24/7 MEDIA INC
Filing Type: 8-K/A
Description: Current Report
Filing Date: March 25, 2000
Period End: March 25, 2000
Primary Exchange: NASDAQ - National Market System
Ticker: TFSM
<PAGE>
24/7 MEDIA INC-8-K - Current Report Date Filed: 1/25/2000
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Table of Contents
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To jump to a section, double-click on the section name.
8-K/A
Item 2.........................................................................2
Item 7..........................................................................
Balance Sheet..................................................................4
Income Statement...............................................................5
EX-23.1
EX-23.1 7
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 8-K/A
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CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
January 10, 2000 0-29768
-------------------------------- ------------------------
Date of Report (Date of earliest Commission File Number
event reported)
24/7 MEDIA, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3995672
-------------------------------- ------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification Number)
1250 Broadway
New York, New York 10001
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(Address of Principal Executive Office (Zip Code)
(212) 231-7100
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(Registrant's telephone number, including area code)
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[Sabela]
<PAGE>
Item 2. Acquisition or Disposition of Assets.
This Form 8-K/A amends the Current Report of 24/7 Media, Inc. on Form 8-K
filed on January 10, 2000 to incorporate Item 7 (a), the Financial
Statements of Business Acquired.
On January 10, 2000, 24/7 Media, Inc. ("24/7 Media" or the "Company")
announced the acquisition of Sabela Media, Inc. ("Sabela"), a
privately-held Delaware Corporation and a global ad serving, tracking and
analysis company with products for online advertisers and Web publishers,
for approximately $70.0 million. On January 10, 2000, the Company acquired
all of the issued and outstanding shares of capital stock of Sabela in a
merger transaction whereby a subsidiary of 24/7 Media was merged with and
into Sabela. 24/7 Media also assumed all of the outstanding stock options
of Sabela under the Company's stock incentive plan.
Pursuant to the Agreement and Plan of Merger dated January 9, 2000 among
24/7 Media, Killer-App Holding Corp., Sabela, Freshwater Consulting Ltd.,
James Green and Galmos Holdings, Inc., (i) in exchange for all of the
outstanding shares of Sabela, 24/7 Media exchanged approximately 1.3
million shares of its common stock, par value $.01 per share (the "24/7
common stock"), and paid approximately $2.3 million to the stockholders of
Sabela, (ii) 24/7 Media assumed all of the outstanding stock options of
Sabela and reserved approximately 42,000 shares of common stock to cover
the exercise thereof, and (iii) 24/7 Media assumed all of the outstanding
warrants of Sabela and reserved approximately 105,000 shares of its common
stock to cover the exercise thereof. In connection with the merger, 24/7
Media also incurred transaction costs of approximately $3.0 million. For
accounting purposes the effective date of the merger is January 1, 2000.
The consideration payable by 24/7 Media was determined as a result of
negotiation by and between 24/7 Media and Sabela. The number of shares of
24/7 Media common stock issued to the holders of Sabela common stock was
determined based on an exchange ratio of 0.1104 shares of 24/7 common
stock for each share of Sabela common stock. Warrants assumed are also
convertible at this ratio. The number of options of 24/7 Media issued to
the holders of Sabela stock options was determined based on an exchange
ratio of 0.1146 24/7 stock options for each stock option of Sabela. The
net assets of Sabela acquired by 24/7 Media as a result of the merger
transaction consisted of equipment, intellectual property, and other
physical property. These assets are used in connection with the operation
of Sabela's ad serving, tracking and analysis services. 24/7 Media intends
to operate the business and use the assets as previously operated and used
by Sabela, provided that changing business conditions or strategic plans
may lead to changes in Sabela's operations in the future.
<PAGE>
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits
(a) Reference is made to the audited financial statements of Sabela
required by this Form 8-K/A as listed under the heading Financial
Statements of Sabela Media, Inc.
(b) Reference is made to the unaudited 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
5.1 The Agreement and Plan of Merger dated January 9, 2000 by and among 24/7
Media, Killer-App Holding Corp., Sabela Media, Inc., Freshwater Consulting
Ltd., James Green and Galmos Holdings, Inc.(filed as Exhibit 2.1 to 24/7
Media, Inc.'s current report on Form 8-K for an event dated January
10,2000 and incorporated herein by reference)
23.1 Consent of KPMG LLP
99.1 The Press Release dated January 10, 2000, regarding Sabela (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 24, 2000 By: /s/ Mark E. Moran
----------------------------
Name: Mark E. Moran
Title: Senior Vice President and
General Counsel
<PAGE>
EXHIBIT INDEX
Exhibit Number Description
- -------------- -----------
5.1 Agreement and Plan of Merger, dated January 9, 2000, between
the Company, Killer-App Holding Corp., Sabela Media, Inc.,
Freshwater Consulting Ltd., James Green and Galmos Holdings,
Inc.(incorporated herein by reference to the 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 Sabela Media,
Inc. (incorporated herein by reference to the Current Report
on Form 8-k for an event dated January 10, 2000 and
incorporated herein by reference)
<PAGE>
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
The Unaudited Pro Forma Combining Balance Sheet as of December 31, 1999 gives
effect to the acquisition of Sabela as if the acquisition had occurred on that
date. The unaudited Pro Forma Combining Statement of Operations for the year
ended December 31, 1999 gives effect to the acquisition of Sabela as if the
acquisition had occurred at the beginning of the period presented.
Under the terms of the transaction, the holders of Sabela common stock received
shares of 24/7 Media common stock on the basis of an exchange ratio of
0.1104 shares of 24/7 Media common stock for each share of Sabela common stock.
Warrants assumed are also convertible at this ratio. The number of shares of
24/7 Media common stock issued to the holders of Sabela stock options was
determined on the basis of an exchange ratio of .1146 of 24/7 Media common stock
for each share of Sabela stock option. The conversion ratio was determined
through arm's length negotiations.
The consideration paid by 24/7 Media in connection with the acquisition of
approximately $70.0 million consisted of the following;
o The issuance of approximately 1.3 million shares of 24/7 Media
Common stock valued at approximately $58.4 million as consideration
for all Sabela shares outstanding;
o cash consideration of $2.3 million for outstanding shares of Sabela;
o fair value of warrants assumed of $4.6 million;
o fair value of assumed options of $1.7 million; and
o estimated transaction costs of $3.0 million.
We will record the merger as a purchase. 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 Sabela believes are
reasonable. We will account for the merger based upon the estimated fair market
value of the net tangible and intangible assets (liabilities) 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 you that the
actual adjustments will not differ 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
indentifable 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 Sabela. The preliminary allocation of the
purchase price may be subject to change depending upon 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 values.
The remaining purchase price over the fair value of the assets acquired and
liabilities assumed has preliminarily been allocated to goodwill, workforce and
technology. The workforce allocation approximate $1.1 million. The technology
allocation approximates $7.1 million with a possible range of $6 million to $8.2
million. The remaining portion of purchase price in excess of tangible and
intangible assets, estimated at $61.0 million, has been allocated to goodwill.
Goodwill and other intangible assets will be amortized over their expected
period of benefit ranging from two to four years (four years for goodwill and
technology, and two years for workforce).
The Unaudited Pro Forma Combining Financial Statements are intended for
informational purposes only 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 and are
qualified by the historical financial statements of 24/7 Media and historical
financial statements of Sabela, together with the related notes thereto. We have
included the historical financial statements of Sabela elsewhere in this
document.
<PAGE>
24/7 Media, Inc.
UNAUDITED PRO FORMA COMBINING BALANCE SHEETS
AS OF DECMBER 31, 1999
<TABLE>
<CAPTION>
24/7 Media Sabela Pro Forma Pro Forma
ASSETS Historical Historical Adjustments Combined
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<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents ............................ $ 42,786,000 415,000 (2,317,000) 1) $ 40,884,000
Accounts receivable, net of allowances ............... 34,004,000 347,000 -- 34,351,000
Prepaid expenses and other current assets ............ 4,846,000 -- -- 4,846,000
------------- ------------- ------------- -----------
Total current assets ............................. 81,636,000 762,000 (2,317,000) 80,081,000
Property and equipment, net ............................. 18,595,000 365,000 -- 18,960,000
Intangible assets, net .................................. 62,398,000 -- 69,174,000 1) 131,572,000
Investments ............................................. 366,630,000 -- -- 366,630,000
Deferred cost of partner agreements ..................... 4,260,000 -- -- 4,260,000
Other assets ............................................ 493,000 312,000 -- 805,000
------------- ------------- ------------- -----------
Total assets ..................................... $ 534,012,000 $ 1,439,000 $ 66,857,000 602,308,000
============= ============= ============= ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ..................................... $ 24,504,000 $ 1,288,000 $ -- $ 25,792,000
Accrued liabilities .................................. 13,875,000 20,000 3,000,000 1) 16,895,000
Current installments of capital leases ............... 49,000 -- -- 49,000
Deferred revenue ..................................... 2,019,000 -- -- 2,019,000
------------- ------------- ------------- -----------
Total current liabilities ........................ 40,447,000 1,308,000 3,000,000 44,755,000
------------- ------------- ------------- -----------
Obligations under capital leases ........................ 13,000 -- -- 13,000
Deferred tax liability .................................. 95,656,000 -- -- 95,656,000
Minority interest ....................................... 105,000 -- -- 105,000
Commitments and contingencies
Stockholders' equity:
Common stock ........................................ 224,000 10,000 13,000 1) 237,000
(10,000) 1)
Additional paid-in capital .......................... 282,806,000 3,829,000 58,359,000 1) 347,447,000
4,592,000 1)
1,708,000 1)
(3,847,000) 1)
Receivable from stockholders ........................ -- (684,000) -- (684,000)
Deferred stock compensation ......................... (232,000) -- -- (232,000)
Accumulated other comprehensive income .............. 194,790,000 (1,000) 1,000 1) 194,790,000
Accumulated deficit ................................. (79,797,000) (3,023,000) 3,041,000 1) (79,779,000)
Total stockholders' equity ...................... 397,791,000 131,000 63,857,000 461,779,000
------------- ------------- ------------- -----------
Total liabilities and stockholders' equity ....... $ 534,012,000 1,439,000 66,857,000 $ 602,308,000
============= ============= ============= =============
</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 Sabela Pro Forma Pro Forma
Historical Historical Adjustments Combined
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<S> <C> <C> <C> <C>
Total revenues ............................... $ 90,011,000 $ 742,000 $ -- $ 90,753,000
Cost of revenues ............................. 65,963,000 1,403,000 -- 67,366,000
------------ ------------ ------------ ------------
Gross profit (loss) ................... 24,048,000 (661,000) -- 23,387,000
------------ ------------ ------------ ------------
Operating expenses:
Selling, general and administrative ....... 50,126,000 2,301,000 -- 52,427,000
Product development ....................... 1,891,000 -- -- 1,891,000
Amortization of goodwill and -- -- --
other intangible assets ................. 15,097,000 -- 17,575,000 2) 32,672,000
------------ ------------ ------------ ------------
Total operating expenses .............. 67,114,000 2,301,000 17,575,000 86,990,000
------------ ------------ ------------ ------------
Loss from operations .................. (43,066,000) (2,962,000) (17,575,000) (63,603,000)
Other Income (Expense):
Other expense ................................ -- (11,000) -- (11,000)
Interest income .............................. 3,093,000 19,000 -- 3,112,000
Interest expense ............................. (68,000) -- -- (68,000)
------------ ------------ ------------ ------------
Net loss before minority interest ..... (40,041,000) (2,954,000) (17,575,000) (60,570,020)
Minority interest in loss of consolidated subs 979,000 -- -- 979,000
------------ ------------ ------------ ------------
Net loss attributable to common stockholders . $(39,062,000) $ (2,954,000) $(17,575,000) $(59,591,000)
============ ============ ============ ============
Net loss per common share--basic and diluted . $ (1.96) $ (2.81)
============ ============
Weighted average common shares outstanding ... 19,972,446 1,251,000 3) 21,223,446
============ ============ ============
</TABLE>
See accompanying notes to unaudited pro forma 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 Sabela at January 10, 2000 as
follows:
The consideration paid by 24/7 Media of approximately $70 million in connection
with the acquisition consisted of the following:
i.) The issuance of approximately 1.3 million shares of 24/7 Media
common stock
- valued at approximately $58.4 million as consideration
for all of the outstanding shares of Sabela;
ii.) cash consideration of $2.3 million for outstanding shares of Sabela;
iii.) fair value of warrants assumed of $4.6 million;
iv.) fair value of options assumed of $1.7 million;
v.) estimated transaction costs of $3 million;
vi.) the elimination of historical net assets acquired comprised of
Sabela historical stockholders' equity excluding receivables from
stockholders;
<PAGE>
vii.) the value of the 195,000 warrants, with a weighted exercise price of
$9.61, assumed has been determined using the Black-Scholes valuation
model assuming 88% volatility, an average risk free interest rate of
6.97% 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
warrants; and
viii.) the value of 42,000 options, with a weighted average exercise price
of $9.96, assumed has also been determined using the Black-Scholes
valuation model assuming 128% volatility, an average risk free
interest rate of 6.19%, and an average exercise period of 1 year.
The following represents the preliminary allocation of the purchase price:
i) Issuance of the Company's common stock
Shares issued for Sabela shares 1,141,000
Shares issued for non-assumed options 110,000
----------
Total shares issued to acquire Sabela 1,251,000
Per share price $ 46.66
----------
Value of shares issued $ 58,372,000
ii) Cash paid for outstanding shares 2,317,000
iii) Value of warrrants assumed 4,592,000
iv) Value of assumed options 1,708,000
v) Estimated transaction costs 3,000,000
------------
Purchase Price $ 69,989,000
vi) Less: Fair value of net assets acquired 131,000
Less: Receivable from stockholders 684,000
------------
Excess of cost over fair value of net assets acquired $ 69,174,000
============
24/7 Media has made a preliminary allocation of excess cost over estimated net
assets acquired to goodwill and other intangibles as Sabela's assets and
liabilities approximate fair value.
(2) Reflects amortization expense for the year ended December 31, 1999 assuming
the transaction had occurred on January 1, 1999. This amortization expense
includes amortization relating to the goodwill, workforce and technology.
Goodwill and technology are being amortized over a four-year period. Workforce
is being amortized over a two-year period. Both amortization periods represent
the expected useful lives of the intangible assets. 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
averaged number of common shares outstanding. The calculation of the weighted
average number of shares outstanding assumes that 1,251,000 of 24/7 Media,
Inc.'s common stock issued in connection with its acquisition of Sabela 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
presented.
<PAGE>
SABELA MEDIA, Inc. AND SUBSIDIARIES
Consolidated Financial Statements
December 31, 1999 and 1998
(With Independent Auditors' Report Thereon)
<PAGE>
Independent Auditors' Report
The Board of Directors
Sabela Media, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Sabela Media,
Inc. and subsidiaries as of December 31, 1999 and 1998 and the related
consolidated statements of operations and comprehensive income, stockholders'
equity and cash flows for the year ended December 31, 1999 and the period from
June 29, 1998 (inception) to December 31, 1998. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Sabela Media, Inc.
and subsidiaries as of December 31, 1999 and 1998 and the results of their
operations and their cash flows for the year ended December 31, 1999 and the
period from June 29, 1998 (inception) to December 31, 1998 in conformity with
generally accepted accounting principles.
KPMG LLP
/s/ KPMG LLP
Los Angeles, California
March 10, 2000
<PAGE>
SABELA MEDIA, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1998 and 1999
<TABLE>
<CAPTION>
Assets 1998 1999
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<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,324 414,822
Trade accounts receivable, less allowance for doubtful
accounts of $3,350 and $69,959 in 1998 and 1999 respectively 18,149 347,327
---------- ----------
Total current assets 19,473 762,149
Notes receivable 51,296 --
Property and equipment at cost, less accumulated depreciation 26,247 364,779
Other assets -- 311,978
---------- ----------
Total assets $ 97,016 1,438,906
========== ==========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable & accrued expenses $ 41,433 1,287,612
Other liabilities -- 20,000
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Total liabilities 41,433 1,307,612
---------- ----------
Stockholders' equity:
Common Stock, $.001 par value; none authorized, issued or
outstanding in 1998; authorized 25,000,000 shares, issued
and outstanding 10,335,233 in 1999 -- 10,335
Common Stock, $.65 par value; authorized 1,000,000 shares,
issued and outstanding 12 and 6 for December 31, 1998
and 1999, respectively 8 --
Additional paid-in capital 122,556 3,829,000
Accumulated deficit (68,706) (3,022,736)
Receivable for issuance of common stock -- (312,346)
Shares issued for receivables from officer -- (371,925)
Accumulated other comprehensive income (loss) 1,725 (1,034)
---------- ----------
Total stockholders' equity 55,583 131,294
Commitments and contingencies
Total liabilities and stockholders' equity $ 97,016 1,438,906
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
SABELA MEDIA, INC. AND SUBSIDIARIES
Consolidated Statements of Operations and Comprehensive Income
Period from June 29, 1998 (inception) to December 31, 1998 and the year
ended December 31, 1999
<TABLE>
<CAPTION>
1998 1999
----------- -----------
<S> <C> <C>
Revenues $ 40,573 742,213
Cost of goods sold 85,632 1,403,433
----------- -----------
Gross profit (loss) (45,059) (661,220)
Selling, general and administrative expenses 23,647 2,301,311
----------- -----------
(68,706) (2,962,531)
Other income (expense):
Interest income -- 18,799
Miscellaneous -- (9,498)
----------- -----------
Loss before income taxes (68,706) (2,953,230)
Income taxes -- (800)
----------- -----------
Net loss (68,706) (2,954,030)
Other comprehensive income (loss) 1,725 (2,759)
----------- -----------
Comprehensive loss $ (66,981) (2,956,789)
=========== ===========
Net loss per share, basic and diluted $ (0.02) (0.29)
=========== ===========
Shares used in computing basic and diluted net loss per share 4,290,000 10,335,233
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
Statements of Stockholders' Equity
Period from June 29, 1998 (inception) to December 31, 1998 and
the year ended December 31, 1999
<TABLE>
<CAPTION>
Common Stock Additional Receivable for
----------------------- paid-in Accumulated Issuance of
Shares Amount capital deficits Common Stock
---------- ---------- ---------- ----------- --------------
<S> <C> <C> <C> <C> <C>
Sabela Media Pty. Ltd. (Predecessor)
Balance at June 29, 1998 (inception) -- $ -- -- -- --
Issuance of common stock 12 8 122,556 -- --
Net loss for the year ended December 31, 1998 -- -- -- (68,706) --
Foreign currency translation gain -- -- -- -- --
---------- ---------- --------- ---------- --------
Balance at December 31, 1998 12 8 122,556 (68,706) --
Sabela Media Inc.
Shares issued pursuant to the reorganization:
Net issuance of shares in Sabela Media,
Inc. in exchange for Sabela Media Pty.
Ltd. common stock 4,289,988 4,282 (4,282) -- --
Issuance of common stock 4,585,317 4,585 2,103,354 -- --
Shares issued for receivables from officer 337,500 338 371,587 -- (371,925)
Issuance of common stock 838,986 839 923,722 -- --
Issuance of common stock 113,430 113 124,887 -- (125,000)
Common stock subscription 170,000 170 187,176 -- (187,346)
Net loss for the year ended December 31, 1999 -- -- -- (2,954,030) --
Foreign currency translation loss -- -- -- -- --
---------- ---------- --------- ---------- --------
Balance at December 31, 1999 10,335,233 $ 10,335 3,829,000 (3,022,736) (684,271)
========== ========== ========= ========== ========
<CAPTION>
Accumulated
Other
Comprehensive
income (loss) Total
------------- -----
<S> <C> <C>
Sabela Media Pty. Ltd. (Predecessor)
Balance at June 29, 1998 (inception) $ --
Issuance of common stock -- 122,564
Net loss for the year ended December 31, 1998 -- (68,706)
Foreign currency translation gain 1,725 1,725
------- ----------
Balance at December 31, 1998 1,725 55,583
Sabela Media Inc.
Shares issued pursuant to the reorganization:
Net issuance of shares in Sabela Media,
Inc. in exchange for Sabela Media Pty.
Ltd. common stock -- --
Issuance of common stock -- 2,107,939
Shares issued for receivables from officer --
Issuance of common stock 924,561
Issuance of common stock --
Common stock subscription -- --
Net loss for the year ended December 31, 1999 -- (2,954,030)
Foreign currency translation loss (2,759) (2,759)
------- ----------
Balance at December 31, 1999 (1,034) $ 131,294
======= ==========
</TABLE>
<PAGE>
SABELA MEDIA, INC. AND SUBSIDIARIES
Statements of Cash Flows
Period from June 29, 1998 (inception) to December 31,
1998 and the year ended December 31, 1999
<TABLE>
<CAPTION>
1998 1999
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (68,706) (2,954,030)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 5,185 44,695
Changes in operating assets and liabilities:
Accounts receivable (18,149) (329,178)
Notes receivable (51,296) 51,296
Other assets -- (311,978)
Accounts payable and accrued expenses 41,433 1,246,179
Other liabilities -- 20,000
---------- ----------
Net cash used in operating activities (91,533) (2,233,016)
---------- ----------
Cash flows from investing activities:
---------- ----------
Purchase of property and equipment (31,432) (383,227)
---------- ----------
Cash flows from financing activities:
Net proceeds from issuance of common stock 122,564 3,032,500
---------- ----------
Net cash provided from financing activities 122,564 3,032,500
Effect of foreign exchange rate changes on cash and
cash equivalents 1,725 (2,759)
---------- ----------
Net increase in cash and cash equivalents 1,324 413,498
Cash and cash equivalents at beginning of period -- 1,324
---------- ----------
Cash and cash equivalents at end of period $ 1,324 414,822
========== ==========
Supplemental disclosure of cashflow information:
Cash paid during the year for taxes $ -- 800
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
(1) Nature of Business and Basis of Presentation
Sabela Media Pty. Ltd. (Predecessor) was incorporated on June 29, 1998
(inception) in Sydney, Australia and Sabela Media, Inc. was incorporated
in Delaware on January 19, 1999. Sabela Media Pty. Ltd. and Sabela Media,
Inc. are collectively referred to herein as the "Company." The
consolidated financial statements include the accounts of Sabela Media
Pty. Ltd. in the presentation of the financial information as of December
31, 1998 and for the period from June 29, 1998 (inception) to December 31,
1998.
During March and April 1999, in a series of related transactions, the
Company effected the following reorganization (the Reorganization): i)
each of the two 50% owners of Sabela Media Pty. Ltd. exchanged their
shares of Sabela Media Pty. Ltd. for 2,145,000 shares of Sabela Inc.,
resulting in Sabela Media, Pty. Ltd. becoming a wholly owned subsidiary of
Sabela Media, Inc. and ii) Sabela Media, Inc. issued 4,585,317 shares to
various new investors for a cash investment of $2,107,939.
The Reorganization has been accounted for at Predecessor cost, and as
such, the financial statements prior to the Reorganization reflect the
combined financial position and results of operations of Sabela Media Pty.
Ltd. and Sabela Media, Inc.
The Company provides customers with the storage, delivery, targeting, and
measurement of advertising over the Internet.
<PAGE>
(2) Summary of Significant Accounting Principles
(a) Principles of Consolidation
The consolidated financial statements include the accounts of Sabela
Media, Inc. and subsidiaries. All significant intercompany balances
have been eliminated in consolidation.
(b) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain
estimates and assumptions that affect the reported amounts of
assets, liabilities, revenues and expenses and the amount of any
contingent assets or liabilities disclosed in the financial
statements. Actual results could differ from the estimates made.
(c) Cash and Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.
(d) Fair Value of Financial Instruments
The carrying amounts of trade accounts receivable, prepaid expenses
and other assets, income tax receivable, trade accounts payable and
accrued expenses and liabilities approximate fair market value
because of the short maturity of these items.
(e) Revenue Recognition
Ad Serving revenue is recognized when the impressions are fully
delivered over the Internet. A provision is made for doubtful
receivables. The Company has no concentrated credit risk with any
individual customer.
(f) Property and Equipment
Property and equipment are stated at cost. Depreciation of property
and equipment is provided over the estimated useful lives of the
respective assets on the straight-line method. Estimated useful
lives are 7 years or the lease term, if shorter, for leasehold
improvements, 3-5 years for computer equipment and software and 7
years for furniture and fixtures.
<PAGE>
(g) Impairment of Long-Lived Assets
The Company reviews its long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. Recoverability of assets to be
held and used is measured by a comparison of the carrying amount of
an asset to future undiscounted cash flows expected to be generated
by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the assets.
(h) Income Taxes
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 and tax credit
carryforwards. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date. The Company records a
valuation allowance against its deferred tax assets to the extent
such assets may not be recoverable.
(i) Stock Compensation
The Company accounts for stock option grants to employees under the
intrinsic value model of Accounting Principles Board Opinion No. 25.
Had compensation cost been determined using the fair value model of
Statements of Financial Accounting Standards No. 123, Accounting for
Stock Based Compensation (SFAS No. 123), the Company's 1999 pro
forma net loss and loss per share would have been reduced to the
amounts as indicated below:
For the year ended
December 31, 1999
-----------------
Pro forma net loss $ 2,989,394
Pro forma net loss per share:
Basic $ (0.29)
Diluted $ (0.29)
-----------
The Company did not grant stock options to employees prior to 1999.
<PAGE>
The fair value of each option is estimated on the date of grant. The
Company uses the Black Scholes option-pricing model to estimate the
fair value of its stock option awards. The following assumptions
were used:
----------
Dividend yield 0%
Expected volatility 55%
Risk-free interest rate 5.60%
Expected life of option 5 years
==========
(j) Foreign Currency Translation
Assets and liabilities of the foreign operations are translated at
the rate of exchange at the balance sheet date. Revenues and
expenses have been translated at the weighted average rate of
exchange during the period. Foreign currency translation adjustments
have been reflected in other comprehensive income.
(k) Comprehensive Loss
The Company's comprehensive loss is comprised of its net loss and
its foreign currency translation adjustments.
(l) Earnings (loss) per Share
Basic loss per common share is calculated by dividing net loss by
the average number of common shares outstanding during the period.
Diluted loss per common share is calculated by adjusting outstanding
shares, assuming conversion of all potentially dilutive stock
options and warrants.
The diluted share base for the year ended December 31, 1999 excludes
1,329,910 incremental shares related to employee stock options and
952,424 shares related to warrants. These incremental shares are
excluded due to their antidilutive effect as a result of the
Company's net loss during 1999.
1998 loss per share is calculated on a pro forma basis assuming the
number of shares issued in the Reorganization to the continuing
stockholders had been outstanding during all of 1998.
(3) Property and Equipment
Property and equipment consist of the following at December 31, 1998 and
1999:
1998 1999
--------- ---------
Leasehold improvements $ -- 10,898
Furniture and fixtures -- 46,373
Computer equipment and software 31,432 357,388
--------- ---------
Less accumulated depreciation (5,185) (49,880)
--------- ---------
$ 26,247 364,779
========= =========
<PAGE>
(4) Accounts Payable and Accrued Expenses
Accounts Payable and Accrued Expenses consist of the following at December
31, 1998 and 1999:
1998 1999
---------- ----------
Trade accounts payable $ 35,591 1,178,272
Payrolls, commissions and employee benefits 5,842 109,340
---------- ----------
$ 41,433 1,287,612
========== ==========
(5) Commitments and Contingencies
(a) Leases
Future minimum lease payments under noncancelable operating leases
as of December 31, 1999 are:
1999
---------
2000 $ 521,434
2001 390,444
Thereafter --
---------
$ 911,878
=========
Total rental expense for the period from June 29, 1998 (inception)
to December 31, 1998 and the year ended December 31, 1999 amounted
to approximately $12,913 and $429,662 respectively.
(b) Litigation
In December 1999, the Company was named as plaintiff in a lawsuit
alleging various claims relating to patient infringement. As these
matters are in the early stages of discovery, neither the Company
nor its counsel are able to conclude as to the potential likelihood
of an unfavorable outcome. The Company is vigorously defending these
complaints and believes their defenses to be meritorious.
Accordingly, the Company has not provided for any potential losses
associated with this lawsuit as of December 31, 1999.
(6) Income Taxes
Following are the domestic and foreign components of loss before income
taxes:
Period from June 29,
1998 (inception) to Year ended
December 31, 1998 December 31, 1999
-------------------- -----------------
Domestic $ -- 2,007,193
Foreign 68,706 946,037
-------- ---------
Loss before income taxes $ 68,706 2,953,230
======== =========
<PAGE>
Income tax expense for the year ended December 31, 1999 was solely related
to state income taxes.
Actual income tax benefit differs from the "expected" tax benefit computed
by applying the U.S. Federal corporate rate of 34% to the loss before
income taxes as follows:
<TABLE>
<CAPTION>
1998 1999
---------- ----------
<S> <C> <C>
Computed "expected" income tax benefit $ (23,360) (1,004,098)
State income taxes, net of Federal income tax expense -- (87,876)
Foreign taxes (3,322) (75,461)
Increase in valuation allowance 26,682 1,168,235
---------- ----------
Income tax expense $ -- 800
========== ==========
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax asset as of December 31, 1998 and 1999 are as
follows:
1998 1999
---------- ----------
Deferred tax assets:
Net operating loss $ 26,682 1,162,978
Bad debts -- 27,884
Capital loss carryforward -- 3,783
Other reserves -- 272
---------- ----------
Total gross deferred tax assets 26,682 1,194,917
Less valuation allowance (26,682) (1,194,917)
---------- ----------
Net deferred tax assets $ -- --
========== ==========
At December 31, 1999, the Company has available net operating loss
carryforwards (NOL's) that may be used to offset future taxable income as
follows.
1999
----------
Federal and state $1,966,253
Australia 297,828
United Kingdom 440,165
Canada 318,490
----------
$3,022,736
----------
The federal and state NOL's expire in 2019, and the Australian and
Canadien NOL's expire in 2005 and 2006. The United Kingdom NOL's
carryforward indefinitely.
Based on the Company's historical taxable income record, when adjusted for
nonrecurring items such as accounting changes and estimates of future
profitability, management has concluded that operating income will not be
sufficient to give rise to tax expense to cover all deferred tax assets.
Accordingly, a valuation allowance has been provided.
<PAGE>
Federal and California tax laws impose substantial restrictions on the
utilization of net operating loss and credit carryforwards in the event of
an "ownership change" for tax purposes, as defined in Section 382 of the
Internal Revenue Code. In addition, the Company's foreign NOL's have
similar limitations. If an ownership change occurred, utilization of the
net operating loss carryforwards could be reduced significantly.
(7) Stock Option Plan
During 1999, the Company adopted a stock incentive plan for issuance of
options to selected key employees of the Company. Up to 2,400,000 shares
of the Company's common stock are reserved for grant. The options become
exercisable during a three-year period in monthly installments, beginning
after twelve months of employment. The Company had outstanding 1,329,910
options at December 31, 1999. No options were vested as of December 31,
1999. The plan is administered by the Compensation Committee.
As of December 31, 1998 and 1999, the Company's outstanding stock options
are summarized as follows:
<TABLE>
<CAPTION>
Weighted
Number of Option average
shares price price
----------- ----------- ----------
<S> <C> <C> <C>
Shares under option at December 31, 1998 -- -- --
Granted 1,837,410 $1.10 $1.10
Exercised 507,500 $1.10 $1.10
----------- ---------- ----------
Shares under option at December 31, 1999 1,329,910 $1.10 $1.10
=========== =========== ==========
</TABLE>
At December 31,1999, the exercise price was $1.10 and weighted-average
remaining contractual life of outstanding options was nine years.
The weighted average per share exercise price of options granted to
employees during the year ended December 31, 1999 was $1.10. The weighted
average per share fair value of options granted to employees during the
year ended December 31, 1999 amounted to $0.03.
The fair value of common stock options is estimated at the date of grant
using a Black-Scholes option-pricing model with the following weighted
average assumptions for the period: risk-free interest rate of 5.6%;
weighted average expected life of the option of five years; no expected
volatility; and no expected dividends. The weighted average grant-date
fair value of the Company's stock options granted during the year-ended
December 31, 1999 was estimated to be $0.03 per share.
<PAGE>
(8) Stock Split
On October 19, 1999 the Company's Board of Directors authorized a
one-for-ten stock split of its common stock to shareholders of record on
that date. The stock split has been reflected in the accompanying
financial statements and all applicable references to the number of common
shares and per share information has been restated.
(9) Stockholders' Equity
On various dates throughout 1999, common stock options for a total of
507,500 shares were exercised by non-employees, including an officer of
the Company. The Company recorded receivables in exchange for the stock
issued. The receivables from the officer in the amount of $371,925 have
been recorded in stockholders' equity for the issuance of 337,500 shares
of common stock. The receivables are collaterized by the 337,500 shares of
common stock. Receivables for $187,346 from another non-employee were
exchanged for 170,000 shares of common stock. Such receivable has been
recorded in stockholders' equity as receivable for issuance of common
stock and is collaterized by the 170,000 shares of common stock.
On December 10, 1999, the Company issued 952,416 shares of common stock at
$1.10 per share plus 952,424 warrants to purchase common stock at $1.10
per share to various outside investors for $1,049,561. At December 31,
1999, $125,000 of such consideration was included in receivable for
issuance of common stock.
(10) Segment Information
The Company operates in one segment and accordingly has provided only the
required enterprise wide disclosures. For the period from June 29, 1998
(inception) to December 31, 1998, the Company had one significant customer
which accounted for 66% of revenues. For the year ended December 31, 1999,
the Company had two significant customers which each accounted for 13% of
revenues.
<PAGE>
The Company's corporate offices are in the United States. In addition to
servicing the Australian market, the Company's Australian operations are
responsible for the Company's research and development and technical
support. The Company's customer service center is located in Canada and
the Company has its European headquarters in the United Kingdom.
<TABLE>
<CAPTION>
Period from June 29,
1998 (inception) to Year ended
December 31, 1998 December 31, 1999
-------------------- -----------------
<S> <C> <C>
Revenues from unaffiliated customers:
Australia $ 40,573 437,897
United States - 282,361
United Kingdom - 21,955
Canada - -
--------- ----------
Total revenues $ 40,573 742,213
========= ==========
Operating loss
Australia $ (68,706) (229,122)
United States - (1,974,754)
United Kingdom - (440,165)
Canada - (318,490)
--------- ----------
Total operating loss $ (68,706) (2,962,531)
========= ==========
<CAPTION>
As of As of
December 31, 1999 December 31, 1999
----------------- -----------------
<S> <C> <C>
Total Assets
Australia $ 97,016 416,439
United States -- 835,080
United Kingdom -- 114,832
Canada -- 72,555
--------- ----------
Total assets $ 97,016 1,438,906
========= ==========
</TABLE>
(11) Subsequent Events - Unaudited
On January 10, 2000, 24/7 Media, Inc. (24/7 Media) acquired all of the
issued and outstanding stock of the Company for approximately 1.3 million
shares of 24/7 media common stock and approximately $2.3 million in cash.
In addition, 24/7 Media assumed all of the Company's outstanding stock
options.
Exhibit 23.1
ACCOUNTANTS' CONSENT
The Board of Directors
Sabela Media, Inc. and Subsidiaires:
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 10, 2000 relating to the consolidated balance sheets of
Sabela Media, Inc. and subsidiaries as of December 31, 1999 and 1998, and the
related consolidated statements of operations and comprehensive income,
stockholders' equity and cash flows for the year ended December 31, 1999 and the
period from June 29, 1998 (inception) to December 31, 1998, which report appears
in the Current Report on Form 8-K/A of 24/7 Media, Inc. dated March 24, 2000.
KPMG LLP
/s/ KPMG LLP
Los Angeles, CA
March 24, 2000
