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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
Act of 1934 (Fee Required) For the fiscal year ended December 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
Exchange Act of 1934 (No Fee Required)
For the transition period from ___________ to ___________
Commission File No. 0-29768
24/7 MEDIA, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-3995672
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(State or other jurisdiction of (I.R.S. Employer Identification)
incorporation or organization)
1250 BROADWAY
NEW YORK, NEW YORK 10001
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(Address of principal executive offices) (Zip Code)
(212) 231-7100
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.01 PER SHARE
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES /X/ NO / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
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Aggregate market value of voting stock held by non-affiliates of registrant as
of March 15, 2000: $1,175,677,944.
Number of shares of Common Stock outstanding as of March 15, 2000:
APPROXIMATELY 25,968,461.
24/7 MEDIA, INC.
1999 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
Item No. Page
Part I
1. Business.............................................................3
2. Properties..........................................................17
3. Legal Proceedings...................................................17
4. Submission of Matters to a Vote of Security Holders.................18
Part II
5. Market for Registrant's Common Equity and Related Stockholder
Matters.............................................................18
6. Selected Consolidated Financial Data................................19
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations...........................................20
8. Consolidated Financial Statements and Supplementary Data............34
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure............................................34
Part III
10. Directors and Executive Officers....................................35
11. Executive Compensation..............................................40
12. Security Ownership of Certain Beneficial Owners and Management......43
13. Certain Relationships and Related Transactions......................44
Part IV
14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K.....45
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS BASED ON OUR CURRENT
EXPECTATIONS, ASSUMPTIONS, ESTIMATES AND PROJECTIONS ABOUT 24/7 MEDIA AND OUR
INDUSTRY. THESE FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES. OUR
ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN SUCH
FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, AS MORE FULLY
DESCRIBED IN THIS ANNUAL REPORT. 24/7 MEDIA UNDERTAKES NO OBLIGATION TO UPDATE
PUBLICLY ANY FORWARD-LOOKING STATEMENTS FOR ANY REASON, EVEN IF NEW INFORMATION
BECOMES AVAILABLE OR OTHER EVENTS OCCUR IN THE FUTURE.
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PART I
ITEM 1. BUSINESS OF THE REGISTRANT
OVERVIEW
We are a leading global provider of end-to-end advertising and marketing
solutions for Web publishers, online advertisers, advertising agencies,
e-marketers and e-commerce merchants. We provide a comprehensive suite of media
and technology products and services that enable such Web publishers, online
advertisers, advertising agencies and e-marketers to attract and retain
customers worldwide, and to reap the benefits of the Internet and other
electronic media. Our solutions include advertising and direct marketing sales,
ad serving, promotions, email list management, email list brokerage, email
delivery, data analysis, loyalty marketing and convergence solutions, all
delivered from our industry-leading data and technology platforms. Our 24/7
Connect ad serving technology solutions are designed specifically for the
demands and needs of advertisers and agencies, Web publishers and e-commerce
merchants.
Commencing in 2000, our business will be organized into three principal
lines of business:
o 24/7 Network
o 24/7 Mail
o 24/7 Technology Solutions
THE 24/7 NETWORK
The 24/7 Network is a global online advertising network. The 24/7 Network
aggregates the advertising inventory of hundreds of Web sites that are
attractive to advertisers, generate a high number of ad impressions and
contribute a variety of online content to the network. Web publishers seeking to
join the network must meet our affiliation criteria, including high quality
content, brand name recognition, significant existing and projected page views,
attractive user demographics, and sponsorship opportunities. For Web sites on
the 24/7 Network, we sell Web site-specific advertising campaigns and also
bundle advertisements for sale in content channels or across the entire network.
For our flagship Web sites on the network, we actively solicit sponsorships and
integrate sales efforts with the Web site's management. We deliver advertising
on our network using our 24/7 Connect technology, which enables us to offer
advertisers the ability to target Internet users based on a variety of criteria
including on a geo-targeted basis. Our Internet advertising network is organized
as follows:
o In the U.S., the network consists of over 400 high profile Web sites to
which we delivered an aggregate of more than 3.3 billion advertisements in
December 1999;
o In Europe, the network consists of over 250 Web sites to which we
delivered an aggregate of more than 550 million advertisements in December 1999.
We developed our European operations in 1999 after acquiring InterAd Holdings
Ltd. (renamed 24/7 Media Europe) in a two-step transaction through which we
acquired a majority interest in January 1999 and the remainder in January 2000;
o In Canada, the network consists of over 80 high profile Web sites to
which we delivered an aggregate of more than 45 million advertisements in
December 1999. We developed our Canadian operations in 1999 after acquiring
Clickthrough Interactive Services, Inc. in July 1999;
o In Latin America, the network consists of over 30 Web sites to which we
delivered an aggregate of more than 5 million advertisements in December 1999;
o In Asia, through our partner chinadotcom corporation, we support the
operation of the network, that consists of more than 500 high profile Web sites.
This network covers Greater China, the ASEAN nations, Australia, South Korea and
Japan; and
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o The 24/7 Network also includes The ContentZone, which consists of over
3,500 small to medium-sized Web sites to which we delivered an aggregate of more
than 100 million advertisements in December 1999.
Through the 24/7 Network we also offer network-related value-added
solutions to advertisers, marketers and Web publishers. For example, our
AwardTrack subsidiary offers a private label, loyalty customer relationship
management program that enables Web retailers and content sites to issue points
to Web users as a reward for making purchases, completing surveys or
investigating promotions. We also offer our creative design services,
sponsorship opportunities and syndication services.
24/7 MAIL
Our 24/7 Mail business was developed through the integration of our
acquisitions of Sift, Inc. in March 1999 and ConsumerNet, Inc. in August 1999
and subsequent growth. 24/7 Mail provides opt-in email direct marketing
services. Our permission-based email-marketing database of more than 20 million
email addresses is the largest such database in the world and enables direct
marketers to target promotional campaigns to consumers who choose to receive
commercial messages. The users can opt out, or stop receiving these messages, at
any time. Currently, 24/7 Mail has U.S. operations that serve as list manager
for permission-based email lists that collectively contained more than 20
million email addresses as of March 2000, and European operations that were
recently launched in the UK, and currently serve as list manager for
permission-based email lists that collectively contained more than two million
email addresses as of March 2000.
24/7 TECHNOLOGY SOLUTIONS
24/7 Technology Solutions is comprised of comprehensive service and
software solutions designed specifically for the needs of three targeted
customer segments: advertisers and agencies, Web publishers and e-commerce
merchants. Our technical service team of over 150 employees provides consulting
services and around-the-clock support for our ad serving clients. Products
within 24/7 Technology Solutions include:
o 24/7 Connect, a next generation Internet ad serving system that is
available on two platforms: 24/7 Connect for Networks, that will initially serve
the 24/7 Network in the United States, and 24/7 Connect for Advertisers and
Publishers, our third-party ad serving solution. We expect to combine the two
platforms into a single solution later this year. We acquired 24/7 Connect for
Advertisers and Publishers through our acquisition of Sabela Media, Inc. in
January 2000; and
o e.merge, a fully integrated, customizable suite of business applications
designed to manage marketing campaigns across multiple forms of electronic media
including broadband, set-top boxes and wireless (WAP) applications. We acquired
e.merge through our acquisition of IMAKE Software and Services, Inc. in January
2000.
We also operate Profilz, a database of Web user profiles that aids in
delivering targeted advertising and marketing messages based on demographic
profiles.
INDUSTRY BACKGROUND
We operate in the rapidly growing Internet advertising, direct marketing
and technology industries. Jupiter Communications estimates that at the end of
1999 there were over 100 million Web users in the United States and over 234
million Web users worldwide, and that by the end of 2002 the number of Web users
will increase to over 157 million in the United States and to over 504 million
worldwide. These rapid industry growth rates may not be achieved and we may not
experience similar rates of growth.
We believe that advertisers seek to place Internet ads in ways to maximize
unduplicated reach. In February 2000, according to Media Metrix, our network
reached 56.4% of all U.S. Internet users. We believe that this reach figure is
among the highest in the Internet advertising industry. We plan to aggressively
recruit Web sites for our network to further extend our reach, provide
advertisers with a broad and diverse base of online content and page views, and
improve our brand awareness and visibility with media buyers.
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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 advertisements. Our 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 sites.
Advertisers and direct marketers can achieve their objectives by buying ad space
on a specific Web site or email list, within a particular content channel or
across our entire network.
As Internet traffic grows, Web publishers increasingly seek to maximize the
value of their online inventory. Our extensive sales and marketing expertise
provides Web publishers and email list owners access to media buyers at large ad
agencies and advertisers and enables them to sell advertisements and marketing
space without incurring the costs and challenges associated with building and
maintaining an internal ad sales force.
GROWTH OF ONLINE COMMERCE
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 approximately 29% of Web users purchased
goods or services over the Web in 1999 and that approximately 54% of Web users
will make online purchases in 2003. We believe that as electronic commerce
expands, advertisers and direct marketers will increasingly use the Web to
advertise products, drive traffic to their Web sites, attract and retain
customers, and facilitate transactions.
GROWTH OF INTERNET ADVERTISING
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. 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. Forrester Research estimates that the dollar value of Internet
advertising in the U.S. will increase from $2.8 billion in 1999 to $22.2 billion
in 2004, representing a 67% compounded annual growth rate. International online
ad spending is expected to grow from $0.5 billion in 1999 to $10.8 billion in
2004. We believe 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
television 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. 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 or 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, in 1999,
$176.5 billion was spent on direct marketing initiatives in the United States,
and also estimates that expenditures on direct marketing over the Internet will
exceed $221.5 billion in 2003.
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OUR COMPREHENSIVE SOLUTIONS
We believe that we currently are the only company to offer a complete
end-to-end e-marketing solution for Web publishers, advertisers and e-marketers
that seek to attract and retain customers on the Internet and otherwise generate
revenue from their activities.
BENEFITS TO ADVERTISERS AND DIRECT MARKETERS.
We reduce costs and ease time pressures for advertisers and direct
marketers by alleviating the need to purchase a series of ad campaigns from
numerous Web publishers. Our network and email lists 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 customize their ad
delivery on our network or email lists by purchasing ad space either on selected
Web sites within our network, within a particular content channel or across the
entire network, as well as on our email lists. In addition, we provide
advertisers and direct marketers with comprehensive reporting services to
monitor the effectiveness of ad delivery. Lastly, our 24/7 Connect for
Advertisers is an end-to-end solution for buyers of online media that includes
targeting, tracking and reporting systems that are focused exclusively on
meeting the needs of online advertisers.
BENEFITS TO WEB PUBLISHERS.
Affiliation with our online advertising network enables Web publishers to
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. Web sites in our
network benefit from our experienced management team, our extensive sales and
marketing organization and our direct access to advertisers and agencies. The
organization of our network into content channels enhances the value of
inventory on small to medium-sized Web sites. We also provide sophisticated
tracking and reporting functions for our Web sites. Furthermore, the targeting
capabilities of our 24/7 Connect ad serving technology enables us to increase
the value of Web publishers' inventory.
THE 24/7 MEDIA STRATEGY
Our objective is to provide comprehensive marketing and technology solutions for
Web publishers, online advertisers and direct marketers to enable them to
attract and retain customers. We intend to further this objective by continuing
to implement the following interconnected strategies:
EXPAND END-TO END SOLUTIONS. We believe that we offer the broadest range of
solutions to advertisers and Web publishers. Our solutions include advertising
and direct marketing sales, ad serving, promotions, email list management, email
list brokerage, email delivery, data analysis, loyalty marketing and convergence
solutions, all delivered from our industry-leading data and technology
platforms. We continually seek to identify additional value-added services for
our clients, in order to help them maximize their customer acquisition and
revenue goals.
EXPAND OUR NETWORK OF WEB SITES. We plan to continue to aggressively
recruit Web sites for our network, to extend our reach and to provide a broad
base of page views and online content to advertisers. We recruit Web sites of
all sizes, including high-profile to medium-sized Web sites on the 24/7 Network
as well as medium to smaller-sized Web sites on the ContentZone area of the 24/7
Network. Such a collection of Web sites of diverse sizes and content allows
advertisers to target Internet users by interest and enhances the value of each
of our Web sites' inventory. An increased number of Web sites in our network and
an expanded breadth of available content on such Web sites will further enable
advertisers to consolidate their ad purchases and will improve our brand
awareness and visibility with media buyers.
EXTEND MARKET LEADERSHIP IN OPT-IN EMAIL. We intend to maintain and extend
our leadership role in email direct marketing by aggressively expanding our
network of email lists with additional lists worldwide. In connection with our
worldwide email list expansion, we intend to develop capabilities for adding
email addresses to our database from non-English language consumers. We also
plan on hiring additional business development personnel to assist us in
obtaining more list members.
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EXTEND LEADERSHIP IN ONLINE ADVERTISING TECHNOLOGY. We intend to maintain
and extend our leadership role in online advertising technology by continuously
developing and enhancing our state of the art systems. One of our principal
focuses will be the continued integration of all our technologies to further
enhance the ability of online advertisers to deliver their messages across Web
sites, e-mail, wireless services, set-top boxes and other Internet appliances.
MAXIMIZE SALES AND MARKETING EFFECTIVENESS. We believe that our sales and
marketing organization is among the largest in the Internet advertising
industry, providing us with a competitive advantage. We intend to leverage the
substantial media sales expertise of our management team to maximize the value
of ad campaigns to benefit our advertiser and Web site clients. We also
continually expand our services for advertisers and advertising agencies in
order to establish and expand the recognition of our corporate identity.
INCREASE VALUE OF AD INVENTORY. We seek to increase the rate at which users
click on advertisements by employing the targeting capabilities of 24/7 Connect
and our Profilz database to deliver advertisements to a more highly targeted
audience, resulting in more effective advertising campaigns and enabling us to
charge higher rates. Furthermore, we believe that as we increase the breadth and
depth of our content channels, the sale of ads targeted to specific channels
will increase. We intend to further increase the value of our Web sites' ad
inventory by selling sponsorships on our Web sites and by further refining our
management of ad space inventory.
ENHANCE CAPABILITIES OF AD TARGETING TECHNOLOGY. We intend to continue to
enhance our targeting capabilities through continued investment in our
technology initiatives. We believe that these profiles will enable us to deliver
targeted advertisements to the right person at the right time, thereby
increasing the value of the advertising inventory that we sell.
PROVIDE HIGHEST LEVEL OF CUSTOMER SERVICE. We emphasize service for our Web
site and advertiser clients. For example, we employ techniques of benchmarking,
statistical analysis and continuous process improvement to provide our Web sites
and advertisers with "best of class" service. We continually survey our Web
sites and advertisers to monitor service levels and identify and resolve
problems.
OUR PRINCIPAL LINES OF BUSINESS
24/7 NETWORK
The 24/7 Network is a global advertising network where advertisers can
place a global campaign, or geographically select regions of the world to target
advertising. The network aggregates Web sites that are attractive to
advertisers, generate a high number of ad impressions and contribute a variety
of online content to the network. Web publishers seeking to join our 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. For Web sites on the 24/7
Network, we sell Web site-specific advertising campaigns as well as bundle
advertisements for sale in one of the channels listed above or across the entire
network. For our flagship Web sites on the network, we appoint a relationship
manager, actively solicit sponsorships and integrate sales efforts with the Web
site's management. The 24/7 Network also contains the ContentZone, that consists
of smaller to medium-sized Web sites. Our global advertising network is
described below:
o IN THE UNITED STATES, through the 24/7 Network, we provide advertisement
sales and delivery services and related functions to over 400 high-profile Web
sites that generated an aggregate of 3.3 billion impressions in December 1999.
We currently derive more than half our revenue from the 24/7 Network in the
United States. The 24/7 Network includes, among others, the following Web sites:
AT&T WorldNet Asian Avenue
Blizzard BoxerJam
College Club Currency Site
Dialpad Doonesbury
EarthLink Freeagent.com
GoTo.com Hotoffice.com
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Juno Knight Ridder/Real Cities
MapQuest MindSpring
NetZero New York Magazine
Playbill Reader's Digest
Reuters MoneyNet Reuters News Network
Searchopolis The Sporting News
Talk City Won.net
Zagat.com
o IN CANADA we provide advertisement sales and delivery services and
related functions to over 80 Web sites that generated an aggregate of 45 million
impressions in December 1999 including MyBC.com, Canada Newswire, The Toronto
Stock Exchange, MLS Online, the Weather Network, and Canadian Living.
o IN EUROPE, we provide advertisement sales and delivery services and
related functions to over 250 Web sites that generated an aggregate of 550
million impressions in December 1999 including MSN Hotmail, Belcart, Torget and
Startsiden. The network currently covers Belgium, Denmark, Finland, France,
Germany, Holland, Italy, Norway, Portugal, Spain, Sweden and UK.
o IN LATIN AMERICA, we provide advertisement sales and delivery services
and related functions to over 30 Web sites that generated an aggregate of 5
million impressions in December 1999 including Universa Online. The network in
Latin America currently covers Brazil, Mexico, Peru and Argentina.
o IN ASIA, through an agreement with chinadotcom corporation, we are
supporting the development of the 24/7 Network. The network in Asia is comprised
of more than 500 major Web sites.
o THE CONTENTZONE. The ContentZone consists of over 3,500 small to
medium-sized Web sites to which we provide advertisement sales and delivery
services and auxiliary functions. The ContentZone provides one of the few
advertising opportunities for such small and emerging Web sites. Ads are
delivered across Web sites included in specific Zones or across the entire
network. Any Web publisher possessing non-objectionable content on its Web site
can qualify for admission to the ContentZone, and we "graduate" ContentZone
members to high-profile status in the 24/7 Network if they generate a sufficient
number of ad impressions and satisfy the requisite standards. ContentZone was
recently substantially redesigned and relaunched, providing new enhancements to
make it even more attractive to Web publishers.
CHANNELS ON THE 24/7 NETWORK
The 24/7 Network is currently organized into the following topical
channels:
Automotive Business/Financial
Career College
Community E-commerce
Entertainment Games
Health ISP/Portal
Kids/Teen Music
News/Information Real Estate
Search Engines Search Engines
Small Business Sports
Technology Travel
Women's Interest
We are presently enhancing existing channels and developing several new
channels for our network prompted by user and advertiser interests.
ADVERTISERS ON THE NETWORK
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We focus our sales and marketing efforts on the leading Internet and
traditional advertisers and advertising agencies, many of which have utilized
our solutions. Advertisers and advertising agencies employ us in various ways.
Advertisers and ad agencies typically buy advertising using written purchase
order agreements that run for a limited time. Based on our breadth of online
content and our extensive reach, we have the ability to package personalized
advertising solutions for advertisers and ad agencies. Our sales force works
closely with advertisers to customize ad delivery to enhance the effectiveness
of advertising campaigns. Stated below is a representative list of advertising
agencies and advertisers that delivered advertisements on the 24/7 Network in
the United States in 1999. Some of these advertising agencies and advertisers
represented less than one percent of our total revenues in 1999.
ADVERTISING AGENCIES
Anderson & Lembke Avenue A
BBDO Interactive Beyond Interactive
Bozell Carat Freeman
Cone Interactive Eagle River Interactive
Euro RSCG/DSW Partners Go Beyond
iBalls iFrontier
iTraffic J. Walter Thompson
Jump Start Media Kirshenbaum Bond & Partners
Left Field McCann-Erickson
Media.com Modem Media
Ogilvy One Organic Online
Saatchi & Saatchi USWeb/CKS
Western International Media
ADVERTISERS
About.com Ameritech
APB Online Audio Highway
Bank of America Barnes & Noble
Bell South BonusMail
Cendant Dealtime.com
EBay Get Smart
Fleet Bank LifeMinders
Mail.com MBNA America Bank
MicroWarehouse NextCard
Providian Qwest
Charles Schwab ShopNow.com
Shopping.com Travelscape
VALUE-ADDED SOLUTIONS FOR THE NETWORKS
Through the 24/7 Network, we also offer network-related value-added
solutions to advertisers, marketers and Web publishers. For example, our
AwardTrack subsidiary offers a private label loyalty customer relationship
management program that enables Web retailers and content sites to issue points
to Web users as a reward for making purchases, completing surveys or
investigating promotions. These points can be issued, redeemed and exchanged in
real-time for points in programs of other AwardTrack partners using our
proprietary technology. We acquired AwardTrack, Inc. in February 2000.
Furthermore, we also offer our clients other value added solutions such as
creative design services, sponsorship opportunities, and syndication services.
24/7 MAIL
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24/7 Mail provides opt-in email direct marketing services. Our
permission-based email marketing database of more than 20 million email
addresses is the largest such database in the world and enables direct marketers
to target promotional campaigns to consumers who choose to receive commercial
messages. The users can opt out, or stop receiving these messages, at any time.
Our opt-in email direct marketing business offers direct marketers three key
advantages over traditional postal direct marketing and banner advertising:
o SPEED. Opt-in email campaigns can be sent out immediately to millions of
potential customers. Email campaigns generate results in a shorter period of
time than traditional postal direct marketing, producing leads and sales within
24 to 48 hours, compared to six to eight weeks offline.
o RESPONSIVENESS. Opt-in email campaigns typically generate higher response
rates than postal mail or banner ad campaigns. Such response rates for email
campaigns typically range from 5% to 15%. This rate of response greatly exceeds
typical postal direct mail response rates, which we believe to be approximately
2%.
o REDUCED COST. Opt-in email campaigns cost less than traditional postal
direct marketing campaigns. Forrester Research estimates that the typical
delivery costs for email campaigns range from 5 to 10 cents per email message
sent (to rent a list and have an email service bureau send it out). This cost
compares to an average cost of between 50 cents and $1.00 per delivery for a
traditional postal direct marketing campaign (including the list rental,
printing, postage and processing fees).
Our 24/7 Mail customers include Web sites that collect email addresses and
direct marketers, including advertisers and email list brokers. Our 24/7 Mail
service allows demographic selection of email addresses based on more than 260
selected categories of user demographics and psychographics. The 24/7 Mail staff
helps marketers maximize their return on investment through custom email
marketing programs that reach the targeted customers they are looking to acquire
and build relationships with. 24/7 Mail utilizes state-of-the-art technology
including Web based reporting, campaign analysis and modeling. We also feature
built in loyalty programs to encourage existing customers to make future
purchases.
Our email address database offers direct marketers and email address list
brokers more than 20 million permission-based email addresses gathered from a
network of more than 200 third-party Web sites, including sites such as NetZero,
Fastweb, PCDriver's HQ, Bits & Pieces, Guitar.com, eDiets, and Gotoworld. We
provide marketers and e-commerce retailers a selection of targeted email address
lists designed to achieve maximum response to their offers.
24/7 MAIL SERVICES
O 24/7 MAIL LIST MANAGEMENT. We currently aggregate and manage opt-in
email lists across a network of more than 200 third-party Web sites. When a
user opts in to receive email or other information through one of these web
site clients, the user's email address is added to our database. However, the
Web site from which the email address was derived continues to be the owner
of its list of email addresses..
o 24/7 MAIL ALLIANCE DATABASE. The 24/7 Alliance database is the industry's
largest aggregated database of opt-in email addresses and related information.
We co-own the data that is aggregated in the 24/7 Mail Alliance database. The
database includes up to 35 fields of self reported preference data and over 260
fields of appended information. Direct marketers can use the database to deliver
e-marketing messages selected by preference, demographic and lifestyle elements.
o 24/7 MAIL LIST BROKERAGE. As a list broker, we rent lists to supplement
our managed lists on behalf of marketers who want to use email to reach
prospects and customers. We help marketers reach their objectives by running
campaigns using the email lists under management by 24/7 Mail. If a specific
list is not under management by 24/7 Mail, we can rent those lists from other
managers or directly from list owners on behalf of the marketer.
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o 24/7 MAIL NEWSLETTER NETWORK. 24/7 Mail delivers HTML banner ads and text
links in email editorial newsletters for third parties. The 24/7 Mail team
handles all facets of campaigns, including orders, execution and payment, and we
track and report results for campaign analysis.
o 24/7 EMAIL SERVICE BUREAU AND LIST DELIVERY. 24/7 Mail has the technical
infrastructure required to deliver high volumes of email with a complete suite
of targeting and tracking features. We will deliver, on behalf of list owners
and marketers, multi media email with sound and full motion video, HTML and
plain text email messages. We currently have the capacity to deliver over ten
million email messages per day. Our service bureau offers bounce processing,
opt-out management and robust data mining and reporting. In addition, we provide
direct marketers with high-level analysis and forecasting tools including
customer lifestyle and trend analysis.
24/7 TECHNOLOGY SOLUTIONS
24/7 CONNECT
We recently launched our next generation Internet ad serving system, 24/7
Connect. 24/7 Connect enables centralized ad delivery, ad management and
reporting. 24/7 Connect selects an appropriate advertisement for a Web page at
the same time that content is being delivered to that Web page from a third
party, and, based on various targeting criteria, delivers that advertisement to
the user within milliseconds.
24/7 Connect is available on two platforms: 24/7 Connect for Networks, that
will initially serve the 24/7 Network in the United States, and 24/7 Connect for
Advertisers and Publishers (formerly Sabela for Advertisers and Publishers),
that is our third-party ad serving solution. We expect to combine the two
platforms into a single solution later this year.
o 24/7 CONNECT FOR NETWORKS. 24/7 Connect for Networks is a single high
volume, highly-scalable system tailored to streamline work flow for tomorrow's
high volume business, increase sales force productivity and efficiency and
provide agencies and advertisers with advanced online reporting, analytical and
automated purchasing tools. We believe that it is the only system in the world
designed to support ad serving across multiple networks globally from a
centralized data repository. We believe that 24/7 Connect for Networks is the
first unified platform to provide true multi-medium support integrating
traditional online ad delivery with email, sponsorship, and local market
components. We built 24/7 Connect utilizing various components of our previous
proprietary ad serving system, Adfinity. We are in the process of converting our
entire 24/7 Network in the United States to 24/7 Connect for Networks and will
continue to do so in incremental stages. The transition has proceeded smoothly
to date with plans to complete the conversion by the second quarter of 2000. To
complete this transition, we must, among other things, ensure that this
technology will function efficiently at increasingly high volumes, and we must
continue to work with our Web site clients to transition them to 24/7 Connect.
o 24/7 CONNECT FOR ADVERTISERS AND PUBLISHERS. 24/7 Connect for Advertisers
is an effective campaign planning, management and optimization tool that allows
advertisers to streamline and control their online ad campaigns, understand
their customers and act quickly on knowledge gained. 24/7 Connect for
Advertisers uses the same globally distributed system architecture and ad
servers that support 24/7 Connect for Publishers. 24/7 Connect for Advertisers
and Publishers also features low-latency ad delivery, detailed tracking,
unsurpassed network scalability, global multi-network support and sales
automation tools. All information is independently audited, validated and
confirmed through PricewaterhouseCoopers and the Audit Bureau of Circulations
(ABC). 24/7 Connect for Advertisers and Publishers currently serves more than
one billion impressions per month on behalf of clients such as Western
Initiative Media, House of Blues, OzEmail, IDG Communications and TMP Worldwide.
Until the completion of the transition to 24/7 Connect for Networks is
complete, we will be primarily dependent on AdForce, Inc. to deliver ads to our
networks. Our agreement with AdForce, entered into as of January 1, 1999,
provides that AdForce will deliver advertisements to our Web sites at an
agreed-upon rate per thousand advertisements. The AdForce agreement has a term
of five years, but permits us to terminate the contract at any time for any
reason upon three months' prior written notice to AdForce. We have agreed to
provide AdForce with quarterly forecasts of expected monthly volumes. AdForce
has agreed to deliver at least the volumes set forth in our forecasts and we
have agreed to purchase at least 80% of the advertisements specified in such
forecasts.
Page 11
o E.MERGE. Our e.merge(TM) product offers a fully integrated, customizable
suite of business applications designed to manage marketing campaigns across
multiple forms of electronic media. e.merge provides real-time targeted
marketing, complete back office support services and other applications that
facilitate the integration of broadband video programming with a variety of
Internet-enabled services. The integration of 24/7 Connect with the e.merge
technology enables us to deliver campaigns across Web sites, email, electronic
programming guides, wireless, set top boxes and other information appliances via
one interface. We acquired the e.merge technology through our acquisition of
IMAKE Software & Services, Inc. in January 2000. IMAKE is a leading provider of
technology products that facilitate the convergence of Internet technologies
with broadband video programming. IMAKE also provides system integration
services and played a key role in the development of 24/7 Connect. The IMAKE
acquisition extends our customer base to telecommunication companies, Internet
service providers, cable service operators and digital entertainment content
providers. Our combined product offerings will enable Web publisher clients to
develop enhanced broadband and wireless content, and advertising capabilities.
IMAKE's current customers include the americast consortium (The Walt Disney
Corporation, GTE, Ameritech, Bell South and Southern New England
Telecommunications), Bell Atlantic, MCI Worldcom, Motorola and Associated Press.
o PROFILZ. We are in the process of building Profilz, an online database of
Web user profiles, that we expect to employ with our ad serving technology to
deliver ads based on demographic profiles. We will compile opt-in data for
Profilz through agreements with our Web site clients that have a database of
registered users as well as through our strategic relationships with Naviant
Technology Solutions, Inc. and others. With these partners, and with user
consent, we may set cookies and retrieve basic user information, which may
include name, address, city, state, zip code and e-mail address. To complete the
demographic and lifestyle profile of these records, with a user's consent, we
will be able to match such profiles with a Naviant file that contains more than
200 opt-in demographic and lifestyle data characteristics on over 100 million
U.S. households. Since advertisers seek to reach consumers who fit their
demographically-profiled target, our Profilz database will provide online
advertisers the ability to execute highly targeted, database marketing campaigns
based on consumers' lifestyles and interests, and track the effectiveness of the
campaigns markets.
PRIVACY PROTECTION
The growth of our business and of the Internet depends on user trust in the
integrity of the Internet. We believe that fostering user confidence in online
privacy is an integral component of our mission to deliver the right message to
the right user at the right time. We have been, and intend to continue to be, a
leader in providing notice and choice to users about our use of non-personally
identifiable information collected about them in the delivery of Internet
advertising. With the development of our Profilz database, we are developing
ways to provide notice to users about the marketing uses of personally
identifiable information collected online and the choice not to participate.
In associating online and offline information about a user, we believe we have
an obligation to the user community to protect their privacy. Therefore, in
connection with our Profilz database and products currently under development,
we will not associate any personally identifiable information about a user with
his or her Internet browser unless that user has first been provided with notice
about the collection and use of personally identifiable information about that
user, and the choice not to participate. In addition, we believe that some
sensitive information, such as health-related information, credit information or
information regarding children, is inappropriate for advertising targeting, and
we will not make that sensitive information part of our targeting systems
without the express affirmative consent of the user or the user's legal
guardian, in the case of a child.
We built our 24/7 Connect technology with user privacy concerns in mind. Connect
for Advertisers and Publishers offers users a selective opt-out that makes it
impossible for us to associate any online behavior with the user's browser or to
associate any personally identifiable information with a browser that has opted
out, and we intend to make this feature available in 24/7 Connect for Networks
as promptly as practicable. This opt-out is available to all users, whether or
not we have any personally identifiable information linked to that person's
browser. We call this opt-out selective because, unlike deleting cookies, our
opt-out only impacts our ability to recognize a user. None of the user's other
personalization efforts (e.g., customized home pages) are affected.
Page 12
As a founding member of the Network Advertising Initiative, we are working
closely with the industry and government groups in developing industry
self-regulating principles for the collection and use of user information by
network advertising companies. Further, we actively monitor privacy laws and
regulations, and endeavor to comply with all applicable privacy requirements.
24/7 MEDIA SALES ORGANIZATION
We believe we maintain one of the largest Internet advertising sales
organizations. We sell services worldwide from 50 offices in 27 countries
through a sales and marketing organization which included approximately 310
sales professionals as of December 31, 1999. In the United States, these
employees are located at our headquarters in New York and our offices in
Atlanta, Boston, Chicago, Dallas, Detroit, Houston, Los Angeles, Miami, New
Jersey, San Francisco, Seattle, Silicon Valley and the Washington, D.C.
area.
Globally, we also have offices in Argentina, Australia, Belgium, Brazil, Canada,
China, Denmark, Finland, France, Germany, Holland, Japan, Italy, Korea,
Malaysia, Mexico, Norway, Peru, Portugal, Singapore, South Korea, Spain, Sweden,
Taiwan, Thailand and the United Kingdom. Advertisers typically purchase
advertising under written purchase order agreements that run for a limited time.
We believe that the terms of our purchase order agreements are consistent with
industry practice. These agreements provide for our indemnification by the
advertiser for breach of representations and warranties and limit the right of
the advertiser to cancel or modify a campaign once commenced. We to sell
sponsorship advertising whereby an advertiser enters into a long-term agreement
with a single Web site, typically with exclusivity and renewal privileges and
restrictions on the advertisers' ability to cancel the agreement. Sponsorship
advertising involves a greater degree of integration among our company, the
advertiser and our Web sites.
We believe that we have a competitive advantage due to the geographic breadth of
our sales force and our ability to continually improve our sales and marketing
capabilities. We continuously leverage the substantial media expertise of our
management team to maximize the value of ad campaigns for both our advertisers
and our Web sites. We also employ a Web site relationship department that
surveys our Web sites and monitors qualitative indicators of service levels in
order to continuously improve our customer service.
We believe that advertiser awareness of our company and our services is critical
to our success. As a result, we seek to continually communicate with advertisers
and advertising agencies through our Web site, trade publication advertisements,
public relations, direct mail, ongoing customer communications programs,
promotional activities, trade shows and online advertisements over our networks
and on third party Web sites.
INTERNATIONAL OPERATIONS
Our organization is a global one, and we intend to continue to expand our global
reach by acquiring or entering into strategic alliances with existing Internet
advertising networks in other foreign. In January 1999, we acquired a 60%
interest in 24/7 Media Europe Ltd., formerly known as InterAd Holdings Limited,
that operates the 24/7 Network in Europe, and we acquired 100% of the remaining
interest in 24/7 Media Europe in January 2000. We acquired our operations in
Canada from our acquisition of Clickthrough Interactive in July 1999. In October
1998, we entered into an agreement with chinadotcom corporation to jointly
develop the 24/7 Network in Asia. We collaborate with chinadotcom in expanding
and training its China and Hong Kong-based sales force as well as recruiting Web
sites for the network. We will receive royalties from all sales through the 24/7
Network for a period of between seven and ten years. We also acquired an equity
stake in Chinadotcom that currently represents an interest of 6.4% of the
company.
INTELLECTUAL PROPERTY
Intellectual property is critical to our success, and we rely upon patent,
trademark, copyright and trade secret laws in the United States and other
jurisdictions to protect our proprietary rights and intellectual property. We
have received two patents, and we have filed and intend to file additional
applications with the United States Patent and
Page 13
Trademark Office, to protect aspects of our 24/7 Connect and other technologies.
We have also applied to register our trademarks both domestically and
internationally. These trademark registrations and patent applications may not
be approved or granted and may be challenged by others or invalidated through
administrative process or litigation. Patent, trademark, copyright and trade
secret protection may not be available in every country in which our services
are distributed or made available. In addition, we protect our proprietary
rights through the use of confidentiality agreements with employees, consultants
and affiliates.
Profilz will collect demographic profiles of Internet users and the ad serving
technology we employ collects and uses data derived from user activity on our
networks and our Web sites. This data is intended to be used for advertisement
targeting and for predicting advertisement performance. Although we believe that
we have the right to use such data, trade secret, copyright or other protection
may not be available for such information or others may claim rights to such
information. Further, under our contracts with Web publishers using our
services, we are obligated to keep information regarding the Web publisher
confidential.
COMPETITION
The market for interactive marketing solutions is intensely competitive. We
expect this competition to continue to increase. Competition may also increase
as a result of industry consolidation. We compete for Internet advertising
revenues with large Web publishers and Web portals, such as America Online,
Excite@Home, Go Network, Lycos, Microsoft Network and Yahoo!. We also compete
with the traditional advertising media including television, radio, cable and
print for a share of advertisers' total advertising budgets.
The 24/7 Network competes for Web site clients with a variety of Internet
advertising networks, including DoubleClick, Engage Technologies (which is
majority owned by CMGI, Inc. and has agreed to acquire both AdSmart and
Flycast), L90 and Real Media. Our 24/7 Mail business competes for list
management clients with Message Media, NetCreations and YesMail (a unit of
CMGI). In the third party adserving business, we compete with DoubleClick,
AdForce (a unit of CMGI), AdKnowledge (a unit of Engage Technologies), Avenue A
and MatchLogic. We also have additional regional competitors in each of our
business lines. We encounter competition from a number of other sources,
including content aggregators, companies engaged in advertising sales networks,
advertising agencies, and other entities that facilitate Internet advertising.
Many of our 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 we do.
EMPLOYEES
As of December 31, 1999, we employed approximately 470 persons worldwide,
including approximately 310 in sales, marketing and customer support, 50 in
technology and product development, and 110 in accounting, human resources and
administration. We are not subject to any collective bargaining agreements and
believe that we enjoy a good relationship with our employees.
RECENT DEVELOPMENTS
ACQUISITION OF SABELA MEDIA, INC.
On January 9, 2000, we acquired Sabela Media, Inc., a global ad serving,
tracking and analysis company with products for online advertisers and Web
publishers, for approximately $70 million. We acquired all of the issued and
outstanding shares of capital stock of Sabela in a merger transaction whereby a
subsidiary of 24/7 Media was merged with and into Sabela.
Sabela's sophisticated, real-time user profiling technology, called 24/7 Connect
for Advertisers and Publishers, uses unique filtering and analysis tools to
allow online advertisers to match their messages with key audiences on a true
one-to-one basis. Such adaptive targeting technology enables advertisers to
react to specific changes in a user's
Page 14
profile on an instantaneous basis. Sabela currently serves top-tier worldwide
customers that include Western Initiative Media, House of Blues, OzEmail, IDG
Communications and TMP Worldwide. We have integrated Sabela's business and
employees into our 24/7 Technology Solutions Group.
ACQUISITION OF IMAKE SOFTWARE & SERVICES, INC.
On January 13, 2000, we acquired IMAKE Software and Services, Inc., for
approximately $80 million, including contingent consideration. IMAKE is a
provider of technology products that facilitate the convergence of Internet
technologies with broadband video programming. We acquired all of the issued and
outstanding shares of capital stock of IMAKE in a merger transaction whereby a
subsidiary of 24/7 Media was merged with and into IMAKE.
IMAKE's flagship e.merge(TM) product offers a fully integrated, customizable
suite of business applications designed to manage marketing campaigns across
multiple forms of electronic media. e.merge provides real-time targeted
marketing, complete back office support services and other applications that
facilitate the integration of broadband video programming with a variety of
Internet-enabled services. IMAKE also provides system integration services and
played a key role in the development of 24/7 Connect, 24/7 Media's next
generation online ad serving and management system. IMAKE's current customers
include the americast consortium (The Walt Disney Corporation, GTE, Ameritech,
Bell South and Southern New England Telecommunications), Bell Atlantic, MCI
Worldcom, Motorola and Associated Press. The integration of 24/7 Connect with
IMAKE's e.merge technology enables 24/7 Media to deliver campaigns across Web
sites, email, electronic programming guides, wireless, set top boxes and other
information appliances via one interface. The IMAKE acquisition extends 24/7
Media's customer base to telecommunication companies, Internet service
providers, cable service operators and digital entertainment content providers.
24/7 Media's product offerings will enable Web publisher clients to develop
enhanced broadband and wireless content, and advertising capabilities.
ACQUISITION OF AWARDTRACK, INC.
On February 11, 2000, we acquired AwardTrack, Inc. ("AwardTrack"), a privately
held California corporation, for approximately $70 million. We acquired all of
the issued and outstanding shares of capital stock of AwardTrack in a merger
transaction whereby a subsidiary of 24/7 Media was merged with and into
AwardTrack.
AwardTrack offers a turnkey private label loyalty customer relationship
management (CRM) program that enables Web retailers and content sites to issue
points to Web users as a reward for making purchases, completing surveys or
investigating promotions. These points can be issued, redeemed and exchanged in
real-time for points in programs of other AwardTrack partners using our
proprietary technology. What separates AwardTrack from other technologies is its
ability to allow users to not only combine aggregate points from several rewards
programs automatically, but to also transfer points in real-time between
participating awards programs. For example, two competing airlines may have a
rewards program that can be redeemed at the same hotel chain. If a consumer does
not have enough air miles from one airline program to qualify for a night's stay
at the hotel, they can transfer air miles from one or several airlines to make
up the difference. This proprietary feature can be licensed to portals, content
sites and e-commerce sites to create an unrivaled sticky application.
POTENTIAL ACQUISITION OF EXACTIS.COM, INC.
On February 29, 2000, we announced that we entered into a merger agreement with
Exactis.com, Inc., a publicly traded Delaware corporation and a provider of
permission-based precision e-mail marketing and communication outsourcing
solutions, in a stock-for-stock transaction. Pursuant to an agreement and plan
of merger dated February 29, 2000, a wholly owned subsidiary of our company will
merge with and into Exactis.com. At the effective time of the merger, expected
to be in the second quarter of this year, each issued and outstanding share of
Exactis.com common stock will be converted into the right to receive 0.60 shares
of 24/7 Media common stock. We also expect that all outstanding warrants issued
by Exactis.com will be converted into our common stock at the same exchange
ratio of 0.60, and we expect to assume all outstanding stock options of
Exactis.com at the closing of the merger. The consummation of the merger is
subject to various conditions precedent, including:
o the adoption of the merger agreement by the stockholders of
Exactis.com,
o the approval of the issuance of our common stock in the merger by
our stockholders; and
Page 15
o the expiration or early termination of the waiting period
required under the Hart-Scott-Rodino Antitrust Improvements Act
of 1976, as amended.
Page 16
ITEM 2. PROPERTIES.
Our principal executive offices are located at 1250 Broadway, New York, New
York. They consist of approximately 41,000 square feet under a lease that
expires in 2008 and provides for total annual rent of approximately $1,200,000,
subject to increase annually to reflect increases in operating expenses.
In addition, we lease office space in the following domestic locations:
Atlanta, Georgia Boston, Massachusetts
Chicago, Illinois Dallas, Texas
Detroit, Michigan Fairfax, Virginia
Houston, Texas Los Angeles, California
Miami, Florida Mountain View, California
Red Bank, New Jersey Rockville, Maryland
San Francisco, California Seattle, Washington
Furthermore, we lease office space in the following countries for our
international operations:
Argentina Korea
Australia Japan
Belgium Malayasia
Brazil Mexico
Canada Norway
China Peru
Denmark Portugal
England Singapore
Finland South Korea
France Spain
Germany Sweden
Holland Taiwan
Italy Thailand
Hong Kong
We are continually evaluating our facilities requirements.
Our technology software and hardware are housed at GlobalCenter, Inc. in
Herndon, Virginia and New York, New York, Exodus Communications, Inc. in
Sterling, Virginia, Exodus Communication, PLC in London, UUNet Australia Pty,
Ltd in Sydney, Australia and Digital Islands, Inc. in Hong Kong. Our agreements
with these organizations provide for Internet connectivity services, tape
rotation, off-site storage services, facilities management, and the lease of
secure space to store and operate this equipment. In GlobalCenter, the cost of
leasing hardware and software is included in the pricing, but in the other
locations the hardware and software costs are managed by us. Our agreements with
these organizations include a "99% Uptime Guarantee." Downtime results in
certain returns of payment to us and gives rise to a right of termination by us.
In the future, we will be expanding our utilization of Digital Islands, Inc. and
other organizations to ensure the continued support of our present and future
customers and maintain our levels of redundancy.
ITEM 3. LEGAL PROCEEDINGS.
In December 1999, DoubleClick, Inc. filed a patent infringement lawsuit against
our subsidiary, Sabela Media, Inc. in the United States District Court for the
Southern District of New York. The suit alleges that Sabela is infringing, and
inducing and contributing to the infringement by third parties of, a patent held
by DoubleClick entitled "Method for Delivery, Targeting and Measuring
Advertising Over Networks". DoubleClick is seeking treble damages in an
unspecified amount, a preliminary and permanent injunction from further alleged
infringement and attorneys' fees and costs. This litigation can be expected to
result in significant expenses to us and the diversion of management time and
other resources, the extent of which cannot be quantified with any reasonable
accuracy given
Page 17
the early stage of this litigation. This case is in the early stages of
discovery. We believe we have meritorious defenses to this lawsuit and intend to
defend ourselves vigorously.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted to a vote of security holders during the fourth
quarter of 1999.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
We have not declared or paid any dividends on our capital stock since our
inception and do not anticipate paying dividends in the foreseeable future. Our
current policy is to retain earnings, if any, to finance the expansion of our
business. The future payment of dividends will depend on the results of
operations, financial condition, capital expenditure plans and other factors
that we deem relevant and will be at the sole discretion of our board of
directors.
Since our initial public offering on August 13, 1998, our common stock has
traded on the Nasdaq National Market under the symbol "TFSM." The following
table sets forth the high and low sales prices of the common stock, for the
periods indicated, as reported by the Nasdaq National Market.
HIGH LOW
------ ------
YEAR ENDED DECEMBER 31, 1998
Third Quarter (from August 14, 1998) ........... 22 3/4 6 1/2
Fourth Quarter ................................. 41 1/4 6 3/8
YEAR ENDED DECEMBER 31, 1999
First Quarter .................................. 59 22 7/8
Second Quarter ................................. 69 5/8 23 7/8
Third Quarter .................................. 48 3/8 21 3/4
Fourth Quarter ................................. 65 1/4 34 3/8
YEAR ENDED DECEMBER 31, 2000
First Quarter (through March 22, 2000) ......... 65 40 3/8
On March 22, 2000, the last reported sale price for our common stock on the
Nasdaq National Market was $47.625. As of March 15, 2000, there were
approximately 420 holders of record of our common stock.
Page 18
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.
The selected consolidated financial data as of December 31, 1999 and 1998, and
for each of the years in the three-year period ended December 31, 1999 have been
derived from our audited consolidated financial statements, which are included
elsewhere herein. The selected financial data as of December 31, 1997, 1996 and
1995 and for each of the years in the two-year period ended December 31, 1996
are derived from our audited financial statements, which are not included
herein. We believe that due to the many acquisitions that we made in recent
years, the period to period comparisons for 1995 through 1999 are not meaningful
and should not be relied upon as indicative of future performance. You should
read the selected consolidated financial data stated below 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 herein.
For the Years Ended December 31,
-----------------------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
(In thousands, except for per share amounts)
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenues:
Network ............................................ $ 81,158 $ 19,744 $ 1,467 $ 1,111 $ 152
Email .............................................. 8,853 1,003 69 -- --
Consulting and license fees ........................ -- 119 1,681 436 --
----------- ----------- ---------- ---------- ----------
Total revenues .................................... 90,011 20,866 3,217 1,547 152
Cost of revenues:
Network ............................................ 61,000 15,970 1,655 1,596 198
Email .............................................. 4,963 179 14 -- --
----------- ----------- ---------- ---------- ----------
Total cost of revenues ............................ 65,963 16,149 1,669 1,596 198
----------- ----------- ---------- ---------- ----------
Gross profit (loss) ................................ 24,048 4,717 1,548 (49) (46)
Operating expenses:
Sales and marketing ................................ 23,396 8,235 1,857 2,364 115
General and administrative ......................... 26,730 9,396 3,258 3,414 679
Product development ................................ 1,891 2,097 1,603 1,617 426
Other expenses ..................................... -- -- 989 -- --
Write-off of acquired in-process technology ........ -- 5,000 -- -- --
Amortization of goodwill and other intangible assets 15,097 5,722 -- -- --
----------- ----------- ---------- ---------- ----------
Total operating expenses .......................... 67,114 30,450 7,707 7,395 1,220
----------- ----------- ---------- ---------- ----------
Loss from operations ................................ (43,066) (25,733) (6,159) (7,444) (1,266)
Interest (expense) income, net ...................... 3,025 576 (154) (38) --
----------- ----------- ---------- ---------- ----------
Net loss before minority interest ................... (40,041) (25,157) (6,313) (7,482) (1,266)
Minority interest in loss of consolidated
subsidiaries ...................................... 979 -- -- -- --
Net loss ............................................ (39,062) (25,157) (6,313) (7,482) (1,266)
Cumulative dividends on mandatorily
convertible preferred stock ........................ -- (276) -- -- --
----------- ----------- ---------- ---------- ----------
Net loss attributable to common stockholders ........ $ (39,062) $ (25,433) $ (6,313) $ (7,482) $ (1,266)
=========== =========== ========== ========== ==========
Basic and diluted net loss per common share ......... $ (1.96) $ (2.48) $ (3.50) $ (4.24) $ (1.22)
=========== =========== ========== ========== ==========
Weighted average common shares outstanding........... 19,972,446 10,248,677 1,802,235 1,765,053 1,036,634
=========== =========== ========== ========== ==========
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents ........................... $ 42,786 $ 34,049 $ 121 $ 1,847 $ 216
Working capital (deficit) ........................... 41,189 31,290 (1,668) (232) (235)
Intangible assets, net .............................. 62,398 10,935 -- -- --
Total assets ........................................ 534,012 63,108 1,463 4,687 713
Long-term debt ...................................... -- -- 2,317 -- --
Obligations under capital leases, excluding
current installments ............................... 13 34 80 -- --
Total stockholders' equity (deficit) ................ 397,791 51,087 (2,947) 1,888 462
Page 19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
GENERAL
We are a leading global provider of end-to-end advertising and marketing
solutions for Web publishers, online advertisers, advertising agencies,
e-marketers and e-commerce merchants. We provide a comprehensive suite of media
and technology products and services that enable such Web publishers, online
advertisers, advertising agencies and e-marketers to attract and retain
customers worldwide, and to reap the benefits of the Internet and other
electronic media. Our solutions include advertising and direct marketing sales,
ad serving, promotions, email list management, email list brokerage, email
delivery, data analysis, loyalty marketing and convergence solutions, all
delivered from our industry-leading data and technology platforms. Our 24/7
Connect ad serving technology solutions are designed specifically for the
demands and needs of advertisers and agencies, Web publishers and e-commerce
merchants. Commencing in 2000, our business will be organized into three
principal lines of business:
o 24/7 Network,
o 24/7 Mail, and
o 24/7 Technology Solutions.
Through our global advertising network, 24/7 Media provides a full suite of
interactive marketing solutions and services. Through the 24/7 Network, we serve
more than 3.9 billion ad impressions per month on more than 700 high-profile
sites globally. 24/7 Mail, the world's largest permission-based, opt-in email
database, consists of more than 20 million profiles that can be used to deliver
targeted online banner and email campaigns. Our 24/7 Technology Solutions
enables 24/7 Connect to provide advertisers, marketers and Web sites a
centralized ad delivery, ad management and reporting system. Based in New York,
24/7 Media, Inc. has offices in 50 cities in 27 countries.
We generate our revenues primarily by delivering advertisements and promotions
to affiliated Web sites on our networks. We typically sell our advertisements
and deliver our email related services under purchase order agreements with
advertisers which are short-term in nature or subject to cancellation.
The pricing of ads and email messages is based on a variety of factors,
including the gross dollar amount spent on the advertising campaign and the
platform over which the campaign is delivered. We strive to sell 100% of our
inventory through the combination of advertisements sold on a "CPM" basis, which
is the cost to the advertiser to run 1,000 ads, and a "cost-per-action" basis
whereby revenues are generated if the user responds to the ad with an action,
such as an inquiry or a purchase of the product advertised.
We recognize advertising and email revenues in the period that the advertisement
or promotion is delivered, provided that no significant obligations remain. In
nearly all cases, we recognize revenues generated from advertising sales, net of
any commissions paid to advertising agencies on behalf of their clients. We pay
our affiliated Web site clients a fee calculated as a percentage of revenues
generated by advertisements run on the Web site, which amount is included in
cost of revenues. We pay our email list owners a royalty for use of their email
list in our ad campaigns. In addition, we are generally responsible for billing
and collecting for advertisements delivered to our networks.
The period-to-period comparisons of our historical operating results should not
be relied upon as indicative of future performance. Our prospects should be
considered in light of the risks, expenses and difficulties encountered by
companies in the early stages of development, particularly companies in the
rapidly evolving Internet market. Although we have experienced revenue growth in
recent periods, we anticipate that we will incur operating losses for the
foreseeable future due to a high level of planned operating and capital
expenditures. In particular, we expect to increase our operating expenses in
order to expand our sales and marketing organization and to further enhance,
develop, integrate and scale our 24/7 Connect and e.merge technologies.
Page 20
RESULTS OF OPERATIONS - 1999 COMPARED TO 1998
Total revenues increased 331% in 1999 from 1998 due to the explosive growth of
the Internet as a business medium and our rapidly growing position within this
medium on a global basis. In addition to expanding our services geographically
from the U.S. to Canada, Europe and Latin America in 1999, we also extended our
product line beyond the Web site network business to offer opt-in email services
and technology solutions.
REVENUES
NETWORK REVENUES. Our network revenues increased to $81.2 million in 1999 from
$19.7 million in 1998, representing 311% growth. This increase was fueled by a
dramatic expansion in the number of ad impressions sold in the U.S. network
business, a significantly increasing number of Web sites that we represent, and
our expansion globally to Canada, Europe and Latin America. In addition, the
number of advertisers and the amount of advertising spending on the Internet
increased significantly during this period.
EMAIL REVENUES. Our email revenues increased to $8.9 million in 1999 from $1.0
million in 1998, representing 783% growth. This increase was fueled by a
significant expansion in the types of email services that we offer to include
email list management and list brokerage services in addition to our service
bureau offerings, as well as a dramatic increase in the number of opt-in email
addresses under management. The expansion into these new service offerings was
supported by our acquisition of ConsumerNet in the third quarter of 1999. We
believe that strong industry acceptance of opt-in email advertising has promoted
this strong historical growth and will continue to increase our revenue in the
future.
COST OF REVENUES AND GROSS PROFIT
NETWORK COST OF REVENUES AND GROSS PROFIT. The cost of network revenues consists
primarily of fees paid to affiliated Web sites, which are calculated as a
percentage of revenues resulting from ads delivered on our networks. Cost of
revenues also includes third party ad serving costs, depreciation of our ad
serving system and Internet access. Gross profit dollars increased significantly
and the gross margin, which is network gross profit as a percent of total
network revenues, increased to approximately 25% in 1999 from 19% in 1998. The
increase in gross margin was primarily due to more favorable third party ad
serving costs due to renegotiated rates.
EMAIL COST OF REVENUES AND GROSS PROFIT. The cost of email revenues consists
primarily of list provider royalties and delivery costs. Gross profit dollars
increased significantly due to the growth in revenues. Gross margin decreased
from 82% to 44% as the mix of business shifted from service bureau in 1998 to
primarily list management and list brokerage in 1999, each of which has a lower
gross margin.
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. Sales and marketing expenses
increased in dollar terms; however, as a percentage of revenue the expenses
decreased from 39% in 1998 to 26% in 1999. Sales and marketing expenses
increased as a result of the growth of our business on a global scale and the
resulting additions to sales staff as well as increased marketing expenses. We
expect sales and marketing expenses to increase in dollar terms as we continue
to invest in sales and marketing personnel, expand into new markets and broaden
our visibility; however, we expect that sales and marketing expenses as a
percentage of revenue will decline as our business matures across multiple
product lines and geographic regions.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses consist
primarily of compensation, facilities expenses and other overhead expenses
incurred to support the growth of our business. General and administrative
expenses increased in dollar terms; however, as a percentage of revenue the
expenses decreased from 45% in 1998 to 30% in 1999. General and administrative
expenses increased as a result of the growth of our business, the addition of
new personnel and increased operating expenses. We expect general and
administrative expenses to continue to increase due to the additional personnel
and other expenses required to support our anticipated business growth; however,
we expect that general and administrative expenses as a percentage of revenues
will decline as our business matures across multiple product lines and
geographical regions.
Page 21
PRODUCT DEVELOPMENT EXPENSES. Product development expenses consist primarily of
compensation and related costs incurred to further develop our ad serving and
other technology capabilities. Product development expenses decreased in 1999
compared to 1998 as 24/7 Connect, our ad serving solution, reached the
application development stage in March 1999 and we began capitalizing costs
related to the project. We expect to continue to capitalize certain costs
through early 2000 when 24/7 Connect will become fully operational. We continue
to believe that investment in product development, particularly for our broad
range of technology platforms and initiatives, is critical to our strategy of
providing excellent service, and we expect to increase the future amounts spent
on product development.
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLE ASSETS. In 1999, we incurred total
amortization charges of $15.1 million compared to $5.7 million in 1998. The
expense is the amortization of goodwill and other intangible assets related to
the acquisitions of InterAd Holdings Ltd., ClickThrough Interactive, ConsumerNet
and Netbooking OY in 1999 and Petry, Advercomm, Intelligent Interactions,
CardSecure and CliqNow! in 1998.
INTEREST (EXPENSE) INCOME, NET. Interest income, net was $3.0 million in 1999
and $0.6 million in 1998. The increase in interest income was attributable to
interest earned on the cash and cash equivalents from the net proceeds due to
our secondary offering of common stock in May 1999.
MINORITY INTEREST IN LOSS OF CONSOLIDATED SUBSIDIARIES. Minority interest
relates to losses attributable to minority investors in 24/7 Media Europe
N.V. We acquired 24/7 Media Europe N.V. in 1999, and at December 31, 1999 we
owned approximately 58% of the primary common equity.
RESULTS OF OPERATIONS - 1998 COMPARED TO 1997
For the fiscal year ended December 31, 1998, our historical results of
operations reflect the acquisitions of Petry, Advercomm, CliqNow!,
Intelligent Interactions and CardSecure from their respective dates of
acquisition. Interactive Imaginations, our then parent, was merged into us on
April 9, 1998 in a manner similar to a pooling-of-interests. As a result, our
historical results of operations for the fiscal years ended December 31,
1997, 1996 and 1995 represent the results of Interactive Imaginations and do
not reflect any of the operating results of Petry, Advercomm, CliqNow!,
Intelligent Interactions or CardSecure.
During 1997, the historical results of operations of Interactive Imaginations,
the stability and morale of its workforce and overall value of the common stock
were negatively impacted by certain significant factors. Such events included a
class action lawsuit in the second and third quarters of 1997, which resulted in
extraordinary expenses of $232,000 in legal costs, unfavorable publicity to
Interactive Imaginations, a significant diversion of management resources, and
difficulty in obtaining financing to continue its operations.
We do not believe that the historical revenues or expenses for the years 1998
and 1997 as discussed below are reliable or accurate indicators of the future
performance of the combined company.
REVENUES. Total revenues were $20.9 million and $3.2 million for the years ended
December 31, 1998, and 1997, respectively. The increase in 1998 was caused
primarily by the inclusion of the acquired companies' activities and a
significant increase in advertising revenue, offset by a decline in revenues
caused by the cessation of a license agreement with SegaSoft in 1997. We do not
expect to realize meaningful revenues from the SegaSoft agreement in the future.
COST OF REVENUES AND GROSS PROFIT. Cost of revenues was $16.1 million and $1.7
million for the years ended December 31, 1998 and 1997, respectively. The
increase in 1998 was primarily related to increased payments to our Affiliated
Web sites which were caused by growth in advertising revenue and the temporary
increase in rates in connection with our transition to a single ad serving
technology. This increase was offset by reduced ContentZone ad serving costs.
OPERATING EXPENSES. Total operating expenses were $30.5 million and $7.7 million
for the years ended December 31, 1998 and 1997, respectively. The increase from
1997 to 1998 was caused by: higher sales and marketing and general and
administrative expenses resulting from the acquisitions we completed in 1998;
additional operating expenses incurred in anticipation of future growth,
particularly in the number of employees, offices, and other
Page 22
operating expenses to support expanded U.S. operations; amortization of goodwill
and other intangible assets resulting from the acquisitions we completed in
1998; and acquired in-process technology of approximately $5.0 million from the
acquisition of Intelligent Interactions which was immediately charged to
operations in April 1998. The value of the acquired in-process technology was
determined using a combination of a risk-adjusted income approach and an
independent valuation. The acquired in-process technology had not reached the
stage of technological feasibility at the date of acquisition and had no
alternative future use.
QUARTERLY RESULTS OF OPERATIONS--UNAUDITED
Our 1999 results of operations were significantly affected by the rapid growth
of our existing business as well as expansion both geographically and into new
product lines, including through acquisition. The following table presents our
unaudited quarterly results of operations for 1999. We believe that all
necessary adjustments, consisting of normal recurring adjustments, have been
included in the amounts stated below.
Three Months Ended
-----------------------------------------------
March 31, June 30, Sept. 30, Dec. 31,
1999 1999 1999 1999
-------- -------- -------- --------
(In thousands)
Consolidated Statements of Operations Data:
Revenues:
Network ............................................ $ 11,071 $ 16,536 $ 21,861 $ 31,690
Email .............................................. 379 619 2,452 5,403
-------- -------- -------- --------
Total revenues .................................... 11,450 17,155 24,313 37,093
Cost of revenues:
Network ............................................ 8,749 12,815 16,368 23,068
Email .............................................. 47 247 1,379 3,290
-------- -------- -------- --------
Total cost of revenues ............................ 8,796 13,062 17,747 26,358
-------- -------- -------- --------
Gross profit ...................................... 2,654 4,093 6,566 10,735
-------- -------- -------- --------
Operating expenses:
Sales and marketing ................................ 3,494 4,454 6,920 8,528
General and administrative ......................... 3,512 5,220 7,809 10,189
Product development ................................ 922 320 327 322
Amortization of goodwill and other intangible assets 2,258 2,122 4,212 6,505
-------- -------- -------- --------
Total operating expenses .......................... 10,186 12,116 19,268 25,544
-------- -------- -------- --------
Operating loss ..................................... (7,532) (8,023) (12,702) (14,809)
Interest (expense) income:
Interest income .................................. 311 892 1,045 845
Interest expense ................................. (23) (32) (11) (2)
-------- -------- -------- --------
Total interest (expense) income, net ............... 288 860 1,034 843
Minority interest in loss of consolidated
subsidiary ........................................ -- -- -- 979
-------- -------- -------- --------
Net loss ........................................... $ (7,244) $ (7,163) $(11,668) $(12,987)
======== ======== ======== ========
REVENUES. Our revenues increased each quarter primarily due to an increase in
advertising revenue on the 24/7 Network. This increase is due to the same
reasons noted in the year-to-year comparison, that is, a dramatic expansion in
the number of ad impressions sold in the US network business, a significantly
increasing number of Web sites that we represent, and our expansion globally
through acquisition to Canada, Europe and Latin America. In addition to network
revenues, we generated increased revenues through email services. We expect
email to generate a larger percentage of our revenue in the future.
COST OF REVENUES AND GROSS PROFIT. Cost of revenues increased each quarter due
to the growth of our business. Gross margin increased each quarter, reaching
approximately 29% in the fourth quarter. The increase is due to favorable ad
serving costs in the network business, as well as an increasing percentage of
total revenues being generated by email, which enjoys a higher gross margin than
the network business.
SALES AND MARKETING EXPENSES. Sales and marketing expenses increased as a result
of the growth of our business and the resulting additions to sales staff as well
as increased marketing expenses. We expect sales and marketing expenses to
increase as we continue to invest in sales and marketing personnel, expand into
new markets and broaden our visibility.
Page 23
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased as a result of the growth of our business, the addition of new
personnel and increased operating expenses. We expect general and administrative
expenses to continue to increase due to the additional personnel and other
expenses required to support our anticipated business growth.
PRODUCT DEVELOPMENT EXPENSES. Product development expenses decreased from the
first quarter to the second quarter due to capitalizing development costs for
24/7 Connect. Product development expenses remained consistent for the second
through the fourth quarters as we continued to develop 24/7 Connect. We continue
to believe that investment in product development, particularly for our broad
range of technology platforms and initiatives, is critical to our strategy of
providing excellent service, and we expect to increase the future amounts spent
on product development.
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLE ASSETS. Amortization of goodwill
and other intangible assets relates to acquisitions. The expense increased
during the third and fourth quarters principally due to the acquisition of
ConsumerNet in August of 1999.
INTEREST INCOME. Interest income is attributable to interest earned on cash and
cash equivalents. Interest income increased in the second and third quarters as
cash and cash equivalents were increased.
MINORITY INTEREST IN LOSS OF CONSOLIDATED SUBSIDIARIES. Minority interest
relates to losses attributable to minority investors in 24/7 Media Europe N.V.
We acquired 24/7 Media Europe N.V. in 1999, and at December 31, 1999 we owned
approximately 58%.
LIQUIDITY AND CAPITAL RESOURCES.
At December 31, 1999, we had cash and cash equivalents of $42.8 million versus
$34.0 million at December 31, 1998. Cash and cash equivalents are comprised of
highly liquid short term investments with maturities of three months or less.
The value of investments totaled $366.6 million and $6.6 million at December 31,
1999 and 1998, respectively. These investments generally relate to equity and
cash transfers from us for minority equity ownership positions. Such investments
include, but are not limited to, chinadotcom, ShopNow.com, Naviant, Inc. and
idealab!. We used approximately $45.1 million and $3 million in cash to fund
these investments in 1999 and 1998, respectively. In addition, the Company
acquired majority and full ownership positions in several companies through the
transfer of common stock and cash. These acquisitions included, but were not
limited to InterAd Holdings, Ltd., Netbooking, ClickThrough Interactive and
ConsumerNet during 1999. Cash used for such acquisitions approximated $7.0
million during 1999 and $1.5 million during 1998.
We generated much of our liquidity through our initial public offering that
occurred in 1998 and our secondary offering which occurred in 1999. The initial
public offering and the secondary offering provided us with approximately $44.8
million and $100.5 million, respectively, and was used to finance growth in
operations, acquisitions of subsidiaries and investments discussed above, and
the purchase of property and equipment needed during this growth period. We used
approximately $22.0 million and $14.9 million of cash in operating activities
during 1999 and 1998 generally as a result of our net operating losses, adjusted
for certain non-cash items such as amortization of goodwill and other intangible
assets and non-cash related equity transactions, and also by significant
increases in accounts receivable that were partially offset by increases in
accounts payable and accrued liabilities.
Net cash used by us for investing activities was approximately $70.7 million and
$6.0 million during 1999 and 1998, respectively. In addition to the acquisitions
and investments discussed above, we have continued to develop our infrastructure
through capital expenditures, including capitalized software. Cash used for such
expenditures totaled approximately $18.6 million and $1.5 million for 1999 and
1998, respectively. To the extent we continue to acquire additional ad serving
hardware, make cash investments in other businesses or acquire other businesses,
net cash used in investing activities could increase. Currently, we have various
capital and operating leases relating to the use of computer hardware, software
and office space.
Page 24
The annual lease for our corporate headquarters is approximately $1.2 million
per year. We expect to expand our corporate headquarters space. We believe that
the expenses associated with the additional space will not have a material
effect on our results of operations or financial position. Total rent expense
for 1999 relating to all leases was $3.0 million.
No provision for federal or state income taxes has been recorded because we
incurred net operating losses for all periods presented. At December 31,
1999, we had approximately $56.2 million of US and $8 million of foreign net
operating loss carryforwards available to offset future taxable income; such
carryforwards expire in various years through 2019. As a result of various
equity transactions during 1999, 1998 and 1997, we believe that our company
has undergone an "ownership change" as defined by Section 382 of the Internal
Revenue Code. Accordingly, the utilization of $24.8 million of the net
operating loss carryforward is limited. Due to this limitation, and the
uncertainty regarding the ultimate utilization of this portion of the net
operating loss carryforward, we have not recorded any tax benefit for these
or the foreign net operating losses, and a valuation allowance has been
recorded for these portions of the net deferred tax assets. In connection
with the unrealized gain on the chinadotcom, and ShopNow.com investments
reflected as a separate component of stockholders' equity (deficit) pursuant
to Statement of Financial Accounting Standards No. 115, Accounting for
Certain Investments in Debt and Equity Securities ("SFAS No. 115"), it is
considered more likely than not that $11.3 million of the net operating loss
carryforward at December 31, 1998 will be realized. As a result, the portion
of the valuation allowance relating to the net deferred tax asset associated
with this amount has been released, with the effects netted against the SFAS
115 gain. Similarly, a deferred tax asset was recognized for a $20.1 million
net operating loss incurred in 1999, with the benefit netted against the SFAS
115 gain.
We believe that our current cash and cash equivalent balances will be sufficient
to fund our requirements for working capital and capital expenditures for at
least the next 12 months. To the extent we encounter additional opportunities,
we may need to sell a portion of our current investments in affiliates, or we
may sell additional equity or debt securities which would result in further
dilution of our stockholders.
We expect to invest additional amounts of working capital in our purchased
subsidiaries and majority-owned businesses in 2000 to support their future
operations.
We believe that our current cash and cash equivalent balances will be sufficient
to fund our requirements for working capital and capital expenditures for at
least the next 12 months. To the extent that we encounter unanticipated
opportunities, we may need to raise additional funds sooner, in which case we
may sell additional equity, issue debt securities or convertible debt securities
or borrow funds from banks or other financial sources. Sales of additional
equity or issuances of additional debt securities may result in additional
dilution of our stockholders. We cannot be certain that we will be able to sell
additional equity or issue debt securities in the future or that additional
financing will be available to us when needed on commercially reasonably terms,
or at all.
YEAR 2000 COMPLIANCE
To date our systems and software have not experienced any material disruption
due to the onset of the Year 2000, and we have completed our Year 2000
preparedness activities. However, we cannot assure that we will not experience
disruptions in the future as a consequence of Year 2000 issues. We cannot
quantify the amount of our potential exposure, but do not believe it to be
material.
IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activity" which delayed the effective date of SFAS 133
to fiscal years beginning after June 15, 2000. SFAS 133 established accounting
and reporting standards for derivative instruments and for hedging activities.
SFAS 133 requires that an entity recognize all derivatives as either assets or
liabilities and measure those instruments at fair value. We have not yet
determined the impact of this pronouncement on our financial position or results
of operations.
Page 25
FORWARD-LOOKING STATEMENTS
This report includes forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, and Section 21E of the Securities Exchange
Act of 1934. We intend such forward-looking statements to be covered by the safe
harbor provisions for forward-looking statements contained in the Private
Securities Litigation Reform Act of 1995, and we are including this statement
for purposes of complying with these safe harbor provisions. We have based these
forward-looking statements on our current expectations and projections about
future events. These forward-looking statements are not guarantees of future
performance and are subject to risks, uncertainties and assumptions, including
those set forth under "Item 7.--Risk Factors".
Words such as "expect", "anticipate", "intend", "plan", "believe", "estimate"
and variations of such words and similar expressions are intended to identify
such forward-looking statements. We undertake no obligation to publicly update
or revise any forward-looking statements, whether as a result of new
information, future events or otherwise. In light of these risks, uncertainties
and assumptions, the forward-looking events discussed in this report might not
occur.
RISK FACTORS
You should carefully consider the following risk factors before you decide to
buy our common stock. These risks may adversely impair our business operations.
WE HAVE A LIMITED OPERATING HISTORY ON WHICH AN INVESTOR CAN EVALUATE OUR
BUSINESS. We were formed as a result of three companies in February 1998. None
of the companies nor any company that we have since acquired had an operating
history of more than four years prior to acquisition or merger. We, therefore,
have an extremely limited operating history. You must consider the risks,
expenses and difficulties typically encountered by companies with limited
operating histories, particularly companies in new and rapidly expanding markets
such as Internet advertising. These risks include our ability to:
o develop new relationships and maintain existing relationships with our
Web sites, advertisers, and other third parties;
o further develop and upgrade our technology;
o respond to competitive developments;
o implement and improve operational, financial and management
information systems; and
o attract, retain and motivate qualified employees.
WE MAY BE UNABLE TO SUCCESSFULLY INTEGRATE THE COMPANIES THAT WE HAVE ACQUIRED.
We were formed in February 1998 to consolidate three Internet advertising
companies and have since acquired or agreed to acquire eleven more companies. In
combining these entities, we have faced risks and continue to face risks of
integrating and improving our financial and management controls, ad serving
technology, reporting systems and procedures, and expanding, training and
managing our work force. This process of integration may take a significant
period of time and will require the dedication of management and other
resources, which may distract management's attention from our other operations.
We intend to continue pursuing selective acquisitions of businesses,
technologies and product lines as a key component of our growth strategy. Any
future acquisition or investment may result in the use of significant amounts of
cash, potentially dilutive issuances of equity securities, incurrence of debt
and amortization expenses related to goodwill and other intangible assets. In
addition, acquisitions involve numerous risks, including:
o the difficulties in the integration and assimilation of the
operations, technologies, products and personnel of an acquired
business;
o the diversion of management's attention from other business concerns;
o the availability of favorable acquisition financing for future
acquisitions; and
Page 26
o the potential loss of key employees of any acquired business.
Our inability to successfully integrate any acquired company could adversely
affect our business.
WE ANTICIPATE CONTINUED LOSSES AND WE MAY NEVER BE PROFITABLE.
We incurred net losses attributable to common stockholders of $39.1 million and
$25.4 million for the years ended December 31,1999 and 1998, respectively. Each
of our predecessors had net losses in every year of their operation. We
anticipate that we will incur operating losses for the foreseeable future due to
a high level of planned operating and capital expenditures. Although our revenue
has grown rapidly in recent periods, such growth may not continue and may not
lead to profitability. Even if we do achieve profitability, we cannot assure you
that we can sustain or increase profitability on a quarterly or annual basis in
the future.
OUR FUTURE REVENUES AND RESULTS OF OPERATIONS MAY BE DIFFICULT TO FORECAST.
Our results of operations may fluctuate significantly in the future as a result
of a variety of factors, many of which are beyond our control. These factors
include:
o the addition of new or loss of existing clients;
o changes in fees paid by advertisers and direct marketers;
o changes in service fees payable by us to owners of Web sites or email
lists, or ad serving fees payable by us to third parties;
o the introduction of new Internet marketing services by us or our
competitors;
o variations in the levels of capital or operating expenditures and
other costs relating to the maintenance or expansion of our
operations, including personnel costs; and
o general economic conditions.
Our future revenues and results of operations may be difficult to forecast due
to the above factors. In addition, our expense levels are based in large part on
our investment plans and estimates of future revenues. Any increased expenses
may precede or may not be followed by increased revenues, as we may be unable
to, or may elect not to, adjust spending in a timely manner to compensate for
any unexpected revenue shortfall. As a result, we believe that period-to-period
comparisons of our results of operations may not be meaningful. You should not
rely on past periods as indicators of future performance. In future periods, our
results of operations may fall below the expectations of securities analysts and
investors, which could adversely affect the trading price of our common stock.
OUR REVENUES ARE SUBJECT TO SEASONAL FLUCTUATIONS.
We believe that our revenues are subject to seasonal fluctuations because
advertisers generally place fewer advertisements during the first and third
calendar quarters of each year and direct marketers mail substantially more
marketing materials in the third quarter each year. Expenditures by advertisers
and direct marketers tend to vary in cycles that reflect overall economic
conditions as well as budgeting and buying patterns. Our revenue could be
materially reduced by a decline in the economic prospects of advertisers, direct
marketers or the economy in general, which could alter current or prospective
advertisers' spending priorities or budget cycles or extend our sales cycle.
OUR BUSINESS MAY NOT GROW IF THE INTERNET ADVERTISING MARKET DOES NOT CONTINUE
TO DEVELOP. The Internet as a marketing medium has not been in existence for a
sufficient period of time to demonstrate its effectiveness. Our business would
be adversely affected if the Internet advertising market fails to continue to
develop. There are currently no widely accepted standards to measure the
effectiveness of Internet marketing other than clickthrough rates, which
generally have been declining. We cannot be certain that such standards will
develop to sufficiently support Internet marketing as a significant advertising
medium. Actual or perceived ineffectiveness of online marketing in general, or
inaccurate measurements or database information in particular, could limit the
long-term growth of online advertising and cause our revenue levels to decline.
BANNER ADVERTISING, FROM WHICH WE CURRENTLY DERIVE MOST OF OUR REVENUES, MAY NOT
BE AN EFFECTIVE ADVERTISING METHOD IN THE FUTURE.
Page 27
The majority of our revenues are derived from the delivery of banner
advertisements. If advertisers determine that banner advertising is an
ineffective or unattractive advertising medium, we cannot assure you that we
will be able to effectively make the transition to any other form of Internet
advertising. Also, there are "filter" software programs that limit or prevent
advertising from being delivered to a user's computer. The commercial viability
of Internet advertising, and our business, results of operations and financial
condition, would be materially and adversely affected by Web users' widespread
adoption of such software.
GROWTH OF OUR BUSINESS DEPENDS ON THE DEVELOPMENT OF ONLINE DIRECT MARKETING.
Adoption of online direct marketing, particularly by those entities that have
historically relied upon traditional means of direct marketing, such as
telemarketing and direct mail, is an important part of our business model.
Intensive marketing and sales efforts may be necessary to educate prospective
advertisers regarding the uses and benefits of our products and services to
generate demand for our direct marketing services. Enterprises may be reluctant
or slow to adopt a new approach that may replace, limit, or compete with their
existing direct marketing systems. In addition, since online direct marketing is
emerging as a new and distinct market apart from online advertising, potential
adopters of online direct marketing services will increasingly demand
functionality tailored to their specific requirements. We may be unable to meet
the demands of our clients.
OUR DEVELOPMENT OF A NEXT GENERATION AD SERVING TECHNOLOGY MAY NOT BE SUCCESSFUL
AND MAY CAUSE BUSINESS DISRUPTION. 24/7 Connect is our proprietary next
generation ad serving technology that is intended to serve as our sole ad
serving solution. We recently launched 24/7 Connect, and to successfully
complete the roll-out of 24/7 Connect, we must, among other things, ensure that
this technology will function efficiently at high volumes, interact properly
with our Profilz database, offer the functionality demanded by our customers and
assimilate our sales and reporting functions. This development effort could fail
technologically or could take more time than expected. Even if we successfully
address all these challenges, we must then work with our Web sites, advertisers
and direct marketing clients to transition them to our new system, which would
also create a risk of business disruption and loss of any of our clients.
LOSS OR FAILURE OF OUR THIRD PARTY AD SERVING TECHNOLOGY COULD DISRUPT OUR
BUSINESS. Unless and until the complete roll-out and transition to 24/7 Connect
is complete, we will be partially dependent on AdForce, Inc. to deliver ads to
our networks and Web sites. If such service becomes unavailable or fails to
serve our ads properly or fails to produce the frequent operational reports
required, our business would be adversely affected. Additionally, our use of
multiple systems to serve ads requires us to employ significant effort to
prepare information for billing, client statements and financial reporting. We
are upgrading our systems to integrate a new accounting system with our ad
serving technologies to improve our accounting, control and reporting methods.
Our inability to upgrade our existing reporting systems and streamline our
procedures may cause delays in the timely reporting of financial information.
LOSS OF OUR MAJOR WEB SITES WOULD SIGNIFICANTLY REDUCE OUR REVENUES.
The 24/7 Network generates substantially all of our revenues and it consists of
a limited number of our Web sites that have contracted for our services under
agreements cancelable generally upon a short notice period. For the twelve month
periods ended December 31, 1999 and 1998, approximately 32% and 47%,
respectively, of our total revenues were derived from advertisements on our top
ten Web sites. For the twelve month period ended December 31, 1999, the top ten
Web sites included AT&T WorldNet Service, Mapquest.com, Havas Interactive,
Netscape Communications, Earthlink Network, Goto.com, Small World Sports,
AllAdvantage.com, Multi-Player Games Network and World Gaming Corp.] We
experience turnover from time to time among our Web sites, and we cannot be
certain that the Web sites named above remain or will remain associated with us.
Our business, results of operations and financial condition would be materially
adversely affected by the loss of one or more of the Web sites that account for
a significant portion of our revenue from the 24/7 Network.
LOSS OF OUR ADVERTISERS OR AD AGENCIES WOULD REDUCE OUR REVENUES.
We generate our revenues from a limited number of advertisers and ad agencies
that purchase space on our Web sites. We expect that a limited number of these
entities may continue to account for a significant percentage of our
Page 28
revenues for the foreseeable future. For the twelve month period ended December
31, 1999, our top ten advertisers and ad agencies accounted for approximately
26% of our total revenues.
ADVERTISERS AND AD AGENCIES TYPICALLY PURCHASE ADVERTISING UNDER PURCHASE ORDER
AGREEMENTS THAT RUN FOR A LIMITED TIME. Typically, we enter into short-term
contracts with advertisers and ad agencies. Since these contracts are
short-term, we will have to negotiate new contracts or renewals in the future
that may have terms that are not as favorable to us as the terms of existing
contracts. We cannot be certain that current advertisers and ad agencies will
continue to purchase advertising from us or that we will be able to attract
additional advertisers and ad agencies successfully, or that agencies and
advertisers will make timely payment of amounts due to us. In addition, current
and potential competitors have established or may establish cooperative
relationships among themselves or with third parties to increase the ability of
their products or services to address the needs of our prospective clients.
OUR FAILURE TO SUCCESSFULLY COMPETE MAY HINDER OUR GROWTH.
The markets for Internet advertising and related products and services are
intensely competitive and such competition is expected to increase. Our failure
to successfully compete may hinder our growth. We believe that our ability to
compete depends upon many factors both within and beyond our control, including:
o the timing and market acceptance of new products and enhancements of
existing services developed by us and our competitors;
o changing demands regarding customer service and support;
o shifts in sales and marketing efforts by us and our competitors; and
o the ease of use, performance, price and reliability of our services
and products.
Many of our competitors have longer operating histories, greater name
recognition, larger customer bases and significantly greater financial,
technical and marketing resources than ours. In addition, current and potential
competitors have established or may establish cooperative relationships among
themselves or with third parties to increase the ability of their products or
services to address the needs of our prospective clients. We cannot be certain
that we will be able to successfully compete against current or future
competitors. In addition, the Internet must compete for a share of advertisers'
total budgets with traditional advertising media, such as television, radio,
cable and print, as well as content aggregation companies and other companies
that facilitate Internet advertising. To the extent that the Internet is
perceived to be a limited or ineffective advertising or direct marketing medium,
advertisers and direct marketers may be reluctant to devote a significant
portion of their advertising budgets to Internet marketing, which could limit
the growth of Internet marketing.
WE MAY BE UNABLE TO CONTINUE TO SUCCESSFULLY MANAGE RAPID GROWTH.
We continue to increase the scope of our operations both domestically and
internationally, in both sales and marketing as well as technological
development. We expect that we will need to continue to improve our financial
and managerial controls, reporting procedures and systems. We have experienced
rapid growth and expansion in operations that have placed a significant strain
on our managerial, operational and financial resources. We expect