report on
Form 8K)
</TABLE>
<PAGE>
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
The following Unaudited Pro Forma Combining Balance Sheet as of December 31,
1999 and Unaudited Pro Forma Combining Statement of Operations for the year
ended December 31, 1999 illustrate the effect of the merger of IMAKE ("the
Merger"). The Unaudited Pro Forma Combining Balance Sheet assumes that the
transaction referred to above was completed as of December 31, 1999 and the
Unaudited Pro Forma Combining Statement of Operations assumes that the
transaction referred to above was completed as of the beginning of the period
presented.
Under the terms of the transaction, approximately 400,000 shares of common
stock of 24/7 Media were exchanged for all of the outstanding shares of
capital stock of IMAKE. The consideration paid by 24/7 Media in connection
with the acquisition of approximately $29.3 million consisted of the
following;
- The issuance of approximately 400,000 shares of the Company's
common stock valued at approximately $18.7 million;
- Fair value of options assumed of $9.9 million;
- Estimated transaction costs of $750,000; and
- The issuance of 134,000 restricted shares to employees valued
at $6.3 million not included in the purchase price which is
accounted for as deferred compensation.
In addition, 880,000 shares of common stock and 26,000 shares of restricted
stock are expected to be issued upon the achievement of certain revenue
targets. These amounts are excluded from the purchase price until such
revenue targets, as defined, are achieved.
For accounting purposes, 24/7 Media will be deemed to be the surviving
corporation in the merger. The pro forma adjustments are based upon currently
available information and upon assumptions that management of each of 24/7
Media and IMAKE believes are reasonable. We will account for the merger based
upon the estimated fair market value of the net tangible and intangible
assets acquired at the date of acquisition. The adjustments included in the
Unaudited Pro Forma Combining Financial Statements represent the preliminary
determination of these adjustments based upon available information. We
cannot assure that the actual adjustments will not differ significantly from
the pro forma adjustments reflected in the pro forma financial information.
The acquisition has been accounted for using the purchase method of
accounting, and, accordingly, the purchase price will be allocated to the
tangible and identifiable intangible assets acquired and liabilities assumed
on the basis of their fair values on the acquisition date. 24/7 Media is in
the process of performing an independent valuation of IMAKE. The preliminary
allocation of the purchase price may be subject to change depending on the
final outcome of the valuation. For pro forma purposes, the Company has
assumed that the historical carrying amounts of such assets and liabilities
approximated their fair value. A preliminary valuation of in process research
and development of $4.7 million in connection with the acquisition of IMAKE
is based on an independent appraisal which determined that the e.merge
technology acquired from IMAKE had not been fully developed at the date of
acquisition. As a result, the Company will be required to incur additional
costs to successfully develop and integrate the e.merge platform. The
remaining purchase price in excess of the liabilities assumed was allocated
to workforce and goodwill. The allocation to workforce was approximately $1.0
million, and will be amortized over two years. The allocation to goodwill was
approximately $23.9 million and will be amortized over its expected period of
benefit of four years.
The Unaudited Pro Forma Combining Financial Statements are for informational
purposes and are not necessarily indicative of either future results of
operations or results that might have been achieved if the foregoing
transactions had been consummated as of the indicated dates. The Unaudited Pro
Forma Combining Financial Statements should be read in conjunction with the
historical financial statements of 24/7.
<PAGE>
Media and IMAKE, together with the related notes thereto. We have included the
historical financial statements of IMAKE elsewhere in this document.
<PAGE>
24/7 MEDIA, INC.
UNAUDITED PRO FORMA COMBINING BALANCE SHEETS
AS OF DECEMBER 31, 1999
<TABLE>
<CAPTION>
24/7 MEDIA IMAKE PRO FORMA PRO FORMA
HISTORICAL HISTORICAL ADJUSTMENTS COMBINED
------------- ----------- ------------ -------------
<S> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents .................................... $ 42,786,000 $ 87,000 $ - $ 42,873,000
Accounts receivable, net ..................................... 34,004,000 885,000 - 34,889,000
Prepaid expenses and other current assets .................... 4,846,000 48,000 - 4,894,000
Deferred taxes 507,000 (507,000) 4) -
------------- ----------- ------------ -------------
Total current assets ............................ 81,636,000 1,527,000 (507,000) 82,656,000
------------- ----------- ------------ -------------
Property and equipment, net .................................... 18,595,000 622,000 - 19,217,000
Intangible assets, net ......................................... 62,398,000 - 24,945,000 1) 87,343,000
Investments .................................................... 366,630,000 - - 366,630,000
Deferred cost of partner agreements ............................ 4,260,000 - 4,260,000
Other assets ................................................... 493,000 - - 493,000
------------- ----------- ------------ -------------
Total assets ................................... $ 534,012,000 $ 2,149,000 $ 24,438,000 $ 560,599,000
============= =========== ============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable ............................................. $ 24,504,000 262,000 - $ 24,766,000
Due to affiliates ............................................ - 40,000 - 40,000
Income tax liability.......................................... - 208,000 - 208,000
Current installments of capital leases ....................... 49,000 - - 49,000
Deferred revenue ............................................. 2,019,000 1,717,000 - 3,736,000
Accrued liabilities .......................................... 13,875,000 253,000 750,000 1) 14,878,000
------------- ----------- ------------ -------------
Total current liabilities ........................ 40,447,000 2,480,000 750,000 43,677,000
------------- ----------- ------------ -------------
Obligations under capital leases ............................... 13,000 - - 13,000
Deferred tax liability ......................................... 95,656,000 4,000 - 95,660,000
Minority interest .............................................. 105,000 - - 105,000
Commitments and contingencies
Stockholders' equity:
Common Stock ................................................ 224,000 - 14,000 1) 238,000
Additional paid-in capital ................................... 282,806,000 - 18,650,000 1) 317,604,000
9,896,000 1)
6,252,000 1)
Deferred stock compensation .................................. (232,000) - (6,252,000) 1) (6,484,000)
Accumulated other comprehensive income ...................... 194,790,000 - - 194,790,000
Accumulated deficit .......................................... (79,797,000) (335,000) 335,000 1) (85,004,000)
(4,700,000) 1)
(507,000)
------------- ----------- ------------ -------------
Total stockholders' equity (deficit) ................ 397,791,000 (335,000) 23,688,000 421,144,000
------------- ----------- ------------ -------------
Total liabilities and stockholders' equity (deficit). $ 534,012,000 $ 2,149,000 $ 24,438,000 $ 560,599,000
============= =========== ============ =============
</TABLE>
See accompanying notes to unaudited pro forma combining financial statements.
<PAGE>
24/7 MEDIA, INC.
UNAUDITED PRO FORMA COMBINING STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
----------------------------------------------------------------
24/7 Media IMAKE Pro forma Pro forma
Historical Historical Adjustments Combined
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Total revenues ........................................... $ 90,011,000 $ 13,849,000 $ (6,086,000) 6) $ 97,774,000
Cost of revenues ......................................... 65,963,000 4,843,000 (2,130,000) 6) 68,676,000
------------ ------------ ------------ ------------
Gross profit ......................... 24,048,000 9,006,000 (3,956,000) 29,098,000
------------ ------------ ------------ ------------
Operating expenses:
Selling, general and administrative................... 50,126,000 3,417,000 2,500,000 5) 56,043,000
Research and product development ..................... 1,891,000 920,000 - 2,811,000
Amortization of goodwill and other intangible assets.. 15,097,000 - 6,486,000 2) 21,583,000
------------ ------------ ------------ ------------
Total operating expenses ............. 67,114,000 4,337,000 8,986,000 80,437,000
------------ ------------ ------------ ------------
(Loss) income from operations ........ (43,066,000) 4,669,000 (12,942,000) (51,339,000)
Other income (expense):
Interest income .......................................... 3,093,000 69,000 - 3,162,000
Interest expense ......................................... (68,000) - - (68,000)
------------ ------------ ------------ ------------
Net (loss) income before
minority interest and taxes .... (40,041,000) 4,738,000 (12,942,000) (48,245,000)
Provision for income taxes ............................... - 1,849,000 (1,849,000) 4) -
Minority interest in loss of
consolidated subsidiaries ............................ (979,000) - - (979,000)
------------ ------------ ------------ ------------
Net (loss) income
attributable to common stockholders ................. $(39,062,000) $ 2,889,000 (11,093,000) $(47,266,000)
============ ============ ============= ============
Net loss attributable
to commonstockholders- basic and diluted ............ $ (1.96) $ (2.30)
============ ============
Weighted average common shares outstanding ............... 19,972,446 534,000 3) 20,506,446
============ ============= ============
</TABLE>
See accompanying notes to unaudited proforma combining financial statements.
<PAGE>
24/7 Media, Inc.
NOTES TO UNAUDITED PRO FORMA COMBINING FINANCIAL STATEMENTS
1) Reflects the acquisition by 24/7 Media of IMAKE at January 1, 2000 as
follows:
(i) the issuance of approximately 400,000 shares of 24/7
Media for all outstanding shares of capital stock of IMAKE; and
the issuance of 134,000 restricted shares to IMAKE employees;
(ii) the value of options exchanged, with a weighted average exercise
price of $46.00, has been determined using the Black-Scholes
method assuming 88% volatility, an average risk free interest
rate of 6.59%, and an average exercise period of 5 years. Because of
the limited history of 24/7 Media as a public company, companies
with similar operations were used to estimate volatility in valuing
the options;
(iii) estimated transaction costs of $ 750,000;
(iv) the elimination of historical net liabilities assumed;
(v) 24/7 Media has made a preliminary allocation of excess cost over
estimated net liabilities assumed to goodwill and workforce as
IMAKE's assets and liabilities are estimated to approximate fair
value; and
(vi) the one time charge relating to in process research and development
relating to the e.merge technology of approximately $4.7 million
has been recorded as an increase to the accumulated deficit.
<PAGE>
The following represents the preliminary allocation of the purchase price:
(i) Issuance of Common Stock:
Shares issued to acquire all IMAKE
shares outstanding.............................. 400,000
Per share price................................. $ 46.66
---------
Value of shares issued.......................... $ 18,664,000
(ii) Value of options exchanged...................... 9,896,000
(iii) Estimated transaction costs..................... 750,000
-------------
Purchase Price.................................. 29,310,000
(iv) Add: Net liabilities assumed.................... (335,000)
Excess of cost over fair value of net assets
acquired........................................ 29,645,000
(v) Less: Write off of in process research
and development........................... 4,700,000
----------
Intangible assets..................................... $ 24,945,000
----------
Deferred compensation (134,000 restricted shares at
$46.66 per share)................................. $ 6,252,000
----------
For purposes of the pro forma financial information, the estimated amount of
in process research and development of approximately $4.7 million. Because
such in-process technologies are not expected to reach the stage of
technological feasibility as of the acquisition date and is expected to have
no future use this amount shall be immediately written off by the Company
and has been reflected in the pro forma balance sheet as a charge to
stockholders' equity (deficit).
2) Reflects amortization expense of the excess of cost over fair value of net
liabilities assumed in the merger by use of the straight-line method over
the estimated period of benefit. Workforce is being amortized over
two years. Goodwill is being amortized over four years. The amounts
allocated to all intangibles are preliminary, and, therefore the
amortization expense is subject to change based on a change in this
allocation.
3) The pro forma basic and diluted net loss per common share is computed by
dividing the net loss attributable to common stockholders by the
weighted average number of shares outstanding. The calculation of the
weighted average number of shares outstanding assumes that 400,000 of
24/7 Media Inc.'s common stock and 134,000 of restricted shares issued
in connection with its acqusition of IMAKE were outstanding for the
entire period. Diluted net loss per share equals basic net loss per
share, as common stock equivalents are anti-dilutive for the period.
4) The provision for income taxes has been reversed as the combined losses of
the two entities would not result in the need for a tax provision. The
deferred tax asset has also been fully reserved based on the Company's
uncertainty of realizing the asset in the future.
5) The value of the restricted shares issued is recorded as deferred
compensation and amortized over two years, according to the terms of the
agreement--40% of the value is amortized in the first year, 60% in the
second year.
6) Sales from IMAKE to 24/7 Media and the related costs have been eliminated
as these sales are deemed to be intercompany for pro forma purposes.
7) The issuance of 880,000 common shares and 26,000 restricted shares are
expected to be distributed based upon the achievement of certain revenue
targets, as defined, and have not been included in the purchase price as
of the acquisition date due to their contingent nature.
<PAGE>
IMAKE SOFTWARE MEDIA DIVISIONS
Combined Financial Statements
December 31, 1999 and 1998
(With Independent Auditors' Report Thereon)
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
IMAKE Software and Services, Inc.:
We have audited the accompanying combined balance sheets of the media
divisions of IMAKE Software & Services, Inc. and IMAKE Consulting, Inc.
(referred to as "IMAKE Software Media Divisions" or the "Company") as of
December 31, 1999 and 1998, and the related combined statements of
operations, division equity (deficit), and cash flows for the years then
ended. These combined financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
combined financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of IMAKE
Software Media Divisions as of December 31, 1999 and 1998, and the combined
results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
/s/ KPMG LLP
McLean, Virginia
March 14, 2000
<PAGE>
IMAKE SOFTWARE MEDIA DIVISIONS
Combined Balance Sheets
December 31, 1999 and 1998
<TABLE>
<CAPTION>
ASSETS 1999 1998
------------------ -------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 87,070 801,731
Accounts receivable, net 884,688 786,672
Deferred tax asset 506,700 --
Prepaid and other current assets 47,794 55,642
------------------ -------------------
Total current assets 1,526,252 1,644,045
Property and equipment, net 622,237 603,580
Other assets -- 27,339
------------------ -------------------
Total assets $ 2,148,489 2,274,964
================== ===================
LIABILITIES AND DIVISION EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 262,079 10,913
Due to stockholders -- 74,575
Due to affiliates 40,328 15,000
Income tax liability 208,000 177,318
Deferred taxes -- 281,900
Deferred revenue 1,716,911 --
Deferred rent 10,106 7,365
Accrued liabilities 242,198 101,490
------------------ -------------------
Total current liabilities 2,479,622 668,561
Non-current deferred taxes 4,000 62,500
------------------ -------------------
Total liabilities 2,483,622 731,061
------------------ -------------------
Commitments and contingencies
Division equity (deficit) (335,133) 1,543,903
------------------ -------------------
Total liabilities and division equity (deficit) $ 2,148,489 2,274,964
================== ===================
</TABLE>
See accompanying notes to combined financial statements.
<PAGE>
IMAKE SOFTWARE MEDIA DIVISIONS
Combined Statements of Division Equity (Deficit)
Years ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
----------------- -----------------
<S> <C> <C>
Revenues $ 13,848,979 4,481,697
Cost of revenues 4,842,801 1,627,144
----------------- ----------------
Gross profit 9,006,178 2,854,553
Operating expenses:
Selling, general and administrative 3,416,790 1,621,937
Research and development 919,728 942,523
----------------- -----------------
Operating profit 4,669,660 290,093
Interest income, net 69,270 35,121
----------------- -----------------
Income before provision for income taxes 4,738,930 325,214
Provision for income taxes 1,849,900 118,343
----------------- -----------------
Net income $ 2,889,030 206,871
================= =================
</TABLE>
See accompanying notes to combined financial statements.
6
<PAGE>
IMAKE SOFTWARE MEDIA DIVISIONS
Combined Statements of Division's Equity (Deficit)
Years ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
DIVISION EQUITY
(DEFICIT)
---------------
<S> <C>
Balance at January 1, 1998 1,683,072
Net income 206,871
Distributions (346,040)
---------------
Balance at December 31, 1998 1,543,903
Net income 2,889,030
Current tax liabilities attributable to stockholders (note 2i) 2,639,618
Distributions (7,407,684)
---------------
Balance at December 31, 1999 (335,133)
===============
</TABLE>
See accompanying notes to combined financial statements.
7
<PAGE>
IMAKE SOFTWARE MEDIA DIVISIONS
Combined Statements of Cash Flows
Years ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
------------------- --------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,889,030 206,871
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 256,856 217,530
Deferred income taxes (847,100) (82,500)
Loss on disposal of assets 216,240 17,120
Other -- 5,025
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (4,322,262) 287,274
(Increase) decrease in other prepaids and other
current assets 7,848 (15,242)
Increase in other assets (2,079) (8,258)
Increase (decrease) in accounts payable 273,856 198
Increase (decrease) in accrued liabilities 140,708 28,121
Increase (decrease) in income tax liabilities 2,670,300 177,318
Increase (decrease) in deferred revenue 1,716,911 (85,050)
Increase (decrease) in deferred rent 2,741 (5,550)
--------------------- --------------------
Net cash provided by operating activities 3,003,049 742,857
--------------------- --------------------
Cash flows from investing activities:
Capital expenditures (491,753) (134,994)
--------------------- --------------------
Net cash used in investing activities (491,753) (134,994)
--------------------- --------------------
Cash flows from financing activities:
Distributions to shareholders (3,125,507) (346,040)
Advances to/from affiliates (100,450) --
Advances from shareholders -- 27,398
--------------------- --------------------
Net cash used in financing activities (3,225,957) (318,642)
--------------------- --------------------
Net increase (decrease) in cash and cash
equivalents (714,661) 289,221
Cash and cash equivalents, beginning of the year 801,731 512,510
----------------------- --------------------
Cash and cash equivalents, end of the year $ 87,070 801,731
======================= ====================
</TABLE>
See accompanying notes to combined financial statements.
8
<PAGE>
(1) BASIS OF PRESENTATION AND BUSINESS DESCRIPTION
The accompanying combined financial statements reflect the financial
position, operating results and cash flows of the media divisions of IMAKE
Software & Services, Inc. (IMAKE Software) and IMAKE Consulting, Inc.
(IMAKE Consulting), which are referred to herein as "IMAKE Software
Media Divisions" or the "Company", as of and for the periods presented.
These operating divisions are the businesses being acquired by 24/7
Media, Inc. (24/7) as of January 13, 2000 (note 9).
IMAKE Software and IMAKE Consulting are related entities that are commonly
owned by two individuals. Prior to December 1999, IMAKE Software and IMAKE
Consulting were each comprised of two divisions, a media division and a
finance division, which served clients in the media and finance
industries, respectively. In December 1999, IMAKE Software acquired the
media division of IMAKE Consulting. Concurrently IMAKE Consulting
acquired the finance division of IMAKE Software. These transactions were
recorded at historical cost.
IMAKE Software was incorporated in February 1994 as a Sub-chapter C
Corporation, in the State of Maryland. IMAKE Consulting was incorporated
as a Sub-Chapter S Corporation. The Company is in the business of
providing custom software development and systems integration to the
digital entertainment, internet, cable and telecom industries. The
Company is located in Bethesda, Maryland, and substantially all of it's
sales are to nationally based concerns in the high technology industries
identified above.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) RECOGNITION OF REVENUE
The Company derives its revenue from software consulting, development and
maintenance contracts and accounts for such contracts in accordance with
Statement of Position (SOP) 97-2, "Software Revenue Recognition" as
amended by SOP 98-4 and SOP 98-9. The Company's software consulting and
custom application contracts are generally fixed price or time and
materials contracts. The Company's maintenance contracts are usually
fixed monthly amounts or time and materials contracts. Revenues under
fixed price contracts are recognized on a percentage of completion
basis based on labor hours incurred to total estimated contract labor
hours. Revenues under time and materials contracts are recognized as the
hours are incurred. Fixed monthly maintenance contracts are recognized
in the corresponding months.
Provisions for estimated losses on uncompleted contracts are made in the
period in which losses are determined. Changes in estimated profitability
are recognized in the period in which the revisions are determined.
(b) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and
9
<PAGE>
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Significant estimates used in
preparing these financial statements include those used under the
percentage-of-completion revenue recognition method. It is at least
reasonably possible that the significant estimates used will change within
the next year. Actual results could differ from those estimates.
(c) CASH AND CASH EQUIVALENTS
The Company considers all highly liquid instruments with an original
maturity of three months or less to be cash equivalents.
(d) CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist primarily of accounts receivable.
The Company derives substantially all of its revenue from businesses in
digital entertainment, internet, cable and telecommunications industries
and grants credit to its customers in the normal course of business.
The accounts receivable balance at December 31, 1999 is due from two
customers, the accounts receivable balance at December 31, 1998 was due
from five customers.
Sales to four customers in 1999 and to three customers in 1998, all
companies in the high technology industries as identified above,
represented 80 percent and 84 percent of total sales for the years ended
December 31, 1999 and 1998, respectively.
(e) PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation expense is
calculated using the straight-line method over the estimated useful lives
of the assets which is generally a period of five years.
(f) PRODUCT DEVELOPMENT COSTS
The Company accounts for product development costs in accordance with
SFAS No. 86, "Accounting for the Costs of Computer Software to be Sold,
Leased, or Otherwise Marketed," under which certain software development
costs incurred subsequent to the establishment of technological
feasibility are capitalized and amortized over the estimated lives of
the related products. Technological feasibility is established upon
completion of a working model. Through December 31, 1999, all
development costs have been charged to research and development expense
in the accompanying combined statements of operations.
(g) VALUATION OF LONG-LIVED ASSETS
The Company accounts for the valuation of long-lived assets under SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of." SFAS No. 121 requires that
long-lived assets and certain identifiable intangible assets be reviewed
for impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. Recoverability
of the long-lived assets is measured by a comparison of the carrying
amount of the asset to future undiscounted net cash flows expected to be
generated by the asset. If such assets are considered to be impaired,
the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds its estimated fair value. Assets
to be disposed of are reported at the lower of the carrying amount or
fair value less costs to sell.
10
<PAGE>
(h) RESEARCH AND DEVELOPMENT COSTS
Research and development costs are charged to expense as incurred.
(i) INCOME TAXES
The Company is not a tax paying entity. The accompanying combined
financial statements are presented as if the Company were a stand-alone
taxpayer for all periods presented. However, the current income tax
liability that arose from the operations of the IMAKE Consulting media
division remains the responsibility of the IMAKE Consulting stockholders,
as IMAKE Consulting is a Sub-Chapter S Corporation. Accordingly this
liability, which approximated $2,639,618 as of December 31, 1999, has
been shown as an increase in division equity in the combined statements
of division equity (deficit).
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases and operating loss carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
(j) ALLOCATION OF CERTAIN GENERAL AND ADMINISTRATIVE COSTS
IMAKE Software Media Divisions shares office space and certain
administrative expenses with the Finance divisions of IMAKE Software and
IMAKE Consulting. The allocation of these expenses to the Media
divisions was based upon management's estimate of the space occupied by
the divisions.
(3) ACCOUNTS RECEIVABLE
Accounts receivable consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------
1999 1998
----------------- -----------------
<S> <C> <C>
Accounts receivable $ 884,688 786,672
Less allowance for doubtful accounts -- --
----------------- -----------------
$ 884,688 786,672
================= =================
</TABLE>
11
<PAGE>
(4) FURNITURE AND EQUIPMENT
Furniture and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
ESTIMATED ---------------------------------
LIVES 1999 1998
----------------- --------------- ---------------
<S> <C> <C> <C>
Leasehold improvements 5 years $ 13,054 71,201
Software and computer equipment 3-5 years 884,729 858,113
Office furniture and fixtures 10 years 209,067 291,692
--------------- ---------------
1,106,850 1,221,006
Accumulated depreciation and amortization (484,613) (617,426)
--------------- ---------------
Furniture and equipment, net $ 622,237 603,580
=============== ===============
</TABLE>
(5) DUE TO AFFILIATE
The amounts due to affiliates are due to IMAKE Consulting, Inc.'s finance
division and are unsecured, non-interest bearing, and are due on demand.
12
<PAGE>
(6) OPERATING LEASES
The Company leases office space under operating lease agreements
expiring December 31, 2000, which were amended during 1999 to include
more office space. Rent expense was approximately $236,000 and $133,000
in the years ended December 31, 1999 and 1998, respectively.
The following is a schedule of future minimum lease payments required under
the operating leases as of December 31, 1999:
YEAR ENDING DECEMBER 31,
2000 $ 346,000
================
The minimum lease payment represents amounts due for the entirety of
the leased space without reduction for amounts to be sublet to the
finance divisions.
Additionally, the leases provide for additional rent to be paid for
increases in operating costs and real estate taxes.
(7) DEFERRED COMPENSATION PLAN
Effective February 1, 1996, the Company adopted a qualified profit sharing
plan with a 401(k) deferred compensation provision. All employee are
eligible to participant in the Company's 401(k) plan as long as they are at
least 21 years of age. The Company matches 100 percent of the employee
contribution up to 1 percent of covered payroll. The contribution expense
for the years ended December 31, 1999 was $40,000.
1
<PAGE>
(8) INCOME TAXES
Deferred income tax liabilities reported on the balance sheet related to the
media division of IMAKE Software & Services, Inc. at December 31 consists
of the following:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Deferred tax assets:
Accounts payable and accrued expenses $ 200,600 46,700
Deferred revenues 669,900 --
Net operating loss carryforwards 27,200 27,200
---------- ----------
Total deferred tax assets $ 897,700 73,900
---------- ----------
Deferred tax liabilities:
Accounts receivable $ (345,200) (306,900)
Prepaids and other assets (18,600) (32,300)
Fixed assets (31,200) (79,100)
---------- ----------
Total deferred tax liabilities $ (395,000) (418,300)
---------- ----------
Net deferred income tax asset (liabilities) 502,700 (344,400)
========== ==========
The provision for income taxes consists of:
Current taxes
Federal $2,171,700 161,720
State 525,300 39,123
---------- ----------
Total current tax expense 2,697,000 200,843
---------- ----------
Deferred taxes
Federal $ (682,100) (66,400)
State (165,000) (16,100)
---------- ----------
Total deferred tax expense (benefit) (847,100) (82,500)
---------- ----------
Total tax expense $1,849,900 118,343
========== ==========
</TABLE>
The total tax expense differs from the expense which would be expected
based upon the pre-tax income at the Federal statutory rate of 34% due
to the impact of state income taxes. Permanent differences between income
as reported in the financial statements and taxable income were not
significant.
The Company is a cash basis taxpayer. In assessing the realizability of
deferred tax assets, management considers whether it is more likely than
not that some portion or all of the deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is dependent
upon the generation of future taxable income during the periods in which
those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable
income, and tax planning strategies in making this assessment. Based upon
the level of historical taxable income and projections for future taxable
income, management believes it is more likely than not the Company will
realize the benefits of these deductible differences.
(9) ACQUISITION BY 24/7 MEDIA AND DISTRIBUTION TO STOCKHOLDERS
Effective January 13, 2000, 24/7 Media, Inc. acquired the IMAKE Software
Media Divisions through a stock acquisition of IMAKE Software & Services
Inc., in exchange for approximately 1.3 million shares of 24/7 Media,
Inc. common stock. The total consideration includes amounts which are
dependent upon future operating results. The Company generated revenues
of $6,085,844 and $0 from 24/7 for the years ended December 31, 1999 and
1998 respectively. There were no outstanding accounts receivable with
24/7 as of December 31, 1999. Effective December 31, 1999, in
contemplation of the acquisition certain assets and liabilities, which
were retained by the stockholders as part of the merger agreement, were
distributed to the stockholders as follows:
Cash $3,120,743
Accounts receivables 4,224,246
Other assets 29,418
Due to/from affiliates 51,203
Prepaids and other current assets 7,400
Other liabilities (25,326)
----------
Total distribution, net $7,407,684
==========
(10) STOCK COMPENSATION PLAN
On January 13, 2000, the board of directors of the Company authorized the
adoption of the 1999 Stock Option Plan (the "Stock Plan"), which provides
for the grant of incentive stock options, restricted stock awards, and
stock appreciation rights. On January 13, 2000 the Company awarded
297,000 stock options to its employees at an exercise price of $45.9375.
Under the terms of the merger agreement these options will be assumed
under 24/7 Media Inc.'s 1998 Stock Incentive Plan.
2
<PAGE>
Exhibit 23.1
ACCOUNTANTS' CONSENT
The Board of Directors
IMAKE SOFTWARE & SERVICES, INC. AND IMAKE CONSULTING, INC.:
We consent to the incorporation by reference in the registration statements
(No. 333-66995) on Form S-8 and (No. 333-89985) on Form S-3 of 24/7 Media,
Inc. of our report dated March 14, 2000, with respect to the combined balance
sheets of IMAKE Software Media Divisions as of December 31, 1999 and 1998,
and the related combined statements of operations and division equity
(deficit) and cash flows for the years then ended, which report appears in the
Form 8-K/A of 24/7 Media, Inc. dated March 27, 2000.
/s/ KPMG LLP
McLean, Virginia
March 27, 2000
3
