Initial Public Offering (IPO): Registration Statement (General Form) — Form S-1
Filing Table of Contents
Document/Exhibit Description Pages Size
1: S-1 Registration Statement (General Form) 111 753K
2: EX-10.1 1998 Stock Incentive Plan 30 116K
10: EX-10.10 Employment Agreement 8 32K
11: EX-10.11 Employment Agreement 8 34K
12: EX-10.12 Employment Agreement 7 33K
13: EX-10.13 Consulting Agreement 5 20K
14: EX-10.14 Confidential Separation Agree. and General Release 6 28K
15: EX-10.15 Indemnification Agreement 8 33K
3: EX-10.2 Form of Stock Option Agreement 3 14K
4: EX-10.3 Agreement of Lease 77 253K
5: EX-10.4 Agreement and Plan of Merger 49 216K
6: EX-10.5 Agreement and Plan of Merger 36 158K
7: EX-10.7 Securities Purchase Agreement 52 263K
8: EX-10.8 Registration Rights Agreement 16 77K
9: EX-10.9 Employment Agreement 8 32K
16: EX-21.1 Subsidiaries of 24/7 Media, Inc. 1 6K
17: EX-23.1 Consent of Kpmg Peak Marwick LLP 1 7K
18: EX-23.2 Consent of Arthur Andersen LLP 1 7K
19: EX-27 ƒ Financial Data Schedule (Pre-XBRL) 1 11K
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
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24/7 MEDIA, INC.
(Exact name of Registrant as specified in its charter)
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DELAWARE 7319 13-3995672
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
1250 Broadway, New York, NY 10001
(212) 231-7100
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
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DAVID J. MOORE
Chief Executive Officer
24/7 Media, Inc.
1250 Broadway, New York, New York 10001
(212) 231-7100
Fax (212) 760-1774
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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Copies of Communications to:
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Ronald R. Papa, Esq. Larry W. Sonsini, Esq.
Proskauer Rose LLP David Drummond, Esq.
1585 Broadway Wilson Sonsini Goodrich & Rosati
New York, New York 10036-8299 Professional Corporation
(212) 969-3000 650 Page Mill Road
Fax (212) 969-2900 Palo Alto, California 94304
(650) 493-9300
Fax (650) 493-6811
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Approximate date of commencement of proposed sale to the public:
As soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, check the following box. -
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. -
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the
same offering. - -------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. -
CALCULATION OF REGISTRATION FEE
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Title of each class of Securities Proposed Maximum Aggregate Amount of Registration
To Be Registered Offering Price (1)(2) Fee
---------------------------------------- ---------------------------- -----------------------
Common Stock, par value $.01 per share $46,000,000 $13,570
(1) Includes $6,000,000 of Common Stock, par value $.01 per share (the "Common
Stock") which the Underwriters have an option to purchase to cover over-
allotments, if any.
(2) Estimated pursuant to Rule 457(o) under the Securities Act of 1933, as
amended, solely for the purpose of calculating the registration fee.
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The Registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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SUBJECT TO COMPLETION PRELIMINARY PROSPECTUS DATED JUNE 4, 1998
PROSPECTUS
Shares
24/7 Media, Inc.
Common Stock
----------------
All of the shares of Common Stock, par value $.01 per share, (the "Common
Stock") offered hereby (the "Offering") are being sold by 24/7 Media, Inc.
("24/7 Media" or the "Company"). Prior to the Offering, there has been no
public market for the Common Stock. It is currently estimated that the initial
public offering price for the Common Stock will be between $ and
$ per share. See "Underwriting" for information relating to the factors
considered in determining the initial public offering price of the Common
Stock.
Shares of Common Stock may be reserved for sale at the public offering price to
the Company's employees, directors and other persons with relationships with
the Company. Such employees, directors and other persons may purchase, in the
aggregate, not more than 10% of the Common Stock offered hereby. See
"Underwriting."
The Company intends to apply for listing of the Common Stock on the Nasdaq
National Market under the symbol "TFSM."
See "Risk Factors" beginning on page 5 for a discussion of certain factors
which should be considered by prospective purchasers of Common Stock offered
hereby.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
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Price to Underwriting Proceeds to
Public Discount (1) Company (2)
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Per Share......... $ $ $
------------------- ---------- -------------- ------------
Total (3) ......... $ $ $
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(1) The Company has agreed to indemnify the several Underwriters against
certain liabilities under the Securities Act of 1933, as amended. See
"Underwriting."
(2) Before deducting expenses payable by the Company estimated at $ .
(3) The Company has granted the Underwriters an option to purchase up to an
additional shares of Common Stock to cover over-allotments. If such
option is exercised in full, the total Price to Public, Underwriting
Discount and Proceeds to Company will be $ , $ , and $ ,
respectively. See "Underwriting."
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The shares of Common Stock are offered by the several Underwriters,
subject to prior sale, when, as and if accepted by them, subject to approval of
certain legal matters by counsel for the Underwriters. The Underwriters reserve
the right to withdraw, cancel or modify such offer and to reject orders in
whole or in part. It is expected that delivery of the shares of Common Stock
will be made in New York, New York, on or about , 1998.
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Merrill Lynch & Co.
Allen & Company Incorporated
J.P. Morgan & Co.
----------------
The date of this Prospectus is , 1998.
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS IN SUCH
SECURITIES AND THE IMPOSITION OF A PENALTY BID IN CONNECTION WITH THE OFFERING.
FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information, including "Risk Factors" and the Consolidated Financial Statements
(including the Notes thereto), appearing elsewhere in this Prospectus. The
discussion in this prospectus contains forward looking statements that involve
risks and uncertainties including, but not limited to, those specifically
discussed in this Prospectus. 24/7 Media's actual results could differ
materially from those discussed herein. The terms "24/7 Media" and "the
Company" mean 24/7 Media, Inc. and its subsidiary and each of its predecessor
entities. In addition, unless otherwise indicated, all information herein (i)
assumes no exercise of the Underwriters' over-allotment option, (ii) reflects
the automatic conversion of shares of the Company's Series A Preferred
Stock into an aggregate of shares of Common Stock (the "Preferred Stock
Conversion") to be effected simultaneously with the closing of the Offering,
(iii) has not been adjusted to give effect to a 1-for- reverse split of the
Company's Common Stock (the "Stock Split") to be effected prior to the closing
of the Offering, and (iv) does not reflect the acquisition of CliqNow! as
described under "Recent Developments" in this Prospectus Summary.
The Company
Overview
24/7 Media operates networks of Websites that enable both advertisers and
Web publishers to capitalize on the many opportunities presented by Internet
advertising, direct marketing and commerce. The Company generates revenues by
delivering advertisements and promotions to Websites affiliated with the
Company ("Affiliated Websites"). In particular, 24/7 Media: (i) operates the
24/7 Network (the "24/7 Network"), a network of over 80 high profile Websites
to which the Company delivered an aggregate of over 325 million advertisements
in April 1998; (ii) operates the ContentZone (the "ContentZone"), a network of
over 2,000 small to medium-sized Websites to which the Company delivered an
aggregate of over 40 million advertisements in April 1998; (iii) licenses its
Adfinity[TM] advertising management system ("Adfinity[TM]") to independent
Websites to manage and serve high-volume advertising and direct marketing
campaigns; and (iv) markets its dbCommerce[TM] software ("db Commerce[TM]") to
Web commerce companies ("e-commerce merchants") to enable the delivery of
targeted promotions.
The Company operates in the rapidly growing Internet advertising industry.
International Data Corp. ("IDC") estimates that at the end of 1997 there were
over 38 million users on the World Wide Web (the "Web") in the United States
and over 68 million Web users worldwide, and that by the end of 2002 the number
of Web users will increase to over 135 million in the United States and to over
319 million worldwide. Jupiter Communications projects that the dollar value of
Internet advertising in the United States will increase from $940 million in
1997 to $7.7 billion in 2002.
The Company believes that advertisers seek to place Internet ads in ways
to maximize unduplicated "reach" (the breadth of user contacts on the
Internet). During April 1998, the 365 million impressions generated by the
Company's networks reached more than one third of all Internet users, according
to a study prepared for the Company by Media Metrix. The Company believes that
this reach figure is among the highest in the Internet advertising industry.
The Company plans to aggressively recruit Websites of all sizes for its
networks in order to further extend the Company's reach as well as to provide
advertisers with a broad base of online content and Web pages viewed by
Internet users ("page views"), and to improve the Company's brand awareness and
visibility with media buyers.
In addition, as online advertisers and direct marketers increase their use
of the Internet, they seek solutions and technologies that allow them to
efficiently deliver highly targeted messages. 24/7 Media's customized solutions
allow advertisers and direct marketers to tailor their ad campaigns in order to
reach desired audiences, while reducing costs, easing time pressures and
alleviating the need to purchase a series of ad campaigns from numerous Web
publishers. Advertisers and direct marketers can achieve their objectives by
buying ad space on a specific Website, within a particular content channel or
across an entire network.
As Internet traffic grows, Web publishers increasingly seek to maximize
the value of their online inventory. The Company's extensive sales and
marketing experience enables Web publishers to access media buyers at large ad
agencies and to sell advertisement space without incurring the costs and
challenges associated with building and maintaining an ad sales force.
Additionally, the ad serving and targeting capabilities of Adfinity[TM]
effectively deliver advertisements to the Company's Affiliated Websites.
1
The recent addition of the Company's Adfinity[TM] and dbCommerce[TM]
technologies allows 24/7 Media to provide comprehensive advertising solutions
for advertisers, direct marketers and Web publishers. Adfinity[TM] is designed
to target, deliver, and track advertisements and direct marketing promotions
across the Company's networks. Adfinity[TM] can create a profile of an Internet
user by integrating such user's online behavior with third party demographic
and lifestyle data. These profiles can allow Adfinity[TM] to deliver targeted
advertisements to the right person at the right time. dbCommerce[TM] software
is designed to enable e-commerce merchants to deliver promotions and messages
to targeted customer audiences by integrating database marketing techniques
with customer transaction information and third party databases.
The Company's senior management team includes several individuals with
over fifteen years of experience in advertising sales in the television and
proprietary online network industries. Other members of senior management
contribute extensive knowledge of ad serving technology and database targeting.
The Company leverages its media sales and technology expertise to maximize the
value of ad campaigns for both advertisers and Affiliated Websites.
Formation of the Company
The Company was incorporated in Delaware on January 23, 1998 to
consolidate three Internet advertising companies: (i) Petry Interactive, Inc.
("Petry"), a Delaware corporation which sold advertising for Websites organized
in a network, (ii) Advercomm, Inc. ("Advercomm"), a newly-formed Delaware
corporation which brought a number of high profile Websites to the 24/7
Network, and (iii) Interactive Imaginations, Inc. ("Interactive Imaginations"),
a New York corporation which operated the ContentZone and Riddler.com.
Subsequently, the Company acquired both Intelligent Interactions Corporation
("Intelligent Interactions"), a Delaware corporation that develops and licenses
ad serving technology and e-commerce software, and the CliqNow! division
("CliqNow!") of K2 Design, Inc.
The Company was formed as a wholly owned subsidiary of Interactive
Imaginations. On February 24, 1998, the Company simultaneously consummated the
merger of each of Petry and Advercomm with and into the Company (together with
the concurrent investment of approximately $10 million by certain investors,
the "Initial Merger"). On April 9, 1998, Interactive Imaginations was merged
with and into the Company (together with the Initial Merger, the "Merger") . On
April 13, 1998, the Company acquired Intelligent Interactions as a wholly-owned
subsidiary of the Company (the "Acquisition"), and as of June 1, 1998, the
Company acquired CliqNow!.
The Company's principal executive offices are located at 1250 Broadway,
New York, New York, 10001, and its telephone number at that location is (212)
231-7100. The Company's main Website address is www.247media.com.
Recent Developments
As of June 1, 1998, the Company acquired CliqNow! for $4,000,000, with
$1,000,000 payable in cash and $3,000,000 payable in Series B Convertible
Preferred Stock. The preferred stock converts to Common Stock automatically
upon consummation of the Offering at a conversion price per share of Common
Stock equal to the per share proceeds to the Company as set forth on the cover
of this prospectus. CliqNow! is an Internet advertising network that generated
revenues of $500,559 for the three months ended March 31, 1998 and $896,427 for
the period from inception in April 1997 to December 31, 1997. CliqNow!'s
network is comprised of approximately 80 medium to large Websites organized
into eight topical channels: Financial, Golf, Tech, College, Travel, Sports,
Home and Kids. The Company has also hired ten employees of CliqNow!, six of
whom are principally engaged in sales. The Company intends to furnish
CliqNow!'s audited financial statements within 60 days of the effective date of
the acquisition pursuant to the requirements of Rule 3-05 of Regulation S-X of
the Securities Act of 1933, as amended.
2
The Offering
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Common stock offered ........................... shares
Common stock to be outstanding after the
Offering ...................................... shares(1)
Use of proceeds ................................ For general corporate purposes, including working capital,
expansion of sales and marketing capabilities, and
possible acquisitions. See "Use of Proceeds."
Proposed Nasdaq National Market symbol ......... The Company intends to apply for a listing of the
Common Stock on the Nasdaq National Market under the
symbol "TFSM."
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(1) Excludes approximately 3,733,951 shares of Common Stock issuable upon
exercise of stock options outstanding at June 1, 1998 granted under the
Company's 1998 Stock Incentive Plan (of which 675,931 are vested and
exerciseable at June 1, 1998) and approximately 2,016,043 shares of Common
Stock reserved for issuance pursuant to future grants under the 1998 Stock
Incentive Plan. The outstanding stock options have a weighted average
exercise price of $0.89 per share. Also excludes approximately 15,952,077
shares of Common Stock issuable upon exercise of outstanding warrants at
June 1, 1998. Such warrants have a weighted average exercise price of
$2.09 per share. Also excludes 3,000 shares of Series B Convertible
Preferred Stock issued in connection with the acquisition of CliqNow!. See
"Shares Eligible for Future Sale."
3
Summary Consolidated Financial Data
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Three Months Ended
Year Ended -----------------------------------------------------------------------------
December 31, March 31, June 30, Sept. 30, Dec. 31, March 31,
1997 1997 1997 1997 1997 1998
--------------- --------------- --------------- --------------- --------------- -------------
Pro Forma (1)
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Consolidated Statement of Operations Data:
Advertising revenue ............... $ 2,736,365 $ 399,688 $ 526,192 $ 649,036 $ 1,161,449 $ 1,846,748
Consulting and license fees ....... 1,746,896 805,245 639,588 244,890 57,173 88,362
Total revenue ................... 4,483,261 1,204,933 1,165,780 893,926 1,218,622 1,935,110
Gross profit ...................... 1,653,323 730,584 583,320 95,421 243,998 326,831
Operating loss (2) ................ (19,802,635) (8,034,181) (3,796,930) (5,144,072) (2,827,452) (3,849,659)
Net loss .......................... (19,898,240) (8,020,039) (3,798,230) (5,174,674) (2,905,297) (4,028,351)
Pro forma:
Basic net loss
per share (3) ....................
Shares outstanding (3) ...........
Historical
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Consolidated Statement of Operations Data:
Advertising revenue ............... $ 1,467,105 $ 388,892 $ 355,346 $ 315,697 $ 407,170 $ 1,076,250
Consulting and license fees ....... 1,681,464 805,245 630,588 233,130 12,501 --
Total revenue ................... 3,148,569 1,194,137 985,934 548,827 419,671 1,076,250
Gross profit ...................... 1,493,229 734,550 551,294 37,361 170,024 146,247
Operating loss .................... (5,209,362) (798,059) (1,423,535) (2,400,167) (587,601) (2,128,080)
Net loss .......................... (5,305,828) (784,377) (1,427,594) (2,433,302) (660,555) (2,295,338)
Cumulative dividends on
mandatorily redeemable
convertible preferred stock ...... -- -- -- -- -- (33,500)
Net loss attributable to common
stockholders ..................... $ (5,305,828) $ (784,377) $ (1,427,594) $ (2,433,302) $ (666,555) $ (2,328,838)
Basic net loss
per share (3) ....................
Shares outstanding (3) ............
As of March 31, 1998
--------------------------------------------------
Pro Forma
Actual Pro Forma (4) As Adjusted (5)
------------- --------------- ----------------
Consolidated Balance Sheet Data:
Cash and cash equivalents .................................. $ 7,764,695 $ 7,768,370
Working capital ............................................ 6,317,136 6,033,480
Goodwill, net .............................................. 7,870,174 10,217,580
Total assets ............................................... 18,201,993 20,783,592
Long-term debt ............................................. 479,408 479,408
Mandatorily redeemable convertible preferred stock ......... 10,093,502 --
Total stockholders' equity ................................. $ 4,264,180 $16,550,883
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(1) Pro forma consolidated statement of operations data reflects the
consolidation of the results of operations of Petry, Advercomm and
Intelligent Interactions as if each company had been acquired on January
1, 1997 (or inception, if later) and the conversion of all outstanding
shares of mandatorily redeemable convertible preferred stock into shares
of Common Stock, which will be converted immediately prior to the Offering
as if it had occurred on January 1, 1997.
(2) Includes acquisition related non-cash charges for amortization of goodwill
and write-off of acquired in-process technology. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
and the Pro Forma Consolidated Financial Information and the related Notes
thereto.
(3) See Note 1 to the Company's Consolidated Financial Statements for the
determination of shares used in computing pro forma basic net loss per
share.
(4) Pro forma consolidated balance sheet data gives effect to (i) the
acquisition of Intelligent Interactions which occurred after March 31,
1998, as if such acquisition occurred on March 31, 1988 and (ii) the
conversion of all outstanding shares of mandatorily redeemable convertible
preferred stock into 14,308,306 shares of Common Stock immediately prior
to the closing of this Offering.
(5) Adjusted to reflect the sale of shares of Common Stock by the Company
at the assumed initial public offering price of $ per share and the
application of the estimated net proceeds therefrom. See "Use of
Proceeds."
4
RISK FACTORS
In addition to the other information in this Prospectus, prospective
investors should consider carefully the following risk factors in evaluating
the Company and its business before purchasing the Common Stock offered hereby.
This Prospectus contains forward-looking statements that are based largely on
the Company's current expectations and that are subject to a number of risks
and uncertainties, including those set forth below. The Company's actual
results could differ materially from the results discussed in "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and elsewhere in this Prospectus.
Extremely Limited Operating History; History of Losses; Integration of Acquired
Entities
Because none of the predecessor companies that were combined to form 24/7
Media had an operating history of more than four years, the Company has an
extremely limited operating history upon which an evaluation of the Company can
be based. The Company and its prospects must be considered in light of the
risks, expenses and difficulties encountered by companies with limited
operating histories, particularly companies in the new and rapidly evolving
Internet market. To address these risks, the Company must, among other things,
effectively develop new relationships and maintain existing relationships with
customers, business and technology partners and other third parties; further
develop and upgrade its technology; improve its technical support and service;
respond to competitive developments; implement and improve operational,
financial and managerial information systems; and attract, retain and motivate
qualified personnel. There can be no assurance that the Company will succeed in
addressing such risks and the failure to do so could have a material adverse
effect on the Company's business, results of operations and financial
condition.
Although the Company has experienced revenue growth in recent periods,
such growth may not be sustained and is not necessarily indicative of future
operating results. The Company incurred pro forma net losses of $19.9 million
for the year ended December 31, 1997 and $4.0 million for the three months
ended March 31, 1998. Each of the predecessors of the Company had net losses in
each year since its inception. The Company anticipates that it will incur
operating losses for the foreseeable future due to a high level of planned
operating and capital expenditures. There can be no assurance that operating
losses will not increase in the future or that the Company will ever achieve or
sustain profitability. The Company's business, results of operations and
financial condition may be materially and adversely affected if revenues do not
grow at anticipated rates or if the Company is unable to adjust operating
expenses to appropriate levels for revenue levels achieved.
24/7 Media did not conduct any substantial operations until February 1998.
In February 1998, the Company closed a transaction pursuant to which Petry and
Advercomm were merged into the Company. In April 1998, the Company completed
two transactions pursuant to which Interactive Imaginations was merged into the
Company and Intelligent Interactions became a wholly-owned subsidiary of the
Company. In June 1998, the Company acquired the CliqNow! network of Websites.
See "Prospectus Summary--Formation of the Company" and "--Recent Developments."
In order to effectively integrate the previously independent operations, the
Company must continue to integrate and improve its financial and management
controls, ad serving technology, reporting systems and procedures, and expand,
train and manage its work force. Completion of such 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 other
operations of the Company. See "--Management of Growth; Risks Associated with
Acquisitions; Risks of International Expansion."
Potential Fluctuations in Quarterly Operating Results; Seasonality
The Company's results of operations may fluctuate significantly in the
future as a result of a variety of factors, many of which are beyond the
Company's control. These factors include the addition of new or loss of current
advertisers or Affiliated Websites, changes in fees paid by advertisers,
changes in the level of user traffic and number of available impressions on the
Websites in the Company's networks, changes in service fees payable by the
Company to Web publishers, the introduction of new Internet advertising
services by the Company or its competitors, variations in the levels of capital
expenditures and other costs relating to the expansion of the Company's
operations, and general economic conditions. Future revenues and results of
operations of the Company may be difficult to forecast due to such factors.
Management believes that its revenues are also subject to seasonal
fluctuations because advertisers generally place fewer advertisements during
the first and third calendar quarters of each year. Additional seasonal
patterns in Internet advertising spending may emerge as the industry matures.
Expenditures by advertisers tend to vary in cycles that reflect overall
economic conditions as well as budgeting and buying patterns. The Company's
business
5
could be materially adversely affected by a decline in the economic prospects
of advertisers or the economy generally, which could alter current or
prospective advertisers' spending priorities or budget cycles or extend the
Company's sales cycle with respect to certain of its advertisers.
The Company's current and future expense levels are based in large part on
its investment plans and estimates of future revenues. In particular, the
Company expects to significantly increase its operating expenses in order to
expand its sales and marketing organization and to enhance its Adfinity[TM]
technology. To the extent that such expenses precede or are not subsequently
followed by increased revenues, the Company's business, results of operations
and financial condition would be materially and adversely affected. The Company
may be unable to, or may elect not to, adjust spending in a timely manner to
compensate for any unexpected revenue shortfall. Therefore, any significant
shortfall in revenues in relation to the Company's expectations would have a
material adverse effect on the Company's business, results of operations and
financial condition.
Due to the foregoing factors, 24/7 Media believes that period-to-period
comparisons of its results of operations may not be meaningful and should not
be relied upon as indicators of future performance. Furthermore it is possible
that in some future periods the Company's results of operations may fall below
the expectations of securities analysts and investors. In such event, the
trading price of the Common Stock would likely be materially and adversely
affected. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Developing Market; Unproven Effectiveness of Web Advertising and Online Direct
Marketing
In the new and rapidly evolving Internet advertising market, demand and
market acceptance for products and services are subject to high levels of
uncertainty, and a significant number of entrants continually seek to penetrate
the market. Since 24/7 Media expects to derive substantially all of its
revenues in the foreseeable future from Internet advertising, the future
success of the Company is highly dependent on the increased use of the Internet
as an advertising medium.
The Internet as an advertising medium has not been in existence for a
sufficient period of time in order to demonstrate its effectiveness as compared
with traditional advertising media. Most of the Company's current or potential
advertising customers have limited or no experience using the Internet as an
advertising medium, have not devoted a significant portion of their advertising
expenditures to Internet advertising and may not find Internet advertising to
be effective for promoting their products and services relative to advertising
across traditional media. Companies adopting Internet advertising, particularly
those that use traditional media for advertising, must accept new ways of
conducting business and exchanging information. In addition, most Web
publishers have limited or no experience in generating revenues from the sale
of advertising space on their Websites. There can be no assurance that the
market for Internet advertising will continue to emerge or be sustainable.
Online advertising must demonstrate a level of effectiveness necessary to
justify a reallocation of resources from traditional forms of advertising to
this developing medium. There are currently no widely accepted standards to
measure the effectiveness of Internet advertising and there can be no assurance
that such standards will develop to sufficiently support Internet advertising
as a significant advertising medium. Advertisers may not accept the Company's
or third-party measurements of impressions on Websites utilizing the Company's
services or that such measurements will not contain errors. In addition, the
effectiveness of Internet advertising is dependent upon the accuracy of
information contained in the databases used to target advertisements. There can
be no assurance that the information in the Company's database will be accurate
or that advertisers will be willing to have advertisements targeted by any
database containing such potential inaccuracies. Actual or perceived
ineffectiveness of online advertising generally, or accuracy of measurements or
database information in particular, could limit the long-term growth of online
advertising which would have a material adverse effect on the Company's
business, results of operations and financial condition.
Banner advertising, from which the Company currently derives most of its
revenues, may not be an effective advertising method in the future. There can
be no assurance that any other forms of Internet advertising will be developed
or accepted by the market and if so developed, that the Company would
effectively transition to the marketing and sale of such other forms of online
advertising. Moreover, "filter" software programs that limit advertising from
being delivered to a Website are currently available. Failure to successfully
develop alternative forms of online advertising or widespread adoption of
filter software could have a material adverse effect upon the Internet
advertising market and 24/7 Media's business, results of operations and
financial condition.
6
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), requires the broad acceptance of a new and
substantially different approach to direct marketing. As with online
advertising and other new markets, intensive marketing and sales efforts may be
necessary to educate prospective advertisers regarding the uses and benefits of
the Company's products and services in order to generate demand for the
Company's services. Enterprises that have already invested substantial
resources in other methods of conducting business may be reluctant or slow to
adopt a new approach that may replace, limit, or compete with their existing
systems. In addition, since online direct marketing is emerging as a new and
distinct market apart from online advertising, potential adoptees of online
direct marketing services will increasingly demand functionality tailored to
their specific requirements.
Reliance on a Limited Number of Web Publishers; Dependence on the 24/7 Network
The Company expects to generate most of its revenues for the foreseeable
future from advertisements delivered to Websites of a limited number of Web
publishers on the 24/7 Network. For the year ended December 31, 1997 and for
the three months ended March 31, 1998, approximately 70% and 66%, respectively,
of the 24/7 Network's pro forma advertising revenues were derived from
advertisements on the top ten Affiliated Websites on the 24/7 Network. The 24/7
Network consists of a limited number of Affiliated Websites that have
contracted for the Company's services under agreements cancellable upon a
specified notice period. Affiliated Websites generally measure satisfaction by
acceptable revenue levels, adequate "click-thru rates" (the percentage of times
users click on an advertisement), high levels of customer service and timely
and accurate reporting. There can be no assurance that such Affiliated Websites
will remain associated with the 24/7 Network, that the Affiliated Websites will
maintain consistent or increasing levels of traffic over time, or that the
Company would be able to replace any Affiliated Website with another Web
publisher with comparable traffic patterns and user demographics. The loss or
reduction in traffic of such Websites may cause advertisers or Web publishers
to withdraw from the 24/7 Network, which, in turn, could materially adversely
affect the Company's business, results of operations and financial condition.
The failure of the Company to successfully market the 24/7 Network or the
failure of Affiliated Websites to maintain consistent or increasing levels of
traffic would have a material adverse effect on the Company's business, results
of operations and financial condition.
Reliance on a Limited Number of Advertisers and Ad Agencies
The Company's revenues have been derived from a limited number of
advertisers and ad agencies that purchase space on Affiliated Websites and the
Company expects that a limited number of these entities may continue to account
for a significant percentage of the Company's revenues for the foreseeable
future. In particular, for the year ended December 31, 1997 and the three
months ended March 31, 1998, the Company's top ten advertisers and ad agencies
accounted for an aggregate of approximately 48% and 51%, respectively, of the
24/7 Network's pro forma advertising revenues. Advertisers and ad agencies
typically purchase advertising pursuant to purchase order agreements that run
for a limited time. There can be no assurance that current advertisers and ad
agencies will continue to purchase advertising from the Company or that the
Company will be able to successfully attract additional advertisers and ad
agencies. The loss of one or more of the advertisers or ad agencies that
represent a material portion of the revenues generated on the 24/7 Network or
the ContentZone could have a material adverse effect on the Company's business,
results of operations and financial condition. In addition, the non-payment or
late payment of amounts to the Company due from a significant advertiser or ad
agency could have a material adverse effect on the Company's business, results
of operations and financial condition.
Integration of Adfinity[TM] Technology; Dependence on Third Party Technology
The Company currently utilizes the AdForce advertisement management
service from IMGIS, Inc. to deliver its advertisements to the 24/7 Network. The
Company intends to replace the AdForce service with the Company's Adfinity[TM]
system, which is expected to become the technology platform for the Company's
networks. The Company anticipates that Adfinity[TM] will enable it to deliver
targeted advertisements based on demographic profiles and consumer behavior.
There can be no assurance that the information required to develop user
profiles will be available and, if available, that the utilization of such
information will not be cost prohibitive. The Company's ability to deliver
increased value to advertisers and Web publishers in the future is therefore
based, in large part, on the successful integration of Adfinity[TM] as the
technology platform for the Company's networks. In order to complete the
transition to Adfinity[TM], the Company must, among other things, ensure
scaleability of the Adfinity[TM] system, assimilate the Company's current sales
and reporting functions into the Adfinity[TM] model, work with existing
Affiliated Websites to re-tag such Websites, and install new computer hardware
and software. Although the Company expects that the transition to Adfinity[TM]
will be completed by the third quarter of 1998, there can be no
7
assurance that the Company will be able to integrate Adfinity[TM] on a timely
basis. The failure of the Company to effect a successful transition to
Adfinity[TM] could result in a loss of Affiliated Websites, a disruption in the
Company's ability to effectively deliver advertisements and a negative impact
on its business in general until Adfinity[TM] or an alternative advertisement
management technology is integrated. If the Company is unable to successfully
integrate the Adfinity[TM] technology on a timely basis, or if the Adfinity[TM]
technology does not enable the Company to successfully target advertisements
based on demographic profiles and consumer behavior, or if the information to
develop user profiles is not available, the Company's business, results of
operations and financial condition would be materially adversely affected.
Until the integration of Adfinity[TM] is completed, the Company will be
dependent upon AdForce to deliver its ads to the 24/7 Network. If the AdForce
service becomes unavailable or if AdForce fails to effectively serve the
Company's advertisements, the Company's business, results of operations and
financial condition would be materially adversely affected. In addition to the
delivery of advertisements, AdForce also produces frequent operational reports
for use by the Company, advertisers and the Affiliated Websites. However, the
AdForce system requires the Company to employ a significant amount of effort to
prepare information for financial reporting. This causes difficulties in
preparing financial statements and reporting information on a timely basis. The
Company is in the process of upgrading its systems in order to integrate newly
developed and/or purchased modules with its existing systems and with
Adfinity[TM] in order to improve its accounting, control and reporting methods.
The Company's inability to add additional software and hardware or to further
develop and upgrade its existing technologies, systems or network
infrastructure may cause unanticipated delays in delivering its customers'
advertisements and providing timely reporting of accurate financial
information.
Competition
The markets for Internet advertising and related products and services are
intensely competitive and such competition is expected to increase. The Company
believes that its ability to compete depends upon many factors both within and
beyond its control, including the timing and market acceptance of new products
and enhancements of existing services developed by the Company and its
competitors; changing demands regarding customer service and support; shifts in
sales and marketing efforts by the Company and its competitors; and the ease of
use, performance, price and reliability of the Company's services and products.
The Company competes for Internet advertising revenues with large Web
publishers and Web search engine companies, such as America Online, Excite,
Infoseek, Lycos and Yahoo. Further, the 24/7 Network competes with a variety of
Internet advertising networks, including DoubleClick and Rainbow Interactive, a
joint venture of Cablevision Systems Corp. and NBC. In marketing the Company's
networks and its Adfinity[TM] service to Web publishers, the Company also
competes with providers of advertisement software and related services,
including NetGravity and Accipiter, a division of CMG Information Services,
Inc. In marketing dbCommerce[TM], the Company competes with a variety of
entities, including BroadVision. The Company also encounters competition from a
number of other sources, including content aggregators, companies engaged in
advertising sales networks, advertising agencies and other entities which
facilitate Internet advertising. Many of the Company's existing competitors, as
well as a number of potential new competitors, have longer operating histories,
greater name recognition, larger customer bases and significantly greater
financial, technical and marketing resources than the Company. There can be no
assurance that the Company will be able to compete successfully against current
or future competitors or that competitive pressures will not have a material
adverse effect on the Company's business, results of operations and financial
condition. In addition, the Internet, in general, and the Company,
specifically, also 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 and would have a material adverse effect on
the Company's business, results of operations and financial condition.
Technological Change
The Internet market is characterized by rapidly changing technology,
evolving industry standards, frequent new product announcements, introductions
and enhancements, and changing customer demands. The introduction of new
products and services embodying new technologies and the emergence of new
industry standards and practices can render existing products and services
obsolete and unmarketable or require unanticipated investments in research and
development. These market characteristics are heightened by the emerging nature
of the Internet industry. The Company's future success depends on its ability
to adapt to rapidly changing technologies and to
8
improve the performance, features and reliability of its services and products
in response to changing customer and industry demands. The failure of the
Company to successfully adapt to such technological change could adversely
affect its business, results of operations and financial condition.
Furthermore, there can be no assurance that the Company will not
experience difficulties that could delay or prevent the successful design,
development, testing, introduction or marketing of services, or that any new
services or enhancements to existing services will adequately meet the
requirements of its current and prospective advertisers and Affiliated Websites
and achieve any degree of significant market acceptance. If the Company is
unable, for technological or other reasons, to develop and introduce new
services or enhancements to existing services in a timely manner or in response
to changing market conditions or customer requirements, or if its services or
enhancements contain errors or do not achieve a significant degree of market
acceptance, the Company's business, results of operations and financial
condition would be materially and adversely affected.
Dependence on the Web Infrastructure
24/7 Media's success depends upon, among other things, the continued
expansion of, and reliance on, the Internet and the development and maintenance
of a viable Web network infrastructure. The maintenance and improvement of this
infrastructure will require timely development of products, such as high speed
modems and communications equipment, in order to continue to provide reliable
Web access and improved content. The current Web infrastructure may not be able
to support an increased number of users or the increased bandwidth requirements
of users, and, as such, the performance or reliability of the Web may be
adversely affected. Furthermore, the Web has experienced certain outages and
delays as a result of damage to portions of its infrastructure. Such outages
and delays, including those resulting from Year 2000 problems, could adversely
affect Websites and the level of traffic on the Company's networks. The
effectiveness of the Web may decline due to delays in the development or
adoption of new standards and protocols (for example, the next-generation
Internet protocol) designed to support increased levels of activity. There can
be no assurance that the infrastructure or products or services necessary to
maintain the Web will be developed, or that the Web will be a viable commercial
medium for advertisers. If the necessary infrastructure, standards, protocols,
products, services or facilities are not developed , or if the Web does not
become a viable commercial medium, 24/7 Media's business, results of operations
and financial condition could be materially and adversely affected. Even if
such infrastructure, standards or protocols or complementary products, services
or facilities are developed, there can be no assurance that the Company will
not be required to incur substantial expenditures in order to adapt its
services to changing or emerging technologies, which could have a material
adverse effect on the Company's business, results of operations and financial
condition. Moreover, critical issues concerning the commercial use and
government regulation of the Internet (including security, cost, ease of use
and access, intellectual property ownership and other legal liability issues)
remain unresolved and could materially and adversely impact both the growth of
the Internet and the Company's business, results of operations and financial
condition.
Dependence on Third Party Systems; Risk of System Failure; Capacity Constraints
A key to the Company's strategy is to generate a high volume of traffic
for its products and services. In particular, the future success of the Company
depends on the performance of Adfinity[TM] and third party service providers.
Adfinity's computer hardware and software is housed at GlobalCenter, Inc.
("GlobalCenter"), a third party provider of Internet communication services.
Any Adfinity[TM] or third party ad server system failure, including failures
that delay the delivery of advertisements to Websites, could reduce customer
satisfaction and result in a material adverse effect on the Company's business,
results of operations and financial condition.
In general, the Company's operations are dependent upon the proper
operation of its own and third party computer systems. Any damage from fire,
power loss, telecommunications failures, vandalism and other malicious acts,
and similar unexpected events could adversely affect 24/7 Media's business,
results of operations and financial condition. In addition, failure of the
Company's telecommunications providers to provide the data communications
capacity in the time frame required by the Company for any reason could cause
interruptions in the services provided by the Company. Despite precautions
taken by the Company, unanticipated problems affecting the Company's computer
and telecommunications systems in the future could cause interruptions in the
delivery of the Company's services. Any damage or failure that interrupts or
delays the Company's operations could have a material adverse effect on the
Company's business, results of operations and financial condition.
Furthermore, large increases in the volume of advertising delivered
through the Company's ad servers could strain the capacity of the software or
hardware deployed by the Company, which could lead to slower response
9
time or system failures and could have a material adverse effect on the
Company's business, results of operations and financial condition.
Unproven Business Model
Since the markets for online advertising and direct marketing are in the
early stages of development, there can be no assurance that the Company's model
for pricing its products and services will remain an acceptable model. The
Company's business model is to generate revenues primarily by providing
Internet advertising services to advertisers and Web publishers. The profit
potential of the Company's business model is unproven. To be successful, the
Company must develop and market services that are broadly accepted by
advertisers and Web publishers. There can be no assurance that Internet
advertising, in general, or that the Company's services, in particular, will
achieve broad market acceptance. The Company's ability to generate significant
revenues from advertisers will depend, in part, on the continued development of
a large base of Web publishers that utilize the Company's services and have
Websites with adequate available ad space inventory, and whose Websites
generate sufficient user traffic with demographic characteristics that are
attractive to such advertisers. A variety of related pricing models have
developed in the Company's marketplace, making it difficult to project future
levels of advertising revenues and applicable gross margins that can be
sustained by the Company. A key component of the Company's strategy is to
enhance the value of the ad inventory on its networks by seeking to sell 100%
of its inventory of available page views and by increasing the breadth and
depth of its content channels. The Company has limited experience in
implementing and following such a strategy and there can be no assurance that
such strategy will succeed or that the Company will be able to maintain
sufficient gross margins.
Management of Growth; Risks Associated with Acquisitions; Risks of
International Expansion
24/7 Media has experienced rapid growth and expansion in operations that
have placed a significant strain on the Company's managerial, operational and
financial resources. The Company has grown from approximately 60 employees on a
pro forma basis as of September 30, 1997 to approximately 100 employees as of
May 31, 1998 and expects the number of employees to increase in the future. In
order to successfully compete in the evolving Internet industry, 24/7 Media
must continue to improve its financial and management controls, enhance its
reporting systems and procedures, and expand, train and manage its work force.
There can be no assurance that the Company's systems, procedures or controls
will be adequate to support 24/7 Media's expanding operations, or that
management will be able to respond effectively to such growth. The Company's
future results of operations also depend on the expansion of its sales,
marketing and customer support organizations. 24/7 Media's business, results of
operations and financial condition could be materially adversely affected if
growth is not managed effectively.
24/7 Media intends to pursue selective acquisitions of businesses,
technologies and product lines as a key component of its growth strategy. 24/7
Media regularly seeks to identify and acquire companies or assets that will
enhance 24/7 Media's revenue growth, operations and profitability. Any future
acquisition 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, each of which could
materially adversely affect the Company's business, results of operations or
financial condition. In addition, acquisitions involve numerous risks,
including the difficulties in the integration and assimilation of the
operations technologies, products and personnel of any 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. In the event that
an acquisition does occur, there can be no assurance that 24/7 Media will be
able to successfully integrate the acquired business, and the failure to do so
could have a material adverse effect on the Company's results of operations and
financial position. See "--Integration of Adfinity[TM] Technology; Dependence
on Third Party Technology."
The Company may, in the future, operate in international markets and such
an expansion would involve certain inherent risks, such as unexpected changes
in regulatory requirements, potentially adverse tax consequences, general
export restrictions and export controls relating to encryption technology,
tariffs and other trade barriers, political instability and fluctuations in
currency exchange rates, and seasonal reductions in business activity. Any of
the above could have a material adverse effect on the success of the Company's
future international initiatives.
Dependence on Key Personnel
The Company's success depends upon its senior management and its key sales
and technical personnel, particularly David J. Moore, Chief Executive Officer,
Jacob I. Friesel, Executive Vice President, and Yale R. Brown,
10
Executive Vice President. The loss of the services of one or more of these
persons could materially adversely affect 24/7 Media's business, results of
operations and financial condition. 24/7 Media's success also depends on its
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 there
can be no assurance that the Company will be able to retain its key personnel
or that it can attract, assimilate or retain other highly qualified personnel
in the future. The Company has 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. The
failure by the Company to successfully hire and retain candidates with
appropriate qualifications could have a material adverse effect on the
Company's business, results of operations and financial condition.
Trademarks, Patents and Proprietary Rights; Risk of Infringement; Privacy
Concerns
24/7 Media relies upon patent, trademark, copyright and trade secret laws
to protect its intellectual property. The Company seeks to protect its
trademarks by registering them in the United States and internationally (where
necessary) and has applied for registrations for trademarks in the United
States. There can be no assurance that all of the Company's trademark
registrations or patent applications will be approved or granted or that they
will not be successfully challenged by others. Such patent, trademark,
copyright and trade secret protection may not be available in every country in
which the Company's services are distributed. In addition, 24/7 Media protects
its proprietary rights through the use of confidentiality agreements with
employees and affiliates. 24/7 Media also licenses certain proprietary rights
to third parties. There can be no assurance that such agreements and licenses
will provide adequate protection of 24/7 Media's proprietary rights; that the
Company's employees and affiliates may not keep such information confidential;
and such proprietary information may otherwise become known, or be
independently developed by competitors.
Legal standards relating to the validity, enforceability and scope of
protection of certain proprietary rights in Internet-related industries are
uncertain and still evolving, and no assurance can be given as to the future
viability or value of any proprietary rights of the Company or other companies
within the industry. There can be no assurance that the steps taken by the
Company to protect its proprietary rights will be adequate or that third
parties will not infringe or misappropriate the Company's proprietary rights.
Any such infringement or misappropriation, should it occur, could have a
material adverse effect on the Company's business, results of operations and
financial condition. Furthermore, there can be no assurance that the Company's
business activities will not infringe upon the proprietary rights of others, or
that other parties will not assert infringement claims against the Company. The
Company anticipates that it may be subject to claims in the ordinary course of
its business, including claims of alleged infringement of the trademarks and
other intellectual property rights of third parties by the Company and its
business partners. Such claims and any resultant litigation, should it occur,
could subject the Company to significant liability for damages and could result
in invalidation of the Company's proprietary rights and, even if not
meritorious, could be time-consuming and expensive to defend, and could result
in the diversion of management time and attention, any of which could have a
material adverse effect on the Company's business, results of operations and
financial condition.
The Company's Adfinity[TM] technology collects and utilizes data derived
from user activity on the 24/7 Network and the Websites of independent Web
publishers using the Company's services. There can be no assurance that any
trade secret, copyright or other protection will be available for such data or
that others will not claim rights to such data. 24/7 Media must also keep
certain information regarding Web publishers confidential pursuant to its
contracts with Web publishers. Adfinity[TM] enables the use of "cookies," in
addition to other mechanisms, 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 bits of information keyed to a specific
server, file pathway or directory location that are stored on a user's hard
drive and passed to a Website's server through the user's browser software.
Cookies are placed on the user's hard drive without the user's knowledge or
consent, but can be removed by the user at any time through the modification of
the user's browser settings. Due to privacy concerns, some Internet
commentators, advocates and governmental bodies have suggested that the use of
cookies be limited or eliminated. In addition, certain currently available
Internet browsers allow a user to delete cookies or prevent cookies from being
stored on the user's hard drive.
Government Regulation
Due to the increasing popularity and use of the Web, a number of laws and
regulations may be adopted regarding user privacy, pricing, acceptable content,
taxation and quality of products and services. Although there are currently few
11
laws or regulations directly governing access to or commerce on the Internet,
any new legislation could inhibit the growth in use of the Web and decrease the
acceptance of the Web as a communications and commercial medium which could
have a material adverse effect on the Company's business, results of operations
and financial condition. In addition, the growing use of the Web has burdened
existing telecommunications infrastructure and has caused interruptions in
phone service. Certain telephone carriers have petitioned the government to
regulate and impose fees on Internet service providers and online service
providers in a manner similar to long distance telephone carriers. Any such
regulations could affect the costs of communicating on the Web and adversely
affect the growth in use of the Web, which could in turn decrease the demand
for the Company's products or otherwise have a material adverse effect on the
Company's business, results of operations and financial condition. Further, due
to the global nature of the Web, governments of states or foreign countries may
attempt to regulate Internet transmissions or levy sales or other taxes
relating to the Company's activities. There can be no assurance that violations
of local laws will not be alleged by applicable governments, 24/7 Media may not
violate such laws or new laws will not be enacted in the future. Moreover, the
applicability to the Internet of existing laws governing issues such as
property ownership, libel and personal privacy is uncertain. Any of the
foregoing developments could have a material adverse effect on the Company's
business, results of operations and financial condition.
Year 2000 Compliance
Beginning in the year 2000, the date fields coded in certain software
products and computer systems will need to accept four digit entries in order
to distinguish 21st century dates from 20th century dates. Significant
uncertainty exists in the software industry concerning the potential effects
associated with such compliance issues. The Company is currently taking steps
to make its products Year 2000 compliant. However, there can be no assurance
that the Company will be successful in making its products Year 2000 compliant.
In addition, the Company's ad servers and certain of its customers may also be
impacted by Year 2000 complications. Any failure by the Company or its ad
servers or its customers to make their products Year 2000 compliant could
result in a decrease in sales of the Company's products, an increase in the
allocation of resources to address Year 2000 problems of the Company's
customers without additional revenue commensurate with such dedication of
resources, or an increase in litigation costs relating to losses suffered by
the Company's customers due to such Year 2000 problems. The occurrence of any
such event could have a material adverse effect on the Company's business,
results of operations and financial condition.
Control by Principal Stockholders, Officers and Directors
After the Offering, the directors and executive officers and their
affiliates will beneficially own approximately % of the outstanding Common
Stock. As a result, these stockholders will be able to exercise control over
all matters requiring stockholder approval, including the election of directors
and approval of significant corporate transactions. This concentration of
ownership may have the effect of delaying or preventing a change in control of
the Company. See "Management" and "Security Ownership of Certain Beneficial
Owners and Management."
Broad Discretion in Use of Proceeds
The net proceeds of the offering will be added to the Company's working
capital and will be available for general corporate purposes, including capital
expenditures and potential future acquisitions. As of the date of this
Prospectus, the Company cannot specify with certainty the particular uses for
the net proceeds to be received upon completion of the offering. Accordingly,
the Company's management will have broad discretion in the application of the
net proceeds. See "Use of Proceeds."
Shares Eligible for Future Sale
Sales of significant amounts of Common Stock in the public market after
the offering, or the perception that such sales will occur, could materially
affect the market price of the Common Stock or the future ability of the
Company to raise capital through an offering of its equity securities. The
Company will have shares of Common Stock outstanding after the offering.
The shares offered hereby will be eligible for immediate sale in the
public market without restriction, except shares purchased by "affiliates" of
the Company within the meaning of Rule 144 promulgated under the Securities
Act. The remaining shares of Common Stock held by existing stockholders
will be "restricted securities" within the meaning of Rule 144 under the
Securities Act. Restricted securities may be sold in the public market only if
registered or if they qualify for an exemption from registration under Rules
144, 144(k) or 701 promulgated under the Securities Act. The Company's
directors and officers and certain of its stockholders have agreed that they
will not sell, directly or indirectly, any Common Stock
12
without the prior consent of the representatives of the Underwriters for a
period of 180 days from the date of this Prospectus. See "Underwriting."
Subject to these lock-up agreements and the provisions of Rules 144, 144(k) and
701, additional shares will be available for sale in the public market (subject
in the case of shares held by affiliates to compliance with certain volume
restrictions) as follows: (i) shares will be eligible for sale 90 to 180
days after the date of this Prospectus, (ii) shares will be eligible for
sale upon the expiration of lock-up agreements 180 days after the date of this
Prospectus and (iii) shares will be eligible for sale immediately upon
the date of this Prospectus. In addition, there are outstanding options to
purchase shares of Common Stock and outstanding warrants to purchase
shares of Common Stock which will be eligible for sale in the public
market from time to time subject, in the case of options, to vesting and, in
the case of certain options and warrants, the expiration of lock-up agreements.
In addition, certain stockholders, representing approximately shares of
Common Stock, and certain optionholders, with respect to an aggregate
shares of Common Stock issuable upon the exercise of stock options, have the
right, subject to certain conditions, to include their shares in future
registration statements relating to the Company's securities and/or to cause
the Company to register certain shares of Common Stock owned by them. See
"Shares Eligible For Future Sale."
Lack of Public Market for Common Stock; Possible Volatility of Stock Price
Prior to the Offering, there has been no public market for the Common
Stock. Accordingly, there can be no assurance that an active trading market for
the Common Stock will develop or be sustained after the Offering or that the
market price of the Common Stock will not decline below the initial public
offering price. The initial public offering price will be determined by
negotiations between the Company and the representatives of the Underwriters.
See "Underwriting." The trading price of the Common Stock could be subject to
wide fluctuations caused by, among other things, variations in quarterly
results of operations, the gain or loss of significant advertisers or
Affiliated Websites, changes in earning estimates of 24/7 Media by industry
analysts, announcements of technological innovations or new services by 24/7
Media or its competitors, or general conditions in the economy in general or in
Internet-related industries.
In addition, the stock market in general has experienced extreme price and
volume fluctuations which have affected the market price for many companies in
industries similar or related to that of the Company and which have been
unrelated to the operating performance of these companies. These market
fluctuations may have a material adverse effect on the market price of the
Company's Common Stock.
Anti-takeover Effects of Certain Charter, Bylaws And Delaware Law Provisions;
Possible Issuance of Preferred Stock
After the Offering and upon receipt of the requisite stockholder approval,
the Company's board of directors may issue up to 10,000,000 shares of preferred
stock without any further vote or action by the stockholders, and determine the
price, rights, preferences, privileges and restrictions, including voting
rights of such shares. The preferred stock may be issued with voting,
liquidation, dividend and other rights superior to those of the Common Stock.
The issuance of preferred stock could make it difficult for a third party to
acquire a majority of the outstanding voting stock of the Company. Further,
certain provisions of the Company's certificate of incorporation, the Company's
bylaws and Delaware law could have the effect of delaying or preventing a
change in control of the Company. See "Description of Capital Stock--Delaware
Anti-Takeover Law and Certain Charter Provisions."
Dilution
Investors purchasing shares of Common Stock in the offering will incur
immediate and substantial dilution in net tangible book value per share. To the
extent outstanding options or warrants to purchase Common Stock are exercised,
there will be further dilution. See "Dilution."
Litigation
24/7 Media has been subject to legal claims in the ordinary course of its
business. Such claims have not had a material adverse effect on the Company's
business, results of operations or financial condition. Nonetheless, these
claims and future claims, if successful, could subject the Company to liability
for damages, invalidate 24/7 Media's proprietary rights and/or divert
management's time and attention, any of which could have a material adverse
effect on the Company's business, results of operations and financial
condition.
13
USE OF PROCEEDS
The net proceeds to 24/7 Media from the sale of the shares of
Common Stock offered pursuant to the Offering are estimated to be approximately
$ million ($ million if the Underwriter's over-allotment option is
exercised in full), assuming an initial offering price of $ per share and
after deducting underwriting discounts and estimated offering expenses payable
by 24/7 Media. The primary purposes of the Offering are to create a public
market for the Common Stock, to facilitate the Company's future access to the
public equity markets and to obtain additional working capital.
The Company intends to use the net proceeds of the Offering for general
corporate purposes, including working capital, and for the expansion of its
operations and sales and marketing capabilities. In addition, the Company may
use a portion of the net proceeds of the Offering to acquire or invest in
complementary businesses, technologies, services or products, although there
are no current agreements with respect to any such acquisitions, investments or
other transactions. As of the date of this Prospectus, the Company cannot
specify with certainty the particular uses for the net proceeds to be received
upon completion of the Offering. Accordingly, the Company's management will
have broad discretion in the application of the net proceeds. Pending such
uses, the net proceeds will be primarily invested in short-term, investment
grade instruments, certificates of deposit or direct or guaranteed obligations
of the United States.
DIVIDEND POLICY
24/7 Media has not declared or paid any dividends on its capital stock
since inception and does not anticipate paying dividends in the foreseeable
future. It is the present policy of the board of directors to retain earnings,
if any, to finance the expansion of the Company's business. The future payment
of dividends will depend on the results of operations, financial condition,
capital expenditure plans and other factors deemed relevant by 24/7 Media and
will be at the sole discretion of the board of directors.
14
CAPITALIZATION
The following table sets forth the capitalization of 24/7 Media as of
March 31, 1998 (i) on an actual basis, (ii) on a pro forma basis, giving effect
to the Acquisition and the Preferred Stock Conversion and (iii) on a pro forma
as adjusted basis to give effect to the sale by the Company of shares of
Common Stock offered hereby at an assumed offering price of $ per share and
the application by the Company of the estimated net proceeds therefrom, after
deducting estimated underwriting discounts and offering expenses. See "Use of
Proceeds." The capitalization information set forth in the table below is
qualified by and should be read in conjunction with the more detailed
Consolidated Financial Statements and Pro Forma Consolidated Financial
Information and Notes thereto included elsewhere in this Prospectus.
[Enlarge/Download Table]
March 31, 1998
----------------------------------------------------
Pro Pro Forma
Actual Forma As Adjusted
---------------- ---------------- --------------
Long-term debt .......................................... $ 479,408 $ 479,408 $
Mandatorily redeemable convertible preferred stock Series
A; $.01 par value; 30,000,000 shares authorized;
10,060,002 shares outstanding .......................... 10,093,502 --
Stockholders' equity (1):
Common stock, $.01 par value; 100,000,000 shares
authorized; 27,481,201 shares issued and outstanding
actual; 45,586,476 shares issued and outstanding on a
pro forma basis and shares issued and
outstanding on a pro forma as adjusted basis ......... 274,812 455,865
Additional paid-in-capital .............................. 19,623,624 37,206,555
Accumulated deficit ..................................... (15,634,256) (21,111,537)
------------- -------------
Total stockholders' equity ............................ 4,264,180 16,550,883
------------- -------------
Total capitalization ................................. $ 14,837,090 $ 17,030,291
============= =============
----------------
(1) Excludes approximately 3,733,951 shares of Common Stock issuable upon the
exercise of stock options outstanding at June 1, 1998 granted under the
Company's 1998 Stock Incentive Plan (of which 675,931 are vested and
exerciseable at June 1, 1998) and approximately 2,016,043 shares of Common
Stock reserved for issuance pursuant to future grants under the 1998 Stock
Incentive Plan. The outstanding stock options have a weighted average
exercise price of $0.89 per share. Also excludes approximately 15,952,077
shares of Common Stock issuable upon exercise of outstanding warrants at
June 1, 1998. Such warrants have a weighted average exercise price of
$2.09 per share. Also, excludes 3,000 shares of Series B Convertible
Preferred Stock issued in connection with the acquisition of CliqNow!. See
"Shares Eligible for Future Sale."
15
DILUTION
As of March 31, 1998, the pro forma net tangible book value (deficit) of
24/7 Media was $ in the aggregate, or $ per share. Pro forma net
tangible book value (deficit) per share represents 24/7 Media's total tangible
assets less total liabilities, divided by the number of outstanding shares of
Common Stock giving effect to the acquisition of Intelligent Interactions, the
Preferred Stock Conversion and the Stock Split. Dilution per share represents
the difference between the amount per share paid by investors in this offering
of Common Stock and the net tangible book value (deficit) per share after the
Offering. After giving effect to the sale of shares of Common Stock (at an
assumed initial public offering price of $ per share) and after
application by the Company of the estimated net proceeds from the Offering, the
Company's pro forma net tangible book value as of March 31, 1998 would have
been $ in the aggregate, or $ per share. This represents an immediate
increase in pro forma net tangible book value of $ per share to existing
shareholders and an immediate dilution in pro forma net tangible book value of
$ per share to new investors purchasing shares of Common Stock in the
Offering. If the initial public offering price is higher or lower, the dilution
to the new investors will increase or decrease accordingly. The following table
illustrates this per share dilution:
[Enlarge/Download Table]
Assumed initial public offering price per share .......................................
Pro forma net tangible book value (deficit) per share before the Offering ............
Pro forma increase in net tangible book value (deficit) per share attributable to new
investors
Pro forma net tangible book value (deficit) per share after the Offering ..............
Pro forma dilution in net tangible book value per share to new investors ..............
The following table summarizes, on a pro forma basis as of March 31, 1998,
after giving effect to the acquisition of Intelligent Interactions, the
Preferred Stock Conversion and the Stock Split, the total number of shares of
Common Stock purchased from the Company, the total consideration paid to the
Company and the average price per share paid by existing shareholders and by
new investors:
[Enlarge/Download Table]
Shares Purchased Total Consideration Average
-------------------- ----------------------- price per
Number Percent Amount Percent share
-------- --------- ----------- --------- ----------
Existing shareholders ......... % $ % $
New investors .................
Total ......................... % $ % $
The calculations in the above tables assume no exercise of the
Underwriters' over-allotment option or exercise of any outstanding stock
options or warrants. If such outstanding options or warrants are exercised,
there will be further dilution to new investors. See "Management--1998 Stock
Incentive Plan."
16
SELECTED PRO FORMA CONSOLIDATED FINANCIAL DATA
The following pro forma consolidated statement of operations data reflect
the Merger, the Acquisition and the Preferred Stock Conversion as if each had
occurred on January 1, 1997 (or inception, if later). The pro forma
consolidated balance sheet data reflect the Acquisition as if it occurred on
March 31, 1998 and the Preferred Stock Conversion, which will take place
immediately prior to the closing of this Offering. The pro forma financial data
is presented for informational purposes only and may not be indicative of the
results of operations had the mergers and acquisitions occurred on March 31,
1998 for balance sheet purposes and on January 1, 1997 for Statement of
Operations Data purposes, nor do they purport to indicate the future results of
operations of the Company. The following pro forma financial data should be
read in conjunction with the Consolidated Financial Statements and Notes
thereto and the Pro Forma Consolidated Financial Information and related Notes
appearing elsewhere in this Prospectus. Management believes that all
adjustments necessary to present fairly such pro forma financial data have been
made.
[Enlarge/Download Table]
Pro Forma Pro Forma
Year Three Months Ended
Ended -------------------------------------------------------------------------------
Dec. 31, March 31, June 30, Sept. 30, Dec. 31, March 31,
1997 1997 1997 1997 1997 1998
---------------- --------------- --------------- --------------- --------------- ---------------
Consolidated Statement of
Operations Data:
Revenues:
Advertising ..................... $ 2,736,365 $ 399,688 $ 526,192 $ 649,036 $ 1,161,449 $ 1,846,748
Consulting and license fees ..... 1,746,896 805,245 639,588 244,890 57,173 88,362
-------------- ------------- ------------- ------------- ------------- -------------
Total revenues ................. 4,483,261 1,204,933 1,165,780 893,926 1,218,622 1,935,110
Cost of revenues ................. 2,829,938 474,349 582,460 798,505 974,624 1,608,279
-------------- ------------- ------------- ------------- ------------- -------------
Gross profit 1,653,323 730,584 583,320 95,421 243,998 326,831
Operating expenses:
Sales and marketing ............. 4,653,418 923,062 1,397,203 1,443,764 889,389 1,178,438
General and administrative ...... 4,978,381 1,158,354 1,358,096 1,450,340 1,011,591 1,745,511
Product development ............. 1,745,745 469,309 542,683 521,708 212,045 66,738
Other expenses (1) .............. 989,099 -- 123,843 865,256 -- --
Amortization of
goodwill (2) ................... 3,612,034 736,759 958,425 958,425 958,425 1,185,803
Write-off of acquired in-process
technology (2) ................. 5,477,281 5,477,281 -- -- -- --
-------------- ------------- ------------- ------------- ------------- -------------
Total operating expenses ....... 21,455,958 8,764,765 4,380,250 5,239,493 3,071,450 4,176,490
-------------- ------------- ------------- ------------- ------------- -------------
Operating loss .................. (19,802,635) (8,034,181) (3,796,930) (5,144,072) (2,827,452) (3,849,659)
Interest (expense) income, net .. (95,605) 14,142 (1,300) (30,602) (77,845) (178,692)
-------------- ------------- ------------- ------------- ------------- -------------
Net loss ........................ (19,898,240) (8,020,039) (3,798,230) (5,174,674) (2,905,297) (4,028,351)
============== ============= ============= ============= ============= =============
Pro forma:
Basic net loss per share (3) ...
Shares outstanding (3) .........
As of
March 31, 1998
---------------
Consolidated Balance Sheet Data:
Cash and cash equivalents ....................... $ 7,768,370
Working capital ................................. 6,033,480
Goodwill, net ................................... 10,217,580
Total assets .................................... 20,783,592
Long-term debt .................................. 479,408
Mandatorily redeemable convertible preferred stock --
Total stockholders' equity ...................... $16,550,883
----------------
(1) Includes an aggregate of $232,304 in legal costs incurred in defending a
class-action lawsuit filed by certain Affiliated Websites on the
ContentZone, which defense resulted in grant of summary judgment in favor
of the Company, and a net write-off of $756,795 of property and equipment
that was deemed to have no future economic benefit. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
and the Consolidated Financial Statements and the related Notes thereto.
(2) Includes acquisition related non-cash charges for amortization of goodwill
and write-off of acquired in-process technology. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
and the Pro Forma Consolidated Financial Information and the related Notes
thereto.
(3) See Note 1 to the Company's Consolidated Financial Statements for the
determination of shares used in computing pro forma basic net loss per
share.
17
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data as of and for each of the years
in the three-year period ended December 31, 1997 have been derived from the
audited consolidated financial statements of the Company, which are included
elsewhere in this Prospectus. The selected financial data for the period from
September 1994 through December 31, 1994 have been derived from financial
statements of Interactive Imaginations not included herein and the Company's
accounting records. The selected consolidated financial data as of March 31,
1998 and for the three months ended March 31, 1997 and 1998 are derived from
unaudited consolidated financial statements appearing herein. In the opinion of
the Company, such unaudited data reflect all adjustments (consisting only of
normal recurring adjustments) necessary for a fair statement of the financial
data for such period. The results of operations for the three months ended
March 31, 1998 are not necessarily indicative of results that may be expected
for the full year. The selected consolidated financial data set forth below is
qualified in its entirety by, and should be read in conjunction with,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and the related Notes
thereto included elsewhere in this Prospectus.
[Enlarge/Download Table]
September
1994 (inception) Year Ended December 31,
through December 31, -----------------------------------------------
1994 (1) 1995 1996 1997
---------------------- --------------- --------------- ---------------
Consolidated Statement of Operations Data:
Revenues:
Advertising .................................... $ -- $ 151,750 $ 1,106,329 $ 1,467,105
Consulting and license fees .................... -- -- 435,834 1,681,464
--------- ------------ ------------ ------------
Total revenues ................................ -- 151,750 1,542,163 3,148,569
Cost of revenues ................................ -- 198,291 1,592,771 1,655,340
--------- ------------ ------------ ------------
Gross profit (loss) ............................ -- (46,541) (50,608) 1,493,229
Operating expenses:
Sales and marketing ............................ -- 114,348 2,240,399 1,672,999
General and administrative ..................... (35,771) 581,069 3,010,009 2,622,743
Product development ............................ -- 426,187 1,460,928 1,417,750
Other expenses (2) ............................. -- -- -- 989,099
Amortization of goodwill (3) ................... -- -- -- --
--------- ------------ ------------ ------------
Total operating expenses ...................... (35,771) 1,121,604 6,711,336 6,702,591
--------- ------------ ------------ ------------
Operating loss .................................. (35,771) (1,168,145) (6,761,944) (5,209,362)
Interest (expense) income, net .................. -- -- (33,731) (96,466)
--------- ------------ ------------ ------------
Net loss ........................................ (35,771) (1,168,145) (6,795,675) (5,305,828)
Cumulative dividends on mandatorily
convertible preferred stock .................... -- -- -- --
Net loss attributable to common stockholders .... $ (35,771) $ (1,168,145) $ (6,795,675) $ (5,305,828)
========= ============ ============ ============
Basic net loss per share (4) ....................
Shares outstanding (4) ..........................
Three Months Ended
------------------------------
March 31, March 31,
1997 1998
------------- ---------------
Consolidated Statement of Operations Data:
Revenues:
Advertising .................................... $ 388,892 $ 1,076,250
Consulting and license fees .................... 805,245 --
---------- ------------
Total revenues ................................ 1,194,137 1,076,250
Cost of revenues ................................ 459,587 930,003
---------- ------------
Gross profit (loss) ............................ 734,550 146,247
Operating expenses:
Sales and marketing ............................ 450,505 653,460
General and administrative ..................... 682,581 1,285,512
Product development ............................ 399,523 --
Other expenses (2) ............................. -- --
Amortization of goodwill (3) ................... -- 335,355
---------- ------------
Total operating expenses ...................... 1,532,609 2,274,327
---------- ------------
Operating loss .................................. (798,059) (2,128,080)
Interest (expense) income, net .................. 13,682 (167,258)
---------- ------------
Net loss ........................................ (784,377) (2,295,338)
Cumulative dividends on mandatorily
convertible preferred stock .................... -- (33,500)
Net loss attributable to common stockholders .... $ (784,377) $ (2,328,838)
========== ============
Basic net loss per share (4) ....................
Shares outstanding (4) ..........................
[Enlarge/Download Table]
As of December 31,
------------------------------------------------------
1994 1995 1996 1997
---------- ------------- ------------- ---------------
Consolidated Balance Sheet Data:
Cash and cash equivalents ........................ $ 10,722 $ -- $1,689,395 $ 93,945
Working capital (deficit) ........................ (9,278) (235,342) (6,493) (1,165,482)
Goodwill, net .................................... -- -- -- --
Total assets ..................................... 29,229 497,165 3,950,790 1,038,941
Long-term debt ................................... -- -- -- 2,316,511
Mandatorily redeemable convertible preferred stock -- -- -- --
Total stockholders' equity (deficit) ............. $ 9,229 $ 202,573 $1,750,202 $ (2,727,967)
As of March 31, 1998
----------------------------------------------
Pro Forma
Actual Pro Forma (5) As Adjusted (6)
------------- --------------- ----------------
Consolidated Balance Sheet Data:
Cash and cash equivalents ........................ $ 7,764,695 $ 7,768,370
Working capital (deficit) ........................ 6,317,136 6,033,480
Goodwill, net .................................... 7,870,174 10,217,580
-----------
Total assets ..................................... 18,201,993 20,783,592
Long-term debt ................................... 479,408 479,408
Mandatorily redeemable convertible preferred stock 10,093,502 --
Total stockholders' equity (deficit) ............. $ 4,264,180 $16,550,883
----------------
(1) Interactive Imaginations was incorporated in September 1994 and had
insignificant activities from inception through December 31, 1994.
(2) Includes an aggregate of $232,304 in legal costs incurred in defending a
class-action lawsuit filed by certain Affiliated Websites on the
ContentZone, which defense resulted in grant of summary judgment in favor
of the Company and a net write-off of approximately $756,795 of property
and equipment that was deemed to have no future economic benefit. See
"Management's Discussion and Analysis of Financial Condition and Results
of Operations" and the Consolidated Financial Statements and the related
Notes thereto.
(3) Includes acquisition related non-cash charges for amortization of goodwill
in connection with the Petry and Advercomm acquisitions. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
and the Consolidated Financial Statements and the related Notes thereto.
(4) See Note 1 to the Company's Consolidated Financial Statements for the
determination of shares used in computing basic net loss per share.
(5) Pro forma consolidated balance sheet data give effect to (i) the
acquisition of Intelligent Interactions which occurred after March 31,
1998, as if such acquisition occurred on March 31, 1998 and (ii) the
conversion of all outstanding shares of mandatorily redeemable convertible
preferred stock into 14,308,306 shares of Common Stock immediately prior
to the closing of this Offering.
(6) Adjusted to reflect the sale of shares of Common Stock by the Company
at the assumed initial public offering price of $ per share and the
application of the estimated net proceeds therefrom. See "Use of
Proceeds."
18
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Consolidated Financial Statements and the related Notes thereto and the Pro
Forma Consolidated Financial Information and related Notes thereto included
elsewhere in this Prospectus. 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 management believes 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 the Company competes 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 Prospectus.
General
The Company operates networks of Websites that enable both advertisers and
Web publishers to capitalize on the many opportunities presented by Internet
advertising, direct marketing and commerce. In particular, 24/7 Media: (i)
operates the 24/7 Network, a network of over 80 high profile Websites to which
the Company delivered an aggregate of over 325 million advertisements in April
1998; (ii) operates the ContentZone, a network of over 2,000 small to
medium-sized Websites to which the Company delivered an aggregate of over 40
million advertisements in April 1998; (iii) licenses its Adfinity[TM]
advertising management system to independent Websites to manage and serve
high-volume advertising and direct marketing campaigns; and (iv) markets its
dbCommerce[TM] software to e-commerce merchants to enable the delivery of
targeted promotions.
The Company is the result of several recent mergers, and the combination
of these predecessor entities has resulted in an integrated Internet
advertising company with both media sales and technology expertise. See
"Prospectus Summary--Formation of the Company." Petry established the network
business model and contributed its network of Websites which became the
foundation for the 24/7 Network. Advercomm folded several high profile Websites
into the 24/7 Network, which increased the breadth of content available on the
24/7 Network and accelerated the Company's ability to organize its Affiliated
Websites into channels. Interactive Imaginations' ContentZone provided the
Company with the ability to offer advertising solutions for small to
medium-sized Websites. Intelligent Interactions provided the Company with ad
serving and targeting technology, which is expected to become the technology
platform for the Company's networks. Management believes that the combination
of these predecessor entities has enabled the Company to offer advertisers and
Web publishers comprehensive advertising solutions and to pursue its objective
of becoming the leading Internet advertising and direct marketing firm.
The Company generates substantially all of its revenues by delivering
advertisements and promotions to Affiliated Websites on the 24/7 Network and
the ContentZone. The Company sells its products and services through its sales
and marketing staff located in New York, Chicago, Dallas, Los Angeles, San
Francisco, Seattle and the Washington, D.C. area. 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
Website basis, a channel basis or a run of network basis. The Company strives
to sell 100% of its inventory through the combination of advertisements sold on
a "CPM" basis (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).
Advertisements delivered by the Company are typically sold pursuant to
purchase order agreements which are short-term in nature or subject to
cancellation. The Company has recently started to sell sponsorship advertising,
which involves a greater degree of coordination among the Company, the
advertiser and Affiliated Websites. These sponsorships are generally priced
based on the length of time that the sponsorship runs, rather than on a CPM
basis.
Advertising revenues are recognized in the period that the advertisement
is delivered, provided that no significant obligations remain. In nearly all
cases, the Company recognizes revenues generated from advertising sales, net of
any commissions paid to advertising agencies on behalf of their clients. The
Company pays its Affiliated Websites a service fee calculated as a percentage
of revenues generated by advertisements run on the Website, which amount is
included in cost of revenues. In addition, the Company is generally responsible
for billing and collecting for advertisements
19
delivered to its networks. Revenues relating to sponsorship advertising are
recognized ratably over the sponsorship period. In addition, the Company
generates revenue from licensing its Adfinity[TM] technology to third party Web
publishers. To date, revenue from licensing Adfinity[TM] to third parties has
not comprised a significant percentage of the Company's total revenues.
The Company expects to generate most of its revenues for the foreseeable
future from advertisements delivered to Affiliated Websites on the 24/7
Network. The Company's strategy is to aggressively recruit Websites of all
sizes for its networks in order to extend the Company's reach and to provide
advertisers with a broad base of page views and online content. For the three
months ended March 31, 1998 and for the year ended December 31, 1997, no
Affiliated Website accounted for over 10% of the Company's total advertising
revenue. For the three months ended March 31, 1998 and for the year ended
December 31, 1997, the top ten Websites on the 24/7 Network accounted for
approximately 66% and 70%, respectively, of the 24/7 Network's pro forma
advertising revenue. If the Company were to lose one or more significant
Affiliated Websites or if such Websites experienced a significant reduction in
traffic, the Company's results of operations and financial condition could be
materially and adversely affected. See "Risk Factors--Reliance on a Limited
Number of Web Publishers; Dependence on the 24/7 Network."
The Company believes that, due to the Merger and the Acquisition, the
period-to-period comparisons of its historical operating results are not
meaningful and should not be relied upon as indicative of future performance.
The Company's 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 the
Company has experienced revenue growth in recent periods, it anticipates that
it will incur operating losses for the foreseeable future due to a high level
of planned operating and capital expenditures. In particular, the Company
expects to increase its operating expenses in order to expand its sales and
marketing organization and to enhance its Adfinity[TM] technology. See "Risk
Factors--Extremely Limited Operating History; History of Losses; Integration of
Acquired Entities" and "--Potential Fluctuations in Quarterly Operating
Results; Seasonality."
Pro Forma Results of Operations
The following tables present the Company's unaudited results of operations
on a pro forma basis, both in dollar amounts and expressed as a percentage of
the Company's total revenues for the periods indicated, as if the Merger,
Acquisition and the Preferred Stock Conversion had been consummated as of
January 1, 1997 (or inception, if later). As a result, amortization of goodwill
has been recognized beginning in the first quarter of pro forma 1997 and a
charge for acquired in-process technology has been recorded in the first
quarter of pro forma 1997. For reporting purposes (i) amortization of goodwill
will be recognized over a two year period from the respective dates of the
Merger and the Acquisition, and (ii) write-off of in-process technology related
to the Acquisition will be recognized in the second quarter of 1998, date of
acquisition. The Company believes that all necessary adjustments, consisting of
normal recurring adjustments, have been included in the amounts stated below.
The operating results for any period are not necessarily indicative of results
for any subsequent period. Because the Company has a limited operating history,
the Company has included its results of operations on a pro forma basis in
order to better understand the Company's business as a result of the
combination of the businesses of Petry, Advercomm, Interactive Imaginations and
Intelligent Interactions. See Pro Forma Consolidated Financial Information and
the related Notes thereto and "Risk Factors--Potential Fluctuations in
Quarterly Operating Results; Seasonality."
20
[Enlarge/Download Table]
Pro Forma Pro Forma
Year Three Months Ended
Ended ------------------------------------------------------------------------------
Dec. 31, March 31, June 30, Sept. 30, Dec. 31, March 31,
1997 1997 1997 1997 1997 1998
---------------- --------------- --------------- --------------- --------------- --------------
Consolidated Statement
of Operations Data:
Revenues:
Advertising .................. $ 2,736,365 $ 399,688 $ 526,192 $ 649,036 $ 1,161,449 $ 1,846,748
Consulting and license fees 1,746,896 805,245 639,588 244,890 57,173 88,362
------------ ----------- ----------- ----------- ----------- -----------
Total revenues .............. 4,483,261 1,204,933 1,165,780 893,926 1,218,622 1,935,110
Cost of revenues .............. 2,829,938 474,349 582,460 798,505 974,624 1,608,279
------------ ----------- ----------- ----------- ----------- -----------
Gross profit 1,653,323 730,584 583,320 95,421 243,998 326,831
Operating expenses:
Sales and marketing .......... 4,653,418 923,062 1,397,203 1,443,764 889,389 1,178,438
General and administrative 4,978,381 1,158,354 1,358,096 1,450,340 1,011,591 1,745,511
Product development .......... 1,745,745 469,309 542,683 521,708 212,045 66,738
Other expenses ............... 989,099 -- 123,843 865,256 -- --
Amortization of goodwill ..... 3,612,034 736,759 958,425 958,425 958,425 1,185,803
Write-off of acquired
in-process technology ...... 5,477,281 5,477,281 -- -- -- --
------------ ----------- ----------- ----------- ----------- -----------
Total operating
expenses .................. 21,455,958 8,764,765 4,380,250 5,239,493 3,071,450 4,176,490
------------ ----------- ----------- ----------- ----------- -----------
Operating loss ................ (19,802,635) (8,034,181) (3,796,930) (5,144,072) (2,827,452) (3,849,659)
Interest (expense) income, net (95,605) 14,142 (1,300) (30,602) (77,845) (178,692)
------------ ----------- ----------- ----------- ----------- -----------
Net loss ...................... ($ 19,898,240) ($ 8,020,039) ($ 3,798,230) ($ 5,174,674) ($ 2,905,297) ($ 4,028,351)
============ =========== =========== =========== =========== ===========
[Enlarge/Download Table]
Pro Forma
Pro Forma Three Months Ended
Year ---------------------------------------------------------------------
Ended
Dec. 31, March 31, June 30, Sept. 30, Dec. 31, March 31,
1997 1997 1997 1997 1997 1998
------------- ------------- ------------- ------------- ------------- -------------
Consolidated Statement
of Operations Data:
Revenues:
Advertising ...................... 61.0% 33.2% 45.1% 72.6% 95.3% 95.4%
Consulting and license fees 39.0 66.8 54.9 27.4 4.7 4.6
------ ------ ------ ------ ------ ------
Total revenues .................. 100.0 100.0 100.0 100.0 100.0 100.0
Cost of revenues .................. 63.1 39.4 50.0 89.3 80.0 83.1
------ ------ ------ ------ ------ ------
Gross profit .................... 36.9 60.6 50.0 10.7 20.0 16.9
Operating expenses:
Sales and marketing .............. 103.8 76.6 119.9 161.5 73.0 60.9
General and administrative........ 111.0 96.1 116.5 162.2 83.0 90.2
Product development .............. 38.9 38.9 46.6 58.4 17.4 3.4
Other expenses ................... 22.1 -- 10.6 96.8 -- --
Amortization of goodwill ......... 80.6 61.1 82.2 107.2 78.6 61.3
Write-off of acquired
in-process technology .......... 122.2 454.6 -- -- -- --
------ ------ ------ ------ ------ ------
Total operating expenses 478.6 727.4 375.7 586.1 252.2 215.8
------ ------ ------ ------ ------ ------
Operating loss .................... (441.7) (666.8) (325.7) (575.4) (232.0) (198.9)
Interest (expense) income, net ( 2.1) 1.2 ( 0.1) ( 3.4) ( 6.4) ( 9.2)
------ ------ ------ ------ ------ ------
Net loss .......................... (443.8)% (665.6)% (325.8)% (578.9)% (238.4)% (208.1)%
====== ====== ====== ====== ====== ======
21
Revenues
Advertising Revenue. Advertising revenue primarily consists of cash
advertising revenue and also includes barter and prize revenue. The Company's
pro forma cash advertising revenue increased each quarter primarily due to an
increase in the number of Websites on the 24/7 Network, the number of
advertisers utilizing the Company's advertising solutions and the number of
advertisements delivered to the 24/7 Network. Such increase was partially
offset by a decline in cash advertising revenue generated by the ContentZone
through the first three quarters of pro forma 1997. The Company expects the
24/7 Network to continue to account for a significant portion of the Company's
total advertising revenue. Historically, the Company utilized barter
transactions and prizes to drive traffic to its Affiliated Websites on the
ContentZone and Riddler.com. Barter and prize revenue decreased sequentially
from approximately 6.6% of total pro forma advertising revenue for the first
quarter of pro forma 1997 to 0.0% in the first quarter of pro forma 1998. The
Company believes that barter and prize revenue will continue to comprise an
insignificant portion of the Company's total revenues in the future.
Consulting and License Fees. Through the first three quarters of pro forma
1997, the Company derived consulting and license fees primarily from an
agreement with SegaSoft, whereby SegaSoft licensed certain software from
Interactive Imaginations. The Company does not expect to realize meaningful
revenues from the SegaSoft license agreement in the future. Pro forma
consulting and license fees in the fourth quarter of 1997 and the first quarter
of 1998 consisted primarily of fees generated from licensing the Adfinity[TM]
system to third parties. The Company expects to derive consulting and licensing
fees in the future from the licensing of Adfinity[TM] and dbCommerce[TM] to
third parties, but does not expect such revenues to comprise a significant
portion of the Company's total revenues.
Cost of Revenues and Gross Profit (Loss).
Cost of revenues consists primarily of fees paid to Affiliated Websites,
which are calculated as a percentage of revenues resulting from ads delivered on
the Company's networks. Cost of revenues also includes third party ad serving
costs, depreciation of the Company's ad serving system and Internet access
costs. The general decline in gross profit over the five quarter period was
caused by (i) the significant quarter-to-quarter decline in high margin
consulting and license fees generated by the SegaSoft agreement; (ii) the
significant growth in advertising revenue generated by the 24/7 Network, which
typically pays higher fees to Affiliated Websites, at the same time that
advertising revenue generated by the ContentZone declined; (iii) an increase in
third party ad serving costs related to the growth of the 24/7 Network, as well
as increased costs relating to ad serving capacity for the ContentZone for the
first three quarters of pro forma 1997; and (iv) the temporary increase, which
began late in the first quarter of pro forma 1998, in third party ad serving
costs incurred by the Company in connection with the transition to Adfinity[TM].
Until the Company completes the transition to Adfinity[TM], it expects to incur
ad serving costs that are significantly higher than historical levels.
Thereafter, the Company expects gross margins to increase because third party ad
serving fees will no longer be paid.
Operating Expenses
Each of sales and marketing expenses, general and administrative expenses
and product development expenses increased over the first three quarters of pro
forma 1997 as both Petry and Interactive Imaginations incurred expenses in
connection with the growth of their respective businesses. All of such expense
categories decreased in the fourth quarter of 1997 because (i) Petry's pro
forma fourth quarter results no longer included expenses of its then-parent and
(ii) Interactive Imaginations reduced its expense levels as it consolidated its
operations in the third quarter of pro forma 1997. Beginning in the first
quarter of pro forma 1998, all of such expense categories increased in
anticipation of the Merger and the Acquisition and expected future growth.
Sales and Marketing Expenses. Sales and marketing expenses consist
primarily of sales force salaries and commissions, advertising expenditures and
costs of trade shows, conventions and marketing materials. The Company expects
sales and marketing expenses to increase as it continues to invest in sales and
marketing personnel, expand into new markets and broaden the visibility of the
Company.
General and Administrative Expenses. General and administrative expenses
consist primarily of compensation, facilities expenses and other overhead
expenses incurred to support the growth of the business. Beginning in the
second quarter of pro forma 1998, the Company expects general and
administrative expenses to increase due to the additional ad serving personnel
required to support Adfinity[TM]. In addition, the Company expects general and
administrative expenses to increase as it incurs increased levels of expenses
to support future growth.
Product Development Expenses. Product development expenses consist
primarily of compensation and related costs incurred to further develop the
Company's ad serving capabilities. Product development expenses
22
declined in the fourth quarter of pro forma 1997 due to the consolidation of
the operations of Interactive Imaginations, and such expenses were suspended in
the first quarter of pro forma 1998 as the Company sought a more dynamic ad
serving platform. The Company believes that continued investment in product
development, particularly for its Adfinity[TM] system, is critical to its
strategy of providing excellent service, and it expects to increase the future
amounts spent on product development.
Other Expenses. Other expenses in pro forma 1997 included an aggregate of
$232,304 in legal costs incurred during the second and third quarters in
defending a class-action lawsuit filed by certain Affiliated Websites on the
ContentZone, which defense resulted in a grant of summary judgment in favor of
the Company. During the third quarter of pro forma 1997, in connection with the
consolidation of Interactive Imaginations, the Company recorded a net write-off
of $756,795 of property and equipment that was deemed to have no future
economic benefit. In connection with the development of its Adfinity[TM] and
dbCommerce[TM] technologies, the pro forma impact of the cost of acquired
in-process technology is shown in the first quarter of pro forma 1997. The
Company recorded goodwill amortization expense beginning in the first quarter
of pro forma 1997, which represents the excess purchase price over the fair
value of net liabilities of the acquired businesses of Petry, Advercomm and
Intelligent Interactions.
Historical Results of Operations
Years Ended December 31, 1997, 1996 and 1995
24/7 Media's historical results of operations for the fiscal years ended
December 31, 1997, 1996 and 1995 include the results of Interactive
Imaginations and do not reflect any of the operating results of Petry,
Advercomm or Intelligent Interactions, or the pro forma adjusting entries
resulting from the merger of these entities with and into the Company. The
Company does not believe that the historical revenues or expenses as presented
below are reliable or accurate indicators of the future performance of the
combined Company. See "Selected Consolidated Financial Data" and the Company's
Consolidated Financial Statements and related Notes thereto.
Revenues. Total revenues were $3,148,569, $1,542,163 and $151,750 for the
years ended December 31, 1997, 1996 and 1995, respectively. Year-to-year growth
resulted from increases in (i) advertising revenue generated by the ContentZone
and Riddler.com and (ii) consulting and license fees derived from the SegaSoft
agreement, whereby SegaSoft licensed certain software from Interactive
Imaginations. The Company does not expect to realize meaningful revenues from
the SegaSoft agreement in the future. One customer (SegaSoft) accounted for 55%
of Interactive Imaginations' total revenues during 1997, two customers
(SegaSoft and Microsoft Corporation) accounted for 25% and 12% of total cash
advertising revenues, respectively, during both 1997 and 1996, and four
customers (Marion Foundation, AT&T, Coors and 20th Century) accounted for 33%,
21%, 20% and 13% of total cash advertising revenues, respectively, during 1995.
Cost of Revenues and Gross Profit (Loss). Cost of revenues was $1,655,340,
$1,592,771 and $198,291 for the years ended December 31, 1997, 1996 and 1995,
respectively. The increase in cost of revenues in all years was due to the
related growth in advertising revenue, and the smaller percentage increase from
1996 to 1997 was due to a significant increase in the percentage of total
advertising revenue generated by Riddler.com, which does not entail payment of
fees to Affiliated Websites. Gross profit increased from 1996 to 1997 primarily
due to a significant increase in high margin revenues generated by the SegaSoft
agreement.
Operating Expenses. Total operating expenses were $6,702,591, $6,711,336
and $1,121,604 for the years ended December 31, 1997, 1996 and 1995,
respectively. The increase from 1995 to 1996 was caused by increased
expenditures incurred in anticipation of continued growth of the Company. The
decrease from 1996 to 1997 was primarily due to the consolidation of the
Interactive Imaginations business, offset by $989,099 in other expenses
recorded in 1997. Other expenses included $232,304 of legal costs associated
with the successful defense of a class-action lawsuit filed by certain
Affiliated Websites on the ContentZone, as well as a net write-off of $756,795
of property and equipment that was deemed to have no future economic value.
Three Months Ended March 31, 1998 and 1997
For the three months ended March 31, 1998, 24/7 Media's historical results
of operations reflect the Merger as of February 24, 1998. For the three months
ended March 31, 1997, 24/7 Media's historical results of operations only
include the results of Interactive Imaginations. The Company does not believe
that the historical revenues or expenses as presented below are reliable or
accurate indicators of the future performance of the combined Company. See the
Company's Consolidated Financial Statements and related Notes thereto.
23
Revenues. Total revenues were $1,076,250 for the three months ended March
31, 1998, as compared to $1,194,137 for the three months ended March 31, 1997.
Such decrease was caused primarily by a decline in revenues generated by the
SegaSoft Agreement, offset by a significant increase in advertising revenue.
Cost of Revenues. Cost of revenues was $930,003 for the three months ended
March 31, 1998 as compared to $459,587 for the three months ended March 31,
1997. Such increase primarily related to increases in third party ad serving
costs which were caused by growth in advertising revenue and the temporary
increase in costs in connection with the transition to Adfinity[TM]. Such
increase was offset by reduced ContentZone ad serving costs.
Operating Expenses. Total operating expenses were $2,274,327 for the three
months ended March 31, 1998 as compared to $1,532,609 for the three months
ended March 31, 1997. This increase was caused by higher sales and marketing
and general and administrative expenses in anticipation of the Merger and
future growth, as well as amortization of goodwill resulting from the
acquisition of Petry and Advercomm. Such increase was offset by the significant
reduction of product development expense prior to the acquisition of
Intelligent Interactions.
Liquidity and Capital Resources
Historically, the Company financed its operations primarily from private
placements of equity and convertible debt securities. Concurrently with the
merger of Petry and Advercomm with and into 24/7 Media, the Company completed a
private placement of preferred stock and warrants which resulted in net
proceeds of $9,830,897. As of March 31, 1998, the Company had cash and cash
equivalents of $7,764,695.
In addition to funding on-going operations, the Company's principal
commitments consist of various obligations under operating and capital leases.
On June 1, 1996, the Company entered into an operating lease for the use of
computer equipment with a fair market value of approximately $835,000. Rent
expense for the operating lease was $42,421, $162,862, $559,748 and $381,313
for the three months ended March 31, 1998 and 1997 and the years ended 1997 and
1996, respectively. On May 14, 1998, the Company entered into an operating
lease for computer equipment related to its Adfinity[TM] system, with a fair
market value of approximately $717,000. Total rent expense for currently
outstanding leases is expected to be approximately $115,000 per quarter.
Net cash used in operating activities was $2,309,598, $1,384,894,
$4,465,640, $4,933,106, and $995,194 for the three months ended March 31, 1998
and 1997 and for the years ended December 31, 1997, 1996 and 1995,
respectively. Net cash used in operating activities resulted from the Company's
net operating losses, adjusted for certain non-cash items, including: (i) a
significant advance by SegaSoft in late 1996 for revenues that were primarily
recognized during 1997; (ii) the write-off of property and equipment in 1997;
and (iii) the amortization of goodwill in the first quarter of 1998 related to
the Merger. Net cash used in operating activities also resulted from a high
level of accounts receivables and related accrued liabilities due to the time
lag between revenue recognition and receipt of payments from advertisers. To
the extent the Company is able to improve the timeliness of its billing and
collections processes as it completes the transition to Adfinity[TM], the
Company expects its net working capital as a percentage of total revenues to
improve.
Net cash provided by (used in) investing activities was $71,175, $0,
($19,219), ($1,578,276), and ($464,016) for the three months ended March 31,
1998 and 1997 and the years ended December 31, 1997, 1996 and 1995,
respectively. Net cash used in investing activities resulted primarily from
capital expenditures relating to computer equipment. To the extent that the
Company acquires significant ad serving hardware in the future, net cash used
in investing activities will increase.
Net cash provided by financing activities was $9,909,173, $500,011,
$2,889,409, $8,200,777, and $1,448,488 for the three months ended March 31,
1998 and 1997 and the years ended December 31, 1997, 1996 and 1995,
respectively. Net cash provided by financing activities for the three years
ended December 31, 1997 included issuances of convertible notes, convertible
preferred stock, common stock and warrants. Prior to March 31, 1998, all of the
previously issued convertible notes, convertible preferred stock and warrants
were converted or exercised into common stock, except for approximately
$500,000 principal amount of convertible debt and warrants to purchase
approximately 142,000 shares of Common Stock with an average exercise price of
$0.70 per share. On February 24, 1998, the Company issued Series A Preferred
Stock with detachable warrants at an average exercise price of $2.38.
No provision for federal or state income taxes has been recorded as the
Company incurred net operating losses for all periods presented. At December
31, 1997, the Company had approximately $13,394,000 of federal net
24
operating loss carryforwards available to offset future taxable income; such
carryforwards expire in various years through 2012. As a result of various
equity transactions during 1996, 1997 and 1998, management believes the Company
has undergone an "ownership change" as defined by section 382 of the Internal
Revenue Code. See Note 3 to the Company's Consolidated Financial Statements.
Accordingly, the utilization of a portion of the net operating loss
carryforward may be limited. Due to this limitation, and the uncertainty
regarding the ultimate utilization of the net operating loss carryforward, no
tax benefit for losses has been recorded by the Company and a valuation
allowance has been recorded for the entire amount of the net deferred tax
asset. In addition, certain events, including any sales by the Company of
shares of its stock, including sales pursuant to this Offering, and/or
transfers of a substantial number of shares of Common Stock by the current
stockholders, may partially restrict the ability of the Company to utilize its
net operating loss carryforwards.
The Company believes that the net proceeds from this offering, combined
with current cash and cash equivalent balances will be sufficient to fund its
requirements for working capital and capital expenditures for at least the next
12 months. To the extent that the company encounters unanticipated
opportunities. The Company may need to raise additional funds sooner in order
to take advantage of unanticipated opportunities, in which case, the Company
may sell additional equity or debt securities or borrow funds from banks. Sales
of additional equity or convertible debt securities would result in additional
dilution of the Company's stockholders.
The Company recognizes the need to ensure that its operations will not be
adversely impacted by Year 2000 software failures. The Company has established
procedures for evaluating and managing the risks and costs associated with this
problem and is currently taking steps to make its products and systems Year
2000 compliant. In addition, the Company's ad servers and certain of its
customers may also be impacted by Year 2000 complications. Any failure by the
Company, its ad servers or its customers to achieve Year 2000 compliance could
have a material adverse effect on the Company's business, results of operations
and financial condition.
Recently Issued Accounting Principles
The Company adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income" in the quarter
ended March 31, 1998. SFAS No. 130 requires the Company to report in their
financial statements, in addition to its net income (loss), comprehensive
income (loss), which includes all changes in equity during a period from
non-owner sources including, as applicable, foreign currency items, minimum
pension liability adjustments and unrealized gains and losses on certain
investments in debt and equity securities. There were no differences between
the Company's comprehensive loss and its net loss as reported.
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1
provides guidance for determining whether computer software is internal-use
software and on accounting for the proceeds of computer software originally
developed or obtained for internal use and then subsequently sold to the
public. It also provides guidance on capitalization of the costs incurred for
computer software developed or obtained for internal use. The Company has not
yet determined the impact, if any, of adopting SOP 98-1, which will be
effective for the Company's year ending December 31, 1999.
In June 1997, the FASB issued SFAS No. 131, Disclosure About Segments of
an Enterprise and Related Information. SFAS No. 131 establishes standards for
the way that public business enterprises report information about operating
segments. It also establishes standards for related disclosures about products
and services, geographic areas and major customers. SFAS No. 131 is effective
for fiscal years beginning after December 15, 1997. The Company has determined
that it does not have any separately reportable business segments.
25
BUSINESS
Overview
24/7 Media operates networks of Websites that enable both advertisers and
Web publishers to capitalize on the many opportunities presented by Internet
advertising, direct marketing and commerce. The Company generates revenues by
delivering advertisements and promotions to its Affiliated Websites. In
particular, 24/7 Media: (i) operates the 24/7 Network, a network of over 80
high profile Websites to which the Company delivered an aggregate of over 325
million advertisements in April 1998; (ii) operates the ContentZone, a network
of over 2,000 small to medium-sized Websites to which the Company delivered an
aggregate of over 40 million advertisements in April 1998; (iii) licenses its
Adfinity[TM] advertising management system to independent Websites to manage
and serve high-volume advertising and direct marketing campaigns; and (iv)
markets its dbCommerce[TM] software to e-commerce merchants to enable the
delivery of targeted promotions.
The Company operates in the rapidly growing Internet advertising industry.
IDC estimates that at the end of 1997 there were over 38 million Web users in
the United States and over 68 million Web users worldwide and that by the end
of 2002 the number of Web users will increase to over 135 million in the United
States and to over 319 million worldwide. Jupiter Communications projects that
the dollar value of Internet advertising in the United States will increase
from $940 million in 1997 to $7.7 billion in 2002.
The Company believes that advertisers seek to place Internet ads in ways
to maximize unduplicated reach. During April 1998, the 365 million impressions
generated by the Company's networks reached more than one third of all Internet
users, according to a study prepared for the Company by Media Metrix. The
Company believes that this reach figure is among the highest in the Internet
advertising industry. The Company plans to aggressively recruit Websites of all
sizes for its networks in order to further extend the Company's reach as well
as to provide advertisers with a broad base of online content and page views,
and to improve the Company's brand awareness and visibility with media buyers.
In addition, as online advertisers and direct marketers increase their use
of the Internet, they seek solutions and technologies that allow them to
efficiently deliver highly targeted messages. 24/7 Media's customized solutions
allow advertisers and direct marketers to tailor their ad campaigns to reach
desired audiences, while reducing costs, easing time pressures and alleviating
the need to purchase a series of ad campaigns from numerous Web publishers.
Advertisers and direct marketers can achieve their objectives by buying ad
space on a specific Website, within a particular content channel or across an
entire network.
As Internet traffic grows, Web publishers increasingly seek to maximize
the value of their online inventory. The Company's extensive sales and
marketing experience enables Web publishers to access media buyers at large ad
agencies and to sell advertisement space without incurring the costs and
challenges associated with building and maintaining an ad sales force.
Additionally, the ad serving and targeting capabilities of Adfinity[TM]
effectively deliver advertisements to the Company's Affiliated Websites.
The recent addition of the Company's Adfinity[TM] and dbCommerce[TM]
technologies allows 24/7 Media to provide comprehensive advertising solutions
for advertisers, direct marketers and Web publishers. Adfinity is designed to
target, deliver, and track advertisements and direct marketing messages across
the Company's networks. Adfinity can create a profile of an individual Internet
user by integrating such user's online behavior with third party demographic
and lifestyle data. These profiles can allow Adfinity to deliver targeted
advertisements to the right person at the right time. dbCommerce[TM] software
is designed to enable e-commerce merchants to deliver promotions and messages
to targeted customer audiences by integrating database marketing techniques
with customer transaction information and third party databases.
The Company's senior management team includes several individuals with
over fifteen years of experience in advertising sales in the television and
proprietary online network industries. Other members of senior management
contribute extensive knowledge of ad serving technology and database targeting.
The Company leverages its media sales and technology expertise to maximize the
value of ad campaigns for both advertisers and Affiliated Websites.
26
Industry Background
Growth of the Internet and the Web
The Internet and the Web are experiencing dramatic growth both in terms of
the number of Web users and the number of Websites. IDC estimates that at the
end of 1997 there were over 38 million Web users in the United States and over
68 million Web users worldwide, and that by the end of 2002 the number of Web
users will increase to over 135 million in the United States and to over 319
million worldwide. In addition, Web users are spending an increasing amount of
time on the Web, and a 1997 report by the U.S. Department of Commerce estimates
that overall traffic on the Internet is doubling every 100 days. According to
Network Solutions, the number of Internet domains (.com, .net and .org) had
grown to over 2 million in May 1998. The growth in the number of Web users, the
amount of time users spend on the Web and the increase in the number of
Websites is being driven by the increasing importance of the Internet as a
sales and distribution channel, a communications medium and an information
resource.
Growth of Online Commerce
The Internet is dramatically affecting the methods by which consumers and
businesses are buying and selling goods and services. The Web provides online
merchants with the ability to reach a global audience and to operate with
minimal infrastructure, reduced overhead and greater economies of scale, while
providing consumers with a broad selection, increased pricing power and
unparalleled convenience. As a result, a growing number of consumers are
transacting business on the Web, including trading securities, buying consumer
goods, paying bills and purchasing airline tickets. Jupiter Communications
estimates that over 25% of adult Web users purchased goods or services over the
Web in 1997 and that 50% of adult Web users will make online purchases in 2000.
Jupiter Communications also estimates that retail consumer purchases of goods
and services over the Internet will increase from $2.6 billion in 1997 to $37.5
billion in 2002. The Company believes that as electronic commerce expands,
advertisers and direct marketers will increasingly use the Web to advertise
products, drive traffic to their Websites, attract customers and facilitate
transactions.
Growth of Internet Advertising
The Web is evolving into an important medium for advertisers due to its
interactive nature, global reach, rapidly growing audience and the expected
increase in online commerce. Unlike more traditional advertising methods, the
Web gives advertisers the potential to target advertisements to broad audiences
or to selected groups of users with specific interests and characteristics. The
Web also allows advertisers and direct marketers to measure the effectiveness
and response rates of advertisements and to track the demographic
characteristics of Web users. The interactive nature of Web advertising enables
advertisers to better understand potential customers, and to change messages
rapidly and cost effectively in response to customer behavior and product
availability. Additionally, the Web allows advertisers and direct marketers to
reach users with attractive demographic profiles. A 1997 U.S. Department of
Commerce study estimated that 48% of Web users have a college degree, 34% have
a household income greater than $60,000, and their average age is approximately
35 years.
The unique capabilities of online advertising, the growth in traffic on
the Web and the favorable characteristics of Web users have led to a
significant increase in online advertising. According to Jupiter
Communications, the dollar value of online advertising in the United States is
expected to increase from $940 million in 1997 to $7.7 billion in 2002,
representing a 52% compounded annual growth rate. By comparison, in 1997 IDC
estimated that $173 billion was spent on traditional media advertising
(television, radio, cable and print) in the United States. Until recently, the
leading Internet advertisers have been technology companies, search engines and
Web publishers. However, many of the largest advertisers utilizing traditional
media, including consumer products companies and automobile manufacturers, are
expanding their use of online advertising. The Company believes that online
advertising will continue to capture an increasing share of available
advertising dollars and that this trend will drive demand for online ad
inventory and for sophisticated Internet advertising solutions.
Opportunities for Direct Marketing
The Web also represents an attractive medium for direct marketing, which
has traditionally been conducted through direct mail, telemarketing and
televison infomercials. The interactive nature of the Web enables direct
marketers to deliver targeted promotions to consumers at the point-of-sale. The
success of a direct marketing campaign is measured by the response rate of
consumers (e.g., number of leads, number of sales or transactions
27
as a percentage of promotions viewed). The Internet has the potential to enable
direct marketers to increase consumer response rates and decrease
costs-per-transaction by targeting and delivering direct marketing campaigns to
particular consumers based on their demographic profile, self-selected
interests and online behavioral characteristics. By providing a more
cost-effective method to reach target customers, online advertising is expected
to improve the direct marketer's return on investment. The Direct Marketing
Association estimates that $153 billion was spent in 1997 on all forms of
direct marketing in the United States, and Jupiter Communications estimates
that expenditures on direct marketing over the Internet will exceed $1.3
billion in 2002.
Challenges Facing Advertisers, Direct Marketers and Web Publishers
While the Web offers numerous opportunities, most online advertisers,
direct marketers and Web publishers face a number of significant challenges to
realizing the potential of Internet advertising. As online advertisers, direct
marketers and Web publishers increase their use of the Internet, they seek
solutions and technologies which will allow them to deliver highly targeted
messages, receive real-time feedback, benefit from business efficiencies and
capitalize on other potential advantages of online advertising and direct
marketing.
Advertisers and Direct Marketers. For advertisers and direct marketers,
large advertising campaigns can be time-consuming, expensive and difficult to
manage and can require the use of media purchasers at advertising agencies to
place advertisements. Given the breadth of content available on the Web, it is
difficult for advertisers and direct marketers to justify the costs of
transacting individually with a number of smaller, but desirable, sites in
order to reach a large online audience. In addition, many advertisers and
direct marketers lack the analytical tools to evaluate and optimize the
effectiveness of advertising campaigns, target appropriate users, efficiently
place advertisements and deliver content. Advertisers and direct marketers also
find that individual Websites typically lack the technology to serve a variety
of advertisements to a broad reach of Internet users.
Web Publishers. Web publishers who seek to sell ad space on their Websites
face an array of challenges. Most Web publishers have difficulty attracting and
maintaining experienced personnel to sell ad space on their Websites and
justifying the costs of establishing such a sales force. In addition, most Web
publishers cannot afford, or lack the ability, to operate and maintain
sophisticated ad servers and databases to provide effective ad serving,
targeting and reporting to advertisers. Furthermore, for sales personnel at all
but the largest Websites, it can be difficult to gain access to media buyers at
large advertising agencies. As a result, online advertising spending is highly
concentrated on large Websites. In its most recent report, Jupiter
Communications estimated that, during August 1997, the top ten Websites on the
Internet accounted for approximately 52% of all dollars spent on Internet
advertising. The Company believes all but the largest Websites will continue to
face challenges in capturing a share of the total advertising dollars spent on
the Internet.
The 24/7 Media Solution
The Company operates the 24/7 Network and the ContentZone, which are
networks of Websites that enable both advertisers and Web publishers to
capitalize on the many opportunities presented by Internet advertising, direct
marketing and commerce. The 24/7 Network is comprised of over 80 high profile
Websites and the ContentZone is comprised of over 2,000 small to medium-sized
Websites. The Company offers comprehensive advertising sales solutions for both
emerging and mature Web publishers and provides advertisers and direct
marketers with targeted ad delivery across the Company's networks. During April
1998, the 365 million impressions generated by the Company's networks reached
more than one third of all Internet users, according to a study prepared for
the Company by Media Metrix. The Company believes that this reach figure is
among the highest in the Internet advertising industry. The Company's ability
to deliver targeted advertisements has recently been enhanced by the addition
of the Adfinity[TM] ad serving technology.
Benefits to Advertisers and Direct Marketers
24/7 Media reduces costs and eases time pressures for advertisers and
direct marketers by alleviating the need to purchase a series of ad campaigns
from numerous Web publishers. The Company's networks provide advertisers and
direct marketers with access to a wide variety of online content and a broad
reach of Internet users. Advertisers and direct marketers can enhance the
effectiveness of advertising and direct marketing campaigns by customizing
their ad delivery on the Company's networks and buying ad space either on
selected Affiliated Websites, within a particular content channel or across an
entire network. The Company believes that its Adfinity[TM] technology will
enable advertisers to optimize ad performance by reaching highly targeted
audiences based on demographic profiles
28
and user behavior. In addition, the Company provides advertisers and direct
marketers with comprehensive reporting services in order to monitor the
effectiveness of ad delivery.
Benefits to Web Publishers
Membership on the Company's networks enables Web publishers to immediately
generate advertising revenues by gaining access to advertisers and direct
marketers without the costs and challenges associated with building and
maintaining their own ad sales force and ad serving technology. Websites
included on the Company's networks benefit from 24/7 Media's experienced
management team, its extensive sales and marketing organization and its direct
access to advertisers and agencies. The organization of the Company's networks
into channels of Web publishers' content enhances the value of inventory on
small to medium-sized Websites and enables such Websites to generate revenues
by selling ad space within a channel that is attractive to advertisers.
Furthermore, the Company believes that the targeting capabilities of the
Company's Adfinity[TM] ad management system will increase the value of Web
publishers' inventory. The Company also provides sophisticated tracking and
reporting functions for its Affiliated Websites. For Web publishers with their
own in-house ad sales forces, the Company licenses its Adfinity[TM] ad
management system to serve advertisements and provide enhanced targeting and
reporting capabilities.
Strategy
24/7 Media's objective is to become the leading Internet advertising and
direct marketing firm by providing superior turnkey advertising solutions for
Web publishers and maximizing the effectiveness of advertisers' Internet
advertising campaigns. The Company intends to reach its objective by
implementing the following strategies:
Expand the 24/7 Network and the ContentZone. The Company plans to
aggressively recruit Websites for the 24/7 Network and the ContentZone in order
to extend the Company's reach and to provide a broad base of page views and
online content to advertisers. The Company believes that its approach to
expansion is unique in that it recruits Websites of all sizes, including
high-profile or larger to medium-sized Websites on the 24/7 Network and medium
to smaller-sized Websites on the ContentZone. Such a collection of Websites of
diverse sizes and content allows advertisers to target Internet users by
interest and enhances the value of each Affiliated Website's inventory. An
increased number of Affiliated Websites and an expanded breadth of available
content will further enable advertisers to consolidate their ad purchases and
will improve the Company's brand awareness and visibility with media buyers.
Maximize Sales and Marketing Effectiveness. The Company believes that its
sales and marketing organization is among the largest in the Internet
advertising industry, providing the Company with a competitive advantage. The
Company intends to leverage the substantial media sales experience of its
management team in order to maximize the value of ad campaigns to benefit both
advertisers and Affiliated Websites. 24/7 Media believes that advertiser
awareness of the Company is critical to its success. Accordingly, the Company
continually expands its services for advertisers and advertising agencies in
order to establish and expand the recognition of its corporate identity. The
Company also promotes its service offerings through its Website, trade
publication advertisements, direct mail and promotional activities, trade shows
and other media events.
Enhance Capabilities of Ad Targeting Technology. The Company believes that
its Adfinity[TM] ad management technology creates significant value for
advertisers, direct marketers and Web publishers. Adfinity[TM] can create a
profile of an individual Internet user by integrating such user's online
behavior with third party demographic and lifestyle data. These profiles can
enable Adfinity[TM] to deliver targeted advertisements to the right person at
the right time. The Company intends to continue to enhance its targeting
capabilities and technology through investment in research and development
activities.
Increase Value of Ad Inventory. The Company believes that click-thru rates
will increase as its Adfinity[TM] technology delivers advertisements to a more
highly targeted audience, resulting in more effective advertising campaigns and
enabling the Company to charge higher CPM rates. Furthermore, the Company
believes that as it increases the breadth and depth of its content channels,
the sale of ads targeted to specific channels will increase, displacing lower
CPM run of network campaigns, in which ads are delivered across the Websites in
a network, and cost-per-action campaigns that generate revenues only if the
user responds to the ad with an action, such as an inquiry or a purchase of the
product advertised. The Company intends to further increase the value of its ad
inventory by seeking to sell 100% of inventory through the sale of a
combination of advertisements sold on a CPM
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basis and a cost-per-action basis, by selling sponsorships on Affiliated
Websites and by refining its management of ad space inventory.
Provide Highest Level of Customer Service. The Company emphasizes high
quality service for Web publishers and advertisers. For example, the Company
employs techniques of benchmarking, statistical analysis and continuous process
improvement to provide Web publishers and advertisers with "best of class"
service. The Company continually surveys its Affiliated Websites and
advertisers to monitor service levels and identify and resolve problems. In
addition, the Company expects that Adfinity[TM] will offer enhanced reporting
capabilities that allow Web publishers and advertisers to better assess the
efficiency and performance of ad campaigns.
24/7 Media Products and Services
24/7 Media offers Internet advertisers, direct marketers and Web
publishers comprehensive Internet advertising solutions. The Company also
licenses its Adfinity[TM] ad serving technology and markets its dbCommerce[TM]
software to third parties.
Internet Advertising Networks
The Company operates both the 24/7 Network and the ContentZone, which are
collections of Websites with diverse online content organized into topical
channels.
The 24/7 Network. Through the 24/7 Network, the Company provides
advertisement sales and delivery services and related functions to over 80
Affiliated Websites. The 24/7 Network aggregates large and medium-sized
Websites that are attractive to advertisers, generate a high number of ad
impressions and contribute a variety of online content to the network. No
single Website on the 24/7 Network produced more than ten percent of the 24/7
Network's pro forma advertising revenues in the year ended December 31, 1997 or
in the three months ended March 31, 1998, and the ten largest sites in the 24/7
Network produced approximately 70% and 66% of the 24/7 Network's pro forma
advertising revenue in such periods, respectively. During the month of April
1998, the Company delivered over 325 million advertisements to the 24/7
Network.
ContentZone. The ContentZone is a network of over 2,000 small to
medium-sized Websites to which the Company can deliver targeted advertisements.
Such Websites encompass a broad and diverse range of content that reflects the
eclectic, grass-roots nature of the Web. The ContentZone provides one of the
few advertising revenue opportunities for such small and emerging Websites.
During the month of April 1998, the Company delivered over 40 million
advertisements to the Affiliated Websites on the ContentZone. The Company
created and operates the ContentZone Website (www.contentzone.com) to promote
and generate traffic on its Affiliated Websites on the ContentZone.
Channels on the Networks. The 24/7 Network's and the ContentZone's
Affiliated Websites are currently organized into the following topical
channels:
[Download Table]
[bullet] Automotive [bullet] Real Estate
[bullet] Business/Financial [bullet] Search Directory/ISP
[bullet] Entertainment [bullet] Sports
[bullet] Games [bullet] Technology/Computers
[bullet] International [bullet] Travel
[bullet] News/Information [bullet] Women/Family
The Company is presently developing several new channels prompted by user
and advertiser interests. The Company expects to expand into additional
channels to respond to advertisers' needs.
The Games channel of the 24/7 Network includes the Company's Riddler.com
Website (www.riddler.com), a Website that offers a diverse number of
single-player and multi-player games to over 700,000 registered subscribers, as
well as to a number of unregistered users. Riddler.com offers free games and
prizes as an incentive to consumers to supply the Riddler.com database with
personal demographic and psychographic data. The Company delivers
advertisements and sponsorship messages on Riddler.com that do not interrupt
the game being played, but require the user to scroll through the advertisement
in order to begin playing the game.
Service Levels on the Networks. The Company offers different levels of
service to the Affiliated Websites on its networks.
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The Company offers full service to Affiliated Websites on the 24/7
Network. For such Websites, the Company appoints an account manager to oversee
the relationship with the Website, sells the Website ad inventory directly to
advertisers, solicits sponsorships specifically for such Website and integrates
sales efforts with the Website. The Company recognizes revenues generated from
advertising sales net of any ad agency commissions.
For all other Websites on the 24/7 Network, the Company bundles
advertisements as part of a channel or run of network package, pursuant to
which the advertisement is delivered across Websites in one of the channels
listed above or across the entire 24/7 Network. For example, an advertiser who
buys an advertisement on the Automotive channel is guaranteed that such
advertisement will run only on the Websites in the Automotive channel. The
Company typically receives a minimum available inventory on such Websites,
receives commissions only on the advertisements the Company sells and believes
that it is generally the only third party that sells ads on such Websites.
All Websites on the ContentZone receive service similar to the channel or
run of network service on the 24/7 Network except that advertisement delivery
is highly automated and ads are delivered across Websites included in specific
channels on the ContentZone or across the entire ContentZone.
Advertisers on the Networks. The Company maintains relationships with, and
focuses its sales and marketing efforts on, the leading Internet and
traditional advertisers and advertising agencies, many of which have utilized
the Company's solutions. Advertisers and advertising agencies employ the
Company in various ways. Based on its breadth of online content and its
extensive reach, the Company has the ability to package personalized
advertising solutions for advertisers and ad agencies. The Company's sales
force works closely with advertisers to enhance the effectiveness of
advertising campaigns by customizing ad delivery either on a specific Website,
within a particular content channel, or across an entire network. Set forth
below is a representative list of advertising agencies and advertisers that
have delivered advertisements on the Company's networks during the four months
ended April 30, 1998:
Advertising Agencies
[Download Table]
[bullet] Agency.com [bullet] i-traffic
[bullet] Ammirati Puris Lintas [bullet] J. Walter Thompson
[bullet] Anderson & Lembke [bullet] Kirshenbaum Bond & Partners
[bullet] Avalanche [bullet] LeftField
[bullet] BBDO Interactive [bullet] The Lampshire Group
[bullet] Boss Media [bullet] Media.com
[bullet] CKS/Sitespecific [bullet] Mercury 7
[bullet] Dahlin Smith White [bullet] Modem Media
[bullet] DMB&B [bullet] Ogilvy & Mather
[bullet] Fallon McElligott [bullet] Planet U
[bullet] Freeman [bullet] Strategic Interactive Group
[bullet] Giant Step [bullet] Thunderhouse
[bullet] GM Cyberworks [bullet] TBWA-Chiat Day
[bullet] Grey [bullet] US Interactive
[bullet] Hal Riney [bullet] Wolverine
[bullet] iballs [bullet] Y&R Wunderman
[bullet] ifrontier
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Advertisers
[Download Table]
[bullet] Ace Hardware [bullet] General Motors
[bullet] Amazon.com [bullet] Hewlett Packard
[bullet] American Express [bullet] IBM
[bullet] AT&T [bullet] Infoseek
[bullet] Bell Atlantic [bullet] Intel
[bullet] BellSouth [bullet] Investors Business Daily
[bullet] Bloomberg [bullet] Mastercard
[bullet] Broderbund [bullet] Metromail
[bullet] Cardsecure [bullet] Microsoft
[bullet] CDNow [bullet] The Mining Company
[bullet] Charles Schwab [bullet] News Corp
[bullet] Cendant [bullet] N2K
[bullet] Cisco Systems [bullet] Pointcast
[bullet] Citibank [bullet] Proctor & Gamble
[bullet] Citizens Bank [bullet] Sony
[bullet] Columbia House [bullet] Sprint
[bullet] Compaq [bullet] Standard & Poor's
[bullet] Discover Card [bullet] Time Life
[bullet] Disney [bullet] Tripod
[bullet] eBay [bullet] US West
[bullet] Encyclopedia Britannica [bullet] Visa
[bullet] Entrepreneur [bullet] Web Genesis
[bullet] Ford [bullet] Ziff Davis
[bullet] FTD
Admission to the Networks. Web publishers seeking to join the 24/7 Network
must meet specified standards, such as quality content and brand name
recognition, specified levels of existing and projected page views, attractive
user demographics, and sponsorship opportunities. Any Web publisher possessing
non-objectionable content on its Website can qualify for admission to the
ContentZone. The Company expects to "graduate" ContentZone members to the 24/7
Network if they generate a sufficient number of ad impressions per month and
satisfy the requisite standards.
Adfinity[TM] Ad Serving Technology
Adfinity[TM] ad serving technology is designed to allow Websites to
target, deliver, and track a high volume of advertisements to Internet viewers
without causing a slow down in the performance of the Website or a delay in ad
delivery. 24/7 Media acquired Adfinity[TM] as part of its acquisition of
Intelligent Interactions, and is currently integrating the Adfinity[TM] ad
serving technology into the 24/7 Network. The Company expects Adfinity[TM] to
serve as the Company's technology platform, delivering all of the
advertisements to the 24/7 Network and the ContentZone. In addition, the
Company currently licenses Adfinity[TM] to eight Websites, including The Motley
Fool, MecklerMedia and RealNetworks.
Adfinity[TM]'s targeting engine is designed to enable advertisers and
direct marketers to target advertisements and Internet content to individuals
or audience segments using flexible, advertiser-defined demographic profiles.
Advertisers can control the advertisement delivered, the user targeted, and the
frequency of ad delivery. Adfinity[TM] integrates information, such as a user's
online response rate to advertisements, name, address, age, or e-mail address,
with third-party databases to generate a comprehensive demographic profile of
the Internet user. Using such user profile, the Company can serve
advertisements and promotions specifically targeted to such user. Adfinity[TM]
also utilizes database overlays from marketing firms or other third parties in
order to create a comprehensive direct marketing model for the Company.
Through Adfinity[TM], the Company provides Internet advertisers, direct
marketers and Web publishers with comprehensive timely reports regarding the
demographics of users receiving and responding to advertisements. If a selected
audience does not respond well to an advertising message, then Adfinity[TM]
allows Internet advertisers,
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direct marketers and Web publishers to promptly change advertising messages or
images, refine the targeted demographics and rebroadcast messages.
dbCommerce[TM] Software
24/7 Media acquired dbCommerce[TM] software in connection with the
acquisition of Intelligent Interactions. dbCommerce[TM] software is designed to
enable e-commerce merchants to deliver targeted promotions and messages to
distinct customer segments or specific customers by integrating database
marketing techniques with customer transaction information and third party
databases. dbCommerce[TM] is designed to track the effectiveness of promotional
efforts by source code, page view, products shown and Internet response rates
and to provide reports of this information to e-commerce merchants to improve
the targeting of future promotions and messages.
The Company's Intelligent Interactions subsidiary recently entered into an
agreement pursuant to which IBM bundles the dbCommerce[TM] software with IBM's
I-commerce server for database and Web marketing purposes. Furthermore,
Intelligent Interactions and Open Market Inc. recently entered into an
agreement to jointly market products that result from the integration of the
dbCommerce[TM] software with Open Market's Transact commerce server,
LiveCommerce's industrial cataloging software and SecureLink's development
environment. To date, the Company has not realized any revenues from its
dbCommerce[TM] software.
Privacy Protection
In utilizing its targeting technology and software, the Company adheres to
the principles of the Direct Marketing Association regarding privacy concerns.
To address privacy concerns, users are permitted, at their request, to
"opt-out" of demographic profile targeting. When a subscriber objects to
profile targeting, Adfinity[TM] and dbCommerce[TM] automatically deliver ads
based only on site-defined page, location, or context. The Company generally
does not depend on the use of "cookies", which are bits of information keyed to
a specific server, file or directory location that are stored on a user's hard
drive and passed to a Website's server through the user's browser software. The
use of cookies on the Web has met with some resistance by Internet users. Ad
serving systems can manage targeted advertising and control the frequency of
ads delivered to users without using cookies through the use of a user login at
each session, or with the user's permission, such systems can use a cookie to
identify the user for future visits.
Sales and Marketing
The Company believes it maintains one of the largest Internet advertising
sales organizations. The Company sells its services in the United States
through a sales and marketing organization which included 37 salespeople as of
May 31, 1998. These employees are located at the Company's headquarters in New
York, and in the Company's offices in Chicago, Dallas, Los Angeles, San
Francisco, Seattle and the Washington D.C. area.
The Company believes that it has a competitive advantage due to the
geographic breadth of its sales force and its ability to continually improve
its sales and marketing capabilities. The Company continuously leverages the
substantial media experience of its management team to maximize the value of ad
campaigns for both advertisers and Affiliated Websites. The Company also
employs a Website relationship department that surveys Affiliated Websites and
monitors qualitative indicators of service levels in order to continuously
improve its customer service.
24/7 Media believes that advertiser awareness of the Company and its
services is critical to its success. As a result, the Company seeks to
continually communicate with its advertisers and advertising agencies through
its Website, trade publication advertisements, public relations, direct mail,
ongoing customer communications programs, promotional activities, trade shows
and online advertisements over the Company's networks and on third party
Websites.
Intellectual Property
The Company regards its intellectual property as critical to its success,
and relies upon patent, trademark, copyright and trade secret laws in the
United States and other jurisdictions to protect its proprietary rights. The
Company has filed applications with the United States Patent and Trademark
Office to protect certain aspects of its Adfinity[TM] and dbCommerce[TM]
technologies. The Company pursues the protection of its trademarks by applying
to register the trademarks in the United States and (based upon anticipated
use) internationally, and is the owner of a registration for the 24/7 Media
trademark in the United States. There can be no assurance that any of the
Company's trademark registrations or patent applications will be approved or
granted and, if they are granted, that
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they will not be successfully challenged by others or invalidated through
administrative process or litigation. Further, if the Company's trademark
registrations are not approved or granted due to the prior issuance of
trademarks to third parties or for other reasons, there can be no assurance
that the Company would be able to enter into arrangements with such third
parties on commercially reasonable terms to allow the Company to continue to
use such trademarks. Patent, trademark, copyright and trade secret protection
may not be available in every country in which the Company's services are
distributed or made available. In addition, the Company seeks to protect its
proprietary rights through the use of confidentiality agreements with
employees, consultants, advisors and others. There can be no assurance that
such agreements will provide adequate protection for the Company's proprietary
rights in the event of any unauthorized use or disclosure, that employees of
the Company, consultants, advisors or others will maintain the confidentiality
of such proprietary information, or that such proprietary information will not
otherwise become known, or be independently developed, by competitors.
The Company's Adfinity[TM] technology collects and utilizes data derived
from user activity on the Company's networks and of the Websites of Web
publishers using the Company's services. This data is used for advertisement
targeting and for predicting advertisement performance. Although the Company
believes that it has the right to use such data, there can be no assurance that
any trade secret, copyright or other protection will be available for such
information or that others will not claim rights to such information. Further,
pursuant to its contracts with Web publishers using the Company's services, the
Company is obligated to keep certain information regarding the Web publisher
confidential.
Legal standards relating to the validity, enforceability and scope of
protection of certain proprietary rights in Internet-related industries are
uncertain and currently evolving. The future viability or value of any
proprietary rights of 24/7 Media is unknown. Steps taken by 24/7 Media to
protect its proprietary rights may not be adequate and third parties may
infringe or misappropriate the Company's proprietary rights. Any such
infringement or misappropriation, should it occur, could have a material
adverse effect on the Company's business, results of operations and financial
condition. Furthermore, there can be no assurance that the Company's business
activities will not infringe upon the proprietary rights of others, or that
other parties will not assert infringement claims against the Company.
Competition
The markets for Internet advertising and related products and services are
intensely competitive and such competition is expected to continue to increase.
The Company believes that its ability to compete depends upon many factors
within and beyond its control, including the timing and market acceptance of
new services and enhancements to existing services developed by the Company and
its competitors, customer service and support, sales and marketing efforts, and
the ease of use, performance, price and reliability of the Company's products
and services. The Company believes it has a competitive advantage due to the
geographic breadth of its sales force and its ability to continually improve
its sales and marketing capabilities.
The Company competes for Internet advertising revenues with large Web
publishers and Web search engine companies, such as America Online, Excite,
Infoseek, Lycos and Yahoo. Further, the 24/7 Network competes with a variety of
Internet advertising networks, including DoubleClick and Rainbow Interactive, a
joint venture of Cablevision Systems Corp. and NBC. In marketing the Company's
networks and its Adfinity[TM] system to Web publishers, the Company also
competes with providers of advertisement servers and related services,
including NetGravity and Accipiter, a division of CMG Information Services,
Inc. In marketing dbCommerce[TM], the Company competes with BroadVision. The
Company also encounters competition from a number of other sources, including
content aggregators, companies engaged in advertising sales networks,
advertising agencies, and other entities which facilitate Internet advertising.
Many of the Company's existing competitors, as well as a number of potential
new competitors, have longer operating histories, greater name recognition,
larger customer bases and significantly greater financial, technical and
marketing resources than the Company. See "Risk Factors--Competition."
Employees
As of May 31, 1998, the Company employed 100 persons, including 61 in
sales, marketing and customer support, 24 in product development, and 15 in
accounting, human resources and administration. The Company is not subject to
any collective bargaining agreements and believes that it enjoys a good
relationship with its employees.
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Facilities and Systems
The Company's principal executive offices are located at 1250 Broadway,
New York, New York and consist of approximately 13,000 square feet under a
lease that expires in October 2003; the Company has and expects to exercise in
the next three months an option to lease an additional 13,000 square feet on an
adjacent floor. The Company also leases office space at 915 Broadway, New York,
New York.
In addition, the Company leases office space for its sales, marketing and
product development staff in Chicago, Dallas, Los Angeles, San Francisco and
the Washington D.C. area. The Company believes that its existing facilities,
including the additional space in the executive offices, will be sufficient for
its purposes for the next 12 months.
The Company's Adfinity[TM] ad serving software and hardware are housed at
GlobalCenter in Herndon, Virginia. In the future, the Company may opt to
utilize other GlobalCenter locations in New York and California. GlobalCenter
provides the Company with a secure area to store and operate its computer
systems, capacity communications links and Internet connectivity systems, and
contractual protection against service interruptions.
Legal Proceedings
The Company is not a party to any material legal proceedings.
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MANAGEMENT
Executive Officers and Directors
The following table sets forth certain information concerning the
executive officers and directors of the Company:
[Download Table]
Name Age Position and Offices
---- --- --------------------
David J. Moore 45 President and Chief Executive Officer and a Director
R. Theodore Ammon 48 Chairman of the Board
Yale R. Brown 43 Executive Vice President--Technology and Operations
and a Director
Jacob I. Friesel 48 Executive Vice President--Sales and Marketing and a
Director
C. Andrew Johns 38 Executive Vice President, Treasurer & Chief Financial
Officer
David Chaney 27 Director
Michael P. Paolucci 27 Director
Jack L. Rivkin 57 Director
Charles W. Stryker, Ph.D. 50 Director
David J. Moore has been President and Chief Executive Officer and a
Director of the Company since February 1998. Mr. Moore was Chief Executive
Officer of Petry Interactive from December 1995 to February 1998. From 1993 to
1994, Mr. Moore was President of Geomedica, an online service for physicians,
which he sold to Reuters. From 1982 to 1992, Mr. Moore was a Group Vice
President at Hearst/ABC-Viacom Entertainment Services, where he participated in
the launch of Cable Health Network, Lifetime Television, Lifetime Medical
Television, a service targeted to physicians, and HealthLink Television, a
physician waiting room television service. From 1979 to 1982, Mr. Moore had a
television advertising sales position with Turner Broadcasting. Mr. Moore
received a B.A. degree in Communications from Northern Illinois University.
R. Theodore Ammon, Chairman of the Board of the Company, has been Chairman
of the Board of Big Flower Holdings, Inc. and its predecessor company, Big
Flower Press Holdings, Inc. since 1993. From 1990 to 1992, Mr. Ammon was a
General Partner of Kohlberg Kravis Roberts & Co., a New York and San
Francisco-based investment firm, and an executive of such firm prior to 1990.
Mr. Ammon also serves on the board of directors of each of Host Marriott
Corporation, Culligan Water Technologies, Inc. and Samsonite Corporation. Mr.
Ammon received a B.A. degree in Economics from Bucknell University.
Yale R. Brown has been Executive Vice President--Technology and Operations
and a Director since April 1998. Mr. Brown was Chief Executive Officer of
Intelligent Interactions Corporation since February 1995. Mr. Brown held
various positions with Oracle Corporation from 1990 through 1995, including
Vice President of Emerging Technologies, Vice President of the Advanced
Technologies Group of Oracle Consulting, and Vice President of Strategic
Consulting Services for Oracle Complex Systems Corporation, Oracle's systems
integration subsidiary. Mr. Brown was the Director of the Information Resources
Management Practice of Coopers & Lybrand from 1987 to 1990. From 1981 to 1987,
Mr. Brown was a consultant with Booz, Allen & Hamilton Inc. From 1978 to 1980,
Mr. Brown was a Federal Reserve Examiner for the Board of Governors of the
Federal Reserve System. Mr. Brown received a M.B.A. degree in Applied Economics
and a B.A. degree in Political Science from The George Washington University.
Jacob I. Friesel has been Executive Vice President--Sales and Marketing
and a Director of the Company since February 1998. From 1997 to 1998, Mr.
Friesel was President of Katz Millennium Marketing, the Internet media sales
division of Katz Media Group, Inc. He was Vice President, Strategic Planning
for the Katz Television Group from 1994 to 1997. From 1993 to 1994, he was a
Vice President and General Sales Manager of Katz American Television, a leading
advertising representative of major market television stations. He was Vice
President, General Sales Manager of Katz Continental Television from 1991
through 1993, and was employed in various media advertising sales and
management positions with the Katz Agency from 1976 to 1991. Mr. Friesel
received a B.A. degree in Mass Communications from the City University of New
York.
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C. Andrew Johns has been Executive Vice President, Treasurer and Chief
Financial Officer since April 1998. From 1996 to 1998, he was co-founder and
Managing Director of Manufacturers Renaissance Network, Inc., which provides
strategic consulting and investment banking services to small and medium-sized
businesses. From 1990 to 1996, Mr. Johns was President and owner of Strathmore
Hill Associates, Inc., an investment banking and strategic consulting firm. Mr.
Johns received a M.B.A. degree from Stanford University Graduate School of
Business and a B.S. degree in Commerce from The University of Virginia. Mr.
Johns is a Chartered Financial Analyst.
David Chaney, Director of the Company, has been an associate at Prospect
Street NYC Discovery Fund, L.P. since July 1996, where he manages a portfolio
of $125 million in funds related to venture capital projects. From June 1995 to
July 1996, Mr. Chaney was an associate at UBS Securities involved in investment
banking, and from June 1993 to June 1995, he was an analyst in the investment
banking division of J.P. Morgan Securities Inc. Mr. Chaney received a B.A.
degree in Psychology from Harvard University.
Michael P. Paolucci, Director of the Company, has been a consultant to the
Company in connection with mergers, acquisitions and other strategic
initiatives since February 1998. Mr. Paolucci is a co-founder of Interactive
Imaginations and was Chief Executive Officer of Interactive Imaginations from
its incorporation in 1994 to February 1998. From 1992 to 1994, Mr. Paolucci was
involved in communications, marketing and public relations for Jupiter
Communications. Mr. Paolucci received a B.A. degree in Economics from Cornell
University.
Jack L. Rivkin, Director of the Company, has been Senior Vice President of
the Investment Group of Travelers Group Inc. since October 1995, where he is
responsible for the management of venture capital and public equity
partnerships for various Travelers Insurance Companies. He is also a director
and member of the investment committee of Greenwich Street Capital, a $625
million merchant banking fund affiliated with Travelers, and an adjunct
professor at Columbia University Business School. From March 1993 to October
1995, Mr. Rivkin was vice chairman and director of Global Research at Smith
Barney. From 1987 to 1992, Mr. Rivkin was director of the Equities Division and
Director of Research of Lehman Brothers. From 1984 to 1987, Mr. Rivkin was
President of PaineWebber Capital, Inc., the merchant banking arm of PaineWebber
Group, and Chairman of Mitchell Hutchins Asset Management. Mr. Rivkin is also a
director of HumaScan Inc., a medical device company, and PRT Group, Inc., an
information technology company. Mr. Rivkin received a M.B.A. degree from
Harvard Business School and a B.A. degree in Metallurgical Engineering from the
Colorado School of Mines.
Charles W. Stryker, Ph.D., Director of the Company, has been President of
IntelliQuest Marketing Information Solutions, Inc. and President of
Zona/Research since 1998. Dr. Stryker served as a Director of IntelliQuest
Information Group Inc. from October 1997 to March 1998. From 1991 to 1997, he
was President of each of MkIS User Forum and Information Technology Forum,
companies providing marketing information, consulting and service products to
executives and technology companies. Dr. Stryker received a B.S. degree and a
M.S. degree in Electrical Engineering and a Ph.D. in Computer Science from New
York University.
Key Employees
Mark A. Burchill has been Senior Vice President of Business Development
and Marketing since February 1998 and was Senior Vice President and co-founder
of Petry Interactive, Inc. from December 1995 to February 1998. In 1994, Mr.
Burchill was Director of International Sales & Development for Petry Media
Corp, a television rep firm. From 1992 to 1994, Mr. Burchill was a market
consultant for the Los Angeles Rams and MTV Networks while also pursuing a
graduate degree. From 1989 to 1992, Mr. Burchill was a Senior Media Planner in
the media department of Young & Rubicam Advertising. Mr. Burchill received a
M.B.A. degree from Anderson School of Management at the University of
California at Los Angeles and a B.A. degree from Hobart College.
Garrett P. Cecchini has been Senior Vice President of National Sales since
February 1998. From February 1997 to February 1998, he was Vice President,
General Manager of Katz Millennium Marketing. From December 1994 to February
1997, Mr. Cecchini was co-founder of Goodman Cecchini Media Design, a Website
development concern, and US Cybersites, a commercial bandwidth reseller. From
1992 to 1994, Mr. Cecchini was Vice President, Director of Sales for Sony
Pictures Entertainment's Columbia TriStar Television Division, a syndicator of
television programming. From January 1991 to December 1992, Mr Cecchini was
Senior Vice President, Director of Sales for Telemundo Group, Inc., a Spanish
language television network. From 1989 to 1991, Mr. Cecchini was Vice President
of Sales for WHDH-TV, then a CBS Network affiliate in the Boston television
market. From 1982 to 1989, Mr Cecchini was Vice President and General Sales
Manager for TeleRep Inc., a division of Cox
37
Communications. Prior to 1982, Mr. Cecchini was a Senior Account Executive with
Petry Television Inc., a TV advertisement company. Mr. Cecchini received a B.S.
degree in Accounting and Marketing from Manhattan College.
Scott E. Cohen has been Senior Vice President--Sponsorships & Syndication,
and General Manager of the ContentZone and Riddler.com since February 1998. Mr.
Cohen was Senior Vice President of Sales for Petry Interactive from August 1997
to February 1998, and Vice President of Business Development at Petry
Interactive from November 1996 to August 1997. From 1994 to 1996, Mr. Cohen was
Manager, Business Development and Account Executive, Syndicated Television
Sales for New World Communications and from 1992 to 1994, Mr. Cohen was
Director of Real Estate at Revlon. From 1983 to 1992, Mr. Cohen was Chief
Executive Officer and owner of SEC Enterprises, Inc., a real estate brokerage
and investment company. From 1989 to 1990, Mr. Cohen was Manager of the Real
Estate Consulting Services Group at Coopers & Lybrand. Mr. Cohen received a
M.B.A. degree from the William E. Simon School of Business Administration at
the University of Rochester.
Geoff Judge has been Senior Vice President Technology & Operations since
February 1998. Mr. Judge was President of Interactive Imaginations from
September 1997 to February 1998 and was Executive Vice President, Marketing and
Sales from May 1997 to September 1997. From 1995 to 1997, Mr. Judge was Vice
President, Marketing for iMarket Inc., a software company. From 1994 to 1995,
Mr. Judge was Vice President--Marketing at Doubleday Direct, where he managed
the membership base of the company's nine book clubs. From 1985 to 1994, Mr.
Judge was at American Express in numerous roles including Vice President and
General Manager, Travel & Corporate Insurance Group, where he managed an
operating group of over 70 people, and a $90 million portfolio of products that
were direct marketed to cardmembers. Mr. Judge received a M.B.A. degree from
the Columbia University Graduate School of Business and a B.A. degree in
Economics from Northwestern University.
Mark E. Moran has been Senior Vice President and General Counsel since
April 1998. From June 1993 to April 1998, Mr. Moran was an associate attorney
at Proskauer Rose LLP. From April 1986 to May 1993, Mr. Moran was a financial
analyst in the Securities Processing Division of The Bank of New York. Mr.
Moran received a J.D. degree from Fordham Law School, a M.B.A. degree in
Finance from Fordham Graduate School of Business, and a B.A. degree in
Economics from The University of Virginia.
Stuart D. Shaw has been Senior Vice President of Finance & Administration
since February 1998. He was Vice President and Chief Financial Officer of Petry
Interactive, Inc. from October 1997 to February 1998. From 1991 to 1997, Mr.
Shaw was Director of Financial Reporting, then Vice President of Customer
Resources for Penguin Books, a trade publisher. From 1989 to 1991, Mr. Shaw was
Controller for Warren, Gorham & Lamont, a publisher of professional resource
literature. From 1983 to 1989, Mr. Shaw was an auditor with Arthur Andersen. Mr
Shaw received a B.B.A. degree in Public Accounting from Pace University. Mr.
Shaw is a Certified Public Accountant.
Matthew B. Walker has been Senior Vice President and Chief Technology
Officer since April 1998. Mr. Walker was co-founder and Senior Vice President
of Intelligent Interactions Corporation from February 1995 to April 1998. From
August 1990 to February 1995, Mr. Walker worked in a series of positions at
Oracle Corporation including director of the Emerging Technologies Group,
Manager of Design and Development of the interactive television trial system
for Bell Atlantic Video Services, Inc., and director of Advanced Technologies.
Mr. Walker received a M.B.A. degree from George Mason University and a B.S.
degree in Systems Engineering and Economics from The University of Virginia.
Committees of the Board of Directors
Audit Committee. The Audit Committee, composed of Messrs. Ammon, Rivkin
and Chaney, who are each independent directors who are not employees of the
Company ("Independent Directors"), makes recommendations concerning the
engagement of independent public accountants, reviews with the independent
public accountants the plans and results of the audit engagement, approves
professional services provided by the independent public accountants, reviews
the independence of the independent public accountants, considers the range of
audit and non-audit fees and reviews the adequacy of the Company's internal
accounting controls.
Compensation Committee. The Compensation Committee, composed of Messrs.
Moore, Rivkin and Stryker, approves the salaries and other benefits of the
executive officers of the Company and administers any non-stock based bonus or
incentive compensation plans of the Company (excluding any cash awards intended
to qualify for the exception for performance-based compensation under Section
162(m) of the Internal Revenue Code of 1986,
38
as amended (the "Code")). In addition, the Compensation Committee consults with
the Company's management regarding pension and other benefit plans, and
compensation policies and practices of the Company.
Stock Option Committee. The Stock Option Committee, composed of Messrs.
Ammon, Rivkin and Chaney, directors who qualify as outside directors under
Section 162(m) of the Code and as non-employee directors under Rule 16b-3(c) of
the Securities Exchange Act of 1934, as amended, (the "Exchange Act")
administers any stock-based incentive plans of the Company, including the 1998
Stock Incentive Plan. In addition, the Stock Option Committee is responsible
for granting any cash awards intended to qualify for the exception for
performance-based compensation under Section 162(m) of the Code.
Election of Directors
Prior to the first annual meeting of the stockholders of the Company, the
Company's Board of Directors will be divided into three classes. Directors of
each class will be elected at the annual meeting of stockholders held in the
year in which the term for such class expires and will serve thereafter for
three years. No determination has been made as to which directors will be
members of each class. See "Description of Capital Stock--Delaware Anti-Takeover
Law and Certain Charter Provisions."
Executive Compensation and Employment Agreements
The Company has entered into employment agreements with its executive
officers and several of its key employees providing for annual compensation in
excess of $100,000. The material terms of such employment agreements generally
are as follows: (i) the employment term runs through December 31, 1998 (except
as set forth below) and is automatically renewable for successive one-year
terms unless either party gives written notice to the other at least six months
prior to the expiration of the then employment term; (ii) during the employment
term and thereafter, the Company will indemnify the executive to the fullest
extent permitted by law, in connection with any claim against such executive as
a result of such executive serving as an officer or director of the Company or
in any capacity at the request of the Company in or with regard to any other
entity, employee benefit plan or enterprise; (iii) any dispute or controversy
arising under or in connection with the employment agreement (other than
injunctive relief) shall be settled exclusively by arbitration; (iv) the
agreement may be terminated at any time by the Company with or without cause
(as defined in the agreement) and, if an executive is terminated without cause
(including the Company giving notice of non-renewal), he will receive severance
pay in an amount generally equal to six months' base salary and bonus, plus
continued medical benefits for a period equal to the severance period; and (v)
if termination is the result of the executive's death or disability, the
Company will pay to the executive or his estate an amount equal to six months'
base salary at his then current rate of pay (reduced in the case of disability
by his long-term disability policy payments).
The agreement of David J. Moore extends through January 1, 2001. Mr.
Moore's agreement provides for an annual base salary of $225,000 and a target
bonus of $275,000, $300,000 and $325,000 for 1998, 1999, and 2000,
respectively. Mr. Moore was also awarded 225,000 shares of restricted stock
that vest over three years. Upon termination by the Company without cause, Mr.
Moore shall be entitled to receive severance pay in an amount equal to two
times base salary, plus the maximum bonus for which he is eligible during the
fiscal year of termination.
The agreements of the other executive officers of the Company provide for
base salaries between $140,000 and $160,000 and incentives, based on attainment
of corporate goals, between $45,000 and $121,000. The agreement of Yale R.
Brown extends through December 31, 1999 and permits the executive to terminate
the agreement and receive six months' salary and bonus if the executive is
asked to increase his one way commute more than 25 miles. The agreement of C.
Andrew Johns extends through December 31, 1999.
1998 Stock Incentive Plan
Background; Purpose; Eligibility. On February 13, 1998, the Board of
Directors and the stockholders of the Company approved the 1998 Stock Incentive
Plan (the "Incentive Plan"). The Incentive Plan was subsequently amended and
restated, effective as of February 13, 1998, to reflect certain changes. The
following description of the Incentive Plan is intended only as a summary and
is qualified in its entirety by reference to the Incentive Plan. The purpose of
the Incentive Plan is to enhance the profitability and value of the Company and
its affiliates for the benefit of their stockholders by enabling the Company
(i) to offer employees of the Company stock based incentives and other equity
interests in the Company, thereby creating a means to raise the level of stock
ownership by employees in order to attract, retain and reward such employees
and strengthen the mutuality of interests between
39
employees and the Company's stockholders, and (ii) to make equity based awards
to non-employee directors thereby attracting, retaining and rewarding such
non-employee directors and strengthening the mutuality of interests between
non-employee directors and the stockholders. All employees of the Company and
its subsidiaries that satisfy certain requirements are eligible to be granted
awards under the Incentive Plan. In addition, non-employee directors of the
Company will receive awards of non-qualified stock options under the Incentive
Plan, but are not eligible for other awards thereunder.
Administration. The Incentive Plan will be administered by the Stock
Option Committee of the Board of Directors of the Company which, to the extent
legally required, will be comprised solely of two or more directors qualifying
as outside directors under Section 162(m) of the Code and satisfying any
requirements of Rule 16b-3 of the Exchange Act. The Stock Option Committee will
have full authority and discretion, subject to the terms of the Incentive Plan,
to determine those individuals eligible to receive awards and the amount and
type of awards. Terms and conditions of awards will be set forth in written
grant agreements, the terms of which will be consistent with the terms of the
Incentive Plan. Awards under the Incentive Plan may not be made on or after the
tenth anniversary of the date of its adoption, but awards granted prior to such
date may extend beyond that date.
Available Shares and Other Units. A maximum of shares of Common Stock
may be issued or used for reference purposes pursuant to the Incentive Plan.
The maximum number of shares of Common Stock subject to each issue of stock
options or stock appreciation rights that may be granted to any individual
under the Incentive Plan is for each fiscal year of the Company during the
term of the Incentive Plan. If a stock appreciation right is granted in tandem
with a stock option, it shall apply against the individual limits for both
stock options and stock appreciation rights, but only once against the maximum
number of shares available under the Incentive Plan.
In general, upon the cancellation or expiration of an award, the unissued
shares of Common Stock subject to such awards will again be available for
awards under the Incentive Plan, but will still count against the individual
specified limits.
The Stock Option Committee may make appropriate adjustments to the number
of shares available for awards and the terms of outstanding awards under the
Incentive Plan to reflect any change in the Company's capital stock, split-up,
stock dividend, special distribution to stockholders, combination or
reclassification with respect to any outstanding series or class of stock or
consolidation, merger or sale of all or substantially all of the assets of the
Company.
Amendments. The Incentive Plan provides that it may be amended by the
Board of Directors, except that no such amendment, without stockholder approval
(to the extent such approval is required by Rule 16b-3 of the Exchange Act, the
exception for performance-based compensation under Section 162(m) of the Code
or, to the extent applicable to incentive stock options, under Section 422 of
the Code), may increase the aggregate number of shares of Common Stock reserved
for awards or the maximum individual limits for any fiscal year, change the
classification of employees and non-employee directors eligible to receive
awards, decrease the minimum option price of any option, extend the maximum
option period under the Incentive Plan, change any rights with respect to
non-employee directors or make any other change that requires stockholder
approval under, to the extent applicable, Rule 16b-3 of the Exchange Act, the
exception for performance-based compensation under Section 162(m) of the Code
or, to the extent applicable to incentive stock options, Section 422 of the
Code. The Incentive Plan may not be amended without the approval of the
stockholders of the Company in accordance with the applicable laws or other
requirements to (i) increase the aggregate number of shares of Common Stock
that may be issued under the Incentive Plan, (ii) decrease the minimum option
price of any option, or (iii) make any other amendment that would require
stockholder approval under the rules of any exchange or system on which the
Company's securities are listed or traded at the request of the Company.
Types of Awards. The Incentive Plan provides for the grant of any or all
of the following types of awards to eligible employees: (i) stock options,
including incentive stock options and non-qualified stock options; (ii) stock
appreciation rights, in tandem with stock options or freestanding; and (iii)
restricted stock. In addition, the Incentive Plan provides for the one-time
non-discretionary award of stock options to non-employee directors of the
Company. Each of these types of awards is discussed in more detail below.
Awards may be granted singly, in combination, or in tandem, as determined by
the Stock Option Committee.
40
Stock Options. Under the Incentive Plan, the Stock Option Committee may
grant awards in the form of options to purchase shares of Common Stock. Options
may be in the form of incentive stock options or non-qualified stock options.
The Stock Option Committee will, with regard to each stock option, determine
the number of shares subject to the option, the term of the option (which shall
not exceed ten years, provided, however, that the term of an incentive stock
option granted to a ten percent stockholder of the Company shall not exceed
five years), the exercise price per share of stock subject to the option, the
vesting schedule (if any), and the other material terms of the option. No
option may have an exercise price less than the fair market value of the Common
Stock at the time of grant (or, in the case of an incentive stock option
granted to a ten percent stockholder of the Company, 110% of fair market
value), except that, in the case of certain modifications of the stock options
that are deemed to be new issuances under the Code, the exercise price may
continue to be the original exercise price.
The option price upon exercise may, to the extent determined by the Stock
Option Committee at or after the time of grant, be paid by a participant in
cash, in shares of Common Stock owned by the participant (free and clear of any
liens and encumbrances), in shares of restricted stock valued at fair market
value on the payment date as determined by the Stock Option Committee (without
regard to any forfeiture restrictions applicable to restricted stock), by a
reduction in the number of shares of Common Stock issuable upon exercise of the
option or by such other method as is approved by the Stock Option Committee. If
an option is exercised by delivery of shares of restricted stock, the shares of
Common Stock acquired pursuant to the exercise of the option will generally be
subject to the same restrictions as were applicable to such restricted stock.
All options may be made exerciseable in installments, and the exerciseability
of options may be accelerated by the Stock Option Committee. The Stock Option
Committee may at any time offer to buy an option previously granted on such
terms and conditions as the Stock Option Committee shall establish. The Stock
Option Committee may in its discretion reprice options or substitute options
with lower exercise prices in exchange for outstanding options that are not
incentive stock options, provided that the exercise price of substitute options
or repriced options shall not be less than the fair market value at the time of
such repricing or substitution. Options may also, at the discretion of the
Stock Option Committee, provide for "reloads," whereby a new option is granted
for the same number of shares as the number of shares of Common Stock or
restricted stock used by the participant to pay the option price upon exercise.
Restricted Stock. The Incentive Plan authorizes the Stock Option Committee
to award shares of restricted stock. Upon the award of restricted stock, the
recipient has all rights of a stockholder with respect to the shares, unless so
specified by the Stock Option Committee at the time of grant, subject to the
conditions and restrictions generally applicable to restricted stock or
specifically set forth in the recipient's restricted stock award agreement.
Unless otherwise determined by the Committee at grant, payment of dividends, if
any, shall be deferred until the date that the relevant share of restricted
stock vests.
Recipients of restricted stock are required to enter into a restricted
stock award agreement with the Company which states the restrictions to which
the shares are subject and the date or dates or criteria on which such
restrictions will lapse. Within the limits of the Incentive Plan, the Stock
Option Committee may provide for the lapse of such restrictions in installments
in whole or in part or may accelerate or waive such restrictions at any time.
Stock Appreciation Rights ("SARs"). The Incentive Plan authorizes the
Stock Option Committee to grant SARs either with a stock option ("Tandem SARs")
or independent of a stock option ("Non-Tandem SARs"). A SAR is a right to
receive a payment either in cash or Common Stock as the Stock Option Committee
may determine, equal in value to the excess of the fair market value of a share
of Common Stock on the date of exercise over the reference price per share of
Common Stock established in connection with the grant of the SAR. The reference
price per share covered by an SAR will be the per share exercise price of the
related option in the case of a Tandem SAR and will be not less than the per
share fair market value of the Common Stock on the date of grant (or any other
date chosen by the Stock Option Committee) in the case of a Non-Tandem SAR
subject to the same exception that applies to stock options.
A Tandem SAR may be granted at the time of the grant of the related stock
option or, if the related stock option is a non-qualified stock option, at any
time thereafter during the term of the stock option. A Tandem SAR generally may
be exercised only at the times and to the extent the related stock option is
exercisable. A Tandem SAR is exercised by surrendering the same portion of the
related option. A Tandem SAR expires upon the termination of the related stock
option.
41
A Non-Tandem SAR will be exerciseable as provided by the Stock Option
Committee and will have such other terms and conditions as the Stock Option
Committee may determine. A Non-Tandem SAR may have a term no longer than ten
years from its date of grant. A Non-Tandem SAR is subject to acceleration of
vesting or immediate termination upon termination of employment in certain
circumstances.
The Stock Option Committee is also authorized to grant "limited SARs,"
either as Tandem SARs or Non-Tandem SARs. Limited SARs would become exercisable
only upon the occurrence of a Change in Control (as defined in the Incentive
Plan) or such other event as the Stock Option Committee may designate at the
time of grant or thereafter.
Change of Control. In the event of a merger of the Company, the sale of
substantially all of its assets or securities representing 40% or more of the
total combined voting power of the Company's then outstanding securities or
upon certain changes in membership of the Board of Directors during any
two-year period, then (i) each option and related SARs will be fully vested and
immediately exerciseable, or each option may be repurchased by the Company for
an amount of cash equal to the excess of the Change of Control Price (as
defined in the Incentive Plan) over the exercise price, and (ii) the
restrictions on shares of restricted stock shall lapse as if the applicable
restriction period had ended.
Awards to Non-employee Directors
Directors of the Company do not receive cash compensation for their
service as directors or committee members, but are reimbursed for their
reasonable expenses in attending meetings of the Board of Directors or
committees of the Board of Directors. The Incentive Plan provides for the
grant, at the discretion of the Stock Option Committee, of non-qualified
options to non-employee directors pursuant to the terms of the Incentive Plan.
In February 1998, Charles W. Stryker was granted options to purchase
shares of Common Stock in connection with his service on the Board of
Directors. No other non-employee director has received any non-cash
compensation for serving on the Board of Directors.
42
CERTAIN TRANSACTIONS
Formation of the Company
The Company was incorporated in Delaware on January 23, 1998. On February
24, 1998, the Company simultaneously consummated the merger of each of
Advercomm and Petry with and into the Company, and on April 9, 1998,
Interactive Imaginations was merged with and into the Company. On April 13,
1998, the Company acquired Intelligent Interactions as a wholly-owned
subsidiary of the Company and as of June 1, 1998, the Company acquired
CliqNow!. See "Prospectus Summary--The Company--Formation of the Company" and
"--Recent Developments."
For clarity of presentation, share numbers and per share prices for the
transactions described below do not reflect the Preferred Stock Conversion to
be effected at the closing of the Offering and have not been adjusted to give
effect to the Stock Split to be effected prior to the closing of the Offering.
In addition, the Company intends to file a restated certificate of
incorporation immediately prior to the consummation of the Offering to decrease
the number of authorized shares of common stock and preferred stock.
Investments of the The Travelers Insurance Company prior to the Merger
In January 1997, the Company entered into a Securities Purchase Agreement
with certain investors, including The Travelers Insurance Company, for the sale
and issuance of convertible perferred shares, subject to anti-dilution
adjustment, for an aggregate purchase price of approximately $500,000. In
addition, in 1997 and January 1998, the Company issued to The Travelers
Insurance Company senior convertible notes in an aggregate principal amount of
$1,400,000 and also issued warrants in connection therewith. Jack L. Rivkin, a
director of the Company, is the Senior Vice President of the Investment Group
of Travelers Group Inc.
Merger of Petry, Advercomm and Interactive Imaginations into the Company
Pursuant to an Agreement and Plan of Merger, dated February 2, 1998, among
Interactive Imaginations, 24/7 Acquisitions Corp. (a wholly-owned subsidiary of
Interactive Imaginations), Petry and Advercomm, each of Petry and Advercomm
were merged with and into 24/7 Acquisitions Corp., and 24/7 Acquisitions Corp.
changed its name to 24/7 Media, Inc. Upon consummation of the Initial Merger,
each share of common stock of Petry was converted into 83,954.95 shares of
Common Stock of the Company, and each share of common stock of Advercomm was
converted into 1,049.44 shares of Common Stock of the Company.
In connection with the Initial Merger, Interactive Imaginations entered
into a Securities Purchase Agreement, dated February 25, 1998, with certain
investors (including David J. Moore, the President and Chief Executive Officer
of the Company), (the "Securities Purchase Agreement") for the sale and
issuance of preferred shares and warrants in a private placement for total
proceeds of $10,060,002. Also in connection with the Initial Merger,
Interactive Imaginations entered into a Shareholders' Agreement, dated February
25, 1998, among The Travelers Insurance Company, Prospect Street NYC Discovery
Fund, L.P., Big Flower Digital Services, Inc. and certain individual investors
(the "Shareholders' Agreement"), which provided, among other things, the
shareholders with a right to elect three members of the seven member board of
directors of the Company and a right of first refusal with respect to transfers
of Company securities. The Shareholders' Agreement will be terminated upon the
consummation of this Offering. In connection with the Initial Merger, certain
shareholders of the Company were granted registration rights with respect to
their shares of Common Stock. See "Description of Capital Stock--Registration
Rights."
Petry Interactive entered into an oral consulting agreement with
Manufacturers Renaissance Network, Inc. ("MRN"), a corporation of which C.
Andrew Johns, the Executive Vice President, Treasurer and Chief Financial
Officer of the Company, was an officer and a 50% stockholder, pursuant to which
MRN was paid $75,000 and Class C Warrants to purchase 75,000 shares of Common
Stock at an exercise price of $0.952 per share for consulting services rendered
in connection with the Merger. 24/7 Media also paid MRN a consulting fee of
approximately $33,000 for services rendered in connection with the acquisition
of Intelligent Interactions.
On February 24, 1998, Interactive Imaginations and Michael P. Paolucci, a
director of the Company, entered into a Confidential Separation Agreement and
General Release ("Separation Agreement") pursuant to which Mr. Paolucci's
employment as an executive, but not as a Director, of Interactive Imaginations
was terminated as of February 24, 1998. The terms of the Separation Agreement
generally provide that Mr. Paolucci and Interactive Imaginations agreed to
release and discharge the other party (and its successors and assigns) from all
causes of
43
action, claims, judgments, obligations, damages or liabilities. Interactive
Imaginations agreed to issue to Mr. Paolucci Class C Warrants to purchase up to
2,500,000 shares of Common Stock at an exercise price of $0.952 per share. In
addition, Interactive Imaginations agreed to extend the term from January 31,
2000 to January 31, 2005 in respect of a fully vested option held by Mr.
Paolucci to purchase 52,000 shares of Interactive Imaginations common stock at
$0.43 per share.
Interactive Imaginations also entered into a Consulting Agreement, dated
as of January 1, 1998 with Neterprises, Inc. ("Consulting Agreement"), pursuant
to which Mr. Paolucci, President and sole stockholder of Neterprises, Inc.,
agreed to provide management and consulting services to Interactive
Imaginations for a term of up to one year in connection with the identification
and evaluation of potential strategic relationships and potential acquisition
targets. In return for such services, Mr. Paolucci received a lump sum payment
of $180,000 and currently receives a monthly fee of $12,500.
Intelligent Interactions Acquisition
Pursuant to an Agreement and Plan of Merger, dated as of April 9, 1998,
among 24/7 Media, Inc., Interactions Acquisition Corp. and Intelligent
Interactions Corporation, Interactions Acquisition Corp., a wholly-owned
subsidiary of the Company, was merged with and into Intelligent Interactions.
Shareholders of Intelligent Interactions, including Yale R. Brown, Executive
Vice President-Technology and Operations of the Company, and Trinity Ventures,
received shares of capital stock of the Company. In connection with the
acquisition of Intelligent Interactions, certain shareholders (i) entered into
an amended and restated version of the Shareholders' Agreement and (ii) were
granted registration rights with respect to their shares of Common Stock. See
"Description of Capital Stock--Registration Rights."
During 1995 and 1996, Intelligent Interactions borrowed $56,000 and
$55,000, respectively, from Yale R. Brown, who was the founder and principal
stockholder of Intelligent Interactions. All amounts outstanding at September
6, 1996, under these notes, plus accrued interest on those amounts were
converted into one instrument in the amount of $113,856. During 1997, the full
outstanding balance was paid on this obligation.
Future Transactions
The Board of Directors of the Company has adopted a policy that future
transactions between the Company and its officers, directors, principal
stockholders and their affiliates will be subject to approval of a majority of
the Independent Directors, and will be on terms no less favorable to the
Company than could be obtained from unaffiliated third parties.
Other
For information regarding the grant of stock options to executive officers
and directors, see "Management--
Awards to Non-employee Directors", "--Executive Compensation and Employment
Agreements", "--1998 Stock Incentive Plan" and "Security Ownership of Certain
Beneficial Owners and Management."
44
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information regarding beneficial ownership
of the Common Stock as of May 31, 1998, by: (i) each person who the Company
knows to own beneficially more than 5% of the Common Stock; (ii) each of 24/7
Media's directors and executive officers; and (iii) 24/7 Media's current
directors and executive officers as a group.
[Enlarge/Download Table]
Ownership After Offering
Ownership Prior to Ownership After and Over-Allotment
Offering Offering (2) Shares Option (3)
------------------------ ------------------------ Subject to -----------------------
Over-
Number Number Allotment Number
Beneficial Owner(1) of Shares Percentage of Shares Percentage Option of Shares Percentage
-------------------------- ----------- ------------ ----------- ------------ ----------- ----------- -----------
David J. Moore (4) (5) 8.5%
R. Theodore Ammon (6) 14.3
Yale R. Brown (4) (7) 7.2
Jacob I. Friesel (4) 6.9
C. Andrew Johns (4) (8) *
Garrett P. Cecchini (4) 6.9
Scott E. Cohen (4) 5.5
David Chaney (9) 14.3
Michael P. Paolucci (10) 7.3
Jack L. Rivkin (11) 21.0
Charles W. Stryker --
Trinity Ventures (12) 6.2
All directors and
executive officers as
a group (9 persons) 64.2%
----------------
* Represents less than 1% of the outstanding Common Stock.
(1) Applicable percentage ownership is based on shares of Common
Stock outstanding as of May 31, 1998 (which assumes full conversion of the
Series A Preferred Stock). Beneficial ownership is determined in
accordance with the rules of the Securities and Exchange Commission and
generally includes voting or investment power with respect to securities,
subject to community property laws, where applicable. Shares of Common
Stock subject to options or warrants that are presently exercisable within
60 days of May 31, 1998 and beneficially owned by the person holding such
options and warrants are treated as outstanding for the purpose of
computing the percentage ownership for such person are treated as
outstanding, but are not treated as outstanding for the purpose of
computing the percentage ownership of any other person.
(2) Assumes that the Underwriters' over-allotment option to purchase up to
shares is not exercised.
(3) Assumes that the Underwriters' over-allotment option to purchase
shares is exercised in full.
(4) The address of Messrs. Moore, Brown, Friesel, Johns, Cecchini and Cohen is
c/o 24/7 Media, Inc., 1250 Broadway, New York, New York 10001.
(5) Represents shares, Class A warrants to purchase shares and
Class B warrants to purchase shares. Includes shares of
Common Stock owned by Mr. Moore's wife, as to which Mr. Moore expressly
disclaims beneficial ownership.
(6) Represents shares, Class A warrants to purchase shares and Class B
warrants to purchase shares held by Big Flower Digital Services, Inc., an
indirect subsidiary of Big Flower Holdings, Inc. Mr. Ammon is the Chairman
of the Board of Directors of the Company and of Big Flower Holdings, Inc.
Mr. Ammon does not own any shares of Common Stock of the Company in his
individual capacity and expressly disclaims beneficial ownership of the
shares held by Big Flower Digital Services, Inc. The address of each of
these entities is c/o Big Flower Holdings, Inc., 3 East 54th Street, New
York, New York 10022.
(7) Represents shares, Class A warrants to purchase shares, Class B warrants
to purchase shares and Class C warrants to purchase shares.
(8) Represents Class C warrants to purchase shares.
(9) Represents shares, Class A warrants to purchase shares and Class B
warrants to purchase shares held by Prospect Street NYC Discovery Fund,
L.P. and shares, Class A warrants to purchase shares and Class B warrants
to purchase shares held by Prospect Street NYC Co-Investment Fund, L.P.
Mr. Chaney is a director of the Company and is an associate of Prospect
Street NYC Discovery Fund, L.P. Mr. Chaney does not own any shares of
Common Stock of the Company in his individual
45
capacity and expressly disclaims beneficial ownership of the shares held
by Prospect Street NYC Discovery Fund, L.P. and Prospect Street NYC
Co-Investment Fund, L.P. The address of each of these entities is c/o
Prospect Street NYC Discovery Fund, L.P., 250 Park Avenue, 17th floor, New
York, New York 10177.
(10) Represents shares and Class C warrants to purchase shares.
Mr. Paolucci is a director of the Company and his address is c/o 24/7
Media, Inc., 1250 Broadway, New York, New York 10001.
(11) Represents shares, Class A warrants to purchase shares and
Class B warrants to purchase shares held by The Travelers
Insurance Company, and shares held by Travelers Indemnity. Mr. Rivkin
is a director of the Company and is Senior Vice President of the
Investment Group of Travelers Group Inc., an affiliate of The Travelers
Insurance Company and Travelers Indemnity. Mr. Rivkin does not own any
shares of Common Stock of the Company in his individual capacity and
expressly disclaims beneficial ownership of the shares held by The
Travelers Insurance Company and Travelers Indemnity. The address of each
of these entities is c/o Travelers Group Inc., 388 Greenwich Street, 36th
floor, New York, New York 10013.
(12) Represents shares, Class A warrants to purchase shares, Class B
warrants to purchase shares and Class C warrants to purchase
shares held by Trinity Ventures V, L.P., and shares, Class A warrants
to purchase , Class B warrants to purchase shares and Class C
warrants to purchase shares held by Trinity V Side-by-Side Fund, L.P.
Trinity Ventures, L.P. is the general partner of each of these funds. The
address of these entities is c/o Trinity Ventures, 3000 Sand Hill Road,
Building 1, Suite 240, Menlo Park, California 94025.
46
DESCRIPTION OF CAPITAL STOCK
The following description of 24/7 Media's capital stock is not complete
and should be read in conjunction with (i) applicable provisions of Delaware
law and (ii) the provisions of the Company's certificate of incorporation and
by-laws, copies of which have been filed as exhibits to the registration
statement of which this prospectus is a part. The Company intends to file an
amended and restated certificate of incorporation ("Certificate of
Incorporation") immediately prior to the consummation of the Offering. The
following description of the Company's capital stock is based upon the amended
and restated Certificate of Incorporation.
The authorized capital stock of 24/7 Media consists of shares of
Common Stock, par value $.01 per share, and shares of Preferred Stock, par
value $.01 per share, which may be issued in one or more classes and series.
Upon consummation of this offering, there will be shares of Common
Stock and no shares of Preferred Stock issued and outstanding.
Common Stock
Each holder of Common Stock is entitled to one vote per share of record on
all matters to be voted upon by the stockholders. Holders do not have
cumulative voting rights. Stockholders casting a plurality of the votes of
stockholders entitled to vote in an election of directors may elect all of the
directors. Subject to the preferential rights of any Preferred Stock that may
at the time be outstanding, each share of Common Stock will have an equal and
ratable right to receive dividends when, if, and as declared from time to time
by the board of directors. 24/7 Media may be subject to certain future
agreements which restrict the payment of dividends. 24/7 Media does not
anticipate paying cash dividends in the foreseeable future. See "Dividend
Policy."
If 24/7 Media is liquidated, dissolved or subject to winding up, then
holders of Common Stock are entitled to an equal share of all assets remaining
after payments to creditors and after satisfaction of any liquidation
preference of shares of Preferred Stock that may at the time be outstanding.
Holders of Common Stock have no preemptive, subscription, conversion or
redemption rights and are not subject to further calls or assessments by 24/7
Media. The outstanding shares of Common Stock are validly issued, fully paid
and nonassessable. The shares of Common Stock offered by 24/7 Media in this
offering will also be, when issued and paid for, validly issued, fully paid and
nonassessable.
Preferred Stock
The Company's Certificate of Incorporation authorizes the board of
directors, without any vote or action by the stockholders (subject to
applicable law, regulations and stock exchange rules) to issue up to
shares of Preferred Stock in one or more classes and series and to fix the
designations, preferences, rights, qualifications, limitations and restrictions
thereof, including the voting rights, dividend rights, dividend rate,
conversion rights, terms of redemption (including sinking fund provisions),
redemption price or prices, liquidation preferences and number of shares
constituting any series. Although it presently has no intention to do so, the
Board of Directors could issue Preferred Stock with voting and conversion
rights that could adversely affect the voting powers of the holders of the
Common Stock and the market price of the Common Stock. The issuance of
Preferred Stock may also have the effect of delaying, deferring or preventing a
change of control of 24/7 Media without further action by the stockholders.
Such issuance may also discourage bids for the Common Stock at a premium over
the market price.
Registration Rights
Pursuant to the terms of the Registration Rights Agreement, dated as of
April 9, 1998, among the Company and the investors named therein, after the
closing of the Offering, the holders of shares of Common Stock will be
entitled to certain registration rights with respect to the registration of
such shares under the Securities Act. In addition, pursuant to certain stock
purchase agreements, certain former shareholders of Interactive Imaginations
holding approximately shares of Common Stock have registration rights with
respect to the registration of such shares under the Securities Act. Pursuant
to such Registration Rights Agreements, the holders of such shares are entitled
to demand that the Company register their shares under the Securities Act,
subject to certain limitations. Subject to limited exceptions, the Company is
not required to effect more than two such registrations for certain investors
and three such registrations for certain other investors pursuant to such
demand registration rights. In addition, the holders of such shares of Common
Stock will be entitled to certain piggyback registration rights with respect to
the registration of such shares of Common Stock under the Securities Act. In
the event that the Company proposes to register any shares of Common Stock
under the Securities Act, either for its account or for the account
47
of other security holders, the holders of shares having piggyback registration
rights are entitled to receive notice of such registration and are entitled to
include their shares therein, subject to certain limitations. Further, at any
time after the Company becomes eligible to file a registration statement on
Form S-3, such holders may require the Company to file registration statements
under the Securities Act on Form S-3 with respect to their shares of Common
Stock. These registration rights are subject to certain conditions and
limitations, among them the right of the underwriters of an offering to limit
the number of shares of Common Stock held by security holders with registration
rights to be included in such registration. The Company is generally required
to bear all of the expenses of all such registrations, except underwriting
discounts and commissions. Registration of any of the shares of Common Stock
held by security holders with registration rights would result in such shares
becoming freely tradeable without restriction under the Securities Act
immediately upon effectiveness of such registration.
Delaware Anti-Takeover Law and Certain Charter Provisions
24/7 Media is subject to Section 203 of the Delaware General Corporation
Law ("Section 203") which generally prohibits a Delaware corporation from
engaging in any business combination with any interested stockholder for a
period of three years following the date that such stockholder became an
interested stockholder. Section 203 applies unless: (i) prior to the date such
stockholder became an interested stockholder, the board of directors of the
corporation approved either the business combination or the transaction which
resulted in the stockholder becoming an interested stockholder; (ii) upon
consummation of the transaction which resulted in the stockholder becoming an
interested stockholder, the interested stockholder owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced (the number of shares outstanding excludes those shares owned (A) by
persons who are both directors and officers, and (B) by employee stock plans in
which participants do not have the right to determine confidentially whether
shares held subject to the plan will be tendered in a tender or exchange
offer); or (iii) on or after such date the stockholder became an interested
stockholder, the business combination is approved by the board of directors and
authorized at an annual or special meeting of stockholders (not by written
consent) by the affirmative vote of at least 662/3% of the outstanding voting
stock which is not owned by the interested stockholder.
Section 203 defines a business combination to include: (i) any merger or
consolidation involving the corporation and the interested stockholder; (ii)
any sale, transfer, pledge or other disposition of 10% or more of the assets of
the corporation involving the interested stockholder; (iii) certain
transactions which result in the issuance or transfer by the corporation of any
stock of the corporation to the interested stockholder; (iv) any transaction
involving the corporation which increases the proportionate share of the stock
of any class or series of the corporation beneficially owned by the interested
stockholder; or (v) the receipt by the interested stockholder of any loans,
advances, guarantees, pledges or other financial benefits provided through the
corporation. In general, Section 203 defines an interested stockholder as any
entity or person beneficially owning 15% or more of the outstanding voting
stock of the corporation and any entity or person affiliated with or
controlling or controlled by such entity or person.
Certain provisions of the Company's Certificate of Incorporation and
Delaware law may delay, defer or prevent a change in control of the Company and
may adversely affect the voting and other rights of holders of common stock. In
particular, the ability of the board of directors to issue Preferred Stock
without stockholder approval may delay, defer or prevent a change in control of
the Company and may adversely affect the voting and other rights of other
holders of Common Stock. In addition, the Company's Certificate of
Incorporation provides for a classified board of directors and the inability of
stockholders to vote cumulatively for directors.
Limitation on Directors' Liability and Indemnification Matters
The Company's Certificate of Incorporation provides that, except to the
extent prohibited by Delaware law, the Company's directors shall not be
personally liable to the Company or its stockholders for monetary damages for
any breach of fiduciary duty as directors of the Company. Under Delaware law,
the directors have a fiduciary duty to the Company which is not eliminated by
this provision of the certificate of incorporation and, in appropriate
circumstances, equitable remedies such as injunctive or other forms of
nonmonetary relief will remain available. In addition, each director will
continue to be subject to liability under Delaware law for breach of the
director's duty of loyalty to the Company, for acts or omissions which are
found by a court of competent jurisdiction to be not in good faith or which
involves intentional misconduct, or knowing violations of law, for actions
leading to improper personal benefit to the director, and for payment of
dividends or approval of stock repurchases or
48
redemptions that are prohibited by Delaware law. This provision also does not
affect the directors' responsibilities under any other laws, such as the
Federal securities laws or state or Federal environmental laws.
The Company has obtained liability insurance for its senior officers and
directors and has entered into indemnity agreements to indemnify its executive
officers and directors in addition to the indemnification provided for in the
Company's Certificate of Incorporation and bylaws. These agreements, among
other things, indemnify the Company's directors and executive officers for
certain expenses (including attorneys' fees and associated legal expenses),
judgments and fines and amounts paid in settlement, actually and reasonably
incurred by any such person in any action, suit or proceeding arising out of
such person's services as a director or executive officer on behalf of the
Company. The Company believes that these provisions and agreements are
necessary to attract and retain qualified directors and officers.
Certain Effects of Authorized but Unissued Stock
Upon consummation of this Offering, there will be shares of Common
Stock and shares of Preferred Stock available for issuance without
stockholder approval, except as may be required by the Company's Certificate of
Incorporation, by applicable law or regulatory agencies or by the rules of the
Nasdaq National Market or any stock exchange on which the Common Stock may then
be listed. The Company does not currently have plans to issue additional shares
of capital stock. See "Shares Eligible for Future Sale."
Stock Transfer Agent and Registrar
The Stock Transfer Agent and Registrar for the Common Stock is The Bank of
New York, located at 101 Barclay Street, 11E, New York, New York and its
telephone number at such location is (800) 524-4458.
49
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for the Common Stock.
Future sales of substantial amounts of Common Stock in the public market could
adversely affect market prices prevailing from time to time. Furthermore, since
only a limited number of shares will be available for sale shortly after this
offering because of certain contractual and legal restrictions on resale (as
described below), sales of substantial amounts of Common Stock of the Company
in the public market after the restrictions lapse could adversely affect the
prevailing market price and the ability of the Company to raise equity capital
in the future.
Upon completion of this Offering, the Company will have outstanding an
aggregate of shares of Common Stock, assuming no exercise of the
Underwriters' over-allotment option and no exercise of outstanding options. Of
these shares, the shares sold in this offering will be freely tradeable
without restriction or further registration under the Securities Act of 1933,
as amended (the "Securities Act"), unless such shares are purchased by
"affiliates" of the Company as that term is defined in Rule 144 under the
Securities Act (the "Affiliates"). The remaining shares of Common Stock
held by existing stockholders are "restricted securities" as that term is
defined in Rule 144 under the Securities Act ("Restricted Shares"). Restricted
Shares may be sold in the public market only if registered or if they qualify
for an exemption from registration under Rules 144, 144(k) or 701 promulgated
under the Securities Act, which rules are summarized below. As a result of the
contractual restrictions described below and the provisions of Rules 144,
144(k) and 701, additional shares will be available for sale in the public
market as follows: (i) shares will be eligible for immediate sale on the
date of this Prospectus, (ii) shares will be eligible for sale upon
expiration of the lock-up agreements 180 days after the date of this Prospectus
and (iii) shares will be eligible for sale upon expiration of their
respective one-year holding periods.
Upon completion of this offering, the holdings of shares of Common Stock,
or their transferees, will be entitled to certain rights with respect to the
registration of such shares under the Securities Act. See "Description of
Capital Stock--Registration Rights." Registration of such shares under the
Securities Act would result in such shares becoming freely tradeable without
restriction under the Securities Act (except for shares purchased by
Affiliates) immediately upon the effectiveness of such registration.
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this Prospectus, a person (or persons whose shares are aggregated)
who has beneficially owned Restricted Shares for at least one year (including
the holding period of any prior owner except an Affiliate) would be entitled to
sell within any three-month period a number of shares that does not exceed the
greater of: (i) one percent of the number of shares of Common Stock then
outstanding (which will equal approximately shares immediately after this
offering); or (ii) the average weekly trading volume of the Common Stock on the
Nasdaq National Market during the four calendar weeks preceding the filing of a
notice on Form 144 with respect to such sale. Sales under Rule 144 are also
subject to certain manner of sale provisions and notice requirements and to the
availability of current public information about the Company. Under Rule
144(k), a person who is not deemed to have been an Affiliate of the Company at
any time during the 90 days preceding a sale, and who has beneficially owned
the Restricted Shares for at least two years (including the holding period of
any prior owner except an Affiliate), is entitled to sell such shares without
complying with the manner of sale, public information, volume limitation or
notice provisions of Rule 144; therefore, unless otherwise restricted, "144(k)
shares" may be sold immediately upon the completion of this offering. In
general, under Rule 701 of the Securities Act as currently in effect, any
employee, consultant or advisor of the Company who purchased shares from the
Company in connection with a compensatory stock or option plan or other written
agreement is eligible to resell such shares 90 days after the effective date of
this offering in reliance on Rule 144, but without compliance with certain
restrictions, including the holding period, contained in Rule 144.
The Company intends to file a registration statement on Form S-8 under the
Securities Act covering shares of Common Stock reserved for issuance under the
Company's 1998 Stock Incentive Plan. Such registration statement is expected to
be filed and become effective as soon as practicable after the effective date
of this offering. Accordingly, shares registered under such registration
statement will, subject to Rule 144 volume limitations applicable to
Affiliates, be available for sale in the open market, unless such shares are
subject to vesting restrictions with the Company or the lock-up agreements
described herein.
50
UNDERWRITING
Subject to the terms and conditions set forth in the Purchase Agreement
(the "Purchase Agreement") among the Company and each of the underwriters named
below, the Company has agreed to sell to each of the Underwriters, and each of
the Underwriters, for whom Merrill Lynch, Pierce, Fenner & Smith Incorporated,
J.P. Morgan Securities Inc. and Allen & Company Incorporated are acting as the
representatives (the "Representatives"), has agreed to purchase the number of
shares of Common Stock set forth opposite its name below. In the Purchase
Agreement, the several underwriters have agreed, subject to the terms and
conditions set forth therein, to purchase all of the shares of Common Stock
offered hereby, if any are purchased. In the event of default by an
Underwriter, the Purchase Agreement provides that, in certain circumstances,
purchase commitments of the non-defaulting Underwriters may be increased or the
Purchase Agreement may be terminated.
[Download Table]
Number
Underwriter of Shares
----------- ---------
Merrill Lynch, Pierce, Fenner & Smith
Incorporated .................
Allen & Company Incorporated .........
J.P. Morgan Securities Inc. .......... ----------
Total .........................
==========
The Underwriters have advised the Company that they propose initially to
offer the shares of Common Stock to the public at the initial public offering
price set forth on the cover page of this Prospectus, and to certain dealers at
such price less a concession not in excess of $ per share of Common Stock.
The Underwriters may allow, and such dealers may reallow, a discount not in
excess of $ per share of Common Stock on sales to certain other dealers.
After the initial public offering, the public offering price, concession and
discount may be changed.
At the request of the Company, the Underwriters have reserved up to
shares of Common Stock for sale at the initial public offering price to
directors, officers, employees, associates and related persons of the Company
and its affiliates. The number of shares of Common Stock available for sale to
the general public will be reduced to the extent such persons purchase such
reserved shares. Any reserved shares which are not so purchased will be offered
by the Underwriters to the general public on the same basis as the other shares
offered hereby.
The Company has granted to the Underwriters an option exercisable for 30
days after the date of this Prospectus, to purchase up to an additional
shares of Common Stock to cover over-allotments, if any, at the initial public
offering price set forth on the cover page hereof, less the underwriting
discount. If the Underwriters exercise this option, each Underwriter will have
a firm commitment, subject to certain conditions, to purchase approximately the
same percentage thereof that the number of shares of Common Stock to be
purchased by it shown in the foregoing table is of the shares of Common
Stock initially offered hereby.
The Company has agreed, subject to certain exceptions, not to, directly or
indirectly, (i) sell, grant any option to purchase or otherwise transfer or
dispose of any shares of Common Stock or securities convertible into or
exchangeable or exercisable for Common Stock or file a registration statement
under the Securities Act with respect to the foregoing or (ii) enter into any
swap or other agreement or transaction that transfers, in whole or in part, the
economic consequence of ownership of the Common Stock, without the prior
written consent of Merrill Lynch, for a period of 180 days after the date of
this Prospectus. The foregoing does not prohibit the Company from issuing
shares pursuant to the 1998 Stock Incentive Plan or upon exercise of
outstanding warrants.
The Company has agreed to indemnify the several Underwriters against
certain liabilities under the Securities Act, or to contribute to payments the
Underwriters may be required to make in respect thereof.
The Underwriters have advised the Company that they do not intend to
confirm sales of the Common Stock offered hereby to any accounts over which
they exercise discretionary authority.
Prior to this Offering, there has been no market for the Common Stock of
the Company. The initial public offering price was determined through
negotiations among the Company and the Underwriters. Among the factors
51
considered in determining the initial public offering price, in addition to
prevailing market conditions, were the trading multiples of publicly traded
companies that the Underwriters believe to be comparable to the Company,
certain financial information of the Company, the history of, and the prospects
for, the Company and the industry in which it competes, an assessment of the
Company's management, its past and present operation, the prospects for, and
timing of, future revenues of the Company, the present state of the Company's
development, and the above factors in relation to market values and various
valuation measures of other companies engaged in activities similar to the
Company. There can be no assurance that an active trading market will develop
for the Common Stock or that the Common Stock will trade in the public market
subsequent to the Offering at or above the initial public offering price.
The Company intends to apply for a listing of the Common Stock on the
Nasdaq National Market under the symbol "TFSM."
52
LEGAL MATTERS
The validity of the Common Stock offered hereby is being passed upon by
Proskauer Rose LLP, New York, New York. Certain legal matters in connection
with the Offering will be passed upon for the Underwriters by Wilson Sonsini
Goodrich & Rosati, Professional Corporation, Palo Alto, California.
EXPERTS
The financial statements of 24/7 Media, Inc. as of December 31, 1996 and
1997 and for each of the years in the three-year period ended December 31, 1997
and the financial statements of Interactive Holdings, LLC as of December 31,
1997 and for the period from February 1, 1997 (inception) to September 28, 1997
(Predecessor) and the period from September 29, 1997 to December 31, 1997
(Successor), have been included in this Prospectus and elsewhere in the
Registration Statement in reliance on the reports of KPMG Peat Marwick LLP,
independent certified public accountants, appearing elsewhere herein and upon
the authority of said firm as experts in auditing and accounting.
The financial statements of Intelligent Interactions Corporation as of
December 31, 1997 and 1996 and for the years ended December 31, 1997 and 1996
and the period from inception (February 28, 1995) to December 31, 1995 included
in this Prospectus and elsewhere in the Registration Statement have been
audited by Arthur Andersen LLP, independent public accountants, as indicated in
their reports with respect thereto, and are included herein in reliance upon
the authority of said firm as experts in giving said reports.
AVAILABLE INFORMATION
The Company has filed a registration statement on Form S-1 ("Registration
Statement") relating to the Common Stock offered hereby with the Commission
through the Electronic Data Gathering, Analysis and Retrieval System ("EDGAR").
This Prospectus is part of the Registration Statement and does not contain all
of the information in the Registration Statement and its exhibits and
schedules. For further information about the Company and the Common Stock, a
copy of the Registration Statement and its exhibits and schedules may be
inspected without charge and copied at the offices of the Commission at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at
the Commission's regional offices located at 7 World Trade Center, 13th Floor,
New York, New York 10048; and Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661. You may also access Registration Statements
filed through EDGAR at the Commission's Website at http://www.sec.gov. The
Company's Common Stock is expected to be listed on the Nasdaq National Market.
Reports and other information concerning the Company are available for
inspection at the Nasdaq National Market at 1735 K Street, Washington D.C.
20006.
After this Offering, the Company will have to file reports, proxy
statements and other information with the Commission via EDGAR as required by
the Exchange Act. The Company will furnish common stockholders with annual
reports containing audited financial statements and quarterly reports
containing unaudited financial statements. The Company will also furnish other
reports as it determines or are required by law. Copies of such material may be
inspected and copied at the Commission's offices and viewed electronically at
the Commission's Website.
----------------
24/7 Media, Intelligent Interactions, ContentZone, Riddler.com, CliqNow!,
Adfinity and dbCommerce are trademarks of the Company or its subsidiary,
Intelligent Interactions Corporation. This Prospectus contains other product
names, tradenames and trademarks of the Company and of other entities, all of
which are the property of their respective owners.
53
24/7 MEDIA, INC.
(Successor Company to Interactive Imaginations, Inc.)
INDEX TO FINANCIAL STATEMENTS
[Download Table]
Page
----
24/7 MEDIA, INC. (Successor Company to Interactive Imaginations, Inc.)
Independent Auditors' Report ........................................... F-2
Consolidated Balance Sheet ............................................. F-3
Consolidated Statements of Operations .................................. F-4
Consolidated Statements of Stockholders' Equity (Deficit) .............. F-5
Consolidated Statements of Cash Flows .................................. F-6
Notes to Financial Statements .......................................... F-7
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
Overview ............................................................... F-24
Pro Forma Consolidated Statements of Operations ........................ F-26
Pro Forma Consolidated Balance Sheet ................................... F-27
Notes to Pro Forma Consolidated Financial Information .................. F-28
INTERACTIVE HOLDINGS, LLC (Successor Company to Petry Interactive, Inc.)
Independent Auditors' Report ........................................... F-29
Balance Sheet .......................................................... F-30
Statements of Operations ............................................... F-31
Statements of Shareholder's/Members' Equity (Deficit) .................. F-32
Statements of Cash Flows ............................................... F-33
Notes to Financial Statements .......................................... F-34
INTELLIGENT INTERACTIONS CORPORATION
Report of Independent Public Accountants ............................... F-38
Balance Sheets ......................................................... F-39
Statements of Operations ............................................... F-40
Statements of Stockholders' Equity ..................................... F-41
Statements of Cash Flows ............................................... F-42
Notes to Financial Statements .......................................... F-43
F-1
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
24/7 Media, Inc.
We have audited the accompanying balance sheets of 24/7 Media, Inc.
(successor company to Interactive Imaginations, Inc.) as of December 31, 1996
and 1997, and the related statements of operations, stockholders' equity
(deficit) and cash flows for each of the years in the three-year period ended
December 31, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
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 financial statements referred to above present fairly,
in all material respects, the financial position of 24/7 Media, Inc. as of
December 31, 1996 and 1997, and the results of its operations and its cash
flows for each of the years in the three-years period ended December 31, 1997
in conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
New York, New York
June 2, 1998
F-2
24/7 MEDIA, INC.
(Successor Company to Interactive Imaginations, Inc.)
CONSOLIDATED BALANCE SHEETS
[Enlarge/Download Table]
December 31,
---------------------------------- March 31,
1996 1997 1998
--------------- ---------------- ----------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents .................................... $ 1,689,395 $ 93,945 $ 7,764,695
Accounts receivable, net of allowance for doubtful
accounts of $66,000, $63,723 and $269,968,
respectively ................................................ 267,173 176,034 1,818,899
Prepaid expenses and other current assets .................... 237,527 14,936 52,296
------------ ------------- -------------
Total current assets ..................................... 2,194,095 284,915 9,635,890
------------ ------------- -------------
Property and equipment, net ..................................... 1,677,936 591,337 630,652
Goodwill, net ................................................... -- -- 7,870,174
Deferred offering costs ......................................... -- 110,602 13,148
Intangible assets, net .......................................... 17,287 2,711 2,503
Deposits ........................................................ 61,472 49,376 49,626
------------ ------------- -------------
Total assets ............................................. $ 3,950,790 $ 1,038,941 $ 18,201,993
============ ============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable ............................................. 136,523 882,696 813,518
Accrued liabilities .......................................... 514,355 471,205 2,180,969
Loans payable--related party ................................. -- -- 283,267
Deferred revenue ............................................. 1,549,710 96,496 41,000
------------ ------------- -------------
Total current liabilities ................................ 2,200,588 1,450,397 3,318,754
------------ ------------- -------------
Senior convertible notes payable--related parties, net of debt
discount of $158,348 and $20,592, respectively.................. -- 2,316,511 479,408
Other liabilities ............................................... -- -- 46,149
Mandatorily redeemable convertible preferred stock,
10,060,002 shares authorized; 10,060,002 issued and outstanding
entitled to a liquidation preference of $1 per share plus unpaid
dividends; 4% per annum ($10,093,502 in the aggregate at March
31, 1998) ...................................................... -- -- 10,093,502
Stockholders' equity (deficit):
Convertible preferred stock, $.01 par value; 500,000 shares
authorized; 140,722, 158,144 and no shares issued and
outstanding, respectively; with aggregate liquidation
preference of $4,538,733 at December 31, 1997................ 1,407 1,581 --
Common stock, $.01 par value; 100,000,000 shares
authorized; 4,316,463, 4,595,047 and 27,481,201 shares
issued and outstanding, respectively ........................ 43,165 45,950 274,812
Additional paid-in capital ................................... 9,705,220 10,529,920 19,623,624
Accumulated deficit .......................................... (7,999,590) (13,305,418) (15,634,256)
------------ ------------- -------------
Total stockholders' equity (deficit) ..................... 1,750,202 (2,727,967) 4,264,180
------------ ------------- -------------
Commitments and contingencies
Total liabilities and stockholders' equity
(deficit) ............................................... $ 3,950,790 1,038,941 18,201,993
============ ============= =============
F-3
24/7 MEDIA, INC.
(Successor Company to Interactive Imaginations, Inc.)
CONSOLIDATED STATEMENTS OF OPERATIONS
[Enlarge/Download Table]
Three months
ended
Years ended December 31, March 31,
----------------------------------------------- ----------------------------
1995 1996 1997 1997 1998
--------------- --------------- --------------- ------------ ---------------
Revenues: (unaudited)
Advertising ..................................... $ 151,750 1,106,329 1,467,105 388,892 1,076,250
Consulting and license fees ..................... -- 435,834 1,681,464 805,245 --
------------ --------- --------- ---------- ---------
Total revenues .............................. 151,750 1,542,163 3,148,569 1,194,137 1,076,250
Cost of revenues ................................ 198,291 1,592,771 1,655,340 459,587 930,003
------------ --------- --------- ---------- ---------
Gross profit (loss) ......................... (46,541) (50,608) 1,493,229 734,550 146,247
------------ --------- --------- ---------- ---------
Operating expenses:
Sales and marketing .......................... 114,348 2,240,399 1,672,999 450,505 653,460
General and administrative ................... 581,069 3,010,009 2,622,743 682,581 1,285,512
Product development .......................... 426,187 1,460,928 1,417,750 399,523 --
Write-off of property and equipment .......... -- -- 756,795 -- --
Legal costs in connection with claim ......... -- -- 232,304 -- --
Amortization of goodwill ..................... -- -- -- -- 335,355
------------ --------- --------- ---------- ---------
Total operating expenses ................. 1,121,604 6,711,336 6,702,591 1,532,609 2,274,327
------------ --------- --------- ---------- ---------
Loss from operations ..................... (1,168,145) (6,761,944) (5,209,362) (798,059) (2,128,080)
Interest income ................................. -- 11,704 17,597 13,682 25,504
Interest expense, including amortization of
debt discount of $17,900, $42,652 and
$149,903 in 1996, 1997 and 1998,
respectively ................................... -- (45,435) (114,063) -- (192,762)
------------ ---------- ---------- ---------- ----------
Net loss ................................. (1,168,145) (6,795,675) (5,305,828) (784,377) (2,295,338)
Cumulative dividends on mandatorily
convertible preferred stock .................... -- -- -- -- (33,500)
------------ ---------- ---------- ---------- ----------
Net loss attributable to common
stockholders ................................... $ (1,168,145) (6,795,675) (5,305,828) (784,377) (2,328,838)
Net loss per share--basic ....................... $
============ ========== ========== ======== ==========
Weighted average shares outstanding .............
============ ========== ========== ======== ==========
Pro forma basic net loss per share .............. $
============ ========== ========== ======== ==========
Weighted average shares used in pro forma
basic net loss per share calculation ...........
============ ========== ========== ======== ==========
See accompanying notes to financial statements.
F-4
24/7 MEDIA, INC.
(Successor Company to Interactive Imaginations, Inc.)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Years Ended December 31, 1995, 1996 and 1997
and the Three Months Ended March 31, 1998 (unaudited)
[Enlarge/Download Table]
Stockholders' (Equity) Deficit
-------------------------------------------------
Convertible Common stock
preferred stock voting
------------------------- -----------------------
Shares Amount Shares Amount
------------- ----------- ------------ ----------
Balance as of December 31, 1994 ....................... -- $ -- -- $ --
Issuance of Class B common stock subsequently
converted to Class A ................................. -- -- -- --
Issuance of Class A common stock, net of $20,512
issuance costs ....................................... -- -- -- --
Net loss .............................................. -- -- -- --
------- --------- --------- --------
Balance as of December 31, 1995 ....................... -- -- -- --
Issuance of Class A common stock, net of $39,125
issuance costs ....................................... -- -- -- --
Common stock Class A converted ........................ -- -- 4,308,130 43,081
Issuance of common stock to officer ................... -- -- 8,333 84
Issuance of warrants in connection
with mandatory conversion subordinated notes.......... -- -- -- --
Notes converted to preferred stock .................... 52,262 523 -- --
Issuance of preferred stock, net of $236,820
issuance costs ....................................... 88,460 884 -- --
Net loss .............................................. -- -- -- --
------ --------- --------- --------
Balance as of December 31, 1996 ....................... 140,722 1,407 4,316,463 43,165
Issuance of preferred stock ........................... 17,422 174 -- --
Issuance of common stock to officer ................... -- -- 41,847 418
Issuance of warrants in connection
with senior convertible notes--related parties ....... -- -- -- --
Senior convertible notes payable--related parties
converted into common stock .......................... -- -- 236,737 2,367
Net loss .............................................. -- -- -- --
------- --------- --------- --------
Balance as of December 31, 1997 ....................... 158,144 1,581 4,595,047 45,950
Issuance of warrants in connection with senior
convertible notes--related parties ................... -- -- -- --
Issuance of warrants to former officer ................ -- -- -- --
Issuance of warrants to consultant .................... -- -- -- --
Issuance of common stock for acquired businesses....... -- -- 17,315,701 173,157
Offering costs in connection with mandatorily
redeemable convertible preferred stock ............... -- -- -- --
Senior convertible notes payable--related parties
converted into common stock .......................... -- -- 3,002,344 30,023
Convertible preferred stock converted into
common stock ......................................... (158,144) (1,581) 2,171,633 21,716
Conversion of warrants into common stock .............. -- -- 396,476 3,966
Imputed interest on loans payable--related parties -- -- -- --
Accrual of cumulative dividends on mandatorily
redeemable convertible preferred stock ............... -- -- -- --
Net loss for the period ............................... -- -- -- --
-------- --------- ---------- --------
Balance as of March 31, 1998 (unaudited) .............. -- $ -- 27,481,201 $274,812
======== ========= ========== ========
Stockholders' (Equity) Deficit
--------------------------------------------------------------------------
Common stock
Class A Additional Total
------------------------- paid-in Accumulated stockholders'
Shares Amount capital deficit equity (deficit)
------------- ----------- -------------- --------------- -----------------
Balance as of December 31, 1994 ....................... 100,000 $ 1,000 44,000 (35,771) 9,229
Issuance of Class B common stock subsequently
converted to Class A ................................. 62,707 627 92,373 -- 93,000
Issuance of Class A common stock, net of $20,512
issuance costs ....................................... 130,623 1,306 1,267,182 -- 1,268,488
Net loss .............................................. -- -- -- (1,168,144) (1,168,144)
------- --------- --------- ---------- ----------
Balance as of December 31, 1995 ....................... 293,330 2,933 1,403,555 (1,203,915) 202,573
Issuance of Class A common stock, net of $39,125
issuance costs ....................................... 137,483 1,375 4,484,500 -- 4,485,875
Common stock Class A converted ........................ (430,813) (4,308) (38,773) -- --
Issuance of common stock to officer ................... -- -- 37,543 -- 37,627
Issuance of warrants in connection
with mandatory conversion subordinated notes.......... -- -- 17,900 -- 17,900
Notes converted to preferred stock .................... -- -- 1,499,477 -- 1,500,000
Issuance of preferred stock, net of $236,820
issuance costs ....................................... -- -- 2,301,018 -- 2,301,902
Net loss .............................................. -- -- -- (6,795,675) (6,795,675)
-------- --------- --------- ---------- ----------
Balance as of December 31, 1996 ....................... -- -- 9,705,220 (7,999,590) 1,750,202
Issuance of preferred stock ........................... -- -- 499,837 -- 500,011
Issuance of common stock to officer ................... -- -- 31,473 -- 31,891
Issuance of warrants in connection
with senior convertible notes--related parties ....... -- -- 201,000 -- 201,000
Senior convertible notes payable--related parties
converted into common stock .......................... -- -- 92,390 -- 94,757
Net loss .............................................. -- -- -- (5,305,828) (5,305,828)
-------- --------- --------- ---------- ----------
Balance as of December 31, 1997 ....................... -- -- 10,529,920 (13,305,418) (2,727,967)
Issuance of warrants in connection with senior
convertible notes--related parties ................... -- -- 12,156 -- 12,156
Issuance of warrants to former officer ................ -- -- 450,000 -- 450,000
Issuance of warrants to consultant .................... -- -- 20,240 -- 20,240
Issuance of common stock for acquired businesses....... -- -- 6,753,123 -- 6,926,280
Offering costs in connection with mandatorily
redeemable convertible preferred stock ............... -- -- (229,105) -- (229,105)
Senior convertible notes payable--related parties
converted into common stock .......................... -- -- 2,102,391 -- 2,132,414
Convertible preferred stock converted into
common stock ......................................... -- -- (20,135) -- --
Conversion of warrants into common stock .............. -- -- (3,966) -- --
Imputed interest on loans payable--related parties -- -- 9,000 -- 9,000
Accrual of cumulative dividends on mandatorily
redeemable convertible preferred stock ............... -- -- -- (33,500) (33,500)
Net loss for the period ............................... -- -- -- (2,295,338) (2,295,338)
-------- --------- ---------- ----------- ----------
Balance as of March 31, 1998 (unaudited) .............. -- $ -- 19,623,624 (15,634,256) 4,264,180
======== ========= ========== =========== ==========
See accompanying notes to financial statements.
F-5
24/7 MEDIA, INC.
(Successor Company to Interactive Imaginations, Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
[Enlarge/Download Table]
Years ended December 31,
------------------------------------------------
1995 1996 1997
---------------- --------------- ---------------
Cash flows from operating activities:
Net loss ................................................. $ (1,168,144) (6,795,675) (5,305,828)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization ........................... 59,196 305,050 364,607
Amortization of debt discount ........................... -- 17,900 42,652
Write-off of property and equipment ..................... -- -- 756,795
Accrued interest on senior convertible notes--related
parties ................................................ -- -- 68,609
Imputed interest on note payable--related party ......... -- -- --
Provision for doubtful accounts ......................... 10,000 66,000 --
Amortization of intangible assets ....................... -- -- --
Non-cash compensation ................................... -- 37,627 31,891
Changes in operating assets and liabilities:
Accounts receivable .................................... (69,250) (273,923) 91,139
Prepaid assets and other current assets ................ -- (237,527) 222,591
Deposits ............................................... (14,588) (45,554) 12,096
Accounts payable ....................................... 136,231 292 746,172
Accrued liabilities .................................... 51,361 442,994 (43,150)
Deferred revenue ....................................... -- 1,549,710 (1,453,214)
------------ ---------- ----------
Net cash used in operating activities ................ (995,194) (4,933,106) (4,465,640)
------------ ---------- ----------
Cash flows from investing activities:
Increase in intangible assets ............................ -- (41,205) --
Cash received from acquisitions .......................... -- -- --
Proceeds from sale of property and equipment ............. -- -- 22,850
Purchase of property and equipment ....................... (464,016) (1,537,071) (42,069)
------------ ---------- ----------
Net cash used in investing activities ................ (464,016) (1,578,276) (19,219)
------------ ---------- ----------
Cash flows from financing activities:
Net proceeds from issuance of Mandatorily
Redeemable Series A Preferred Stock ..................... -- -- --
Deferred offering costs .................................. -- -- (110,602)
Proceeds from senior convertible notes payable--
related parties ......................................... -- -- 2,500,000
Proceeds from notes payable--related parties ............. 122,000 -- --
Repayment of notes payable--related parties .............. (35,000) (87,000) --
Proceeds from mandatory conversion subordinated
notes payable ........................................... -- 1,500,000 --
Proceeds from issuance of common stock, net .............. 1,361,488 4,485,875 --
Proceeds from issuance of convertible preferred stock,
net ..................................................... -- 2,301,902 500,011
------------ ---------- ----------
Net cash provided by financing activities ............ 1,448,488 8,200,777 2,889,409
------------ ---------- ----------
Net change in cash and cash equivalents .............. (10,722) 1,689,395 (1,595,450)
Cash and cash equivalents at beginning of period ............ 10,722 -- 1,689,395
------------ ---------- ----------
Cash and cash equivalents at end of period .................. $ -- 1,689,395 93,945
============ ========== ==========
Three Months
Ended
March 31,
-------------------------------
1997 1998
--------------- ---------------
Cash flows from operating activities:
Net loss ................................................. (784,377) (2,295,338)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization ........................... 104,220 58,349
Amortization of debt discount ........................... -- 149,903
Write-off of property and equipment ..................... -- --
Accrued interest on senior convertible notes--related
parties ................................................ -- 7,555
Imputed interest on note payable--related party ......... -- 9,000
Provision for doubtful accounts ......................... 15,000 27,430
Amortization of intangible assets ....................... -- 335,355
Non-cash compensation ................................... 8,041 470,240
Changes in operating assets and liabilities:
Accounts receivable .................................... 147,695 (579,518)
Prepaid assets and other current assets ................ 131,463 (31,885)
Deposits ............................................... -- (250)
Accounts payable ....................................... 148,227 (82,075)
Accrued liabilities .................................... (193,174) (322,868)
Deferred revenue ....................................... (961,989) (55,496)
-------- ----------
Net cash used in operating activities ................ (1,384,894) (2,309,598)
---------- ----------
Cash flows from investing activities:
Increase in intangible assets ............................ -- --
Cash received from acquisitions .......................... -- 168,839
Proceeds from sale of property and equipment ............. -- --
Purchase of property and equipment ....................... -- (97,664)
---------- ----------
Net cash used in investing activities ................ -- 71,175
---------- ----------
Cash flows from financing activities:
Net proceeds from issuance of Mandatorily
Redeemable Series A Preferred Stock ..................... -- 10,060,002
Deferred offering costs .................................. (288,651)
Proceeds from senior convertible notes payable--
related parties ......................................... --
Proceeds from notes payable--related parties ............. 150,000
Repayment of notes payable--related parties .............. (12,178)
Proceeds from mandatory conversion subordinated
notes payable ........................................... --
Proceeds from issuance of common stock, net .............. --
Proceeds from issuance of convertible preferred stock,
net ..................................................... 500,011 --
---------- ----------
Net cash provided by financing activities ............ 500,011 9,909,173
---------- ----------
Net change in cash and cash equivalents .............. (884,884) 7,670,750
Cash and cash equivalents at beginning of period ............ 1,689,395 93,945
---------- ----------
Cash and cash equivalents at end of period .................. 804,511 7,764,695
========== ==========
See accompanying notes to financial statements.
F-6
24/7 MEDIA, INC.
(Successor Company to Interactive Imaginations, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1997
(All information subsequent to December 31, 1997 is Unaudited)
(1) Summary of Operations and Significant Accounting Policies
(a) Summary of Operations
24/7 Media, Inc. (successor company to Interactive Imaginations, Inc.
("Interactive Imaginations")) operates networks of Websites that enable both
advertisers and Web publishers to capitalize on the many opportunities
presented by Internet advertising, direct marketing and commerce. The Company
generates revenues by delivering advertisements and promotions to Websites
affiliated with the Company. Interactive Imaginations's properties include the
ContentZone, which is a network of small to medium-sized Websites to which
advertisements and promotions are served; and Riddler.com, an advertising
supported Website that enables users to play intellectually challenging games
for prizes and cash. Effective February 24, 1998, 24/7 Media commenced
operations of the 24/7 Network, a network of high profile Websites to which
advertisements are served.
Inherent in the Company's business are various risks and uncertainties,
including its limited operating history, unproven business model and the
limited history of commerce on the Internet. The Company's success may depend
in part upon the emergence of the Internet as a communications medium,
prospective project development efforts, and the acceptance of the Company's
solutions by the marketplace.
Interactive Imaginations, Inc. was incorporated in the State of New York
in September 1994 and first recognized revenue in June 1995. 24/7 Media, Inc.
(the "Company") was incorporated in Delaware on January 23, 1998 to consolidate
three Internet advertising companies: (i) Petry Interactive, Inc. ("Petry"),
which sold advertising for Websites organized in a network (ii) Advercomm, Inc.
("Advercomm"), a newly formed corporation which brought a number of high
profile Websites to the 24/7 Network, and (iii) Interactive Imaginations, Inc.
Subsequently, the Company acquired both Intelligent Interactions Corporation
("Intelligent Interactions"), a corporation that develops and licenses ad
serving technology and e-commerce software, and the CliqNow! network of
Websites ("CliqNow!").
The Company was formed on January 23, 1998 as a wholly owned subsidiary of
Interactive Imaginations. On February 24, 1998, the Company simultaneously
consummated the merger of each of Petry and Advercomm with and into the Company
(the mergers, together with the concurrent investment of approximately $10
million by certain investors, the "Initial Merger"). On April 9, 1998,
Interactive Imaginations was merged with and into the Company. In addition, on
April 13, 1998, the Company acquired Intelligent Interactions as a wholly-owned
subsidiary of the Company and as of June 1, 1998, the Company acquired CliqNow!
(see note 11).
(b) Principles of Consolidation
The Company's audited financial statements as of December 31, 1996 and
1997 and for each of the years in the three-year period ended December 31, 1997
include the historical results of Interactive Imaginations and do not reflect
any of the operating results of Petry, Advercomm, Intelligent Interactions or
CliqNow!.
The Company's unaudited consolidated financial statements as of March 31,
1998 and the three months ended March 31, 1998, include the consolidated
accounts of the Company, and Petry and Advercomm from February 24, 1998 (date
of acquisition) through March 31, 1998, giving effect to the Initial Merger as
of February 24, 1998. For the three months ended March 31, 1997, the Company's
historical results of operations only include the results of Interactive
Imaginations. All significant intercompany transactions and balances have been
eliminated in consolidation.
On February 24, 1998, the Company acquired all of the outstanding stock of
Petry and Advercomm in separate transactions in exchange for 10,494,366 and
6,821,335 shares of the Company's Common Stock, respectively, for a total
purchase price of $4,197,800 and $2,728,500, respectively, plus acquisition
costs of $157,000.
The acquisitions have been accounted for using the purchase method of
accounting, and accordingly, the purchase price has been allocated to the
tangible and identifiable intangible assets acquired and liabilities assumed
F-7
24/7 MEDIA, INC.
(Successor Company to Interactive Imaginations, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996 and 1997
(All information subsequent to December 31, 1997 is Unaudited)
(1) Summary of Operations and Significant Accounting Policies --Continued
on the basis of their fair values on the acquisition dates. Approximately
($1,122,200) of the aggregate purchase price was allocated to net tangible
liabilities consisting primarily of cash, accounts receivable, property and
equipment, accounts payable and accrued liabilities. The historical carrying
amounts of such net liabilities approximated their fair values. The purchase
price in excess of the fair value of identified tangible and intangible assets
and liabilities assumed in the amount of $8,205,500 was allocated to goodwill
and is being amortized over its estimated useful life of two years.
The Petry and Advercomm acquisitions have been primarily structured as tax
free exchanges of stock, therefore, the differences between the recognized fair
value of the acquired assets, including intangible assets, and their historical
tax bases is not deductible for income tax purposes.
The fair value of the Company's Common Stock issued as consideration for
the acquisitions was estimated to be $0.40 per share, determined primarily by
reference to the Common Stock conversion price of $0.40 per share in connection
with the Company's issuance of approximately $1,000,000 of senior convertible
notes payable and detachable warrants during the period from September through
November 1997.
(c) Use of Estimates
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(d) Cash and Cash Equivalents
The Company considers all highly liquid securities, with original
maturities of three months or less, to be cash equivalents. Cash equivalents at
December 31, 1996 and 1997 and March 31, 1998 were $1,252,802, $0 and
$6,018,521, respectively, which consisted of certificates of deposit.
(e) Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the related assets,
generally three to five years. Leasehold improvements are amortized using the
straight-line method over the estimated useful lives of the assets or the term
of the leases, whichever is shorter.
(f) Intangible Assets
Intangible assets including trademarks and licenses are being amortized
using the straight-line method over one to five years.
Goodwill resulting from the acquisition of Internet advertising businesses
is estimated by management to be primarily associated with the acquired
workforce, contracts and technological know how. As a result of the rapid
technological changes occurring in the Internet industry and the intense
competition for qualified Internet professionals and customers, recorded
goodwill is amortized on the straight-line basis over the estimated periods of
benefit, which is two years.
At each balance sheet date, the Company assesses the value of recorded
goodwill for possible impairment based upon a number of factors, including
turnover of the acquired workforce and the undiscounted value of expected
future operating cash flows in relation to its net investment in each
subsidiary. To date, the Company has not recorded any provisions for possible
impairment of intangible assets.
(g) Income Taxes
The Company accounts for income taxes using the asset and liability
method. Under this method, deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating
F-8
24/7 MEDIA, INC.
(Successor Company to Interactive Imaginations, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996 and 1997
(All information subsequent to December 31, 1997 is Unaudited)
(1) Summary of Operations and Significant Accounting Policies --Continued
loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in results of operation in the period that the tax change
occurs.
(h) Deferred Revenue
Deferred revenue consists of a prepaid software license fee for use of the
Company's proprietary technology and prepaid advertising fees, although the
majority of the Company's advertising customers generally pay after the
services have been provided. As of December 31, 1996 and 1997 and March 31,
1998, the Company had deferred revenue related to the software license
$1,071,059, $0 and $0 and advertising agreements of $454,064, $96,496 and
$41,000, respectively.
(i) Revenue Recognition
The Company's advertising revenues are derived principally from short-term
advertising agreements in which the Company delivers advertising impressions or
full-page advertisements for a fixed fee to third-party Websites comprising the
24/7 Network, the ContentZone and to a lesser extent its Riddler.com Website.
Revenues from advertising are recognized in the period the advertising
impressions are delivered, provided collection of the resulting receivables is
probable. For the years ended December 31, 1996 and 1997 and the three months
ended March 31, 1998, the Company recognized $436,476, $682,853, and $250,164,
respectively, of cash advertising revenue related solely to the ContentZone.
Websites affiliated with the Company ("Affiliated Websites") register web
page(s) with the Company's networks and display advertising banners on those
pages. The Company pays its Affiliated Websites a service fee for providing
advertising space to the Company's networks. The Company becomes obligated to
make payments to such Affiliated Websites, which have contracted with the
Company to be part of the Company's networks, in the period the advertising
impressions are delivered. Such expenses are classified as cost of revenues in
the consolidated statements of operations.
The Company's licensing revenues are derived principally from a software
licensing fee and fees from maintenance, consulting and support of its
software. Licensing fees are recognized as performance occurs under the terms
of the applicable agreement.
At December 31, 1997 and March 31, 1998, accounts receivable include
approximately $56,000 and $1,242,700, respectively, of unbilled receivables.
(j) Barter Transactions
The Company trades advertisements on its Web properties in exchange for
advertisements on the Internet sites of other companies. Barter revenues and
expenses are recorded at the fair market value of services provided or
received, whichever is more determinable in the circumstances. Revenue from
barter transactions is recognized as income when advertisements are delivered
on the Company's Web properties. Barter expense is recognized when the
Company's advertisements are run on other companies' Web sites, which is
typically, in the same period when the barter revenue is recognized.
Advertising barter revenues and expenses were approximately $0, $55,000,
$83,000 and $0 for the years ended 1995, 1996, 1997 and the three months ended
March 31, 1998, respectively.
The Company also receives payment for its advertising services in the form
of goods that are used as prizes for the Riddler game site. Prize revenue and
the corresponding prize expense is recorded at a discount from its estimated
fair market value. Advertising prize revenues were approximately $0, $196,000,
$86,000 and $0 for the years ended 1995, 1996 and 1997 and for the three months
ended March 31, 1998, respectively.
F-9
24/7 MEDIA, INC.
(Successor Company to Interactive Imaginations, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996 and 1997
(All information subsequent to December 31, 1997 is Unaudited)
(1) Summary of Operations and Significant Accounting Policies --Continued
The Company expects that barter revenue will represent a significantly
smaller percentage of total revenues in the future.
(k) Product Development Costs
Product development costs and enhancements to existing products are
charged to operations as incurred. Software development costs are required to
be 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 to customers. To date, completion of a working
model of the Company's products and general release have substantially
coincided. As a result, the Company has not capitalized any software
development costs since such costs have not been significant.
(l) Deferred Offering Costs
At December 31, 1997 and March 31, 1998 specific incremental costs
directly attributable to the issuance of mandatorily redeemable convertible
preferred stock and initial public offering ("IPO") transactions, respectively
have been deferred. The December 31, 1997 costs have been charged against
additional paid-in capital as a result of the Company's issuance of mandatorily
redeemable convertible preferred stock during the three months ended March 31,
1998. The March 31, 1998 incremental costs incurred in connection with the
Company's IPO will be charged against additional paid-in-capital in connection
with this Offering.
(m) Stock-Based Compensation
The Company accounts for stock-based employee compensation arrangements in
accordance with provisions of APB No. 25, "Accounting for Stock Issued to
Employees," and complies with the disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." Under APB No. 25, compensation cost
is recognized based on the difference, if any, on the date of grant between the
fair value of the Company's stock and the amount an employee must pay to
acquire the stock.
(n) Impairment of Long-Lived Assets
The Company reviews its long-lived assets for impairment whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of assets to be held and used is measured by
a comparison of the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which
the carrying amount of the assets exceed the fair value of the assets.
(o) Advertising Expenses
The Company expenses the cost of advertising and promoting its services as
incurred. Such costs are included in sales and marketing on the statements of
operations and totaled $54,123, $514,637, $181,280 and $208,369 for the years
ended December 31, 1995, 1996 and 1997 and the three months ended March 31,
1998, respectively.
(p) Financial Instruments and Concentration of Risk
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist primarily of cash and cash equivalents,
accounts receivable, accounts payable and accrued liabilities. At December 31,
1996 and 1997, the fair value of these instruments approximated their financial
statement carrying amount. Substantially all of the Company's cash equivalents
were invested in certificates of deposit. The Company has not experienced any
significant credit losses to date.
F-10
24/7 MEDIA, INC.
(Successor Company to Interactive Imaginations, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996 and 1997
(All information subsequent to December 31, 1997 is Unaudited)
(1) Summary of Operations and Significant Accounting Policies --Continued
Revenues associated with major customers, as a percentage of total cash
advertising revenues (excluding barter), are as follows:
[Download Table]
Three Months
Year Ended December Ended
31, March 31,
-------------------- ------------
1995 1996 1997 1997 1998
------ ------ ------ ------ -----
Customer (unaudited)
A ............. 33% -- -- 47% --
B ............. 21% -- -- -- --
C ............. 20% -- -- -- --
D ............. 13% -- -- -- --
E ............. -- 25% 25% -- --
F ............. -- 21% 12% -- --
G ............. -- -- -- -- 15%
Accounts receivable regarding significant advertising customers, as a
percentage of total accounts receivable, are as follows:
[Download Table]
December 31,
--------------- March 31,
1996 1997 1998
------ ------ ------------
Customer (unaudited)
I ............... 28% -- --
II .............. 12% -- --
III ............. -- 13% --
IV .............. -- -- 52%
V ............... -- -- 12%
To date, accounts receivable have been derived from advertising fees
billed to advertisers located in the United States. The Company generally
requires no collateral. The Company maintains reserves for potential credit
losses; historically, such losses have been minor and within management's
expectations.
(q) Interim Results (Unaudited)
The accompanying interim financial statements as of March 31, 1998 and for
the three months ended March 31, 1997 and 1998 are unaudited. In the opinion of
management, the unaudited interim 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 March 31, 1998 and the results of the Company's
operations and its cash flows for the three months ended March 31, 1997 and
1998. The financial data and other information disclosed in these notes to
condensed consolidated financial statements related to these periods are
unaudited. The results for the three months ended March 31, 1998 are not
necessarily indicative of the results to be expected for the year ending
December 31, 1998.
(r) 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). SFAS
128 replaced the presentation of primary and fully diluted earnings (loss) per
share (EPS), with a presentation of basic EPS and diluted EPS. Under 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
F-11
24/7 MEDIA, INC.
(Successor Company to Interactive Imaginations, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996 and 1997
(All information subsequent to December 31, 1997 is Unaudited)
(1) Summary of Operations and Significant Accounting Policies --Continued
converted into common stock and resulted in the issuance of common stock. Only
basic EPS is presented as all common stock equivalents are antidilutive.
Pro forma basic net loss per share is computed by dividing the net loss by
the sum of the weighted average number of shares of common stock and the shares
resulting from the assumed conversion of all outstanding shares of Mandatorily
Redeemable Convertible Preferred Stock as though such conversion occurred at
the beginning of the period or the date of issuance, if later. This data is
unaudited.
At December 31, 1997 and March 31, 1998, outstanding options to purchase
shares of common stock, the outstanding Mandatorily Redeemable Convertible
Preferred Stock and outstanding Warrants could potentially dilute basic
earnings per share in the future and have not been included in the computation
of diluted net loss per share because to do so would have been antidilutive for
the periods presented.
(s) Recent Accounting Pronouncements
The Company adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income" in the quarter
ended March 31, 1998. SFAS No. 130 requires the Company to report in their
financial statements, in addition to its net income (loss), comprehensive
income (loss), which includes all changes in equity during a period from
non-owner sources including, as applicable, foreign currency items, minimum
pension liability adjustments and unrealized gains and losses on certain
investments in debt and equity securities. There were no difference between the
Company's comprehensive loss and its net loss as reported.
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1
provides guidance for determining whether computer software is internal-use
software and on accounting for the proceeds of computer software originally
developed or obtained for internal use and then subsequently sold to the
public. It also provides guidance on capitalization of the costs incurred for
computer software developed or obtained for internal use. The Company has not
yet determined the impact, if any, of adopting SOP 98-1, which will be
effective for the Company's year ending December 31, 1999.
In June 1997, the FASB issued SFAS No. 131, Disclosure About Segments of
an Enterprise and Related Information. SFAS No. 131 establishes standards for
the way that public business enterprises report information about operating
segments. It also establishes standards for related disclosures about products
and services, geographic areas and major customers. SFAS No. 131 is effective
for fiscal years beginning after December 15, 1997. The Company has determined
that it does not have any separately reportable business segments.
F-12
24/7 MEDIA, INC.
(Successor Company to Interactive Imaginations, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996 and 1997
(All information subsequent to December 31, 1997 is Unaudited)
(2) Balance Sheet Components
Prepaid Expenses and Other Current Assets
[Download Table]
December 31,
--------------------- March 31,
1996 1997 1998
----------- --------- ------------
(unaudited)
Prepaid operating lease ......... $108,946 $ -- $ --
Barter receivable ............... 85,358 -- --
Other prepaid ................... 43,223 14,936 52,296
-------- ------- -------
$237,527 $14,936 52,296
======== ======= =======
Property and Equipment, Net
[Enlarge/Download Table]
December 31,
--------------------------- March 31,
1996 1997 1998
------------- ------------- --------------
(unaudited)
Computer equipment ..................................... $1,893,217 $972,283 $1,069,950
Furniture and fixtures ................................. 87,922 -- --
Leasehold improvements ................................. 33,517 -- --
---------- -------- ----------
2,014,656 972,283 1,069,950
Less accumulated depreciation and amortization ......... (336,720) (380,946) (439,298)
---------- -------- ----------
$1,677,936 $591,337 630,652
========== ======== ==========
During 1997, in connection with a reduction in the Company's operations and
personnel, the Company recorded a net write-off of approximately $756,795
of property and equipment that was deemed to have no future economic
benefit.
Intangible Assets
[Download Table]
December 31,
------------------------ March 31,
1996 1997 1998
------------ ----------- --------------
(unaudited)
Licenses .............................. $ 37,040 $ -- $ --
Trademarks ............................ 4,165 4,165 4,165
--------- -------- ----------
41,205 4,165 4,165
Less accumulated amortization ......... (23,918) (1,454) (1,662)
--------- -------- ----------
$ 17,287 $ 2,711 $ 2,503
========= ======== ==========
Goodwill .............................. $ -- $ -- $8,205,529
Less accumulated amortization ......... -- -- (335,355)
--------- -------- ----------
$ -- $ -- $7,870,174
========= ======== ==========
F-13
24/7 MEDIA, INC.
(Successor Company to Interactive Imaginations, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996 and 1997
(All information subsequent to December 31, 1997 is Unaudited)
(2) Balance Sheet Components --Continued
Accrued Liabilities
[Download Table]
December 31,
----------------------- March 31,
1996 1997 1998
----------- ----------- ------------
(unaudited)
Professional fees ......................... $102,105 $225,691 $ 205,882
Employee commissions and expenses ......... -- -- 423,409
Ad management fees ........................ -- -- 258,435
Barter payable ............................ 85,358 -- --
Affiliate royalties ....................... 43,955 81,384 941,715
Prizes .................................... 68,474 -- --
Other ..................................... 214,463 164,130 351,528
-------- -------- ----------
$514,355 $471,205 $2,180,969
======== ======== ==========
(3) Income Taxes
No provision for federal or state income taxes has been recorded as the
Company incurred net operating losses for all periods presented and has no
carryback potential. At December 31, 1997, the Company had approximately
$13,394,000 of federal net operating loss carryforwards available to offset
future taxable income; such carryforwards expire in various years through 2012.
As a result of various equity transactions during 1996 and 1997 as well as
during 1998 (see notes 5 and 11), management believes the Company has undergone
an "ownership change" as defined by section 382 of the Internal Revenue Code.
Accordingly, the utilization of a portion of the net operating loss
carryforward may be limited. Due to this limitation, and the uncertainty
regarding the ultimate utilization of the net operating loss carryforwards, no
tax benefit for losses has been recorded by the Company in 1995, 1996 and 1997,
and a full valuation allowance has been recorded for the entire amount of the
net deferred tax asset.
The tax effects of temporary differences and tax loss carryforwards that
give rise to significant portions of federal deferred tax assets and deferred
tax liabilities at December 31, 1996 and 1997 are presented below.
[Enlarge/Download Table]
1996 1997
--------------- ---------------
Deferred tax assets:
Net operating loss carryforwards ................................... $ 2,223,000 $ 4,554,000
Deferred revenues .................................................. 527,000 33,000
Accounts receivable principally due to allowance for doubtful
accounts .......................................................... 22,000 22,000
Other .............................................................. 24,000 22,000
------------ ------------
Gross deferred tax assets ............................................. 2,796,000 4,631,000
Less: valuation allowance ............................................. (2,698,000) (4,501,000)
------------ ------------
Net deferred tax assets ........................................ 98,000 130,000
------------ ------------
Deferred tax liabilities:
Plant and equipment, principally due to differences in depreciation (98,000) (130,000)
------------ ------------
Gross deferred tax liabilities ........................................ (98,000) (130,000)
------------ ------------
$ -- $ --
============ ============
F-14
24/7 MEDIA, INC.
(Successor Company to Interactive Imaginations, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996 and 1997
(All information subsequent to December 31, 1997 is Unaudited)
(4) Notes Payable
Notes Payable--Related Parties
An officer and stockholder of the Company loaned the Company $80,000 in
1995 at an interest rate of 5.76%. The entire principal and accrued interest
totaling $85,618 related to those loans were paid in full in 1996. Affiliates
of this same stockholder loaned the Company $10,000 and $25,000 in 1995 at
interest rates of 6.97% and 6.19%, respectively. The entire principal balance
of $35,000 related to those loans was paid in full in 1995. In addition, an
officer and stockholder of the Company loaned the Company $7,000 in 1995 at an
interest rate of 6.60%. This loan was offset against certain personal expenses
paid by the Company on behalf of this officer and stockholder.
Mandatory Conversion Subordinated Notes
In August, September and October 1996, the Company issued Mandatory
Conversion Subordinated Notes ("Notes") in the aggregate principal amount of
$1,500,000 and bearing an interest rate equal to 8% per annum. These Notes were
converted into a total of 52,262 Convertible Preferred Shares ("Preferred
Shares") in connection with the Company's November 1996 private placement, as
required by the terms and conditions of such Notes. All accrued interest on
these Notes, aggregating $21,919, was paid to the holders thereof in connection
with the conversion to Convertible Preferred Shares.
Senior Convertible Notes Payable--Related Parties
During 1997, the Company received $2,500,000 in proceeds from the issuance
of senior convertible notes payable primarily to affiliates of stockholders of
the Company, bearing an interest rate of 8% compounded semi-annually. The
notes, including interest thereon, are due on the earlier of prepayment,
redemption, conversion of the notes into common stock or May 15, 1999, the
maturity date. Each of the notes was issued with detachable warrants allowing
such holders to purchase shares of the Company's common stock at prices ranging
from $0.40 to $2.09 per share. The value attributed to the warrants of $201,000
has been recorded as debt discount and is being amortized to interest expense
using the interest method over the term of the notes.
The notes are convertible into common stock at conversion prices ranging
from $0.40 to $2.09 per share upon occurrence of certain events. On December
22, 1997, $94,757 of the notes, including interest thereon, were converted into
236,737 shares of common stock at $0.40 per share. During 1997, the Company
recorded $42,652 of interest expense in connection with the amortization of the
debt discount and conversion of the aforementioned notes.
During January 1998, the Company received $150,000 in proceeds from the
issuance of senior convertible notes payable with terms similar to the notes
issued during 1997. The notes are convertible into 173,282 shares of common
stock at $0.87 per share. The value attributable to 17,240 warrants, to
purchase shares of the Company's common stock at $0.87 per share, of $12,156
was recorded as debt discount.
In connection with the Securities Purchase Agreement and the Merger,
$2,056,250 of the Senior Convertible Notes Payable--Related Parties, plus
accrued interest thereon, were converted into 3,002,344 shares of common stock,
leaving approximately $500,000 of such notes, plus accrued interest thereon,
outstanding as of June 2, 1998.
Loan Payable--Related Party
In connection with the Petry acquisition, Petry Media Corporation, a
shareholder of the Company, agreed to lend an aggregate of $300,000 during the
period September 29, 1997 to December 31, 1997. The loan is repaid through the
payment of 5% of the gross commissions or other revenues received by the
Company, after deducting advertising agency commissions and web-site royalties.
At March 31, 1998, $283,267 of the loan was outstanding.
In accordance with Staff Accounting Bulletin Topic 5:T, the Company has
imputed an interest cost because these loans have no stated interest rate. The
imputed interest rate used was based on a market rate of interest of 12%.
F-15
24/7 MEDIA, INC.
(Successor Company to Interactive Imaginations, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996 and 1997
(All information subsequent to December 31, 1997 is Unaudited)
(4) Notes Payable --Continued
Warrants
In connection with the issuance of Mandatory Convertible Subordinated
Notes in August 1996, in the principal amount of $500,000, the Company also
issued to the note holder detachable warrants to purchase 26,132 of the
Company's Common Shares at a price of $2.87. Such warrants expire no later than
three years from the date of issuance. The value attributed to the warrants of
$17,900 was recorded as debt discount and subsequently charged to interest
expense in connection with the conversion of the aforementioned notes.
On April 9, 1997, the Company granted warrants to purchase 17,500 of the
Company's Common shares at an exercise price of $12.43 per share. The fair
value of the warrants was insignificant on the date of grant.
In connection with the issuance of Senior Convertible Notes
Payable--Related Parties, warrants to purchase 677,264 and 17,240 Common shares
at a price of $0.40 and $0.87 were outstanding as of December 31, 1997 and
February 25, 1998, respectively, and such warrants expire no later than three
years from the date of issuance.
In connection with the February 25, 1998 Securities Purchase Agreement and
Merger, 713,715 warrants to purchase common shares were exchanged for 396,476
shares of Common Stock. Accordingly, the Company charged the unamortized
portion of the applicable debt discount to interest expense in connection with
the conversion of the notes and warrants.
On February 24, 1998, Interactive Imaginations and Michael P. Paolucci
entered into a Confidential Separation Agreement and General Release
("Separation Agreement") pursuant to which Mr. Paolucci's employment as an
executive, but not as a Director, of Interactive Imaginations was terminated as
of February 24, 1998. The terms of the Separation Agreement generally provide
that Mr. Paolucci and Interactive Imaginations agreed to release and discharge
the other party (and its successors and assigns) from all causes of action,
claims, judgments, obligations, damages or liabilities. Interactive
Imaginations agreed to issue to Mr. Paolucci Class C Warrants to purchase up to
2,500,000 shares of Common Stock at an exercise price of $0.952 per share. In
addition, Interactive Imaginations agreed to extend the term from January 31,
2000 to January 31, 2005 in respect of a fully vested option held by Mr.
Paolucci to purchase 52,000 shares of Interactive Imaginations common stock at
$0.43 per share. Accordingly, the Company recorded compensation expense of
$450,000 during the three month period ended March 31, 1998.
(5) Common Stock, Convertible Preferred Shares and Mandatorily Redeemable
Convertible Preferred Stock
Common Stock
In connection with its formation in September 1994, the Company authorized
1,000,000 Common shares, par value $.01 per share, and immediately thereafter
issued a total of 100,000 Common shares to its founders in exchange for
approximately $30,000 worth of expenses, as well as $15,000 in cash.
In February 1995, the Company amended its capital structure to eliminate
the existing Common shares and create Common Stock Class A and Common Stock
Class B. Accordingly, the Company amended its Certificate of Incorporation to
provide for: (i) conversion of the 1,000,000 authorized Common shares (900,000
authorized but not issued; 100,000 issued and outstanding) into 1,000,000 Class
A Common shares, par value $.01 per share; and (ii) authorization of 1,000
Class B Common shares, par value $.01 per share.
In March 1995, the Company issued a total of 999 Class B Common shares in
exchange for approximately $93,000 in cash, which were subsequently (in June
1995) converted to 62,707 Class A Common shares. During the remainder of 1995,
the Company issued a total of 130,623 additional Class A Common shares in
exchange for $1,289,000 in cash. As of December 31, 1995, the Company had
authorized: (i) 1,000,000 Class A Common shares, of which 293,330 were issued
and outstanding; and (ii) 1,000 Class B Common shares, of which none were
outstanding.
F-16
24/7 MEDIA, INC.
(Successor Company to Interactive Imaginations, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996 and 1997
(All information subsequent to December 31, 1997 is Unaudited)
(5) Common Stock, Convertible Preferred Shares and Mandatorily Redeemable
Convertible Preferred Stock--Continued
During 1996, the Company issued an additional 137,483 Class A Common
shares in exchange for $4,525,000 in cash.
In March 1996, the Company's shareholders approved a recapitalization plan
which provided for: (i) conversion of the 1,000,000 authorized Class A Common
Shares into 30,000,000 Common Shares, par value $.01 per share; (ii) conversion
of each of the 430,813 issued and outstanding Class A Common shares into 10 of
the new Common Shares (any remaining fractional shares could be purchased or
sold by each shareholder in the conversion); and (iii) conversion of the 1,000
authorized Class B Common shares into 2,000,000 Preferred Shares, par value
$.01 per share.
Convertible Preferred Shares
In November 1996, the Company designated 500,000 Convertible Preferred
Shares, par value $.01 per share, out of the 2,000,000 Preferred Shares, which
were authorized in March 1996, the rights and preferences of which are
generally more senior to the Company's Common Shares and are more fully
described in the Company's Amended Certificate of Incorporation (the "Amended
Certificate"). Thereafter, the Company completed a private placement of 140,722
Preferred Shares for an aggregate price of $4,038,722. Such consideration
consisted of the cancellation of outstanding Notes (described above) in the
aggregate principal amount of $1,500,000 plus $2,538,722 in cash. Each
Preferred Share is convertible into ten (10) Common Shares (subject to
adjustment as set forth in the Amended Certificate) upon the occurrence of
certain events in respect of the Company or the holders of Preferred Shares. In
January 1997, the Company issued 17,422 shares of Preferred Stock for a payment
of $500,011 in cash.
As of December 31, 1996 and 1997, the 140,722 and 158,144 issued and
outstanding Preferred Shares were convertible into 1,407,220 and 2,171,633
Common Shares, however, no Preferred Shares were converted as of that date (see
note 11). The Company has reserved 5,000,000 authorized but unissued Common
Shares for issuance in connection with the conversion of the Preferred Shares.
These Preferred Shares, in the event of any voluntary or involuntary
liquidation, dissolution or winding up of the Company, as defined, on a pari
passu basis, are entitled to receive an amount equal to $28.70 per share, to be
paid out of the assets of the Company available for distribution before any
such payments shall be made on any shares of the Company's common shares or any
other capital stock of the Company other than the Preferred Shares, plus any
declared and unpaid dividends.
The Preferred Shares are subject to mandatory conversion, and shall be
automatically converted into common shares, as noted above, in the event:
(i) the Company successfully consummates a firm commitment for an
underwritten initial public offering of its equity securities for:
(a) a gross per share price offered to the public of at least 200% of the
then current per share conversion price, as defined; and
(b) a total gross offering amount, as defined, of at least $20,000,000;
or
(ii) the holders of a majority of the Preferred Shares vote in favor of or
consent to such conversion.
For as long as the Preferred Shares are outstanding, the Company shall
not, without the prior written consent or affirmative vote of the holders of at
least 66 2/3 % of all of the outstanding Preferred Shares:
(i) authorize or issue any other equity securities of the Company which
rank superior to the Preferred Shares with respect to conversion,
dividends, redemption, liquidation, antidilution or other preferences,
designations, rights or powers;
F-17
24/7 MEDIA, INC.
(Successor Company to Interactive Imaginations, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996 and 1997
(All information subsequent to December 31, 1997 is Unaudited)
(5) Common Stock, Convertible Preferred Shares and Mandatorily Redeemable
Convertible Preferred Stock--Continued
(ii) authorize or issue any securities of the Company which have voting
rights superior to the Preferred Shares; or
(iii) otherwise amend, alter or repeal the preferences, designations,
rights or powers of the Preferred Shares or enter into any transaction
that shall result in any such amendment, alterations, or repeal, which
would have an adverse effect upon holders of such shares.
Mandatorily Redeemable Convertible Preferred Stock
On February 25, 1998, the Company entered into a Securities Purchase
Agreement for the Sale and Issuance of 10,060,002 shares of Mandatorily
Redeemable Convertible Preferred Stock--Series A ("Mandatorily Redeemable
Convertible Preferred Stock" or "Series A"), par value $.01 per share,
5,283,616 Class A Warrants and 5,283,616 Class B Warrants in a private
placement for total proceeds of $10,060,002.
After giving effect to the Securities Purchase Agreement, including the
Merger, the capital stock of the Company consists of: (i) 100,000,000 common
shares, of which 27,481,201 shares are issued and outstanding, 10,060,002
shares are reserved for issuance upon conversion of issued and outstanding
Mandatorily Redeemable Convertible Preferred Stock or "Series A," 5,283,616
shares are reserved for issuance upon exercise of issued and outstanding Class
A Warrants, 5,283,616 shares are reserved for issuance upon exercise of issued
and outstanding Class B Warrants, 2,575,000 are reserved for issuance upon
exercise of issued and outstanding Class C Warrants, 142,421 are reserved for
issuance upon exercise of issued and outstanding unclassified warrants, 251,028
(subject to adjustment) are reserved for issuance upon exercise of outstanding
convertible debentures, and 5,750,000 shares are reserved for issuance to key
employees, officers and directors of, and consultants to, the Company under
stock incentives that have been granted or are available for grant by the
Company pursuant to the 1998 Stock Incentive Plan; and (ii) 30,000,000
preferred shares, of which none are outstanding and of which 10,060,002 shares
designated as Mandatorily Redeemable Convertible Preferred Stock or Series A
shares, all of which are in a private placement.
The Series A shares rank (i) prior to the Common Stock of the Company;
(ii) with any Securities (as defined in the Securities Purchase Agreement); and
(iii) junior to any Senior Securities, in each case as to dividends and other
distribution of assets and upon liquidation, dissolution or winding up of the
Company, whether voluntary or involuntary. The Series A shareholders are
entitled to receive, when and as declared by the Board of Directors out of
funds legally available, dividends at a rate of $0.04 per share per annum. Such
dividends shall be cancelled pursuant to the Securities Purchase Agreement if
the Company consummates an initial public offering (as defined) prior to
January 1, 1999.
Each share of Series A shall be convertible, at the option of the holder,
at any time and without the payment of additional consideration into common
stock determined by the sum of (i) the Payment Price of $0.952 per Series A
share divided by the conversion price of $0.952 per common share (as adjusted),
plus (ii) all accrued and unpaid dividends with respect to such share divided
by the dividend conversion price of equal to twice the conversion price of
$0.952.
Each Series A share (and, as applicable, all accrued but unpaid dividends
thereon), shall automatically be converted into common shares at the conversion
price (and dividend conversion price) immediately upon the closing of a
qualified public offering.
In the event the Company has not completed a qualified public offering on
the prior to the fifth anniversary of the original issue date, each shareholder
of record of Series A shares will have the right to cause the Company to redeem
at the option of the shareholder all or part of the shareholder's outstanding
Series A shares by paying cash of $0.952 per share plus any dividends accrued.
Additionally, if the Company fails to maintain at least $10 million of Key-Man
Life Insurance on the President and Chief Executive Officer of the Company,
each shareholder of record of Series A Shares will have the right to cause the
company to redeem at the option of the shareholder
F-18
24/7 MEDIA, INC.
(Successor Company to Interactive Imaginations, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996 and 1997
(All information subsequent to December 31, 1997 is Unaudited)
(5) Common Stock, Convertible Preferred Shares and Mandatorily Redeemable
Convertible Preferred Stock--Continued
all or part of the shareholder's outstanding Series A Shares by paying cash of
$0.952 per share plus any dividends accrued.
Series A shareholders have one vote for each full common share into which
a Series A share would be convertible.
In conjunction with the Securities Purchase Agreement, the Company issued
both Class A Warrants and Class B Warrants to purchase 5,283,616 shares of the
Company's common stock, par value $.01 per share, at $1.904 and $2.856 per
share, respectively. Such warrants are immediately exerciseable and expire on
February 25, 2003.
(6) Stock Option Plan
1995 Stock Option Plan--amended
During 1995, the Company established the 1995 Stock Option Plan, which was
amended (the "Amended Plan") by the Board of Directors in December 1996. Under
the Amended Plan, the Board of Directors may issue incentive stock options or
non-qualified stock options to purchase up to 870,000 common shares. Incentive
stock options may be granted to officers who are employees of the Company,
Directors of the Company and other employees of the Company who are deemed to
be "key employees." Incentive stock options must be issued at the fair market
value of the Company's common stock at the date the option is issued.
Non-qualified stock options may be granted to officers, directors, other
employees, consultants and advisors of the Company. The option price for
non-qualified stock options shall be at least 85% of the fair market value of
the Company's common stock. The granted options under the amended plan shall be
for periods not to exceed ten years. Options granted to shareholders who own
greater than 10% of the outstanding stock must be issued at 110% of the fair
market value of the stock on the date the options are granted. Subsequent to
December 31, 1997, the Amended Plan was replaced by the 1998 Stock Incentive
Plan (see below).
The per share weighted-average fair value of stock options granted during
1995, 1996 and 1997 was $0.64, $2.32 and, $0.40, respectively, on the date of
grant using the Black-Scholes method with the following weighted-average
assumptions: 1995--risk-free interest rate 6.39%, and an expected life of two
years; 1996--risk-free interest rate 6.18%, and an expected life of three
years; and 1997--risk-free interest rate 5.64%, and an expected life of two
years.
The Company applies APB Opinion No. 25 in accounting for its Plan and,
accordingly, no compensation cost has been recognized for its stock options in
the accompanying financial statements.
Had the Company determined compensation cost based on the fair value at
the grant date for its stock options under SFAS No. 123, the Company's net
income would have been reduced to the pro forma amounts indicated below:
[Download Table]
1995 1996 1997
---------------- --------------- ---------------
Net loss:
As reported ......... $ (1,168,144) (6,795,675) (5,305,828)
Pro forma ........... $ (1,179,998) (6,838,920) (5,322,570)
Net loss per share:
As reported ......... $
Pro forma ........... $
F-19
24/7 MEDIA, INC.
(Successor Company to Interactive Imaginations, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996 and 1997
(All information subsequent to December 31, 1997 is Unaudited)
(6) Stock Option Plan--Continued
Stock option activity during the periods indicated is as follows:
[Download Table]
Weighted
average
Options exercise
granted price
------------ ---------
Outstanding at December 31, 1994 ............... --
Granted ........................................ 257,700 $ 0.77
Exercised ...................................... --
Canceled ....................................... --
-------
Outstanding at December 31, 1995 ............... 257,700 $ 0.77
Granted ........................................ 227,555 2.82
Exercised ...................................... --
Canceled ....................................... (52,068) 1.28
------- -------
Outstanding at December 31, 1996 ............... 433,187 1.79
Granted (a) .................................... 831,188 0.40
Exercised ...................................... --
Canceled ....................................... (91,133) 1.61
------- -------
Outstanding at December 31, 1997 ............... 1,173,242 0.93
========= =======
Vested at December 31, 1997 .................... 529,493
=========
Options available at December 31, 1997 ......... --
=========
(a) At December 31, 1997, the total number of options outstanding for
purchase of common shares under the Amended Plan exceeded the options
available for issuance. Subsequent to December 31, 1997, the Company
replaced the Amended Plan with the 1998 Stock Incentive Plan (see below)
and increased the number of shares available under the plan to a
maximum of 5,750,000.
The following table summarizes information about stock options outstanding
at December 31, 1997:
[Enlarge/Download Table]
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------- -----------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF NUMBER REMAINING AVERAGE NUMBER AVERAGE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
----------------- ------------- ------------------ ---------------- ------------- ---------------
$0.40-0.43 1,059,671 7.1 years $ 0.40 420,922 $ 0.40
1.00-1.29 37,856 2.1 years 1.23 32,856 1.26
2.00-2.98 75,715 3.3 years 2.70 75,715 2.70
--------- -------
1,173,242 529,493
========= =======
1998 Stock Incentive Plan
On February 13, 1998, the Board of Directors and stockholders of the
Company approved the 1998 Stock Incentive Plan (the Plan). The following is a
summary of the material features of the Plan. This Plan replaces the 1995 Stock
Option Plan--Amended.
All employees of and consultants to the Company are eligible under the
Plan. Eligibility under the Plan shall be determined by the Stock Incentive
Committee. The Plan provides for the grant of any or all of the following types
of awards: (i) stock options, including incentive stock options and
non-qualified stock options; (ii) stock appreciation rights, in tandem with
stock options or free standing; and (iii) restricted stock. In addition, the
Plan provides for the one-time non-discretionary award of stock options to
non-employee directors of the Company.
F-20
24/7 MEDIA, INC.
(Successor Company to Interactive Imaginations, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996 and 1997
(All information subsequent to December 31, 1997 is Unaudited)
(6) Stock Option Plan--Continued
A maximum of 5,750,000 shares of Common Stock may be issued or used for
reference purposes pursuant to the Plan. The maximum number of shares of Common
Stock subject to each of stock options or stock appreciation rights that may be
granted to any individual under the Plan is 250,000 for each fiscal year during
the term of the Plan. If a stock appreciation right is granted in tandem with a
stock option, it shall be applied against the individual limits for both stock
options and stock appreciation rights, but only once against the maximum number
of shares available under the Plan.
Subsequent to December 31, 1997, the Company granted 2,248,096 and 504,116
options at $1.00 per share during March and April 1998, respectively.
(7) Major Contracts
In November 1996, the Company entered into an agreement with SegaSoft to
license the rights to its registration-driven ad targeting software. The
contract term was for two years from the earlier of the first commercial use of
SegaSoft's Heat Network or August 1, 1997. The Company received a license fee
of $1.8 million, of which $1.2 million was received by December 31, 1996. In
addition, the Company received a $300,000 non-refundable consulting retainer
fee in November 1996. This fee, plus an additional $100,000 credit, was applied
against consulting service fees for design modifications to the software for
the SegaSoft Heat Network, which were recognized as revenues as services were
performed. The Company accounted for the majority of the license fee as
performance occurred over the period during which the licensed software was
transferred to SegaSoft and modified to perform to SegaSoft's specifications,
with the remaining balance applied over the two-year term. For the years ended
December 31, 1996 and 1997 and for the three months ended March 31, 1998, the
Company recorded approximately $429,000, $1,681,000 and $0 in revenue,
respectively.
During 1996, the Company entered into an agreement with SegaSoft for
advertising on the Company's ContentZone Websites and/or Riddler.com. The term
of the contract was for one year from the date of signing. The Company received
a prepayment in full for $540,000 in 1996. Revenue from the agreement was
recognized ratably over the terms of the contracts. For the years ended
December 31, 1996 and 1997, the Company recorded $212,000 and $326,000 in
revenue, respectively.
During 1996, the Company entered into an agreement with Microsoft
Corporation for advertising on the Company's ContentZone Websites. The term of
the contracts was for one year from the date of signing. The Company received a
prepayment in full for $150,000 in 1996. Revenue from the agreement was
recognized ratably over the terms of the contracts. For the years ended
December 31, 1996 and 1997, the Company recorded $75,000 and $75,000 in
revenue, respectively.
(8) Supplemental Cash Flow Information
Supplemental disclosure of cash flow information:
During 1996, 1997 and 1998, the amount of cash paid for interest was
$27,535, $0 and $0, respectively.
Non-cash financing activities:
During 1996, the Company converted $1.5 million of mandatory conversion
subordinated notes into Preferred Shares.
During 1997, the Company converted $94,757 of senior convertible notes
into common stock.
For the three months ended March 31, 1998, the Company converted 158,144
shares of convertible preferred stock into 2,171,633 shares of common stock,
converted $2,056,250 of senior convertible notes payable--related parties, plus
accrued interest, into 3,002,344 shares of Common Stock and outstanding
warrants were converted
F-21
24/7 MEDIA, INC.
(Successor Company to Interactive Imaginations, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996 and 1997
(All information subsequent to December 31, 1997 is Unaudited)
(8) Supplemental Cash Flow Information--Continued
into 396,476 shares of Common Stock. Additionally, for the three month period
ended March 31, 1998, the Company recorded imputed interest payable on loans
payable--related party of $9,000. The Company issued 10,494,366 and 6,821,335
shares of common stock in connection with the Petry and Advercomm acquisitions
respectively.
In February 1998, the Company issued warrants to a former officer for
$450,000 (see Note 4).
(9) Commitments
The Company leases its facilities and certain equipment under operating
lease agreements. During May 1996, the Company converted its New York office
lease agreements to a month-to-month basis for approximately 11,000 square feet
of office space. Rental expense from operating leases amounted to $31,000,
$175,000, $183,000 and $26,000 for the years ended 1995, 1996 and 1997 and for
the three month period ended March 31, 1998, respectively.
On June 1, 1996, the Company entered into an eighteen-month operating
lease for the use of computer equipment with a fair market value of
approximately $835,000. The lease requires six quarterly payments of $163,420
beginning on June 1, 1996. In October 1997, the lease agreement was modified
and as a result the quarterly payments were adjusted to $45,935 through the
extended term of the lease, November 30, 1998. Rent expense for the operating
lease was $381,313 and $559,748 for the years ended 1996 and 1997,
respectively.
Future minimum payments under noncancelable operating leases at December
31, 1997 are as follows:
[Download Table]
Operating
Year ending December 31 leases
------------------------------------------------ ----------
1998 ........................................ $271,000
1999 ........................................ 128,000
2000 ........................................ 23,000
2001 ........................................ 1,000
--------
Total minimum payments required ......... $423,000
========
Interactive Imaginations also entered into a Consulting Agreement, dated
as of January 1, 1998 with Neterprises, Inc. ("Consulting Agreement"), pursuant
to which Mr. Paolucci, President and sole stockholder of Neterprises, Inc.,
agreed to provide management and consulting services to Interactive
Imaginations for a term of up to one year in connection with the identification
and evaluation of potential strategic relationships and potential acquisition
targets. In return for such services, Mr. Paolucci received a lump sum payment
of $180,000 and currently receives a monthly fee of $12,500.
In connection with the stock purchase agreement to acquire Petry, the
Company is obligated to pay a related party a royalty of 5% of the gross
commissions or other revenues received by the Company, after deducting
advertising agency commissions and web-site royalties. Total royalties to be
paid will not exceed $1,000,000. Payment of the royalty amount commences upon
full repayment of the loan payable--related party (see note 4). As of March 31,
1998, the Company had accrued $46,149 in royalty payments which are included in
other long-term liabilities.
(10) Legal Proceedings
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material effect on the Company's
financial position, results of operation or liquidity. During 1997, the Company
successfully defended claims against the Company; however, legal costs incurred
in connection with such claims amounted to $232,304.
F-22
24/7 MEDIA, INC.
(Successor Company to Interactive Imaginations, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996 and 1997
(All information subsequent to December 31, 1997 is Unaudited)
(11) Subsequent Events--Unaudited
Intelligent Interactions Acquisition
During April 1998, the Company entered into an Agreement and Plan of
Merger (the "Merger") to acquire all of the outstanding stock of Intelligent
Interactions.
Upon consummation of the Merger, each share of common stock of Intelligent
Interactions was converted into approximately 16.3 shares of common stock, 2.3
Class A Warrants, 2.3 Class B Warrants and 1.2 Class C Warrants of the Company.
Each share of Preferred Stock, Series A Preferred Stock, Series AA
Preferred Stock or Series AAA Preferred Stock of Intelligent Interactions was
converted to approximately 18 shares of Mandatorily Redeemable Convertible
Preferred Stock--Series A, par value $.01 per share, 2.7 Class A Warrants, 2.7
Class B Warrants and 1.4 Class C Warrants of the Company. The convertible note
payable was also converted into Mandatorily Redeemable Convertible Preferred
Stock--Series A and detachable warrants were terminated as a result of the
merger.
In addition, each option to purchase shares of common stock of Intelligent
Interactions was converted into an option to purchase approximately 16 shares
of common stock of the Company under the terms and pursuant to the conditions
of the Company's 1998 Stock Incentive Plan.
The acquisition will be accounted for using the purchase method of
accounting, and accordingly, the total purchase price of $7,670,500 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.
Approximately $(154,200) of the aggregate purchase price is expected to be
allocated to net tangible liabilities consisting primarily of cash, accounts
receivable, property and equipment, accounts payable and accrued liabilities.
The historical carrying amounts of such net liabilities approximate their fair
values. Approximately $5,477,300 is expected to be allocated to in-process
technology and will be immediately charged to operations because such
in-process technology have not reached the stage of technological feasibility
at the acquisition dates and have no alternative future use. The purchase price
in excess of identified tangible and intangible assets and liabilities assumed
in the amount of $2,347,400 is expected to be allocated to goodwill and will be
amortized over its estimated useful life of two years.
CliqNow! Acquisitions
As of June 1, 1998, the Company acquired the CliqNow! division of K2
Design, Inc., an Internet advertising network comprised of medium to large
Websites organized into eight topical channels, for $4,000,000, with $1,000,000
payable in cash and $3,000,000 payable in Series B Convertible Redeemable
Preferred Stock. The preferred stock converts to Common Stock automatically
upon consummation of the Offering at a conversion price per share of Common
Stock equal to the per share proceeds to the Company. The Company intends to
furnish CliqNow!'s audited financial statements within 60 days of the effective
date of the acquisition pursuant to the requirements of Rule 3-05 of Regulation
S-X of the Securities Act of 1933, as amended.
(12) Initial Public Offering and Related Transactions (Unaudited)
The Company is offering shares of its common stock, par value
$.01 per share in an initial public offering (the "Offering"). All pro forma
amounts have been reflected to give effect of the Offering.
F-23
24/7 MEDIA, INC.
(Successor Company to Interactive Imaginations, Inc.)
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
OVERVIEW
During the period from January 1, 1998 through April 13, 1998, the Company
acquired three entities (the "Acquired Entities") in separate transactions in
exchange for securities of the Company. The Acquired Entities are as follows:
[Download Table]
EFFECTIVE EQUITY
ACQUIRED ENTITY DATE CONSIDERATION(1)
---------------------------------- ------------------- -----------------
Petry ............................ February 24, 1998 $ 4,292,800
Advercomm ........................ February 24, 1998 2,790,500
Intelligent Interactions ......... April 13, 1998 7,670,500
-----------
$14,753,800
===========
--------
(1) Includes acquisition costs of $157,000
The acquisitions have been accounted for using the purchase method of
accounting, and accordingly, each purchase price has been or will be allocated
to the tangible and identifiable intangible assets acquired and liabilities
assumed on the basis of their fair values on the acquisition dates.
Approximately $(1,276,400) of the aggregate recognized purchase price is
expected to be allocated to identified net tangible liabilities consisting
primarily of cash, accounts receivable, property and equipment, accounts
payable and accrued liabilities. The historical carrying amounts of such assets
and liabilities approximated their fair values. Approximately $5,477,300 of the
aggregate purchase price is expected to be allocated to in-process technology.
Because such in-process technology had not reached the stage of technological
feasibility at the acquisition dates and had no alternative future use, these
amounts were immediately charged to operations. The purchase price in excess of
identified tangible and intangible assets in the amount of $10,552,900 is
expected to be allocated to goodwill and is being amortized on an entity by
entity basis over its estimated useful life of two years.
The fair value of the Company's equity securities issued as consideration
for the acquisitions was determined based upon a number of considerations. The
fair value of the 17,315,701 aggregate shares of Common Stock issued in
connection with the acquisition of Petry and Advercomm was estimated to be
$0.40 per share, determined primarily by reference to the common stock
conversion price of $0.40 per share in connection with the Company's issuance
of approximately $1,000,000 senior convertible notes payable and detachable
warrants during September and November 1997. The fair value of the Company's
equity securities issued as consideration for the Intelligent Interactions
acquisition was determined based upon a number of factors, including the sale
of 10,060,002 shares of Mandatorily Convertible Redeemable Preferred
Stock-Series A on February 25, 1998 (excluding detachable warrants) for
$10,060,002 in cash. The fair value of the Company's Mandatorily Convertible
Redeemable Preferred Stock was estimated to be $1.06 per share and its Common
Stock $1.00 per share. The fair value of purchased existing and in-process
technologies were determined by management using a risk-adjusted income
valuation approach.
The following unaudited pro forma consolidated statements of operations
give effect to these acquisitions as if they had occurred on January 1, 1997
(or date of inception, if later) by consolidating the results of operations of
the Acquired Entities with the results of operations of 24/7 Media for the year
ended December 31, 1997 and the three months ended March 31, 1998. The pro
forma adjustments include the elimination of all intercompany transactions.
Advercomm was incorporated in November 1997 and had no operations in 1997;
however, the operation of Advercomm's network based advertising services
commenced on February 1, 1998; accordingly, Advercomm's pro forma results of
operations are only included in the pro forma statement of operations for the
two months of operations in the first quarter of 1998. The unaudited pro forma
consolidated statements of operations also gives effect to the conversion of
the Mandatorily Redeemable Preferred Stock into Common Stock which will be
converted immediately prior to the Offering as if it had occurred on January 1,
1997.
F-24
24/7 MEDIA, INC.
(Successor Company to Interactive Imaginations, Inc.)
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION--Continued
OVERVIEW--Continued
The unaudited pro forma consolidated statements of operations are not
necessarily indicative of the operating results that would have been achieved
had the transactions been in effect as of the beginning of the periods
presented and should not be construed as being representative of future
operating results.
The unaudited pro forma consolidated balance sheet gives effect to the
acquisition of Intelligent Interactions as if the acquisition had occurred on
March 31, 1998. The Company's historical consolidated balance sheet as of March
31, 1998 includes the February 24, 1998 acquisition of Petry and Advercomm. See
Notes 1 and 12 to the Consolidated Financial Statements.
The historical financial statements of the Company, Petry, and Intelligent
Interactions are included elsewhere in this Prospectus and the unaudited pro
forma consolidated financial information presented herein should be read in
conjunction with those financial statements and related notes.
F-25
24/7 MEDIA, INC.
(Successor Company to Interactive Imaginations, Inc.)
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
OVERVIEW--Continued
[Enlarge/Download Table]
Year Ended December 31, 1997
---------------------------------------------------------------------------
24/7 Media, Inc.
(successor company Pro forma
to Interactive Acquired Pro forma consolidated
Imaginations, Inc.) Companies adjustments 24/7 Media, Inc.
--------------------- --------------- ------------------ ------------------
Revenues:
Advertising ........................... $ 1,467,105 $ 1,269,260 -- $ 2,736,365
Consulting and license fees ........... 1,681,464 65,432 -- 1,746,896
------------ ------------ -- -------------
Total revenues ....................... 3,148,569 1,334,692 -- 4,483,261
Cost of revenues ....................... 1,655,340 1,174,598 -- 2,829,938
------------ ------------ -- -------------
Gross profit 1,493,229 160,094 -- 1,653,323
------------ ------------ -- -------------
Operating expenses:
Sales and marketing ................... 1,672,999 2,980,419 -- 4,653,418
General and administrative ............ 2,622,743 2,355,638 -- 4,978,381
Product development ................... 1,417,750 327,995 -- 1,745,745
Other expenses ........................ 989,099 -- -- 989,099
Amortization of
goodwill ............................. -- -- 3,612,034(B) 3,612,034
Write-off of acquired in-process
technology ........................... -- -- 5,477,281(A) 5,477,281
------------ ------------ --------- -------------
Total operating expenses ............. 6,702,591 5,664,052 9,089,315 21,455,958
------------ ------------ --------- -------------
Operating loss ......................... (5,209,362) (5,503,958) (9,089,315) (19,802,635)
Interest (expense) income, net ......... (96,466) 861 -- (95,605)
Net loss .............................. $ (5,305,828) $ (5,503,097) $ (9,089,315) $ (19,898,240)
============ ============ ============ =============
Pro forma:
Basic net loss per share (F) .........
Shares outstanding (F) ...............
Three Months Ended March 31, 1998
----------------------------------------------------------------------
24/7 Media, Inc.
(successor company Pro forma
to Interactive Acquired Pro forma consolidated
Imaginations, Inc.) Companies adjustments 24/7 Media, Inc.
--------------------- ------------- ---------------- -----------------
Revenues:
Advertising ........................... $ 1,076,250 $ 770,498 -- $ 1,846,748
Consulting and license fees ........... -- 88,362 -- 88,362
------------ ---------- -- ------------
Total revenues ....................... 1,076,250 858,860 -- 1,935,110
Cost of revenues ....................... 930,003 678,276 -- 1,608,279
------------ ---------- -- ------------
Gross profit 146,247 180,584 -- 326,831
------------ ---------- -- ------------
Operating expenses:
Sales and marketing ................... 653,460 524,978 -- 1,178,438
General and administrative ............ 1,285,512 459,999 -- 1,745,511
Product development ................... -- 66,738 -- 66,738
Other expenses ........................ -- -- -- --
Amortization of
goodwill ............................. 335,355 -- 850,448(B) 1,185,803
Write-off of acquired in-process
technology ........................... -- -- -- --
------------ ---------- ------- ------------
Total operating expenses ............. 2,274,327 1,051,715 850,448 4,176,490
------------ ---------- ------- ------------
Operating loss ......................... (2,128,080) (871,131) (850,448) (3,849,659
Interest (expense) income, net ......... (167,258) (11,434) -- (178,692)
Net loss .............................. $ (2,295,338) $ (882,565) $ (850,448) $ (4,028,351)
============ ========== ========== ============
Pro forma:
Basic net loss per share (F) .........
Shares outstanding (F) ...............
See accompanying notes to Pro Forma Consolidated Financial Information.
F-26
24/7 MEDIA, INC.
(Successor Company to Interactive Imaginations, Inc.)
PRO FORMA CONSOLIDATED BALANCE SHEET
[Enlarge/Download Table]
March 31, 1998 March 31, 1998
---------------------------------------------------------------------------
24/7 Media, Inc.
(successor company Intelligent Pro Pro forma
to Interactive Interactions Forma consolidated
Imaginations, Inc.) Corp. Adjustments 24/7 Media, Inc.
--------------------- ------------------------------------ ----------------
ASSETS
Current assets:
Cash and cash equivalents ............................... $ 7,764,695 3,675 -- 7,768,370
Accounts receivable, net ................................ 1,818,899 87,499 -- 1,906,398
Prepaid expenses and other current assets ............... 52,296 13,568 65,864
-------------- ---------- ----------- -----------
Total current assets ................................ 9,635,890 104,742 -- 9,740,632
Property and equipment, net ............................. 630,652 129,451 -- 760,103
Goodwill, net ........................................... 7,870,174 -- 2,347,406(C) 10,217,580
Deferred offering costs ................................. 13,148 -- -- 13,148
Intangible assets, net .................................. 2,503 -- -- 2,503
Deposits ................................................ 49,626 49,626
-------------- ---------- ----------- -----------
Total assets ........................................ $ 18,201,993 234,193 2,347,406 20,783,592
============== ========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Line of credit .......................................... -- 17,195 -- 17,195
Accounts payable ........................................ 813,518 121,801 66,300(C) 1,001,619
Accrued liabilities ..................................... 2,180,969 183,102 -- 2,364,071
Loans payable--related party ............................ 283,267 -- -- 283,267
Convertible note payable ................................ -- 450,000 (450,000)(E) --
Deferred revenue ........................................ 41,000 -- 41,000
-------------- ---------- ----------- -----------
Total current liabilities ........................... 3,318,754 772,098 (383,700) 3,707,152
Senior convertible notes payable--related parties, net of
debt discount .......................................... 479,408 -- -- 479,408
Other liabilities ....................................... 46,149 -- -- 46,149
450,000(E)
Mandatorily redeemable convertible preferred stock, ..... 10,093,502 3,454,481 (13,999,783)(D) --
Stockholders' equity (deficit):
Convertible preferred stock ............................. -- -- -- --
Common stock ............................................ 274,812 2,412 178,641(D) 455,865
Additional paid-in capital .............................. 19,623,624 135,690 17,447,241(D) 37,206,555
Accumulated deficit ..................................... (15,634,256) (4,130,488) (1,346,793)(C) (21,111,537)
-------------- ---------- ----------- -----------
Total stockholders' equity (deficit) ................ 4,264,180 (3,992,386) 16,279,089 16,550,883
-------------- ---------- ----------- -----------
Commitments and contingencies
Total liabilities and stockholders' equity .......... 18,201,993 234,193 2,347,406 20,783,592
============== ========== =========== ===========
See accompanying notes to Pro Forma Consolidated Financial Information.
F-27
The following adjustments were applied to the Company's historical
consolidated financial statements and the Acquired Entities to arrive at the
pro forma consolidated financial information.
(A) To record acquired in-process technology associated with the
Intelligent Interactions acquisition in the amount of $5,477,300 which has been
recognized on January 1, 1997.
(B) To record amortization expense related to goodwill in the amount of
$10,552,900, which is amortized on an entity by entity basis, as if each
acquisition had occurred on January 1, 1997 (or inception, if later), over its
estimated useful life of two years.
(C) To record goodwill associated with the acquisition of Intelligent
Interactions and record a reduction to accumulated deficit in connection with
the related acquired in-process technology and to eliminate the historical
stockholders' deficit as of the acquisition date using the purchase method of
accounting.
(D) To give effect to the conversion of all outstanding shares of 24/7
Media's mandatorily redeemable convertible preferred stock (included shares
issued in connection with the Intelligent Interactions acquisition) into
14,308,306 shares of Common Stock immediately prior to the closing of this
offering.
(E) To give effect to conversion of Intelligent Interactions' $450,000
convertible note payable and $3,454,500 of manditorily redeemable convertible
preferred stock into shares of 24/7 Media's mandatorily redeemable convertible
preferred stock.
(F) The Company computes net loss per share in accordance with the
provisions of SFAS No. 128, "Earnings Per Share" and SEC Staff Accounting
Bulletin No. 98. Under SFAS No. 128 and SAB No. 98, basic net loss per share is
computed by dividing the net loss for the period by the weighted average number
of common shares outstanding during the period. The weighted average shares
used to compute basic net loss per share include outstanding shares of Common
Stock from the date of issuance. The computation excludes (i) for the year
ended December 31, 1997, _________ equivalent shares of Mandatorily Redeemable
Convertible Preferred Stock Series A. In addition, the calculation of diluted
net loss per share excludes Common Stock issuable upon exercise of employee
stock options and upon exercise of outstanding warrants, as their effect in all
periods presented is antidilutive.
Pro forma net loss per share is computed on the basis described above and
giving effect to the common shares issued to the acquired companies as if
acquired on January 1, 1997.
In future periods, the weighted average shares used to compute diluted
earnings per share will include the incremental shares of Common Stock relating
to outstanding options and warrants to the extent such incremental shares are
dilutive.
F-28
INDEPENDENT AUDITORS' REPORT
The Members of Interactive Holdings, LLC
(formerly Petry Interactive, Inc.)
We have audited the accompanying balance sheet of Interactive Holdings,
LLC (formerly Petry Interactive, Inc.) as of December 31, 1997 (Successor), and
the related statement of operations and shareholder's/members' deficit and cash
flows for the period from February 1, 1997 (inception) to September 28, 1997
(Predecessor) and the period from September 29, 1997 to December 31, 1997
(Successor). These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Interactive Holdings, LLC
as of December 31, 1997 (Successor), and the results of its operations and its
cash flows for the period February 1, 1997 (inception) to September 28, 1997
(Predecessor) and the period from September 29, 1997 to December 31, 1997
(Successor) in conformity with generally accepted accounting principles.
As discussed in note 1 to the financial statements, on September 29, 1997,
Interactive Holdings, LLC acquired Petry Interactive, Inc. As a result of the
change in control, the financial information for the period after the change in
control is presented on a different cost basis than that for the period before
the change in control and, therefore, is not comparable.
KPMG PEAT MARWICK LLP
New York, New York
June 2, 1998
F-29
INTERACTIVE HOLDINGS, LLC
(FORMERLY PETRY INTERACTIVE, INC.)
BALANCE SHEET
[Enlarge/Download Table]
December 31,
1997
-------------
Successor
ASSETS
Current Assets:
Cash ...................................................................... $ 117,849
Accounts receivable, net of allowance for doubtful accounts of $158,777 ... 803,089
Prepaid expenses and other current assets ................................. 6,449
----------
Total current assets .................................................. 927,387
----------
Other assets ................................................................. 5,000
----------
Total assets .......................................................... $ 932,387
----------
LIABILITIES AND MEMBERS' DEFICIT
Current Liabilities:
Loan payable--related party ............................................... 300,000
Accounts payable .......................................................... 8,875
Accrued liabilities ....................................................... 1,297,024
----------
Total current liabilities ............................................. 1,605,899
----------
Other long-term liabilities .................................................. 16,733
----------
Total liabilities ............................................................ 1,622,632
----------
Members' deficit:
Common Stock; $0.01 par value, 200,000 shares authorized, 100 shares issued
and outstanding .......................................................... 1
Paid in capital ........................................................... 6,000
Members' deficit .......................................................... (696,246)
----------
Total members' equity (deficit) ....................................... (690,245)
----------
Commitments and contingencies
Total liabilities and members' deficit ................................ $ 932,387
==========
See accompanying notes to financial statements.
F-30
INTERACTIVE HOLDINGS, LLC
(FORMERLY PETRY INTERACTIVE, INC.)
STATEMENTS OF OPERATIONS
[Download Table]
Period from
February 1, 1997 Period from
(inception) September 29, 1997
to to
September 28, 1997 December 31, 1997
-------------------- -------------------
(Predecessor) (Successor)
Advertising revenue ..................... $ 514,982 $ 754,279
Cost of revenues ........................ 449,621 724,973
------------ ----------
Gross profit ..................... 65,361 29,306
------------ ----------
Operating expenses:
Sales and marketing .................. 1,306,125 424,386
General and administrative ........... 950,210 295,163
------------ ----------
Total operating expenses ......... 2,256,335 719,549
Interest expense ..................... -- 6,000
----------
Net loss ......................... $ (2,190,974) $ (696,243)
============ ==========
See accompanying notes to financial statements.
F-31
INTERACTIVE HOLDINGS, LLC
(FORMERLY PETRY INTERACTIVE, INC.)
STATEMENTS OF SHAREHOLDER'S/MEMBERS' EQUITY (DEFICIT)
[Enlarge/Download Table]
Total
Common Paid-In Shareholder's Shareholder's
Stock Capital Deficit Deficit
-------- --------- --------------- --------------
Balance as of February 1, 1997 (inception) ......... $ 1 -- $ (1) --
Net loss for the period ............................ -- -- (2,190,974) (2,190,974)
--- -- ------------ ----------
Balance as of September 28, 1997 ................... $ 1 -- (2,190,975) (2,190,974)
=== == ============ ==========
--------------------------------------------------------------------------------
[Enlarge/Download Table]
Tota l
Common Paid-In Members' Members'
Stock Capital Deficit Deficit
----- ------- ------- -------
Members' deficit subsequent to the change in control as of
September 28, 1997 ...................................... $ 1 -- -- 1
------ ------ --------- ---------
Imputed interest on loan payable--related party .......... -- 6,000 -- 6,000
Net loss for the period .................................. -- -- (696,246) (696,246)
------ ------ --------- ---------
Members' deficit as of December 31, 1997 ................. $ 1 6,000 (696,246) (690,245)
====== ====== ========= =========
See accompanying notes to financial statements.
F-32
INTERACTIVE HOLDINGS, LLC
(FORMERLY PETRY INTERACTIVE, INC.)
STATEMENTS OF CASH FLOWS
[Enlarge/Download Table]
Period from
February 1, 1997 Period from
(inception) September 29, 1997
to to
September 28, 1997 December 31, 1997
-------------------- -------------------
(Predecessor) (Successor)
Cash flows from operating activities:
Net loss ........................................................ $ (2,190,974) (696,243)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation ................................................... 10,358 --
Provision for doubtful accounts ................................ 12,992 145,786
Imputed interest on loan payable--related party ................ 6,000
Changes in operating assets and liabilities, net of acquisition:
Accounts receivable ........................................... (424,800) (410,861)
Prepaid assets and other current assets ....................... (5,490) (960)
Other assets .................................................. -- (5,000)
Accounts payable .............................................. 15,000 (6,125)
Accrued liabilities ........................................... 528,501 785,252
------------ --------
Net cash used by operating activities ....................... (2,054,413) (182,151)
------------ --------
Cash flows from financing activities:
Proceeds from loan payable--related party ....................... -- 300,000
Net cash transferred from--related party ........................ 2,180,617 --
------------ --------
Net cash provided by financing activities ................... 2,180,617 300,000
------------ --------
Net change in cash .......................................... 126,205 117,849
Cash at the beginning of period .................................... -- --
------------ --------
Cash at end of period .............................................. $ 126,205 117,849
============ ========
See accompanying notes to financial statements.
F-33
INTERACTIVE HOLDINGS, LLC
(FORMERLY PETRY INTERACTIVE, INC.)
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
(All information subsequent to December 31, 1997 is Unaudited)
(1) Summary of Operations and Significant Accounting Policies
(a) Summary of Operations
Interactive Holdings, LLC. (formerly Petry Interactive, Inc.) (the
"Company") operates a network of Websites that enables both advertisers and Web
publishers to capitalize on the many opportunities presented by Internet
advertising, direct marketing and commerce. The Company generates revenues by
delivering advertisements and promotions to Websites affiliated with the
Company ("Affiliated Websites").
Inherent in the Company's business are various risks and uncertainties,
including its limited operating history, unproven business model and the
limited history of commerce on the Internet. The Company's success may depend
in part upon the emergence of the Internet as a communications medium,
prospective project development efforts, and the acceptance of the Company's
solutions by the marketplace.
On February 25, 1998, the Company simultaneously merged with Advercomm,
Inc. and with and into 24/7 Media, Inc. (successor company to Interactive
Imaginations, Inc.).
(b) Basis of Presentation
For the period February 1, 1997 (inception) to September 28, 1997, Petry
Interactive, Inc. was a wholly owned subsidiary of Petry Media Corporation
("PMC") (Predecessor). On February 1, 1997, Petry Interactive commenced
operations as a provider of Internet advertising solutions to a network of
Websites. On September 29, 1997, the Company entered into a Stock Purchase
Agreement whereby all of the outstanding shares of Petry Interactive, Inc. were
purchased by the Company in exchange for $100 in cash plus a warrant to
purchase 20% of the Company for $0.25. Accordingly, the statements of
operations and cash flows for the period February 1, 1997 (inception) to
September 28, 1997 reflect the operations of the Company as part of PMC
(Predecessor), and the balance sheet as of December 31, 1997 and the statements
of operations, members' deficit and cash flows for the period September 29,
1997 to December 31, 1997 reflect the operations and financial position under
the ownership of the Company (Successor).
As a result of the change in control, the financial information for the
period after the change in control is presented on a different cost basis than
that for the period before the change in control and, therefore, is not
comparable.
The accompanying financial statements include certain corporate general
and administrative expenses incurred on a consolidated basis by PMC for the
period February 1, 1997 (inception) to September 28, 1997 that have been
allocated to the Company. Such allocations include corporate salaries, rent,
professional services and depreciation and are included in general and
administrative expenses in the Company's statement of operations. In
management's opinion, the basis for the allocation of such costs is reasonable.
However, the expenses allocated to the Company are not necessarily
representative of what the Company would have incurred on a stand alone basis.
Allocated costs are as follows:
[Download Table]
Period from
February 1, 1997
(inception)
to
September 28, 1997
-------------------
(Predecessor)
Corporate salaries ............ $534,686
Rent .......................... 63,896
Professional services ......... 23,594
Depreciation .................. 10,358
--------
$632,534
========
F-34
INTERACTIVE HOLDINGS, LLC
(FORMERLY PETRY INTERACTIVE, INC.)
NOTES TO FINANCIAL STATEMENTS--Continued
December 31, 1997
(All information subsequent to December 31, 1997 is Unaudited)
(1) Summary of Operations and Significant Accounting Policies --Continued
The purchase of the Company by Interactive Holdings LLC was accounted for
using the purchase method of accounting. The estimated fair value of the net
assets acquired is as follows:
[Download Table]
Accounts receivable, net ...................... $538,013
Prepaid and other current assets .............. 5,490
Accounts payable and accrued expenses ......... 543,502
The estimated fair value of the net assets acquired was determined by
management by reference to the fair value of these instruments at the date of
purchase which approximated their financial statement carrying amount.
(c) 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 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.
(d) Income Taxes
For the period February 1, 1997 (inception) to September 28, 1997, federal
and state income taxes are provided as if the Company filed a separate tax
return. On a stand alone basis, the Company owes no current taxes and has not
been allocated any income tax expense (benefit) by PMC.
For the period September 29, 1997 to December 31, 1997, for federal and
state income tax purpose, the Company is treated as a partnership. The Company
incurred a net operating loss of $696,243 for the period, accordingly, no
provision has been made for income taxes, as income or loss is included in the
tax returns of the members.
(e) Revenue Recognition
The Company's advertising revenues are derived principally from short-term
advertising agreements in which the Company delivers advertising impressions or
full-page deliveries for a fixed fee to third-party Websites comprising the
Petry Network. For the period February 1, 1997 (inception) to September 28,
1997, revenues from advertising were recognized ratably over the term of the
agreement as services were performed. For the period from September 29, 1997,
to December 31, 1997, revenues from advertising are recognized in the period
the advertising impressions are delivered provided collection of the resulting
receivable is probable.
Websites affiliated with the Company ("Affiliated Websites") register web
page(s) with the Company's network and display advertising banners on those
pages. The Company pays its Affiliated Websites a service fee for providing
advertising space to the Petry Network. The Company becomes obligated to make
payments to such Affiliated Websites, which have contracted with the Company to
be part of the Petry Network, in the period the advertising impressions are
delivered. Such expenses are classified as cost of revenues in the statements
of operations.
At December 31, 1997, accounts receivable include approximately $500,700
of unbilled receivables for which revenue was recognized in 1997.
(f) Advertising Expenses
The Company expenses the cost of advertising and promoting its services as
incurred. Such costs are included in sales and marketing in the statement of
operations and totaled $18,000 and $19,765 for the period February 1, 1997
(inception) to September 28, 1997 and for the period September 29, 1997 to
December 31 1997, respectively.
F-35
INTERACTIVE HOLDINGS, LLC
(FORMERLY PETRY INTERACTIVE, INC.)
NOTES TO FINANCIAL STATEMENTS--Continued
December 31, 1997
(All information subsequent to December 31, 1997 is Unaudited)
(1) Summary of Operations and Significant Accounting Policies --Continued
(g) Financial Instruments and Concentration of Risk
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist primarily of cash, accounts receivable,
accounts payable and accrued liabilities. At December 31, 1997 the fair value
of these instruments approximated their financial statement carrying amount.
Accounts receivable have been derived from advertising fees billed to
advertisers located in the United States. The Company generally requires no
collateral. The Company maintains reserves for potential credit losses. At
December 31, 1997, one customer accounted for over 10% of the Company's
accounts receivable, accounting for 12% of total receivables.
(2) Balance Sheet Components
Accrued Liabilities
A summary of accrued liabilities follows:
[Download Table]
December 31,
1997
-------------
Affiliate royalties .......... $ 684,532
Ad management fees ........... 219,120
Employee commissions ......... 203,729
Other ........................ 189,643
----------
$1,297,024
==========
(3) Loan Payable--Related Party
In connection with the Stock Purchase Agreement with PMC, dated September
29, 1997, PMC agreed to lend an aggregate of $300,000 during the period
September 29, 1997 to December 31, 1997. The loan is repaid at a rate of 5% of
the gross commissions or other revenues received by the Company, after
deducting advertising agency commissions and web-site royalties. The loan has
no stated interest and is expected to be paid within the next year.
In accordance with Staff Accounting Bulletin Topic 5:T, the Company has
imputed an interest cost because these loans have no stated interest rate. The
imputed interest rate used was based on a market rate of interest of 12%. For
the three month period ended December 31, 1997, interest expense was $6,000.
(4) Commitments
In connection with the Stock Purchase Agreement dated September 29, 1997,
the Company is obligated to pay PMC a royalty of 5% of the gross commissions or
other revenues received by the Company, after deducting advertising agency
commissions and web-site royalties. Total royalties to be paid will not exceed
$1,000,000. Any payments of the royalty amount commences upon full repayment of
the loan payable--related party (See note 3). As of December 31, 1997, the
Company had accrued $16,733 in royalty payments to PMC which are included in
other long-term liabilities.
(5) Legal Proceedings
The Company is involved in various other claims and legal actions arising
in the ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material effect on the Company's
financial position, results of operation or liquidity.
F-36
INTERACTIVE HOLDINGS, LLC
(FORMERLY PETRY INTERACTIVE, INC.)
NOTES TO FINANCIAL STATEMENTS--Continued
December 31, 1997
(All information subsequent to December 31, 1997 is Unaudited)
(6) Warrants
In connection with the Stock Purchase Agreement dated September 29, 1997,
the Company issued to PMC a warrant for 25 shares of common stock, $.01 par
value for $0.25. The warrant was exercised in connection with the February 1998
Plan of Merger and Securities Purchase Agreement (see Note 7).
(7) Subsequent Event--Unaudited
On February 24, 1998, the Company sold all of its issued and outstanding
shares to 24/7 Media, Inc. in exchange for 10,494,366 shares of 24/7 Media
Inc.'s common stock.
F-37
Report of Independent Public Accountants
To Intelligent Interactions Corporation:
We have audited the accompanying balance sheets of Intelligent
Interactions Corporation (a Delaware corporation in the development stage) as
of December 31, 1996 and 1997, and the related statements of operations,
stockholders' deficit and cash flows for the period from inception (February
28, 1995) to December 31, 1995 and the years ended December 31, 1996 and 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these 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 audits 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 financial statements referred to above present fairly,
in all material respects, the financial position of Intelligent Interactions
Corporation as of December 31, 1996 and 1997, and the results of its operations
and its cash flows for the period from inception to December 31, 1995 and the
years ended December 31, 1996 and 1997, in conformity with generally accepted
accounting principles.
/s/ ARTHUR ANDERSEN LLP
Washington, D.C.
May 13, 1998
F-38
INTELLIGENT INTERACTIONS CORPORATION
(A Development Stage Company)
BALANCE SHEETS
[Enlarge/Download Table]
December 31, March 31,
----------------------------- ---------------
1996 1997 1998
------------- --------------- ---------------
ASSETS (unaudited)
Current assets:
Cash and cash equivalents ......................................................... $ 531,100 $ 423,548 $ 3,675
Accounts receivable ............................................................... -- 23,768 87,499
Other current assets .............................................................. 100 7,169 13,568
---------- ------------- -------------
Total current assets ............................................................ 531,200 454,485 104,742
---------- ------------- -------------
Property and equipment, at cost:
Computer equipment ................................................................ 93,243 151,163 151,163
Furniture and fixtures ............................................................ 2,329 16,648 16,648
Software .......................................................................... 2,656 22,714 22,714
---------- ------------- -------------
98,228 190,525 190,525
Less--Accumulated depreciation .................................................... (11,537) (46,073) (61,074)
---------- ------------- -------------
86,691 144,452 129,451
---------- ------------- -------------
Total assets .................................................................... $ 617,891 $ 598,937 $ 234,193
========== ============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .................................................................. 27,298 100,542 121,801
---------- ------------- -------------
Accrued expenses .................................................................. 36,184 121,991 183,102
Line of credit .................................................................... $ -- $ 19,583 $ 17,195
Note payable to officer ........................................................... 86,446 -- --
Convertible notes payable ......................................................... -- 450,000 450,000
Total current liabilities ....................................................... 149,928 692,116 772,098
Commitments (Note 5) ................................................................
Convertible, redeemable preferred stock; $0.01 par value
Series A; 71,870 shares authorized; 71,870 issued and outstanding in 1996, 1997
and 1998, respectively; entitled to liquidation preference of $16.42 per share
plus unpaid dividends; 8% per annum ($1,209,075, $1,303,483 and $1,327,085
in the aggregate in 1996, 1997 and 1998, respectively) ........................... 1,209,075 1,303,483 1,327,085
Series A-1; 71,870 shares authorized; none issued or outstanding .................. -- -- --
Series AA; 54,150 shares authorized; 0 and 54,142 issued and outstanding in 1996
and in 1997 and 1998, respectively; entitled to liquidation preference of $18.47
per share plus unpaid dividends; 8% per annum ($1,056,447 and $1,076,447 in
the aggregate in 1997 and 1998, respectively) .................................... -- 1,056,447 1,076,447
Series AA-1; 54,150 shares authorized; none issued or outstanding ................. -- -- --
Series AAA; 78,304 shares authorized; 0 and 48,712 issued and outstanding in
1996 and in 1997 and 1998, respectively; entitled to liquidation preference of
$20.53 per share plus unpaid dividends; 8% per annum ($1,030,948 and
$1,050,949 in 1997 and 1998, respectively in the aggregate)....................... -- 1,030,948 1,050,949
Series AAA-1; 78,304 shares authorized; none issued or outstanding ................ -- -- --
---------- ------------- -------------
Total convertible, redeemable preferred stock value 1,209,075 3,390,878 3,454,481
---------- ------------- -------------
Stockholders' deficit:
Common stock; $0.01 par value; 930,000 shares authorized; 230,170 shares issued
and outstanding in 1996, 1997, and 1998, respectively ............................ 2,412 2,412 2,412
Additional paid-in capital ........................................................ 142,290 142,290 142,290
Treasury stock .................................................................... (6,600) (6,600) (6,600)
Deficit accumulated during the development stage .................................. (879,214) (3,622,159) (4,130,488)
---------- ------------- -------------
Total stockholders' deficit ..................................................... (741,112) (3,484,057) (3,992,386)
---------- ------------- -------------
Total liabilities and stockholders' deficit ..................................... $ 617,891 $ 598,937 $ 234,193
========== ============= =============
The accompanying notes are an integral part of these balance sheets.
F-39
INTELLIGENT INTERACTIONS CORPORATION
(A Development Stage Company)
STATEMENTS OF OPERATIONS
[Download Table]
Period From
Inception
(February 28,
1995) To Year Ended Year Ended
December 31, December 31, December 31,
1995 1996 1997
--------------- -------------- ----------------
Revenues:
Consulting and license
fees and support ............... $ -- $ -- $ 65,432
Cost of revenues ................ -- -- --
---------- ---------- ------------
Gross profit ................. -- -- 65,432
Operating expenses:
Sales and marketing ............. -- 254,515 1,249,910
Product development ............. 21,964 92,280 327,995
General and
administrative ................. 133,238 350,368 1,055,589
---------- ---------- ------------
Total operating expenses ......... 155,202 697,163 2,633,494
---------- ---------- ------------
Loss from operations ............. (155,202) (697,163) (2,568,062)
Interest income (expense),
net ............................. 473 (1,438) 6,861
Other income ..................... -- 3,085 --
---------- ---------- ------------
Net loss ......................... (154,729) (695,516) (2,561,201)
Less dividends on
preferred stock ................. -- (28,969) (181,744)
---------- ---------- ------------
Net loss applicable to
common stock .................... $ (154,729) $ (724,485) $ (2,742,945)
========== ========== ============
Period From
Inception
(February 28,
Quarter Ended Quarter Ended 1995) To
March 31, March 31, March 31,
1997 1998 1998
--------------- --------------- ----------------
(unaudited) (unaudited) (unaudited)
Revenues:
Consulting and license
fees and support ............... $ -- $ 88,362 $ 153,794
Cost of revenues ................ -- 13,200 13,200
---------- ---------- ------------
Gross profit ................. -- 75,162 140,594
Operating expenses:
Sales and marketing ............. 182,043 226,548 1,730,973
Product development ............. 91,386 66,738 508,977
General and
administrative ................. 250,165 221,168 1,760,363
---------- ---------- ------------
Total operating expenses ......... 523,594 514,454 4,000,313
---------- ---------- ------------
Loss from operations ............. (523,594) (439,292) (3,859,719)
Interest income (expense),
net ............................. 460 (5,434) 462
Other income ..................... -- -- 3,085
---------- ---------- ------------
Net loss ......................... (523,134) (444,726) (3,856,172)
Less dividends on
preferred stock ................. (23,602) (63,603) (274,316)
---------- ---------- ------------
Net loss applicable to
common stock .................... $ (546,736) $ (508,329) $ (4,130,488)
========== ========== ============
The accompanying notes are an integral part of these balance sheets.
F-40
INTELLIGENT INTERACTIONS CORPORATION
(A Development Stage Company)
STATEMENTS OF STOCKHOLDERS' EQUITY
[Enlarge/Download Table]
Stockholders'
Deficit
-------------------
Preferred Stock Common Stock
----------------------- -------------------
Shares Amount Shares Amount
---------- ------------ ---------- --------
Inception, February 28, 1995 ....................... -- $ -- -- $ --
Sale of Common Stock to Founders at $0.60 per
share, July, September, and December 1995 ........ -- -- 206,670 2,067
Stock issued to employees for services rendered
valued at $0.60 per share, December 1995.......... -- -- 14,500 145
Net loss .......................................... -- -- -- --
------ ---------- ------- ------
Balance, December 31, 1995 ......................... -- -- 221,170 2,212
Stock issued to employee for services rendered
valued at $0.60 per share, February 1996.......... -- -- 20,000 200
Sale of Series A Preferred Stock to investors
valued at $16.42 per share, September 1996........ 71,870 1,180,106 -- --
Repurchase of 11,000 of terminated employee's
shares by the Company at $0.60 per share,
November 1996 ..................................... -- -- -- --
Accrued dividends on Preferred Stock .............. -- 28,969 -- --
Net loss .......................................... -- -- -- --
------ ---------- ------- ------
Balance, December 31, 1996 ......................... 71,870 1,209,075 241,170 2,412
Sale of Series AA Preferred Stock to investors
valued at $18.47 per share, April 1997............ 54,142 1,000,002 -- --
Sale of Series AAA Preferred Stock to investors
valued at $20.53 per share, August 1997........... 48,712 1,000,057 -- --
Accrued Dividends on Preferred Stock .............. -- 181,744 -- --
Net loss .......................................... -- -- -- --
------ ---------- ------- ------
Balance, December 31, 1997 ......................... 174,724 3,390,878 241,170 2,412
Accrued dividends on Preferred Stock
(unaudited) ...................................... -- 63,603 -- --
Net loss (unaudited) .............................. -- -- -- --
------- ---------- ------- ------
Balance, March 31, 1998 (unaudited) ................ 174,724 $3,454,481 241,170 $2,412
======= ========== ======= ======
Stockholders' Deficit
------------------------------------------
Deficit
Accumulated
Additional During the
Paid-In Treasury Development
Capital Stock Stage
------------ ------------- ---------------
Inception, February 28, 1995 ....................... $ -- $ -- $ --
Sale of Common Stock to Founders at $0.60 per
share, July, September, and December 1995 ........ 121,935 -- --
Stock issued to employees for services rendered
valued at $0.60 per share, December 1995.......... 8,555 -- --
Net loss .......................................... -- -- (154,729)
-------- --------- ------------
Balance, December 31, 1995 ......................... 130,490 -- (154,729)
Stock issued to employee for services rendered
valued at $0.60 per share, February 1996.......... 11,800 -- --
Sale of Series A Preferred Stock to investors
valued at $16.42 per share, September 1996........ -- -- --
Repurchase of 11,000 of terminated employee's
shares by the Company at $0.60 per share,
November 1996 ..................................... -- (6,600) --
Accrued dividends on Preferred Stock .............. -- -- (28,969)
Net loss .......................................... -- -- (695,516)
-------- --------- ------------
Balance, December 31, 1996 ......................... 142,290 (6,600) (879,214)
Sale of Series AA Preferred Stock to investors
valued at $18.47 per share, April 1997............ -- -- --
Sale of Series AAA Preferred Stock to investors
valued at $20.53 per share, August 1997........... -- -- --
Accrued Dividends on Preferred Stock .............. -- -- (181,744)
Net loss .......................................... -- -- (2,561,201)
-------- --------- ------------
Balance, December 31, 1997 ......................... 142,290 (6,600) (3,622,159)
Accrued dividends on Preferred Stock
(unaudited) ...................................... -- -- (63,603)
Net loss (unaudited) .............................. -- -- (444,726)
-------- --------- ------------
Balance, March 31, 1998 (unaudited) ................ $142,290 $ (6,600) $ (4,130,488)
======== ========= ============
The accompanying notes are an integral part of these statements.
F-41
INTELLIGENT INTERACTIONS CORPORATION
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
[Enlarge/Download Table]
Period From
Inception
(February 28,
1995) To Year Ended Year Ended
December 31, December 31, December 31,
1995 1996 1997
--------------- -------------- ----------------
Cash flows from operating activities:
Net loss ............................................. $ (154,729) $ (695,516) $ (2,561,201)
Adjustments to reconcile net loss to net cash used
in operating activities-- ...........................
Depreciation ........................................ 2,185 9,352 34,536
Compensation expense on stock grants ................ 8,700 12,000 --
Changes in operating assets and liabilities:
Accounts receivable ................................ -- -- (23,768)
Other current assets ............................... (1,000) 900 (7,069)
Accounts payable and accrued expenses .............. 5,497 57,985 159,051
---------- ----------- ------------
Net cash used in operating activities ............. (139,347) (615,279) (2,398,451)
Cash flows from investing activities:
Purchases of property and equipment .................. (13,109) (85,119) (92,297)
---------- ----------- ------------
Net cash used in investing activities ............. (13,109) (85,119) (92,297)
Cash flows from financing activities:
Proceeds from sale of common stock ................... 124,002 -- --
Proceeds from sale of preferred stock ................ -- 1,180,106 2,000,059
Purchase of treasury shares .......................... -- (6,600) --
Proceeds from note payable ........................... -- -- 450,000
Net proceeds from (payments on) line of credit ....... 10,000 (10,000) 19,583
Net proceeds from (payments on) note payable to
officer ............................................. 56,000 30,446 (86,446)
---------- ----------- ------------
Net cash provided by financing activities ......... 190,002 1,193,952 2,383,196
---------- ----------- ------------
Net increase (decrease) in cash ....................... 37,546 493,554 (107,552)
Cash and cash equivalents, beginning of period ........ -- 37,546 531,100
---------- ----------- ------------
Cash and cash equivalents, end of period .............. $ 37,546 $ 531,100 $ 423,548
========== =========== ============
Supplemental cash flow information:
Cash paid for interest ............................... $ -- $ 10,331 $ 15,284
========== =========== ============
Period From
Inception
(February 28,
Quarter Ended Quarter Ended 1995) To
March 31, March 31, March 31,
1997 1998 1998
--------------- --------------- ----------------
(unaudited) (unaudited) (unaudited)
Cash flows from operating activities:
Net loss ............................................. $ (523,134) $ (444,726) $ (3,856,172)
Adjustments to reconcile net loss to net cash used
in operating activities-- ...........................
Depreciation ........................................ 3,815 15,001 61,074
Compensation expense on stock grants ................ -- -- 20,700
Changes in operating assets and liabilities:
Accounts receivable ................................ (100) (63,731) (87,499)
Other current assets ............................... (19,192) (6,399) (13,568)
Accounts payable and accrued expenses .............. 101,677 82,370 304,903
---------- ---------- ------------
Net cash used in operating activities ............. (436,934) (417,485) (3,570,562)
Cash flows from investing activities:
Purchases of property and equipment .................. (50,749) -- (190,525)
---------- ---------- ------------
Net cash used in investing activities ............. (50,749) -- (190,525)
Cash flows from financing activities:
Proceeds from sale of common stock ................... -- -- 124,002
Proceeds from sale of preferred stock ................ -- -- 3,180,165
Purchase of treasury shares .......................... -- -- (6,600)
Proceeds from note payable ........................... -- -- 450,000
Net proceeds from (payments on) line of credit ....... -- (2,388) 17,195
Net proceeds from (payments on) note payable to
officer ............................................. (28,101) -- --
---------- ---------- ------------
Net cash provided by financing activities ......... (28,101) (2,388) 3,764,762
---------- ---------- ------------
Net increase (decrease) in cash ....................... (515,784) (419,873) 3,675
Cash and cash equivalents, beginning of period ........ 531,100 423,548 --
---------- ---------- ------------
Cash and cash equivalents, end of period .............. $ 15,316 $ 3,675 $ 3,675
========== ========== ============
Supplemental cash flow information:
Cash paid for interest ............................... $ 1,928 $ 6,626 $ 32,241
========== ========== ============
The accompanying notes are an integral part of these statements.
F-42
INTELLIGENT INTERACTIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS
As of December 31, 1997 and 1996 and
As of March 31, 1998 (unaudited)
(All information subsequent to December 31, 1997 is Unaudited)
(1) Business Description and Risk Factors
Intelligent Interactions Corporation (the "Company"), was incorporated on
February 28, 1995, in the state of Delaware. The Company is developing the
Intelligent Programming Engine (IPE[TM]), an enabling technology necessary to
ensure the economic viability of the information super highway. The IPE[TM]
provides targeted content delivery through interactive on-line networks. The
Company is in the development stage and has a limited operating history, has
incurred operating losses since its inception, and expects losses to continue
and increase. Since its inception, the Company has been engaged in development
and organizational efforts, including development of its IPE[TM] software
technology; creation of development and deployment plans; and recruitment of
administrative, technical, and business development staff. Many of the
Company's current and potential competitors have substantially greater
financial and technological resources, sales and marketing capabilities, and
experience than the Company. The Company's success will depend on the continued
service of its management team and technical personnel. There can be no
assurance that the Company will be successful in the development or
commercialization of its services.
In April 1998, the Company was acquired by 24/7 Media, Inc. ("24/7 Media"
See Note 8). 24/7 Media has committed to fund the future operations of
Intelligent Interactions.
Common Stock Split
Pursuant to the amendment of its certificate of incorporation in 1996, the
Company exchanged existing outstanding common stock for 241,170 shares of $0.01
par value common stock completing a 10 to 1 stock split. All amounts have been
restated to reflect the 10 to 1 stock split and change in par value.
(2) Summary of Significant Accounting Policies
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 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. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents. Included in cash and
cash equivalents are investments in a money market account.
Property and Equipment
Property and equipment are stated at cost. Depreciation is calculated
using the straight-line method over a three-year period. Depreciation expense
for 1996 and 1997 was $9,352 and $34,536, respectively.
Income Taxes
The Company accounts for income taxes under Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes," which
requires recognition of deferred tax liabilities and assets for the expected
future tax consequences of events that have been included in the financial
statements or income tax returns. Under this method, deferred tax liabilities
and assets are determined based on the difference between the financial
statement and tax bases of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse.
Management has established a valuation reserve against the net deferred tax
asset related primarily to the Company's net operating loss carryforward.
The Company, with the consent of its stockholders, had previously elected
under the Internal Revenue Code to be an "S" corporation, effective February
28, 1995. In lieu of corporate income taxes, the stockholders of an
F-43
INTELLIGENT INTERACTIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
As of December 31, 1997 and 1996 and
As of March 31, 1998 (unaudited)
(All information subsequent to December 31, 1997 is Unaudited)
(2) Summary of Significant Accounting Policies --Continued
"S" corporation are taxed on their proportionate shares of the Company's
taxable income. No provision or liability for income taxes has been included in
the financial statements for the period of time that the Company was a
Subchapter "S" corporation.
The Company terminated the Subchapter "S" election, by the admittance of a
nonqualified stockholder, on September 10, 1996.
Revenue Recognition
Revenue from software licenses and software support agreements is
recognized ratably over the term of the agreement. Revenue from consulting
services is recognized as the services are provided.
The American Institute of Certified Public Accountants (the "AICPA") has
issued a Statement of Position (the "SOP") SOP-97-2, "Software Revenue
Recognition," and is effective for fiscal years beginning after December 15,
1997. The Company adopted SOP-97-2 effective January 1, 1998 and the adoption
did not have a material impact on the Company.
Product Development Costs
Product development costs and enhancements to existing products are
charged to operations as incurred. Software development costs are required to
be 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 to customers. To date, completion of a working
model of the Company's products and general release have substantially
coincided. As a result, the Company has not capitalized any software
development costs since such costs have not been significant.
Unaudited Interim Financial Statements
The accompanying balance sheet as of March 31, 1998 and the accompanying
statements of operations stockholders' deficit and cash flows for the three
months ended March 31, 1997 and 1998 included herein have been prepared by the
Company and are unaudited. The information furnished in the unaudited financial
statements referred to above includes all adjustments which are, in the opinion
of management, necessary for a fair presentation of such financial statements.
The results of operations for the three months ended March 31, 1998 are not
necessarily indicative of the results to be expected for the entire fiscal
year.
Increase in Authorized Shares
In March 1998, the Board of Directors increased the authorized stock of
the company to consist of 930,000 shares of common stock, $0.01 par value, and
78,304 shares of Series AAA Preferred Stock, no par value. All share amounts in
the accompanying financial statements reflect the increase in authorized
shares.
Reclassifications
Certain reclassifications of prior year amounts have been made to conform
to the December 31, 1997 presentation.
(3) Line of Credit and Note Payable
The Company maintains a line of credit with a bank in the amount of
$50,000. The agreement with the bank provides for a floating interest rate of
prime plus 2 percent, which was 10.25 and 10.50 percent as of December 31, 1996
and 1997, respectively. Borrowings are secured by government securities
belonging to a founder of the Company. The line of credit expires in September
1998. There were no borrowings outstanding at December 31, 1996 and 1997.
F-44
INTELLIGENT INTERACTIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
As of December 31, 1997 and 1996 and
As of March 31, 1998 (unaudited)
(All information subsequent to December 31, 1997 is Unaudited)
(3) Line of Credit and Note Payable --Continued
In January 1997, the Company obtained an additional line of credit with a
bank in the amount of $400,000. The agreement with the bank provides for a
floating interest rate of prime plus one and a half percent which was 10
percent at December 31, 1997. Borrowings are secured by all assets of the
Company. The line of credit expires on July 31, 1998. As of December 31, 1997,
borrowings of $19,583 were outstanding. The line was repaid and cancelled in
April 1998.
During 1995, the Company borrowed $56,000 from the Company's founder and
principal stockholder. The note was originally due in December 1996 and accrued
interest at an annual rate of 10 percent, which was to be paid quarterly.
During 1996, the Company borrowed an additional $55,500 from the Company's
founder and principal stockholder. All amounts outstanding at September 6,
1996, under these notes as well as the 1995 note, plus accrued interest on
those amounts were converted into one instrument in the amount of $113,856.
Principal and interest at the annual rate of 10 percent is due monthly over a
12 month period that began in October 1996. During 1996, the Company paid
$27,410 and $7,052 in principal and interest, respectively, on this obligation.
During 1997, the balance of $86,446 and $3,642 in principal and interest,
respectively, was paid on this obligation.
During 1997, the Company received an aggregate of $450,000 in proceeds
from the issuance of convertible notes payable, bearing an interest rate of 9.5
percent per annum. The notes, and accrued interest, are due on June 29, 1998.
The notes are convertible into any new series of preferred stock ("New Series")
issued by the Company through June 29, 1998. If the Notes are not so converted
within this period, thereafter, each holder of the notes will have the right to
convert the principal and interest of its note into the Series AAA Preferred
stock with a purchase price of $20.53. The Notes were converted as a result of
the Merger (Note 8).
(4) Stockholders' Equity
Common Stock
In September 1996, the Company amended its certificate of incorporation to
increase the number of authorized shares of common stock from 25,000 to 900,000
shares, as well as to effect a 10 for 1 stock split. Common shares are subject
to repurchase by the Company under certain circumstances. In the event a
stockholder terminates employment with the Company, the Company may elect to
repurchase any or all of the shares at the higher of the employee's original
purchase price per share or fair market value. To the extent the employee's
shares are not fully vested, the Company may elect to repurchase any or all of
the unvested shares at the employee's original purchase price. The Company also
has the right of first refusal to purchase a stockholder's shares for the price
offered to the stockholder in the event a stockholder elects to sell his or her
shares. This right of first refusal and repurchase upon termination expires in
the event of an initial public offering of the Company's stock.
Preferred Stock
In 1996, the Company issued 71,870 shares of Series A Convertible,
Redeemable and Voting Preferred Stock ("Series A Preferred Stock") at $16.42
per share. The Preferred Stock is redeemable at any time after September 10,
2003, upon written request from not less than 67 percent of the outstanding
Preferred stockholders at the time of the request. The redemption price shall
be paid in cash equal to the original issue price per share ($16.42) plus any
accrued but unpaid dividends. Dividends are cumulative and accrue at the rate
of 8 percent per share per annum.
In April 1997, the Company issued 54,l42 shares of Series AA Convertible,
Redeemable and Voting Preferred Stock ("Series AA Preferred Stock") at $18.47
per share. The Series AA Preferred Stock is redeemable at any time after April
16, 2004, upon written request from not less than 67 percent of the outstanding
Preferred stockholders at the time of request. The redemption price shall be
paid in cash equal to the original price per share ($18.47) plus any accrued
but unpaid dividends. Dividends are cumulative and accrue at the rate of 8
percent per share per annum.
F-45
INTELLIGENT INTERACTIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
As of December 31, 1997 and 1996 and
As of March 31, 1998 (unaudited)
(All information subsequent to December 31, 1997 is Unaudited)
(4) Stockholders' Equity --Continued
In August 1997, the Company issued 48,712 shares of Series AAA
Convertible, Redeemable and Voting Preferred Stock ("Series AAA Preferred
Stock") at $20.53 per share. The Series AAA Preferred Stock is redeemable at
any time after August 11, 2004, upon written request from not less than 67
percent of the outstanding Preferred stockholders at the time of request. The
redemption price shall be paid in cash equal to the original price per share
($20.53) plus any accrued but unpaid dividends. Dividends are cumulative and
accrue at the rate of 8 percent per share per annum.
The Series A, Series AA, and Series AAA (collectively, "Preferred Stock")
automatically converts to common stock at an initial ratio of 1 to 1 upon a
firm commitment of an underwritten public offering, at not less than $65.68 per
share or $10,000,000 in aggregate proceeds. The conversion ratio is adjustable
for certain future dilutive events. Conversion to common stock can also occur
upon written request of 67 percent of the outstanding Preferred stockholders.
In the event of liquidation, dissolution, or winding up of the Company,
the holders of each share of Preferred Stock will be paid out prior to and in
preference of holders of common stock in an amount equal to the original issue
price ($16.42 for Series A, $18.47 for Series AA, and $20.53 for Series AAA)
plus all declared but unpaid dividends.
Warrants
The convertible notes payable contained detachable warrants which can be
exercised after the first to occur of the conversion of the notes into the New
Series or June 29, 1998. If the Notes convert into the New Series, the warrants
will be exercisable for the New Series at the same price as those received by
the New Series. If the Notes do not convert into the New Series by June 29,
1998, the warrants will thereafter be exercisable for the Series AAA Preferred
Stock at a purchase price of $20.53. Such warrants will expire within five
years of the agreement. The aggregate purchase price payable upon full exercise
of the warrants equals $157,500 and the number of shares issuable upon full
exercise equals the aggregate purchase price divided by the purchase price per
share under the warrants. The warrants were deemed to have no value and were
terminated as a result of the Merger (Note 8).
1996 Stock Option Plan
The Company has issued stock options to its employees under the 1996
Equity Incentive Plan. These options were issued at fair market value at the
date of grant. These options are summarized as follows:
[Enlarge/Download Table]
Weighted
Average Option
Number Exercise Price
of Shares Price Per Share
----------- ---------- -----------------
Company inception ............................. -- $ -- $ --
Granted ....................................... 70,700 1.09 0.60 -- 1.65
Exercised ..................................... -- -- --
Forfeited ..................................... (10,000) 1.09 0.60
------- ------ ------
Balance at December 31, 1996 .................. 60,700 1.09 0.60 -- 1.65
Granted ....................................... 22,500 1.77 1.65 -- 2.05
Exercised ..................................... -- -- --
Forfeited ..................................... (24,000) 1.65 1.65
------- ------ ------
Balance at December 31, 1997 .................. 59,200 $ 1.20 $0.60 -- 2.05
Granted ....................................... 2,000 2.05 2.05
Exercised ..................................... -- -- --
Forfeited ..................................... (9,600) 1.65 1.65
------- ------ ------
Balance at March 31, 1998 (unaudited) ......... 51,600 $ 1.15 $0.60 -- 2.05
======= ====== ===============
F-46
INTELLIGENT INTERACTIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
As of December 31, 1997 and 1996 and
As of March 31, 1998 (unaudited)
(All information subsequent to December 31, 1997 is Unaudited)
(4) Stockholders' Equity --Continued
No options are exercisable at December 31, 1996 and 1997. The weighted
average remaining life for options outstanding at December 31, 1996 and 1997,
was 7.14 years and 6.47 years, respectively, and at March 31, 1998 was 6.11
years.
In October 1995, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS No. 123 defines a
"fair value based method" of accounting for an employee stock option or similar
equity instrument. Under the fair value based method, compensation cost is
measured at the grant date based on the value of the award and is recognized
over the service period.
SFAS No. 123 allows an entity to continue to use the intrinsic value
method as defined by APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and management has elected to do so. Under the intrinsic value
method, compensation cost is the excess, if any, of the quoted market price of
the stock at grant date or other measurement date over the amount an employee
must pay to acquire the stock. However, entities electing to remain with the
accounting in APB Opinion No. 25 must make pro forma disclosures of net income
and earnings per share, as if the fair value based method of accounting had
been applied. Accordingly, net loss would be as follows:
[Download Table]
As Reported Pro Forma
Year Ended Net Loss Net Loss
----------------- --------------- --------------
1996 ......... $ (695,516) $ (701,914)
1997 ......... (2,561,201) (2,564,751)
The fair value of each option is estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions used for
grants in 1996 and 1997: no dividend yield, zero percent volatility, risk-free
interest rates approximating 6 percent, and the estimated life of the option is
the contractual term of the option. The weighted-average grant date fair value
of the options outstanding at December 31, 1996 and 1997, was approximately
$0.45 and $0.50, respectively.
(5) Commitments
In January 1997, the Company entered into a noncancelable operating lease
for office space that expires April 30, 1998. Minimum lease payments required
under this lease are $23,576 in 1998. Total rent paid in 1996 and 1997 was
$27,086 and $69,000, respectively.
(6) Income Taxes
As of December 31, 1996 and 1997, the Company had net operating loss
carryforwards for Federal income tax purposes of approximately $213,000 and
$3,082,000, respectively, that begin expiring in 2011. Net operating loss
carryforwards are subject to review and possible adjustment by the Internal
Revenue Service and may be limited in the event of significant changes in the
ownership of the Company.
SFAS No. 109 requires that the tax benefit of financial reporting net
operating losses and tax credits be recorded as an asset to the extent that
management assesses the utilization of such net operating losses and tax
credits to be "more likely than not." As of December 31, 1996 and 1997, the
Company's net deferred tax assets were approximately $81,000 and $1,171,000,
respectively, which consists primarily of the net operating loss carryforward
and a valuation reserve was recorded against the entire amount.
F-47
INTELLIGENT INTERACTIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
As of December 31, 1997 and 1996 and
As of March 31, 1998 (unaudited)
(All information subsequent to December 31, 1997 is Unaudited)
(7) Accrued Expenses
Accrued expenses consists of the following as of:
[Download Table]
December 31,
March 31,
1996 1997 1998
---------- ---------- ------------
(unaudited)
Vacation ..................... $13,808 $ 33,809 $ 23,685
Accrued Compensation ......... -- 20,000 26,000
Professional Fees ............ -- 36,000 73,000
Travel Expenses .............. -- 21,425 36,042
Other ........................ 22,376 10,757 24,375
------- -------- --------
$36,184 $121,991 $183,102
======= ======== ========
(8) Intelligent Interactions Acquisition
During April 1998, 24/7 Media, Inc. ("24/7 Media") acquired all of the
outstanding stock of Intelligent Interactions (the "Merger").
Upon consummation of the Merger, each share of common stock of Intelligent
Interactions was converted into approximately 16.3 shares of common stock, 2.3
Class A Warrants, 2.3 Class B Warrants and 1.2 Class C Warrants of 24/7 Media.
Each share of Preferred Stock, Series A Preferred Stock, Series AA
Preferred Stock or Series AAA Preferred Stock of Intelligent Interactions was
converted to approximately 18 shares of Mandatorily Redeemable Convertible
Preferred Stock--Series A, par value $.01 per share, 2.7 Class A Warrants, 2.7
Class B Warrants and 1.4 Class C Warrants of 24/7 Media. The convertible note
payable was also converted into Mandatorily Redeemable Convertible Preferred
Stock--Series A and the detachable warrants were terminated as a result of the
merger.
In addition, each option to purchase shares of common stock of Intelligent
Interactions was converted into an option to purchase approximately 16 shares
of common stock of 24/7 Media under the terms and pursuant to the conditions of
the 24/7 Media 1998 Stock Incentive Plan.
F-48
================================================================================
No dealer, salesperson or other individual has been authorized to give any
information or make any representations not contained in this Prospectus. If
given or made, such information or representations must not be relied upon as
having been authorized by the Company or the Underwriters. This Prospectus does
not constitute an offer to sell, or a solicitation of an offer to buy, the
Common Stock in any jurisdiction where, or to any person to whom, it is
unlawful to make such offer or solicitation. Neither the delivery of this
Prospectus nor any sale made hereunder shall, under any circumstances, create
any implication that there has not been any change in the facts set forth in
this Prospectus or in the affairs of the Company since the date hereof.
----------------------------------
TABLE OF CONTENTS
[Download Table]
Page
----------
Prospectus Summary ............................ 1
Risk Factors .................................. 5
Use of Proceeds ............................... 14
Dividend Policy ............................... 14
Capitalization ................................ 15
Dilution ...................................... 16
Selected Pro Forma Consolidated
Financial Data ............................. 17
Selected Consolidated Financial Data .......... 18
Management's Discussion and Analysis of
Financial Condition and Results of
Operations ................................. 19
Business ...................................... 26
Management .................................... 36
Certain Transactions .......................... 43
Security Ownership of Certain Beneficial
Owners and Management ........................ 45
Description of Capital Stock .................. 47
Shares Eligible For Future Sale ............... 50
Underwriting .................................. 51
Legal Matters ................................. 53
Experts ....................................... 53
Available Information ......................... 53
Index to Financial Statements ................. F-1
Until , 1998 (days after the commencement of this offering), all dealers
that effect transactions in the Common Stock, whether or not participating in
this offering, may be required to deliver a Prospectus. This requirement is in
addition to the obligation of dealers to deliver a Prospectus when acting as
Underwriters or with respect to their unsold allotments or subscriptions.
================================================================================
================================================================================
Shares
[LOGO]
24/7 Media, Inc.
Common Stock
----------------------------------
P R O S P E C T U S
----------------------------------
Merrill Lynch & Co.
Allen & Company Incorporated
J.P. Morgan & Co.
, 1998
================================================================================
Part II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The following table sets forth the estimated expenses and costs (other
than underwriting discounts and commissions) expected to be incurred by the
Company in connection with the issuance and distribution of the securities
being registered, all of which will be paid by the Registrant.
[Download Table]
SEC registration fee ...................... $ 13,570
NASD fee .................................. 7,000
Nasdaq Listing Fee ........................ 50,000
Legal fees and expenses ................... 300,000
Printing and engraving expenses ........... 175,000
Accounting fees and expenses .............. 300,000
Blue Sky fees and expenses ................ 15,000
Transfer agent and registrar fees ......... 5,000
Miscellaneous ............................. 59,430
----------
Total ................................... $1,000,000
==========
Item 14. Indemnification of Directors and Officers.
The General Corporation Law of the State of Delaware ("DGCL") permits the
Company and its stockholders to limit directors' exposure to liability for
certain breaches of the directors' fiduciary duty, either in a suit on behalf
of the Company or in an action by stockholders of the Company.
The Certificate of Incorporation of the Company (the "Charter") eliminates
the liability of directors to stockholders or the Company for monetary damages
arising out of the directors' breach of their fiduciary duty of care. The
Charter also authorizes the Company to indemnify its directors, officers,
incorporators, employees, and agents with respect to certain costs, expenses,
and amounts incurred in connection with an action, suit, or proceeding by
reason of the fact that such person was serving as a director, officer,
incorporator, employee, or agent of the Company. In addition, the Charter
permits the Company to provide additional indemnification rights to its
officers and directors and to indemnify them to the greatest extent possible
under the DGCL. The Company has entered into indemnification agreements with
each of its officers and directors and intends to enter into indemnification
agreements with each of its future officers and directors. Pursuant to such
indemnification agreements, the Company has agreed to indemnify its officers
and directors against certain liabilities, including liabilities arising out of
the offering made by this registration statement.
The Company maintains a standard form of officers' and directors'
liability insurance policy which provides coverage to the officers and
directors of the Company for certain liabilities, including certain liabilities
which may arise out of this registration statement.
The Underwriting Agreement filed as Exhibit 1.1 hereto provides for
reciprocal indemnification between the Company and its controlling persons, on
the one hand, and the Underwriters and their controlling persons, on the other
hand, against certain liabilities in connection with this offering, including
liabilities under the Securities Act.
Item 15. Recent Sales of Unregistered Securities
The Registrant has sold and issued the following securities within the
past three years. The below securities were offered and sold by the Registrant
in reliance upon exemptions from registration pursuant to either (i) Section
4(2) of the Securities Act, as transactions not involving any public offering,
or (ii) Rule 701 under the Securities Act. No underwriters were involved in
connection with any sales referred to in this Item 15.
During 1996, the Registrant issued 1,374,830 shares of common stock to
certain investors, including Michael P. Paolucci and The Travelers Insurance
Company for an aggregate purchase price of $4,525,000.
In August 1996, the Registrant issued convertible subordinated notes in
the principal amount of $500,000, convertible into common stock at a price of
$2.87 per share and warrants to purchase 26,132 shares of common stock at a
price of $2.87 per share.
II-1
In November 1996, the Registrant completed a private placement of 140,722
shares of preferred stock, to a group of investors including The Travelers
Insurance Company, convertible into common stock at a price of $2.87 per share,
subject to anti-dilution adjustment, for an aggregate purchase price of
$4,038,722.
During 1997, the Registrant received $2,500,000 in proceeds from the
issuance of senior convertible notes primarily to affiliates and stockholders
of the Company, including The Travelers Insurance Company, bearing an interest
rate of 8% compounded semiannually. Each of the notes was issued with
detachable warrants allowing the holder to purchase shares of common stock at
price ranges ranging from $.40 to $2.09 per share.
In January 1997, the Registrant issued 17,422 shares of preferred stock,
to a group of investors including The Travelers Insurance Company, convertible
into common stock at a price of $2.87 per share, subject to anti-dilution
adjustment, for an aggregate purchase price of $500,011.
In April 1997, the Registrant granted warrants to purchase 17,500 shares
of common stock at $12.43 per share.
In January 1998, the Registrant issued $150,000 in senior convertible
notes to The Travelers Insurance Company, convertible into 173,282 shares of
common stock at $.87 per share.
In January 1998, the Registrant granted warrants to purchase 115, 000
shares of common stock to a consultant of the Registrant in consideration of
services rendered to the Registrant.
In connection with the February 1998 merger of Petry Interactive, Inc and
Advercomm. Inc. with and into the Registrant, (i) the Registrant issued
10,494,366 shares of common stock to former shareholders of Petry Interactive,
Inc., including David J. Moore, Mark A. Burchill and Scott E. Cohen, and
6,821,335 shares of common stock to former shareholders of Advercomm, Inc.,
including Jacob I. Friesel and Garrett P. Cecchini; (ii) the Registrant granted
a former employee (Michael P. Paolucci) warrants to purchase 2,500,000 shares
of common stock at a purchase price of $.952 per share in connection with the
termination of such employee's employment with the Registrant; (iii) the
registrant issued to certain investors 10,060,002 shares of preferred stock for
aggregate proceeds of $10,000,000; (iv) the Registrant granted certain
investors warrants to purchase 5,283,614 shares of common stock at $1.904 per
share and warrants to purchase 5,383,614 shares of common stock at $2.856 per
share; (v) the Registrant granted to consultants warrants to purchase an
aggregate of 37,500 shares of common stock at $.952 per share.
In connection with the April 1998 acquisition of Intelligent Interactions,
Corp., (i) the Registrant issued 3,796,969 shares of common stock to certain
former shareholders of Intelligent Interactions Corp., including Yale R. Brown
and Matthew B. Walker; (ii) the Registrant issued 3,561,505 shares of preferred
stock to certain former shareholders of Intelligent Interactions Corp; (iii)
the Registrant granted to certain former shareholders of Intelligent
Interactions Corp., including Yale R. Brown and Matthew B. Walker, warrants to
purchase 1,060,608 shares of common stock at a purchase price of $1.904 per
share, warrants to purchase 1,060,608 shares of common stock at a purchase
price of $2.856 per share and warrants to purchase 546,212 shares of common
stock at a purchase price of $.952 per share.
In April 1998, the Registrant issued 23,634 shares of common stock to
consultants in consideration of services rendered to the Registrant.
In June 1998, the Company issued to K2 Design, Inc. 3,000 shares of the
Company's Series B Convertible Preferred Stock in connection with the
acquisition of the CliqNow! division of K2 Design, Inc.
The Registrant from time to time has granted stock options to employees in
reliance upon an exemption under the Securities Act of 1933 pursuant to Rule
701 promulgated thereunder. From March 1995 through May 1998 an aggregate of
4,103,304 shares of common stock were issued pursuant to option exercises at
exercise prices ranging from $0.40 to $2.98 to 139 employees, directors and
consultants.
II-2
Item 16. Exhibits and Financial Statement Schedule/Index
[Enlarge/Download Table]
1.1 *Form of Underwriting Agreement.
3.1 *Amended and Restated Certificate of Incorporation of the Company.
3.2 *By-laws of the Company.
5.1 *Opinion of Proskauer Rose LLP.
10.1 1998 Stock Incentive Plan.
10.3 Lease Agreement, dated April 30, 1998, between the Company and 38-32 Associates.
10.4 Agreement and Plan of Merger dated February 2, 1998 by and among Interactive
Imaginations, Inc., 24/7 Acquisition Corp., Petry Interactive, Inc. and Advercomm, Inc.
10.5 Agreement and Plan of Merger dated as of April 9, 1998 by and among 24/7 Media, Inc.,
Interactions Acquisition Corp. and Intelligent Interactions Corporation and the persons set
forth on the signature pages thereto.
10.6 *Asset Purchase Agreement, dated as of June 1, 1998, by and between 24/7 Media, Inc. and
K2 Design, Inc.
10.7 Securities Purchase Agreement, dated February 25, 1998, among Interactive Imaginations and
certain investors named therein.
10.8 Registration Rights Agreement, dated April 9, 1998 by and among 24/7 Media, Inc., The
Travelers Insurance Company, Prospect Street NYC Discovery Fund, L.P., Prospect Street
NYC Co-Investment Fund, L.P. , Big Flower Digital Services, Inc., David Banks, Trinity
Ventures V, L.P., Trinity V Side-By-Side Fund, L.P., Zero Stage Capital V Limited
Partnership, and F&W Investments 1996.
10.9 Employment Agreement between David J. Moore and Interactive Imaginations, Inc., dated
February 24, 1998.
10.10 Employment Agreement between Jacob I. Friesel and Interactive Imaginations, Inc., dated
February 24, 1998.
10.11 Employment Agreement between Yale R. Brown and 24/7 Media, Inc., dated April 9, 1998.
10.12 Employment Agreement between C. Andrew Johns and 24/7 Media, Inc., dated April 20,
1998.
10.13 Consulting Agreement dated as of January 1, 1998 by and between Interactive Imaginations,
Inc. and Neterprises, Inc.
10.14 Confidential Separation Agreement and General Release by and between Michael P. Paolucci
and Interactive Imaginations, Inc., dated February 24, 1998.
10.15 Form of Indemnification Agreement.
11.1 *Statement regarding computation of per share earnings.
21.1 Subsidiaries of the Company.
23.1 Consent of KPMG Peat Marwick LLP.
23.2 Consent of Arthur Andersen LLP.
23.3 *Consent of Proskauer Rose LLP (included in Exhibit 5.1).
24.1 Powers of Attorney (included with signature page).
27.1 Financial Data Schedule.
----------------
* To be filed by amendment.
II-3
Item 17. Undertakings
The undersigned Registrant hereby undertakes to provide to the
Underwriters at the closing specified in the Underwriting Agreement
certificates in such denominations and registered in such names as required by
the Underwriters to permit prompt delivery to each purchaser.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed
as part of this registration statement in reliance upon Rule 430A
and contained in a form of prospectus filed by the registrant
pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act
shall be deemed to be part of this registration statement as of the
time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide
offering thereof.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
a registrant pursuant to the provisions described in Item 14, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by a
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
II-4
SIGNATURES AND POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENT, that each person or entity whose signature
appears below constitutes and appoints David J. Moore, C. Andrew Johns and Mark
E. Moran, and each of them, its true and lawful attorneys-in-fact and agents,
with full power of substitution and resubstitution, for it and in its name,
place and stead, in any and all capacities, to sign any and all amendments,
including post-effective amendments, to this Registration Statement on Form S-1
and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing requisite and
necessary to be done, as fully to all intents and purposes as it might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents or any of them, or their or his substitute or substitutes may
lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-1 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the city of New York, State of New York on June 2, 1998.
24/7 MEDIA, INC.
By: /s/ David J. Moore
----------------------
David J. Moore
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below on June 2, 1998 by the persons
whose signatures appear below, which persons have signed such Registration
Statement in the capacities indicated:
[Download Table]
Signature Title
--------------------------- --------------------------------------------------
/s/ David J. Moore Chief Executive Officer and Director
------------------------- (Principal Executive Officer)
David J. Moore
/s/ R. Theodore Ammon Chairman of the Board
-------------------------
R. Theodore Ammon
/s/ Yale R. Brown Executive Vice President--Technology and Director
-------------------------
Yale R. Brown
/s/ Jacob I. Friesel Executive Vice President and Director
-------------------------
Jacob I. Friesel
/s/ David Chaney Director
-------------------------
David Chaney
/s/ Michael P. Paolucci Director
-------------------------
Michael P. Paolucci
/s/ Jack L. Rivkin Director
-------------------------
Jack L. Rivkin
/s/ Charles Stryker Director
-------------------------
Charles Stryker
/s/ C. Andrew Johns Executive Vice President, Treasurer & Chief
------------------------- Financial Officer (Principal Financial Officer)
C. Andrew Johns
/s/ Stuart D. Shaw Controller (Principal Accounting Officer)
-------------------------
Stuart D. Shaw
II-5
Exhibits and Financial Statement Schedule/Index
Item 16. Exhibits and Financial Statement Schedule/Index
[Enlarge/Download Table]
1.1 *Form of Underwriting Agreement.
3.1 *Amended and Restated Certificate of Incorporation of the Company.
3.2 *By-laws of the Company.
5.1 *Opinion of Proskauer Rose LLP.
10.1 1998 Stock Incentive Plan.
10.2 Form of Stock Option Agreement.
10.3 Lease Agreement, dated April 30, 1998, between the Company and 38-32 Associates.
10.4 Agreement and Plan of Merger dated February 2, 1998 by and among Interactive
Imaginations, Inc., 24/7 Acquisition Corp., Petry Interactive, Inc. and Advercomm, Inc.
10.5 Agreement and Plan of Merger dated as of April 9, 1998 by and among 24/7 Media, Inc.,
Interactions Acquisition Corp. and Intelligent Interactions Corporation and the persons set
forth on the signature pages thereto.
10.6 *Asset Purchase Agreement, dated as of June 1, 1998, by and between 24/7 Media, Inc. and
K2 Design, Inc.
10.7 Securities Purchase Agreement, dated February 25, 1998, among Interactive Imaginations and
certain investors named therein.
10.8 Registration Rights Agreement, dated April 9, 1998 by and among 24/7 Media, Inc., The
Travelers Insurance Company, Prospect Street NYC Discovery Fund, L.P., Prospect Street
NYC Co-Investment Fund, L.P. , Big Flower Digital Services, Inc., David Banks, Trinity
Ventures V, L.P., Trinity V Side-By-Side Fund, L.P., Zero Stage Capital V Limited
Partnership, and F&W Investments 1996.
10.9 Employment Agreement between David J. Moore and Interactive Imaginations, Inc., dated
February 24, 1998.
10.10 Employment Agreement between Jacob I. Friesel and Interactive Imaginations, Inc., dated
February 24, 1998.
10.11 Employment Agreement between Yale R. Brown and 24/7 Media, Inc., dated April 9, 1998.
10.12 Employment Agreement between C. Andrew Johns and 24/7 Media, Inc., dated April 20,
1998.
10.13 Consulting Agreement dated as of January 1, 1998 by and between Interactive Imaginations,
Inc. and Neterprises, Inc.
10.14 Confidential Separation Agreement and General Release by and between Michael P. Paolucci
and Interactive Imaginations, Inc., dated February 24, 1998.
10.15 Form of Indemnification Agreement.
11.1 *Statement regarding computation of per share earnings.
21.1 Subsidiaries of the Company.
23.1 Consent of KPMG Peat Marwick LLP.
23.2 Consent of Arthur Andersen LLP.
23.3 *Consent of Proskauer Rose LLP (included in Exhibit 5.1).
24.1 Powers of Attorney (included with signature page).
27.1 Financial Data Schedule.
----------------
* To be filed by amendment.
II-6
Dates Referenced Herein and Documents Incorporated by Reference
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