-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HGX28yNMB52z8b0/uwVJgDssS65LBi6aSCCiultgUd1wvwOv4FBtktQ8vddv0684 8T6VxcYXtBEcr9E7Bv39vg== 0000912057-01-539733.txt : 20020410 0000912057-01-539733.hdr.sgml : 20020410 ACCESSION NUMBER: 0000912057-01-539733 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010930 FILED AS OF DATE: 20011114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: 24/7 MEDIA INC CENTRAL INDEX KEY: 0001062195 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-ADVERTISING [7310] IRS NUMBER: 133995672 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-29768 FILM NUMBER: 1789788 BUSINESS ADDRESS: STREET 1: 1250 BROADWAY STREET 2: 27TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10001 BUSINESS PHONE: 2122317100 MAIL ADDRESS: STREET 1: 1250 BROADWAY CITY: NEW YORK STATE: NY ZIP: 10001 10-Q 1 a2063686z10-q.txt 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark one) /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2001 or / / TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 1-14355 24/7 Real Media, Inc. (Exact name of registrant as specified in its charter) DELAWARE 13-3995672 (STATE OR OTHER JURISDICTION OF (IRS EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 7319 (STANDARD INDUSTRIAL CLASSIFICATION CODE) 1250 BROADWAY, NEW YORK, NY 10001 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) (212) 231-7100 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) Indicate by check mark whether the registrant has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO --- APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. CLASS OUTSTANDING AT November 9, 2001 Common Stock, par value $.01 per share 49,507,662 Shares 24/7 REAL MEDIA, INC. SEPTEMBER 30, 2001 FORM 10-Q INDEX Part I. Financial Information Item 1. Consolidated Financial Statements Consolidated Balance Sheets as of September 30, 2001 (unaudited) and December 31, 2000....................................... 2 Consolidated Statements of Operations for the three and nine month periods ended September 30, 2001 and 2000 (unaudited)..... 3 Consolidated Statements of Cash Flows for the nine month periods ended September 30, 2001 and 2000 (unaudited)............... 4 Notes to Unaudited Interim Consolidated Financial Statements................................................................. 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.............................. 18 Item 3. Quantitative and Qualitative Disclosure about Market Risk.......................................................... 38 Part II. Other Information Item 1. Legal Proceedings.................................................................................................. 39 Item 2. Changes in Securities and Use of Proceeds.......................................................................... 39 Item 3. Defaults Upon Senior Securities.................................................................................... 39 Item 4. Submission of Matters to a Vote of Security Holders................................................................ 39 Item 5. Other Information.................................................................................................. 39 Item 6. Exhibits and Reports on Form 8-K................................................................................... 39 Item 7. Signatures......................................................................................................... 39
1 24/7 REAL MEDIA, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
September 30, December 31, 2001 2000 ------------- ------------ ASSETS (unaudited) Current assets: Cash and cash equivalents (including restricted cash of $488 in 2001 and $800 in 2000)......................................... $ 7,451 $ 25,856 Restricted cash held in escrow..................................... 1,500 - Accounts receivable, less allowances of $2,354 and $5,868, respectively.......................................... 6,514 34,737 Prepaid expenses and other current assets.......................... 5,171 3,295 ------------- ------------ Total current assets............................................. 20,636 63,888 Property and equipment, net.......................................... 23,165 44,189 Intangible assets, net............................................... 15,856 103,777 Investments.......................................................... - 11,267 Net long-term assets of discontinued operation....................... - 22,787 Other assets......................................................... 743 4,363 ------------- ------------ Total assets..................................................... $ 60,400 $ 250,271 ============= ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable................................................... $ 3,706 $ 12,792 Accrued liabilities................................................ 9,696 22,508 Net current liabilities of discontinued operation.................. - 3,260 Current installments of obligations under capital leases........... 44 99 Deferred revenue................................................... 326 3,356 Deferred gain on sale of non-core assets........................... 2,603 - ------------- ------------ Total current liabilities........................................ 16,375 42,015 ------------- ------------ Obligations under capital leases, excluding current installments..... 120 153 Minority interest.................................................... 105 105 Commitments and contingencies Stockholders' equity: Preferred stock, $.01 par value; 10,000,000 shares authorized; and no shares issued or outstanding - - Common stock, $.01 par value; 140,000,000 shares authorized; 41,290,794 and 42,475,807 shares issued and outstanding, respectively...................................................... 413 425 Additional paid-in capital......................................... 1,068,148 1,069,445 Deferred stock compensation........................................ (1,335) (5,578) Accumulated other comprehensive income (loss)...................... (344) 3,425 Accumulated deficit................................................ (1,023,082) (859,719) ------------- ------------ Total stockholders' equity....................................... 43,800 207,998 ------------- ------------ Total liabilities and stockholders' equity....................... $ 60,400 $ 250,271 ============= ============
See accompanying notes to unaudited interim consolidated financial statements. 2 24/7 REAL MEDIA, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXPECT SHARE AND PER SHARE DATA)
Three months ended September 30, Nine months ended September 30, -------------------------------- ------------------------------- 2001 2000 2001 2000 -------------- --------------- --------------- ------------- (unaudited) (unaudited) Revenues: Integrated Media Solutions.................................... $ 7,039 $ 30,404 $ 28,269 $ 104,885 Technology Solutions.......................................... 1,271 9,696 12,790 15,430 -------------- --------------- --------------- ------------- Total revenues.............................................. 8,310 40,100 41,059 120,315 -------------- --------------- --------------- ------------- Cost of revenues: Integrated Media Solutions.................................... 7,495 21,846 24,814 77,742 Technology Solutions (exclusive of $157, $0, $472 and $0, respectively, reported below as stock-based compensation).... 600 2,864 4,191 5,244 -------------- --------------- --------------- ------------- Total cost of revenues 8,095 24,710 29,005 82,986 -------------- --------------- --------------- ------------- Gross profit................................................ 215 15,390 12,054 37,329 -------------- --------------- --------------- ------------- Operating expenses: Sales and marketing (exclusive of $36, $651, $497 and $1,953, respectively, reported below as stock-based compensation).... 3,686 12,809 17,158 32,133 General and administrative (exclusive of $173, $662, $1,182 and $1,335, respectively, reported below as stock-based compensation)................................................ 5,660 14,792 29,442 33,691 Product development (exclusive of $221, $913, $504 and $2,809, respectively, reported below as stock-based compensation).... 2,565 7,889 12,523 11,057 Amortization of goodwill, intangible assets and advances........ 3,641 44,056 18,094 73,939 Stock-based compensation........................................ 587 2,226 2,655 6,117 Write-off of acquired in process technology and merger related costs.......................................................... - 152 - 5,146 Restructuring and exit costs.................................... 521 - 1,011 - Gain on sale of non-core assets, net............................ (647) - (1,529) - Impairment of intangible assets................................. 15,052 - 68,169 - -------------- --------------- --------------- ------------- Total operating expenses.................................... 31,065 81,924 147,523 162,083 -------------- --------------- --------------- ------------- Operating loss.............................................. (38,850) (66,534) (135,469) (124,754) Interest income, net............................................ 133 501 750 1,234 Gain on sale of investments, net................................ 882 14,885 4,985 37,988 Impairment of investments....................................... - - (3,089) - -------------- --------------- --------------- ------------- Loss from continuing operations................................. (29,835) (51,148) (132,823) (85,532) Loss from discontinued operation................................ (1,018) (5,640) (30,540) (17,268) -------------- --------------- --------------- ------------- Net loss........................................................ $ (30,853) $ (56,788) $ (163,363) $ (102,800) ============== =============== =============== ============= Loss per common share-basic and diluted Loss from continuing operations................................. $ (0.67) $ (1.34) $ (3.04) $ (2.83) Loss from discontinued operation................................ (0.03) (0.15) (0.70) (0.57) -------------- --------------- --------------- ------------- Net loss........................................................ $ (0.70) $ (1.49) $ (3.74) $ (3.39) ============== =============== =============== ============= Weighed average common shares outstanding...................... 44,363,935 38,122,316 43,630,239 30,307,724 ============== =============== =============== =============
See accompanying notes to unaudited interim consolidated financial statements. 3 24/7 REAL MEDIA, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
Nine Months Ended September 30, ----------------------------------- 2001 2000 ------------------ --------------- (unaudited) Cash flows from operating activities: Net loss.............................................................. $ (163,363) $ (102,800) Adjustments to reconcile net loss to net cash used in operating activities: Loss from discontinued operation...................................... 30,540 17,268 Depreciation and amortization of fixed assets......................... 10,247 7,008 Write-off of acquired in-process technology........................... - 4,700 Provision for doubtful accounts and sales reserves, net of write-offs. (3,514) 3,180 Amortization of goodwill and other intangible assets.................. 18,094 72,126 Amortization of partner agreements.................................... - 1,813 Non-cash compensation................................................. 2,655 6,117 Gain on sale of investments........................................... (4,985) (37,988) Gain on sale of non-core assets, net.................................. (1,529) - Warrants issued for services.......................................... 100 - Impairment of investments............................................. 3,089 - Impairment of intangible and other assets............................. 68,169 - Non-cash restructuring and exit costs................................. (549) - Changes in operating assets and liabilities, net of effect of acquisitions and dispositions: Accounts receivable............................................... 28,625 (16,695) Prepaid assets and other current assets........................... (709) (1,572) Other assets...................................................... 3,834 (2,270) Accounts payable and accrued liabilities.......................... (19,814) (14,892) Deferred revenue.................................................. (1,474) (3,393) ------------ ------------ Net cash used in operating activities........................ (30,584) (67,398) ------------ ------------ Cash flows from investing activities: Proceeds from the sale of non-core assets, net of $1.0 million in closing expenses............................. 16,807 - Proceeds from the sale of investments................................. 6,858 40,243 Capital expenditures.................................................. (648) (19,019) Proceeds from the sale of marketable securities....................... - 9,613 Cash paid for acquisitions, net of cash acquired....................... - 23,952 Cash paid for investments............................................. - (6,120) Increase in intangible assets......................................... - (104) ------------ ------------ Net cash provided by investing activities.................... 23,017 48,565 ------------ ------------ Cash flows from financing activities: Proceeds from exercise of stock options and conversion of warrants.... 12 5,309 Cash paid in settlement for treasury stock............................ (275) - Payment of capital lease obligations.................................. (88) (58) ------------ ------------ Net cash (used in) provided by financing activities.......... (351) 5,251 ------------ ------------ Net change in cash and cash equivalents...................... (7,918) (13,582) Cash used by discontinued operations......................... (10,523) (8,330) Net effect of foreign currency adjustments................... 36 (246) Cash and cash equivalents at beginning of period...................... 25,856 41,170 ------------ ------------ Cash and cash equivalents at end of period............................ $ 7,451 $ 19,012 ============ ============
See accompanying notes to unaudited interim consolidated financial statements. 4 (1) SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES SUMMARY OF OPERATIONS AND GOING CONCERN On November 9, 2001, the Company amended its Certificate of Incorporation to change its name from 24/7 Media, Inc. to 24/7 Real Media, Inc ("24/7 Real Media" or the "Company"). 24/7 Real Media together with its subsidiaries is a provider of online marketing solutions for Web publishers, online advertisers, advertising agencies, e-marketers and e-commerce merchants. The Company operates in two principal lines of business: Integrated Media Solutions and Technology Solutions. Integrated Media Solutions provides ad sales solutions for Web-based advertising including banner ads, sponsorships, targeted search traffic delivery, loyalty reward programs and promotions as well as serves as a list manager for permission-based email lists. Technology Solutions provides online ad serving, broadband solutions and professional services. In October 2001, through the merger with Real Media, the Company has expanded its operations into Europe, Latin America and Asia Pacific. The Company's business is characterized by rapid technological change, new product development and evolving industry standards. Inherent in the Company's business are various risks and uncertainties, including its limited operating history, unproven business model and the limited history of commerce and advertising on the Internet. The Company's success may depend, in part, upon the continued expansion of the Internet as a communications medium, prospective product development efforts and the acceptance of the Company's solutions by the marketplace. The Company's independent public accountants have included a "going concern" explanatory paragraph in their audit report accompanying the 2000 consolidated financial statements which have been prepared assuming that the Company will continue as a going concern. The explanatory paragraph states that the Company's recurring losses from operations since inception raise substantial doubt about the Company's ability to continue as a going concern and that the consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. ORGANIZATION AND BASIS OF PRESENTATION PRINCIPLES OF CONSOLIDATION The Company's consolidated financial statements as of September 30, 2001 and December 31, 2000 and for the three and nine month periods ended September 30, 2001 and 2000 include the accounts of the Company and its majority-owned and controlled subsidiaries from their respective dates of acquisition (see note 2). All significant intercompany transactions and balances have been eliminated in consolidation. INTERIM RESULTS The consolidated financial statements as of September 30, 2001 and for the three and nine month periods ended September 30, 2001 and 2000 have been prepared by 24/7 Real Media and are unaudited. In the Company's opinion, the unaudited consolidated financial statements have been prepared on the same basis as the annual consolidated financial statements and reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly the financial position as of September 30, 2001 and the results of the Company's operations and cash flows for the interim periods ended September 30, 2001 and 2000. The financial data and other information disclosed in these notes to the consolidated results for the three and nine month periods ended September 30, 2001 and 2000 are not necessarily indicative of the results to be expected for any subsequent quarter or the entire fiscal year ending December 31, 2001. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the Securities and Exchange Commission's rules and regulations. It is suggested that these unaudited consolidated financial statements be read in conjunction with our audited consolidated financial statements and notes thereto for the year ended December 31, 2000 as included in the Company's report on Form 10-K. CASH AND CASH EQUIVALENTS The Company considers all highly liquid securities, with original maturities of three months or less, to be cash equivalents. Cash and cash equivalents consisted principally of money market accounts. At 5 September 30, 2001, cash and cash equivalents includes $0.5 million in restricted cash related to leases, that becomes available within the next year. RESTRICTED CASH HELD IN ESCROW The Company has $1.5 million of cash held in escrow relating to the sale of Exactis to Experian on May 23, 2001. The balance is due to be released on August 23, 2002 (see note 4). INTANGIBLE ASSETS Goodwill and intangible assets relate to the Company's acquisitions accounted for under the purchase method of accounting. Under the purchase method of accounting, the excess of the purchase price over the identifiable net tangible assets of the acquired entity is recorded as identified intangible assets and goodwill. Intangible assets are estimated by management to be primarily associated with the acquired workforce, contracts, technological know how and goodwill. As a result of the rapid technological changes occurring in the Internet industry and the intense competition for qualified Internet professionals and customers, recorded intangible assets are amortized on the straight-line basis over the estimated period of benefit, which is two to four years (see notes 2 and 5). INVESTMENTS The Company accounts for investments in marketable securities in accordance with Statements of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities. Available-for-sale securities are carried at fair value, with the unrealized gains or losses, net of tax, reported as a separate component of stockholders' equity. Realized gains and losses and the cost of available-for-sale securities sold are computed on the basis of the specific identification method. Realized gains and losses and declines in value judged to be other-than-temporary, are included in other income (expense). Investments in non-marketable equity securities of companies in which the Company owns less than 20% of a company's stock and does not have the ability to exercise significant influence are accounted for on the cost basis. Such investments are stated at the lower of cost or market value. On an ongoing basis, the Company assesses the need to record impairment losses on investments and records such losses when the impairment is determined to be other-than-temporary (see note 6). REVENUE RECOGNITION INTEGRATED MEDIA SOLUTIONS The Company's network revenues are derived principally from short-term advertising agreements in which it delivers advertising impressions for a fixed fee to third-party Web sites comprising the Company's Network from advertising. The Company's email related revenues are derived principally from short-term delivery based agreements in which the Company delivers advertisements to email lists for advertisers and Web sites. Revenues are recognized as services are delivered provided that no significant Company obligations remain outstanding and collection of the resulting receivable is probable. Third party Web sites that register Web pages with the Company's networks and display advertising banners on those pages are commonly referred to as "Affiliated Web sites." These third party Web sites are not "related party" relationships or transactions as defined in Statement of Financial Accounting Standards No. 57, "Related Party Disclosures." The Company pays Affiliated Web sites a fee for providing advertising space to the Company's networks. The Company also has agreements with various list owners in which the Company services its advertisers and other customers through the use of these lists. The Company becomes obligated to make payments to Affiliated Web sites, which have contracted to be part of the Company's networks, and list owners in the period the advertising impressions or emails are delivered. Such expenses are classified as cost of revenues in the consolidated statements of operations. TECHNOLOGY SOLUTIONS 6 The Company's technology revenues are derived from ad serving, software consulting, service, development and maintenance contracts. Revenues under fixed price contracts are recognized on a percentage of completion basis based on labor hours incurred to total estimated contract hours. Revenues under time and materials contracts are recognized as the hours are incurred. Fixed monthly maintenance contracts are recognized in the corresponding months. Service revenue is derived from driving traffic to a client website or the delivery of email messages for clients and is recognized upon delivery. At September 30, 2001 and December 31, 2000, accounts receivable included approximately $1.4 million and $4.0 million, respectively, of earned but unbilled receivables, which are a normal part of the Company's business, as receivables are generally invoiced only after the revenue has been earned. The decrease in unbilled receivables from December 31, 2000 to September 30, 2001 resulted from the decrease in revenues generated in the first nine months of 2001. The terms of the related advertising contracts typically require billing at the end of each month. All unbilled receivables as of September 30, 2001 have been subsequently billed. IMPAIRMENT OF LONG-LIVED ASSETS The Company assesses the need to record impairment losses on long-lived assets, including fixed assets, goodwill and other intangible assets, to be held and used in operations whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable, the Company estimates the undiscounted future cash flows to result from the use of the asset and its ultimate disposition. If the sum of the undiscounted cash flows is less than the carrying value, the Company recognizes an impairment loss, measured as the amount by which the carrying value exceeds the fair value of the asset. Assets to be disposed of are carried at the lower of the carrying value or fair value less costs to sell. On an on-going basis, management reviews the value and period of amortization or depreciation of long-lived assets, including goodwill and other intangible assets. During this review, the Company reevaluates the significant assumptions used in determining the original cost of long-lived assets. Although the assumptions may vary from transaction to transaction, they generally include revenue growth, operating results, cash flows and other indicators of value. Management then determines whether there has been an impairment of the value of long-lived assets based upon events or circumstances, which have occurred since acquisition. The impairment policy is consistently applied in evaluating impairment for each of the Company's wholly owned subsidiaries and investments. In 2001, the Company wrote off $68.2 million in goodwill and intangible assets (see note 5). It is reasonably possible that the impairment factors evaluated by management will change in subsequent periods, given that the Company operates in a volatile business environment. This could result in significant additional impairment charges in the future. RESTRUCTURING ACTIVITIES Restructuring activities are accounted for in accordance with the guidance provided in the consensus opinion of the Emerging Issues Task Force ("EITF") in connection with EITF Issue 94-3 ("EITF 94-3"). EITF 94-3 generally requires, with respect to the recognition of severance expenses, management approval of the restructuring plan, the determination of the employees to be terminated, and communication of benefit arrangement to employees (see note 9). COMPREHENSIVE INCOME (LOSS) Total comprehensive income (loss) for the nine month period ended September 30, 2001 and 2000 was $(167.2) million and $(253.3) million, respectively. Comprehensive loss resulted primarily from net losses of $(163.4) million and $(102.8) million, respectively, as well as a change in unrealized gains (losses) (net of tax), of marketable securities of $(3.8) million and $(150.3) million, respectively, and foreign currency translation adjustments of $0 and $(0.2) million, respectively. The net change in unrealized losses of $(3.8) million for the nine month period ended September 30, 2001 is comprised of net unrealized holding losses 7 arising during the period of $6.3 million, a reclassification adjustment of $5.0 million for net gains related to the sale of all of the Company's available-for-sale securities and some cost based investments and a reclassification adjustment of $2.5 million for other-than temporary losses related to available-for-sale securities of Network Commerce and i3Mobile. LOSS PER SHARE Loss per share is presented in accordance with the provisions of Statement of Financial Accounting Standards No. 128, Earnings Per Share ("EPS"). Basic EPS excludes dilution for potentially dilutive securities and is computed by dividing income or loss available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock and resulted in the issuance of common stock. Diluted net loss per share is equal to basic net loss per share since all potentially dilutive securities are anti-dilutive for each of the periods presented. Diluted net loss per common share for the three and nine months ended September 30, 2001 and 2000 does not include the effects of options to purchase 7.3 million and 7.3 million shares of common stock, respectively; 3.0 million and 3.0 million common stock warrants and 0.3 million and 0.1 million of unvested restricted stock, respectively, on an "as if" converted basis, as the effect of their inclusion is anti-dilutive during each period. RECLASSIFICATIONS Certain reclassifications have been made to prior year consolidated financial statements to conform to current year's presentation. (2) BUSINESS COMBINATIONS ACQUISITION OF 24/7 EUROPE On January 1, 2000, the Company acquired the remaining interest in 24/7 Media Europe through the issuance of common stock. The Company issued 428,745 shares of 24/7 Media common stock, valued at approximately $24.1 million, resulting in additional goodwill and other intangible assets of $24.1 million. The goodwill and other intangible assets were being amortized over the expected period of benefit of three years (see note 3). ACQUISITION OF IMAKE On January 13, 2000, the Company acquired IMAKE, a provider of technology products that facilitate the convergence of Internet technologies with broadband video programming. The purchase price of approximately $34.7 million, excluding contingent consideration of 916,000 shares, consists of 400,000 shares originally valued at approximately $18.7 million, fair value of options assumed of $9.9 million, $5.8 million of deferred compensation and $0.3 million in acquisition costs. The deferred compensation relates to 124,000 shares of restricted stock issued to employees of IMAKE. The contingent shares will be issued when certain revenue targets are attained, as amended. The valuation of in-process technology of $4.7 million in connection with the acquisition of IMAKE is based on an independent appraisal which determined that the e.merge technology acquired from IMAKE had not been fully developed at the date of acquisition. As a result, the Company will be required to incur additional costs to successfully develop and integrate the e.merge platform. The remaining purchase price in excess of the value of identified assets and liabilities assumed of $24.9 million has been allocated $1.0 million to workforce and $23.9 million to goodwill. Goodwill and workforce are being amortized over their expected period of benefit which is four years for goodwill and two years for workforce. The acquisition was accounted for as a purchase business combination, effective as of January 1, 2000, for accounting purposes. On July 20, 2000, the Company issued 880,000 contingent shares. The shares had a value of $11.9 million, which was considered additional goodwill. At September 30, 2000, an additional 18,000 contingent shares were earned pursuant to the agreement, resulting in $0.2 million of additional goodwill. In the third quarter, the remaining 14,000 contingent shares, valued at approximately $3,000 were earned. 8 The additional amounts of goodwill are being amortized over the remaining period of benefit (see note 3). ACQUISITION OF SABELA On January 9, 2000, the Company acquired Sabela, a global ad serving, tracking and analysis company with products for online advertisers and Web publishers. The purchase price of approximately $65.0 million consists of approximately 1.2 million shares of 24/7 Media common stock valued at approximately $58.3 million, cash consideration of $2.1 million, fair value of warrants assumed of $1.2 million, fair value of options assumed of $1.7 million and $1.7 million in acquisition costs. The purchase price in excess of the value of identified assets and liabilities assumed of $64.7 million has been allocated $7.1 million to technology, $1.1 million to workforce and $56.5 million to goodwill. Goodwill and other intangible assets are being amortized over their expected period of benefit which is four years for goodwill and technology; and two years for workforce. The acquisition was accounted for as a purchase business combination, effective as of January 1, 2000, for accounting purposes (see note 4). ACQUISITION OF AWARDTRACK On February 11, 2000, the Company acquired AwardTrack, Inc. ("AwardTrack"), which 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. The purchase price of approximately $69.3 million consists of approximately 1.1 million shares of 24/7 Media common stock valued at approximately $64.0 million, fair value of options assumed of $4.6 million and $0.7 million in acquisition costs. The purchase price in excess of the value of identified assets and liabilities assumed of $69.4 million has been allocated $7.7 million to technology, $0.5 million to tradename, $0.4 million to workforce and $60.8 million to goodwill. Goodwill and other intangible assets are being amortized over their expected period of benefit which is four years for goodwill, technology and tradename; and two years for workforce. The acquisition was accounted for as a purchase business combination effective as of February 11, 2000 for accounting purposes (see note 4). ACQUISITION OF EXACTIS On June 28, 2000, the Company acquired all of the outstanding common stock of Exactis.com, Inc., a provider of email based direct marketing services, in exchange for Company common stock. Exactis.com stockholders received shares of 24/7 Media common stock based on an exchange ratio of 0.6 shares of 24/7 Media common stock for each share of Exactis.com common stock. The purchase price of approximately $475.6 million consists of approximately 8.2 million shares of 24/7 Media common stock valued at approximately $383.0 million, fair value of options assumed of $82.9 million, fair value of warrants assumed of $2.3 million, deferred compensation of $2.9 million and acquisition costs of $4.5 million. The purchase price in excess of the value of identified assets and liabilities assumed of $428.8 million has been allocated $60.8 million to technology, $1.0 million to tradename, $3.2 million to workforce, $2.1 million to customer base and $361.7 million to goodwill. Goodwill and other intangible assets are being amortized over their expected period of benefit which is four years for goodwill, technology, customer base and tradename; and two years for workforce. The acquisition was accounted for as a purchase business combination effective as of June 30, 2000 for accounting purposes (see note 4). ACQUISITION OF WSR On August 24, 2000, the Company acquired WSR, which engages in the business of delivering targeted search traffic on behalf of its clients. The purchase price of approximately $66.7 million, excluding contingent consideration of 2.8 million shares, consists of approximately 4.3 million shares of 24/7 Media common stock valued at approximately $61.3 million, fair value of options assumed of $4.1 million and acquisition costs of $1.3 million. The purchase price in excess of the value of identified assets acquired of $63.0 million has been allocated $1.1 million to deferred compensation and $61.9 to goodwill which is being amortized over its expected period of benefit of four years. The acquisition was accounted for as a purchase business combination. 9 On March 15, 2001, the Company signed an amendment to the WSR purchase agreement dated August 24, 2000. The amendment changed the earn out criteria as it related to the contingent consideration to be based on revenue rather than EBIT, as defined in the original agreement. Based on the new criteria 710,000 shares related to the period ended December 31, 2000 were issued on March 23, 2001 valued at approximately $0.2 million. In addition, employee loans amounting to $0.3 million were forgiven. These amounts were recorded as compensation expense in the first quarter of 2001, of which $0.2 million is included in stock based compensation and $0.3 million is included in sales and marketing expense in the 2001 consolidated statement of operations. An additional cash earn out of up to $1.5 million in cash was put into place for two employees who were the former principal stockholders of WSR. On September 25, 2001, the company and the former principal stockholders entered into a settlement and mutual general release (the "Settlement"). The Settlement rescinded all prior agreements and amendments of the purchase agreement and called for the former principal stockholders (i) to return approximately 3.3 million shares of outstanding stock held by them, (ii) forfeit their rights to the potential earn out of another 1.9 million shares and the $1.5 million in cash and (iii) transfer certain strategic assets and agreements in exchange for $275,000 in cash and forgiveness of any remaining indebtedness of these individuals to the Company. The Company has reflected the return of the common stock as treasury stock amounting to $392,000 using the market price on the settlement date and immediately retired all shares. ACQUISITION OF KENDRO COMMUNICATIONS On April 1, 2000, our subsidiary 24/7 Media Europe NV acquired Kendro Communications, a Swiss based banner network service, for approximately 26,000 shares of the Company's common stock valued at approximately $487,000, excluding contingent consideration of up to $6.7 million to be paid in the Company's common stock, excluding contingent consideration subject to performance standards and other contractual requirements. The performance standards are based on revenues of the acquired business for the fiscal years ended March 31, 2001 and 2002, and the price of the Company's common stock at March 31, 2001 and 2002, respectively, and will be payable by 24/7 Europe within fourteen days after the delivery of audited revenue statements provided that the sellers are employees of the Company. As of March 31, 2001, the Company accrued an estimate of $1.1 million for the settlement of this contingency. In May 2001, the European Board of Directors approved a plan to close down the Swiss operations as well as certain other offices in an effort to restructure the European operations. As a part of that restructuring, the Company entered into an agreement terminating the original Kendro purchase agreement. As full settlement for termination the Company made a cash payment of $1.1 million and issued 1.0 million shares valued at $490,000 to the former shareholders. The Company has reflected the share issuance as stock based compensation which along with the remaining charges are included in the loss from discontinued operations line item in the 2001 consolidated statement of operations (see note 3). ACQUISITION OF IPROMOTIONS On April 17, 2000, the Company acquired iPromotions, Inc., a Seattle based promotions and sweepstakes management firm. The purchase price of $3.5 million consists of $2.0 million in cash, approximately 33,000 shares of common stock valued at approximately $654,000, fair value of options assumed of $736,000 and $100,000 in acquisition costs. SUMMARY The acquisitions of Sabela, IMAKE, AwardTrack, Exactis, Kendro Communications, iPromotions, WSR and the purchase of the remaining interest in Europe have been accounted for using the purchase method of accounting, and accordingly, each purchase price has been allocated to the tangible and identifiable intangible assets acquired and liabilities assumed on the basis of their fair values on the respective acquisition dates. The following summarizes the purchase price allocation for each of the acquisitions: 10
NET TANGIBLE ACQUIRED ENTITY ACQUISITION ASSETS IN-PROCESS DEFERRED INTANGIBLES/ USEFUL LIFE COSTS (LIABILITIES) TECHNOLOGY COMPENSATION GOODWILL (IN YEARS) - --------------------------------------------------------------------------------------------------------------------------------- IMAKE....................... $ 46,750 $ (793) $ 4,700 $ 5,785 $ 37,058 2-4 247/7 Media Europe.......... 24,117 - - - 24,117 3 Sabela...................... 65,026 317 - - 64,709 2-4 AwardTrack.................. 69,293 (82) - - 69,375 2-4 Exactis..................... 475,636 43,939 - 2,870 428,827 2-4 WSR......................... 66,675 3,720 - 1,072 61,883 4 Kendro...................... 527 17 - - 510 4 iPromotions................. 3,489 (127) 97 - 3,519 2-4 ----------------------------------------------------------------------------------- $ 751,513 $ 46,991 $ 4,797 $ 9,727 $ 689,998 ===================================================================================
The following unaudited pro forma consolidated amounts give effect to all of the Company's acquisitions (listed above) accounted for by the purchase method of accounting as if they had occurred at the beginning of the period by consolidating the results of operations of the acquired entities for the three and nine month periods ended September 30, 2000. The unaudited pro forma consolidated statements of operations are not necessarily indicative of the operating results that would have been achieved had the transactions been in effect as of the beginning of the periods presented and should not be construed as being representative of future operating results.
Three Months Ended Nine Months Ended September 30, 2000 September 30, 2000 ------------------------ ----------------------- (in thousands, except share and per share data) Total revenues $ 42,652 $ 139,601 ------------------------ ----------------------- Loss from continuing operations $ (58,835) $ (164,812) Loss from discontinued operation (5,640) (17,268) ------------------------ ----------------------- Net loss $ (64,475) $ (182,080) ======================== ======================= Net loss per share from continuing operations $ (1.44) $ (4.12) Net loss per share from discontinued operation (0.14) (0.43) ------------------------ ----------------------- Net loss per share - basic and diluted $ (1.58) $ (4.55) ======================== ======================= Weighted average shares used in net loss per share calculation (1) 40,825,686 39,978,427 ======================== =======================
(1) The weighted average shares used to compute pro forma basic and diluted net loss per share for the period ended September 30, 2000 includes the 1,129,344, 916,000, 8,156,843, 4,970,000 and 25,694 shares issued for AwardTrack, IMAKE, Exactis, WSR and Kendro, respectively, as if the shares were issued on January 1, 2000. (3) DISCONTINUED OPERATION On August 6, 2001, the Company, determined that it would cease funding its European subsidiaries and communicated that to 24/7 Europe NV's management team and Board of directors. Management of 24/7 Europe has advised us that 24/7 Europe NV is insolvent and would shut down all operations in the third 11 quarter of 2001. The consolidated financial statements of the Company have been restated to reflect the disposition of the international segment as a discontinued operation in accordance with APB Opinion No. 30. Accordingly, revenues, costs and expenses, assets, liabilities, and cash flows of Europe have been excluded from the respective captions in the Consolidated Statements of Operations, Consolidated Balance Sheets and Consolidated Statements of Cash Flows, and have been reported through the date of disposition as "Loss from discontinued operation," "Net assets of discontinued operation," and "Net cash used by discontinued operation," for all periods presented. During the second quarter of 2001, the Company had reduced the carrying value of the net assets of the European operations to zero. Summarized financial information for the discontinued operation is as follows (in thousands): STATEMENTS OF OPERATIONS DATA
Nine months ended September Three months ended September 30, 30, 2001 2000 2001 2000 ------------------ ------------ ------------ ------------ Revenues............................. $ - $ 8,028 $ 10,555 $ 26,695 Net loss............................. (1,018) (5,640) (30,540) (17,268) Gain or loss on disposal............. - - - - BALANCE SHEET DATA September 30, 2001 December 31, 2000 ------------------ ----------------- Current assets....................... $ - $ 18,656 Total assets......................... - 22,787 Current liabilities.................. - (3,260) Long-term liabilities................ - - ------------ ----------- Net assets of discontinued operation.......................... $ - $ 19,527 ============ ===========
(4) DISPOSAL OF NON-CORE ASSETS On May 23, 2001, the Company completed the sale of Exactis to Direct Marketing Technologies, Inc., a subsidiary of Experian. The purchase price was $15.25 million of which $1.5 million was deposited into escrow until August 2002 as security for the Company's indemnification obligations under the Stock Purchase Agreement and $1.75 million was retained as a prepayment for future services that are to be purchased by the Company from Experian pursuant to a services agreement that expires on December 31, 2002. The $1.5 million in escrow and $1.75 million prepayment have been reflected as deferred gain on sale of non-core assets on the consolidated balance sheet. During the quarter ended September 30, 2001, the Company has been billed approximately $650,000 in services which have been reflected as cost of revenues and gain on sale of non core assets in the statement of operations. Through September 30, 2001, the sale has resulted in a loss of $4.7 million, not including the remainder of the aforementioned deferred gains of $2.6 million. The Company has reflected the remaining $1.1 million of prepaid services in prepaid and other current assets and the $1.5 million escrow amounts in restricted cash held in escrow on the consolidated balance sheet. 12 Also during May 2001, the Company sold certain technology assets and intellectual property of Sabela and AwardTrack. The Company has retained the remaining assets of these subsidiaries. AwardTrack operations were closed in 2000 and the Company completed the shut down of the remaining operations of Sabela on September 30, 2001. Proceeds associated with these sales amounted to approximately $5.8 million before shut down and disposal costs. These sales resulted in approximately a $6.2 million gain. (5) INTANGIBLE ASSETS, NET The Company's management performs on-going business reviews and, based on quantitative and qualitative measures, assesses the need to record impairment losses on long-lived assets used in operations when impairment indicators are present. Where impairment indicators were identified, management determined the amount of the impairment charge by comparing the carrying values of goodwill and other long-lived assets to their fair values. Through August 2000, the Company completed numerous acquisitions that were financed principally with shares of the Company's common stock, and were valued based on the price of the Company's common stock at that time (see note 2). During the fourth quarter of 2000 and throughout each quarter in 2001, the Company reevaluated the carrying value of its businesses. The Company's revaluation was triggered by the continued decline in the Internet advertising and marketing sectors in 2000 which has continued throughout 2001. This decline has significantly impacted current projected advertising revenue generated from these entities. In addition, each of these entities have experienced declines in operating and financial metrics over the past several quarters, primarily due to the continued weak overall demand of on-line advertising and marketing services, in comparison to the metrics forecasted at the time of their respective acquisitions. These factors significantly impacted current projected revenue generated from these businesses. The Company's evaluation of impairment was also based on achievement of the unit's business plan objectives and milestones, the fair value of each business unit relative to its carrying value, the financial condition and prospects of each business unit and other relevant factors. The business plan objectives and milestones that were considered included, among others, those related to financial performance, such as achievement of planned financial results, and other non-financial milestones such as successful deployment of technology or launching of new products and the loss of key employees and/or significant customers. The impairment analysis also considered when these properties were acquired and that the intangible assets recorded at the time of acquisition was being amortized over useful lives of 2 - 4 years. The amount of the impairment charge was determined by comparing the carrying value of goodwill and other long-lived assets to fair value at the end of each reporting period. Where impairment was indicated, the Company determined the fair value of its business units based on a market approach, which included an analysis of market price multiples of companies engaged in similar businesses. To the extent that market comparables were not available, the Company used discounted cash flows in determining the value. The market price multiples are selected and applied to the business based on the relative performance, future prospects and risk profile of the business in comparison to the guideline companies. The methodology used to test for and measure the amount of the impairment charge was based on the same methodology used during the Company's initial acquisition valuations. As a result, during management's review of the value and periods of amortization of both goodwill and certain other intangibles it was determined that the carrying value of goodwill and certain other intangible assets were not recoverable. The other intangible assets that were determined to be impaired related to the decline in fair market value of acquired technology, a change in the business model, a significant reduction in the acquired customer bases and turnover of workforce which was in place at the time of the acquisition of these companies. As a result of its review at each quarter end, the Company's management determined that the fair value of goodwill and other intangible assets attributable to Mail, Exactis, Imake and WSR were less than their recorded carrying values. The Company recognized $68.2 million in impairment charges throughout the nine months ended September 30, 2001. Of this amount, $25.3 million related to Mail, $26.9 million to WSR, $11.5 million to IMAKE and $4.5 million to Exactis. During the third quarter of 2001, the Company recognized $15.1 million in impairment charges of which $9.6 million related to WSR and $5.5 million to IMAKE. The impairment factors evaluated by management may change in subsequent periods, given that the Company's business operates in a highly 13 volatile business environment. This could result in significant additional impairment charges in the future. During the second quarter of 2001, management resolved to cease funding of its European operations. As a result, the Company recorded an impairment charge of $7.7 million related to Europe which has been reflected in its loss from discontinued operation in the 2001 consolidated statement of operations. After giving effect to the aforementioned impairment charges of $68.2 million, the sale of Exactis to Experian and the discontinued operations of Europe, the remaining amount of goodwill and other intangibles, net, as of September 30, 2001 was $15.9 million: $6.8 million related to IMAKE, $4.4 million related to Mail, $3.1 million related to WSR and $1.6 million related to ClickThrough.
September 30, December 31, 2001 2000 -------------- ------------ (in thousands) Goodwill................................ $ 17,590 $ 89,793 Technology.............................. 3,076 50,471 Other intangible assets................. 403 6,365 ------------ ----------- 21,069 146,629 Less accumulated amortization........... (5,213) (42,852) ------------ ----------- $ 15,856 $ 103,777 ============ ===========
(6) INVESTMENTS The fair value of the available-for-sale marketable securities is based on the quoted market values reported on NASDAQ. As of September 30, 2001, the Company has sold all of its marketable and cost based securities. During 2001, the Company sold all its remaining shares of chinadotcom stock at prices ranging from $2.00 to $7.69 per share. The shares had a cost basis of $1.7 million, which resulted in a gain of approximately $4.6 million. The Company also sold all of its investments in Network Commerce and i3Mobile, which resulted in proceeds of $0.6 million and a loss of approximately $0.5 million. In September 2001, the company sold its interest in Idealab for $2.5 million resulting in a gain of approximately $0.9 million. As a result, a $2.5 million receivable from Idealab is included in the prepaid and other current assets as of September 30, 2001, all of which was received in October 2001. During the first quarter of 2001, the Company wrote down certain of its investments and recognized impairment charges of approximately $3.1 million for other-than-temporary declines in value of certain investments. The Company's management made an assessment of the carrying value of its cost-based investments and determined that they were in excess of their carrying values due to the significance and duration of the decline in valuations of comparable companies operating in the Internet and technology sectors. The write down of cost based investments was $0.6 million related to Media-Asia. The Company's management also recognized that the decline in value of its available-for-sale investments in Network Commerce and i3Moble were other-than-temporary and recorded an impairment of $2.3 million and $0.2 million, respectively. These impairment charges are included in "Impairment of investments" within other income (expense) in the Company's 2001 consolidated statement of operations. (7) COMMON STOCK On September 25, 2001, the Company entered into a Settlement and Mutual release agreement with the former principal shareholders of Website Results, Inc., which resulted in the return to the Company of approximately 3.3 million shares of common stock previously reflected as outstanding. These shares were immediately retired and are no longer reflected as issued or outstanding. 14 On May 19, 2001, the Company issued 1.0 million shares of common stock on behalf of 24/7 Europe NV as settlement for terminating the Kendro acquisition agreement. A non-cash charge of approximately $490,000 is reflected in loss from discontinued operation in the 2001 consolidated statements of operations. On March 23, 2001, the Company issued 710,000 shares of common stock to employees of the Company for meeting the earn-out provisions in the WSR merger agreement, as amended. The related compensation expense of approximately $0.2 million is reflected as stock based compensation expense in the consolidated statements of operations. Substantially all of these shares were returned as part of the settlement with the former principal stockholders on September 25, 2001. On May 23, 2000, the Company offered certain members of management the option of exchanging their January 1, 2000 option grants for restricted stock in a ratio of one share for three options. As a result, the Company cancelled 832,500 options and issued approximately 285,000 shares of restricted stock to these employees of the Company, which vest over a period of three to four years. Such grants resulted in a deferred compensation expense of approximately $4.5 million, which is being amortized over the vesting period of those shares. On January 1, March 31, June 30, and September 30, 2001, approximately 113,000, 17,000, 10,000 and 13,000 shares became vested. (8) STOCK INCENTIVE PLAN For the nine month period ended September 30, 2001, the Company granted approximately 3.8 million stock options under the 1998 Stock Incentive Plan and 2.3 million stock options under the 2001 Stock Incentive Plan for Non-officers to employees at exercise prices based on the fair market value of the Company's common stock at the respective dates of grant. During the nine months ended September 30, 2001, approximately 0.4 million unvested stock options, for which deferred compensation was recorded as part of the purchases of Exactis, Imake and WSR, were forfeited. A credit of $0.4 million was applied to stock based compensation in the consolidated statement of operations and $1.3 million of unamortized stock based compensation was reversed against additional paid in capital. (9) RESTRUCTURING CHARGES During the nine months ended September 30, 2001, restructuring charges of approximately $1.6 million, were recorded by the Company in accordance with the provisions of EITF 94-3, and Staff Accounting Bulletin No. 100. The Company's restructuring initiatives were to reduce employee headcount by the involuntary termination of approximately 250 employees, divest non-core assets, close one office and downsize four other offices, as well as eliminate certain redundancies related to technology costs. The Company paid the majority of these costs by the end of the third quarter of 2001. As a result of the sale of Exactis, the unutilized portion of their provision amounting to $0.6 million was reversed during the second quarter of 2001. The following sets forth the activities in the Company's restructuring reserve which is included in accrued expenses in the consolidated balance sheet (in thousands):
Current year Beginning provision/ Current year Balance (reversal) utilization Ending Balance --------------- ----------------- ---------------- ---------------- Employee termination benefits............ $ 2,446 $ 1,166 $ 2,967 $ 645 Office closing costs..................... 1,738 (489) 1,065 184 Other exit costs......................... 309 332 573 68 --------------- ----------------- ---------------- --------------- $ 4,493 $ 1,009 $ 4,605 $ 897 =============== ================= ================ ===============
15 (10) SEGMENT INFORMATION On October 30, 2001, the Company merged with Real Media. As a result of this merger and the restructuring performed by both companies, the Company has changed how it operates its businesses and views its reportable segments. Based on these operational changes the consolidated financial statements presented have been restated to reflect these new reportable segments. The Company's business is currently comprised of two reportable segments: integrated media solutions and technology solutions. The integrated media solutions segment generates the majority of its revenues by delivering advertisements and promotions to affiliated Web sites, search engine traffic delivery and marketing services to target online users compiled by list management. The technology solutions segment generates revenue by providing third party ad serving, email delivery service bureau, broadband software solutions and technology services. The Company's management reviews corporate assets and overhead expenses for each segment. The summarized segment information as of and for the three and nine months ended September 30, 2001 and 2000, is as follows:
Three Months Ended September 30, 2001 Three Months Ended September 30, 2000 ------------------------------------- ------------------------------------- Integrated Integrated Media Technology Total Media Technology Total ---------- ---------- ----------- ---------- ---------- ----------- (in thousands) (in thousands) Revenues........................ $ 7,039 $ 1,271 $ 8,310 $ 30,404 $ 9,696 $ 40,100 Segment loss from operations.... (22,202) (8,648) (30,850) (22,955) (43,579) (66,534) Amortization of goodwill, intangibles and advances...... 2,196 1,445 3,641 10,644 33,412 44,056 Impairment of intangible assets 9,600 5,452 15,052 - - - Nine Months Ended September 30, 2001 Nine Months Ended September 30, 2000 ------------------------------------- ------------------------------------- Integrated Integrated Media Technology Total Media Technology Total ---------- ---------- ----------- ---------- ---------- ----------- (in thousands) (in thousands) Revenues........................ $ 28,269 $ 12,790 $ 41,059 $ 104,885 $ 15,430 $ 120,315 Segment loss from operations.... (106,638) (28,831) (135,469) (56,942) (67,812) (124,754) Amortization of goodwill, intangibles and advances...... 11,724 6,370 18,094 28,306 45,633 73,939 Impairment of intangible assets 52,206 15,963 68,169 - - - Total assets: September 30, 2001............ 48,469 11,931 60,400 December 31, 2000............. 153,230 74,254 227,484
Not included in the segment assets at December 31, 2000 is $22,787 of net long-term assets of discontinued operation. (11) SUPPLEMENTAL CASH FLOW INFORMATION The amount of cash paid for interest was $14,000 and $12,000 for the nine month periods ended September 30, 2001 and 2000, respectively. (12) SIGNIFICANT CONTRACTS NBC In March 1999, the Company signed an exclusive agreement with NBC-Interactive Neighborhood (NBC-IN) that would allow the Company to sell advertising on NBC network television stations and their associated Web sites at the local market level in exchange for services to be provided by the Company. As 16 part of this agreement, the Company issued to NBC warrants to purchase up to 150,000 shares of common stock for $26.05 per share. The first 75,000 warrants vested on March 11, 1999 and will expire on March 11, 2002. The remaining 75,000 shares covered by this warrant were to vest in eighteen increments of approximately 4,167 shares each on the first day of every month beginning with October 1, 2000 and ending on March 1, 2002 at $26.05 per share. In the event that NBC terminates the agreement, the portion of the shares that have not vested as of such termination date shall immediately expire. In August 2000, as a result of the termination of the agreement, 75,000 unvested warrants expired. As a result, the Company reversed the original value ascribed to the warrants issued in connection with this partner agreement of $1.8 million which remained unamortized, against additional paid in capital related to the expired warrants. On April 19, 2001, the Company settled with NBC and received $222,000 as reimbursement of costs. This amount has been be reflected as an offset to sales and marketing expense in the second quarter of 2001. COMMON STOCK PURCHASE AGREEMENT On March 21, 2001, the Company entered into a Common Stock Purchase Agreement and a Registration Rights Agreement with Maya Cove Holdings Inc. ("Maya"). Pursuant to the terms of these agreements, beginning on the date that a registration statement covering a number of shares estimated to be issued under the Common Stock Purchase Agreement is declared effective by the SEC, and continuing for 18 months thereafter, the Company has the right, but not the obligation, subject to the satisfaction or waiver of certain conditions as set forth in the Common Stock Purchase Agreement, to sell up to $50 million of its common stock to Maya pursuant to such periodic draw downs as the Company may elect to make (the "Equity Line"). Maya will purchase such shares at a discount of between 3.0% and 3.5%, depending on the market capitalization of the Company's outstanding common stock at the time of issuance. The minimum amount that may be drawn down at any one time is $250,000. No amounts were drawn under this facility through September 30, 2001. In conjunction with this agreement the Company issued to Maya and Pacific Crest Securities, Inc., who acted as the Company's financial advisors, warrants to purchase up to 100,000 shares each of the Company's Stock. The fair value of the warrants relating to the term of the common stock purchase agreement for the purchase of the 200,000 shares were valued at approximately $0.1 million based on a Black Scholes pricing model. The warrants were immediately charged to operations and included in general and administrative expense in the 2001 consolidated statement of operations. The Black-Scholes pricing used with the following assumptions at the date of issuance: risk free interest rate of 4.59%, dividend yield of 0%, expected life of 3 years and volatility of 150%. (13) SUBSEQUENT EVENTS On October 30, 2001, the Company entered into a merger agreement with Real Media, Inc., ("Real Media") a privately-held Delaware Corporation. Pursuant to the Agreement and Plan of Merger between the Company, Continuum Holding Corp., PubliGroupe USA Holding, Inc. and Real Media, the Company acquired all the outstanding common and preferred shares of Real Media in a merger transaction whereby an indirect subsidiary of the Company was merged with and into Real Media, in exchange for approximately 8.2 million shares valued at $2.2 million of the Company's common stock, equal to 19.9 percent of the Company common stock prior to the merger. In the transaction, the Company acquired net assets worth $1.2 million. Additionally, PubliGroupe USA Holding loaned $4.5 million to Real Media in exchange for a five-year note, guaranteed by the Company, with an interest rate of 4.5%, and agreed to lend up to an additional $3.0 million to the Company, subject in part to the achievement of target operating results. The proceeds of the $4.5 million loan are primarily being used to finance Real Media's restructuring plan which provides for office closings, workforce reductions, transition and integration costs and other related obligations. 17 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE TERMS "WE" AND "OUR COMPANY" MEAN 24/7 Real Media, OUR SUBSIDIARIES AND EACH OF OUR PREDECESSOR ENTITIES. 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 "--Risk Factors" below. 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. GENERAL We provide advertising and marketing solutions for Web publishers, online advertisers, advertising agencies, e-marketers and e-commerce merchants. We provide a comprehensive suite of solutions that enable such Web publishers, online advertisers, advertising agencies and e-marketers to attract and retain customers, 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, data analysis, search engine optimization, and broadband/convergence solutions, all delivered from our industry-leading data and technology platforms. Our technology solutions are designed specifically for the demands and needs of advertisers and agencies, Web publishers and e-commerce merchants. Our business is organized into two principal lines of business: - Integrated Media Solutions - Technology Solutions INTEGRATED MEDIA SOLUTIONS Integrated Media Solutions is comprised of an online advertising network, online promotions and sweepstakes, email list management and brokerage and search engine optimization. Products within Integrated Media Solutions include; - The 24/7 Network - aggregates the advertising inventory of thousands of Web sites globally 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 18 advertisements for sale in content channels. For our flagship Web sites on the network, we solicit sponsorships and integrate sales efforts with the Web site's management. The 24/7 Network consists of over 300 high profile Web sites as well as 2,100 small to medium-sized Web sites in North America to which we delivered an aggregate of approximately 3.0 billion advertisements in September 2001. - 24/7 Mail which provides email direct marketing services. Our permission-based email marketing database of more than 38 million email addresses enables direct marketers to target promotional campaigns to consumers who elect to receive commercial messages. The users can opt out of the database and 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 35 million email addresses as of September 2001, and Canadian operations that currently serve as list manager for permission-based email lists that collectively contained more than three million email addresses as of September 2001. - 24/7 Website Results, which delivers targeted search engine traffic on behalf of its clients. We acquired Website Results in August 2000. - Ipromotions which provides sweepstake and loyalty reward programs. We acquired Ipromotions in April of 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. Products within 24/7 Technology Solutions include: - 24/7 Connect, our next generation Internet ad serving system that is one of the industry's fastest and most reliable ad serving systems. 24/7 Connect enables us to offer advertisers the ability to target Internet users based on a variety of criteria including on a geo-targeted basis - e.merge-TM-, a fully integrated, customizable suite of back office business applications designed to enable digital media service providers to offer cutting edge services to their customers including Interactive Advertising, Video on Demand (VOD), Broadband Internet, e-Commerce, and Targeted Broadband Advertising; and RESULTS OF OPERATIONS REVENUES INTEGRATED MEDIA SOLUTIONS REVENUES. Integrated Media Solutions revenues were $7.0 million and $28.3 million for the three and nine month period ended September 30, 2001, respectively, as compared to $30.4 million and $104.9 million for the three and nine month period ended September 30, 2000, representing a 77% and 73% decrease, respectively. We continued to experience significant declines in revenue throughout 2001, which were only slightly offset by the addition of revenue attributable to the acquisition of Website Results at the end of August 2000. This was due to an overall decrease in dollars spent on advertising in general which especially impacted the online sector. TECHNOLOGY SOLUTIONS REVENUES. Technology Solutions revenues were $1.3 million and $12.8 million for the three and nine month period ended September 30, 2001 compared to $9.7 million and $15.4 million for the three and nine month period ended September 30, 2000, representing a decrease of 87% and 17%, respectively. The decrease is due to closing down of our Sabela subsidiary completed in June 2001, partially offset by Exactis operations which were acquired on June 28, 2000 and sold on May 23, 2001. The current quarter Technology Solutions revenue is derived solely from the Broadband and Professional 19 Services unit. Revenues for this unit decreased by 30% for the three months ended September 30, 2001 compared to the three months ended September 30, 2000 and 18% for the nine months ended September 30, 2001 compared to the nine months ended September 30, 2000. Broadband and Professional Services continues to come under pressure due to the reduced implementation budgets of the cable and telecom industries. However, the medium and long-term outlook appears to be brightening causing us to reconsider the sale of this asset. COST OF REVENUE AND GROSS PROFIT (LOSS) INTEGRATED MEDIA SOLUTIONS COST OF REVENUES AND GROSS PROFIT (LOSS): The cost of revenues consists of fees paid to affiliated Web sites, which are calculated as a percentage of revenues resulting from ads delivered on our networks, list provider royalties and delivery costs. Cost of revenues also includes depreciation of our Connect ad serving system and bandwidth charges. In October 2001, we began serving our first third party Connect customer, as a result, in the future these fixed costs will be allocated to Technology solutions with an arms-length service charge based on actual volume reflected in Integrated Media Solutions. Gross profit dollars decreased significantly and the gross margin as a percent of total revenues, decreased to (6%) and 12% for the three and nine month period ended September 30, 2001, compared to 28% and 26% for the three and nine month period ended September 30, 2000, respectively. The decrease is principally due to the sharp decline in revenues which could not offset our fixed costs, primarily depreciation, associated with 24/7 Connect as we significantly increased our ad-serving capacity, functionality and reliability through the third quarter of 2000. In the first quarter of 2001, we began the process of reducing capacity to match market conditions. Depreciation expense as a percentage of revenue increased by 19% and 16% for the three and nine months ended September 30, 2001 as compared to the comparable period in 2000. In addition, during the three months ended September 30, 2001, we were billed approximately $650,000 in initial set up and delivery charges for email and online promotions pursuant to our prepaid service contract with Experian. These billings, which are in dispute, have been reflected in cost of revenues, accounting for approximately 9% and 2% as a percentage of revenue for the three and nine month period ended September 30, 2001. The remaining variances in gross margin were related to a change in the mix of revenues, mainly in mail and targeted search engine traffic. TECHNOLOGY SOLUTIONS COST OF REVENUES AND GROSS PROFIT. The cost of revenues consists of time and materials for consulting contracts. Gross margin for the segment decreased to 53% for the three month period ended September 30, 2001 from 70% for the three month period ended September 30, 2000. Gross margin increased to 67% for the nine month period ended September 30, 2001 from 66% for the nine month period ended September 30, 2000. The fluctuation in the margin is due to the effect of closing down our Sabela subsidiary completed in June 2001, partially offset by Exactis operations which were acquired on June 28, 2000 and sold on May 23, 2001. The margin for the Broadband and Professional services unit decreased to 53% and 57% for the three and nine month period ended September 30, 2001 from 66% and 68% for the three and nine month period ended September 30, 2000, respectively. The decrease in margin is due to the decline in revenue as noted above. OPERATING EXPENSES Operating expenses decreased significantly for the three and nine month periods ended September 30, 2001 compared to the three and nine month periods ended September 30, 2000 as a result of the sale of Exactis in May 2001, the shutdown of Sabela in June 2001 and restructuring activities. Beginning in November 2000, we began a restructuring process to reduce employee headcount, consolidate operations and reduce office space in order to better align our sales, development and administrative organization and to position us for 20 profitable growth consistent with our long-term objectives. This restructuring involved the involuntary terminations of employees, closure or downsizing of certain offices and the sale of certain non-core assets. The restructuring effort has positively impacted our financial results in the period and we anticipate further reductions in operating expenses in the future. 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 decreased both for the three and nine month period ended September 30, 2001 compared to the same period ended September 30, 2000. The decrease is due to headcount reductions and decreased discretionary spending, primarily in advertising. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses consist primarily of compensation, facilities expenses and other overhead expenses. General and administrative expenses decreased for the three and nine month period ended September 30, 2001 compared to the three and nine month period ended September 30, 2000. The decrease is due to headcount reductions and increased operation efficiencies. PRODUCT DEVELOPMENT EXPENSES. Product development expenses consist primarily of compensation and related costs incurred to further develop our ad serving and other technology capabilities. The expense decreased for the three and nine month period ended September 30, 2001 compared to the three and nine month period ended September 30, 2000. The decrease is due to headcount reductions and increased operation efficiencies. AMORTIZATION OF GOODWILL, INTANGIBLE ASSETS AND ADVANCES. Amortization of goodwill, intangible assets and advances was $3.6 million and $18.1 million for the three and nine month period ended September 30, 2001, respectively, compared to $44.1 million and $73.9 million for the three and nine month period ended September 30, 2000. Although additional acquisitions were completed, amortization has decreased due to impairment charges reducing the gross amount of goodwill and other intangible assets. In addition, the three and nine month periods ended September 30, 2000 included amortization related to our NBC and AT&T partner agreements which commenced in April 1999 and October 1999, respectively, and were fully amortized by December 31, 2000. STOCK-BASED COMPENSATION. Stock based compensation of $2.7 million for the nine month period ended September 30, 2001 consists of $1.0 million in amortization of deferred compensation for restricted shares issued to certain employees, $1.5 million in amortization of deferred compensation from acquisitions and a $0.2 million charge for purchase consideration given to certain employees. Stock based compensation of $0.5 million incurred in the first quarter of 2001 for contingent consideration related to the acquisition of Kendro Communications was reclassed to loss from discontinued operation. Stock based compensation of $6.1 million for the nine month period ended September 30, 2000 consists of a $1.6 million charge for shares issued to employees, $3.3 million in amortization of deferred compensation from acquisitions and $1.2 million in amortization of deferred compensation for restricted shares. WRITE-OFF OF IN PROCESS TECHNOLOGY AND OTHER MERGER RELATED COSTS. Write-off of in process technology and other merger related costs of $5.1 million for the nine month period ended September 30, 2000 is primarily acquired in-process technology from the acquisition of IMAKE, amounting to $4.7 million, that was immediately charged to operations and costs associated with integrating acquired operations. RESTRUCTURING AND EXIT COSTS. The restructuring charges of $1.0 million for the nine month period ended September 30, 2001 relate to the reduction of employee headcount and office space. This restructuring involved the involuntary termination of approximately 100 employees in January, 100 employees in April and 25 in September. The charges were $0.3 million, 0.2 million and $0.5 million in the first, second and third quarter of 2001, respectively. 21 GAIN ON SALE OF NON-CORE ASSETS. The $1.5 million gain for the nine month period ended September 30, 2001 relates to the sale of our Exactis subsidiary and the sale of the intellectual property of Sabela and AwardTrack. A portion of the gain on the sale of Exactis is deferred and is recognized as services from Exactis are used and at the time the escrow is released. IMPAIRMENT OF INTANGIBLE ASSETS. Management performs on-going business reviews and, based on quantitative and qualitative measures, assesses the need to record impairment losses on long-lived assets used in operations when impairment indicators are present. Where impairment indicators were identified, management determined the amount of the impairment charge by comparing the carrying values of goodwill and other long-lived assets to their fair values. Through August 2000, we completed numerous acquisitions that were financed principally with shares of our common stock, and were valued based on the price of our common stock at that time. During the fourth quarter of 2000 and the first half of 2001, we reevaluated the carrying value of our businesses. Our revaluation was triggered by the continued decline in the Internet advertising and marketing sectors throughout 2000 which has continued in 2001. This decline has significantly impacted current projected advertising revenue generated from these entities. In addition, each of these entities have experienced declines in operating and financial metrics over the past several quarters, primarily due to the continued weak overall demand of on-line advertising and marketing services, in comparison to the metrics forecasted at the time of their respective acquisitions. These factors significantly impacted current projected revenue generated from these businesses. Our evaluation of impairment was also based on achievement of the unit's business plan objectives and milestones, the fair value of each business unit relative to its carrying value, the financial condition and prospects of each business unit and other relevant factors. The business plan objectives and milestones that were considered included, among others, those related to financial performance, such as achievement of planned financial results, and other non-financial milestones such as successful deployment of technology or launching of new products and the loss of key employees and/or significant customers. The impairment analysis also considered when these properties were acquired and that the intangible assets recorded at the time of acquisition was being amortized over useful lives of 2 - 4 years. The amount of the impairment charge was determined by comparing the carrying value of goodwill and other long-lived assets to fair value at the end of each reporting period. Where impairment was indicated, we determined the fair value of its business units based on a market approach, which included an analysis of market price multiples of companies engaged in similar businesses. To the extent that market comparables were not available, we used discounted cash flows in determining the value. The market price multiples are selected and applied to the business based on the relative performance, future prospects and risk profile of the business in comparison to the guideline companies. The methodology used to test for and measure the amount of the impairment charge was based on the same methodology used during the Company's initial acquisition valuations. As a result, during management's review of the value and periods of amortization of both goodwill and certain other intangibles it was determined that the carrying value of goodwill and certain other intangible assets were not recoverable. The other intangible assets that were determined to be impaired related to the decline in fair market value of acquired technology, a significant reduction in the acquired customer bases and turnover of workforce which was in place at the time of the acquisition of these companies. As a result of our reviews at each quarter end, management determined that the fair value of goodwill and other intangible assets attributable to Mail, Exactis, WSR and Imake were less than their recorded carrying values. We recognized $68.2 million in impairment charges to adjust the carrying values of these entities in the nine months ended September 30, 2001. Of this amount, $25.3 million related to Mail, $26.9 million to WSR, $11.5 million to IMAKE and $4.5 million to Exactis. The impairment factors evaluated by management may change in subsequent periods, given that the Company's business operates in a highly volatile business environment. This could result in significant additional impairment charges in the future. During the second quarter of 2001 management resolved to cease funding of its European operations. As a result, the net assets including an impairment charge of $7.7 million related to Europe has been reflected as loss from discontinued operations in the 2001 consolidated statement of operations. 22 INTEREST INCOME, NET. Interest income, net was $0.1 million and $0.8 million for the three and nine month period ended September 30, 2001 compared to $0.5 million and $1.2 million for the three and nine month period ended September 30, 2000. The decrease is attributable to lower cash balances. GAIN ON SALE OF INVESTMENTS. The gain on sale of investments was $0.9 million and $5.0 million for the three and nine month period ended September 30, 2001 and $14.9 million and $38.0 million for the three and nine month period ended September 30, 2000. These gains relate to sales of the Company's available-for-sale and securities as well as its cost based investment in Idealab!. As of September 30, 2001, the Company has sold all of its available-for-sale securities. IMPAIRMENT OF INVESTMENTS. During 2001, the Company wrote down certain of its investments and recognized impairment charges of approximately $3.1 million for other-than-temporary declines in value of certain investments. Management made an assessment of the carrying value of our cost-based investments and determined that they were in excess of their carrying values due to the significance and duration of the decline in valuations of comparable companies operating in the Internet and technology sectors. The write down of cost based investments was $0.6 million related to Media-Asia. Management also recognized that the decline in value of our available-for-sale investments in Network Commerce and i3Moble were other-than-temporary and recorded an impairment of $2.3 million and $0.2 million, respectively. LOSS FROM DISCONTINUED OPERATION. On August 6, 2001, the Company determined that it would cease funding to its European subsidiaries and communicated that to 24/7 Europe NV's Board of directors. Management of 24/7 Europe has shut down all operations. All revenue, cost and expenses related to the discontinued business are included in this line for the current period and prior periods have been reclassified to reflect this presentation. LIQUIDITY AND CAPITAL RESOURCES At September 30, 2001, we had cash and cash equivalents of $7.5 million including restricted cash of $0.5 million versus $25.9 million including restricted cash of $0.8 million at December 31, 2000. Cash and cash equivalents are comprised of highly liquid short term investments with maturities of three months or less. Not included in the cash and cash equivalents as of September 30, 2001 is restricted cash held in escrow of $1.5 million due to be released in August 2002. The value of our investments totaled $11.3 million at December 31, 2000. These investments generally related to equity and cash transfers from us for minority equity ownership positions. Such investments included, but were not limited to, chinadotcom, Network Commerce, i3Mobile, Naviant, Inc. and idealab! We used approximately $6.1 million in cash to fund these investments in the first half of 2000. In addition, we acquired majority and full ownership positions in IMAKE, Sabela, AwardTrack, iPromotions, Exactis and Website Results in the nine months ended September 30, 2000 through the transfer of common stock and cash. Cash acquired, primarily related to our acquisition of Exactis, net of cash paid for our 2000 acquisitions approximated $24.0 million. As of September 30, 2001, all remaining investments are 100% reserved. We generated a portion of our liquidity through our monetization of our investment in marketable securities and available for sale securities which generated approximately $6.9 million and $49.9 million in the nine month periods ended September 30, 2001 and 2000, respectively. At the end of September 2001, we sold our remaining cost based investments for $2.5 million, the proceeds of which were received in October 2001. We used approximately $30.6 million and $67.4 million of cash in operating activities from continuing operations during the nine month periods ended September 30, 2001 and 2000, respectively, generally as a result of our operating losses from continuing operations, adjusted for certain non-cash items such as amortization of goodwill and other intangible assets, gains on sales of investments, impairment of investments and intangibles, gain on sale of non-core assets and non-cash related equity transactions and restructuring and exit costs, write-off of acquired in-process technology and also by significant changes in accounts receivable, accounts payable and deferred revenue. 23 Net cash provided by investing activities was approximately $23.0 million and $48.6 million in 2001 and 2000, respectively. The majority of the cash provided by investing activities related to proceeds received from our sale of a portion of our investment in marketable securities and available-for-sale securities which amounted to $6.9 million in 2001 and $49.9 million in 2001 and 2000, respectively. In 2000, we continued investment in technology and efforts to develop our infrastructure through capital expenditures, including capitalized software. Cash used for such expenditures totaled approximately $19.0 million for 2000. To the extent we continue to acquire additional ad serving hardware, invest in enhancing or expending our current product lines, make cash investments in other businesses or acquire other businesses, net cash used in investing activities could continue to be significant. Currently, we have various capital and operating leases relating to the use of computer hardware, software and office space. As of September 30, 2001, we have approximately $0.9 million remaining of cash outlays relating to restructuring and exit costs. These amounts consist primarily of severance and rent exit costs which are being paid ratably. The payments are scheduled to be completed in June 2002. Our capital requirements depend on numerous factors, including market demand of our services, the capital required to maintain our technology, and the resources we devote to marketing and selling our services. We have received a report from our independent accountants on our December 31, 2000 consolidated financial statements containing an explanatory paragraph stating that our recurring losses from operations since inception raises substantial doubt about our ability to continue as a going concern. Moreover, management's plans to continue as a going concern rely heavily on achieving revenue targets, further rationalizations, our ability to monetize our non-core assets which includes selling certain divisions, and or raising additional financing, as well as, reducing our operating expenses. In addition, management is currently exploring a number of strategic alternatives and is also continuing to identify and implement internal actions to improve our liquidity. These alternatives may include selling core assets which could result in significant changes in our business plan. 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. Stockholders may experience extreme dilution due both to our current stock price and the significant amount of financing we would be required to raise. These securities may have rights senior to those of holders of our common stock. We do not have any contractual restrictions on our ability to incur debt. Any indebtedness could contain covenants, which restrict our operations. See "Risk Factors - We may need to raise additional funds, including the issuance of debt." On March 21, 2001, we entered into a common stock purchase agreement with Maya Cove Holdings . The agreement gives us the ability to sell up to $50 million of our common stock to Maya pursuant to periodic draw downs. The draw downs are subject to our ability to continue trading on the NASDAQ and our trading volumes and prices. As a result, our ability to utilize this equity credit line is limited and there can be no assurances that it will provide the resources necessary to fund our needs. As of September 30, 2001, we have not drawn down on this facility. We are continuing to evaluate other fund raising vehicles. On October 30, 2001, we entered into a merger agreement with Real Media, Inc., a privately-held Delaware Corporation. Pursuant to the Agreement and Plan of Merger between the Company, Continuum Holding Corp., PubliGroupe USA Holding, Inc. and Real Media, we acquired all the outstanding common and preferred shares of Real Media in a merger transaction whereby an indirect subsidiary of the Company was merged with and into Real Media, in exchange for approximately 8.2 million shares of our common stock, equal to 19.9 percent of our common stock prior to the merger. In the transaction, we acquired net assets worth $1.2 million. Additionally, PubliGroupe USA Holding loaned $4.5 million to Real Media in exchange for a five-year note, guaranteed by us, with an interest rate of 4.5%, and agreed to lend up to an additional $3.0 million to us, subject in part to the achievement of target operating results. The proceeds of the $4.5 million loan are primarily being used to finance Real Media's restructuring plan, which provides for office closings, workforce reductions, transition and integration costs and other related obligations. The additional loans have terms of three years and incur interest at 6% payable upon maturity. Proceeds of $1.5 million related to the additional loans are due to be receive on January 2, 2002 and are not subject to any 24 contingencies. The remaining $1.5 million is conditional upon us achieving targeted operating results in the first quarter of 2002 as set forth in the agreement. We believe that our current cash may not be sufficient to meet our anticipated operating cash needs for the 12 months commencing October 1, 2001. We have limited operating capital and no current access to any meaningful funds from our credit facilities. Our continuing operations therefore will depend on our ability to raise additional funds through sale of certain divisions, bank borrowings or equity or debt financing. 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 on commercially reasonable terms, or at all. MARKET FOR COMPANY'S COMMON EQUITY The shares of our Common Stock are currently listed on the Nasdaq national market. Due to the decline in the share price of our Common Stock and our continued operating losses in April 2001, we received a letter from the Nasdaq stating that they have determined that we have failed to meet Nasdaq's minimum listing requirements and as a result, our Common Stock could be delisted if we do not satisfy these requirements by July 5, 2001. We did not satisfy those requirements and the Company requested a hearing, which was held on August 24, 2001. Under Nasdaq rules, the scheduled delisting was stayed pending the outcome of the hearing. On August 31, 2001, the Company announced that, in order to seek to increase the price per share of its common stock and regain compliance with Nasdaq requirements, it intended to recommend to its stockholders approval of a reverse stock split of its common stock, which would result in stockholders being issued one new share for each ten to 20 shares previously held. In September 2001 the Company received notice from Nasdaq that due to the recent events Nasdaq was suspending its minimum share bid price and market capitalization requirements through at least December 31, 2001. It is currently the expectation of management that Nasdaq will reinstate its bid price and market capitalization requirements in some form as of January 2, 2002, and that, if the Company's stock price remains below $1.00 through May 2002, the Company will again have to consider a reverse stock split in order to regain compliance with Nasdaq requirements. There can be no assurance that the Company will be able to maintain its Nasdaq listing in the future. If the inclusion of our securities in NASDAQ is discontinued, trading, if any, in the securities may then continue to be conducted in the non- NASDAQ over-the-counter market in what are commonly referred to as the electronic bulletin board and the "pink sheets". As a result, an investor may find it more difficult to dispose of or obtain accurate quotations as to the market value of the securities. In addition, we would be subject to a Rule promulgated by the Securities and Exchange Commission that, if we fail to meet criteria set forth in such Rule, imposes various practice requirements on broker-dealers who sell securities governed by the Rule to persons other than established customers and accredited investors. For these types of transactions, the broker-dealer must make a special suitability determination for the purchaser and have received the purchaser's written consent to the transactions prior to sale. Consequently, the Rule may have a materially adverse effect on the ability of broker-dealers to sell the securities, which may materially affect the ability of shareholders to sell the securities in the secondary market. Delisting could make trading our shares more difficult for investors, potentially leading to further declines in share price. It would also make it more difficult for us to raise additional capital. We would also incur additional costs under state blue-sky laws to sell equity if we are delisted. IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In July 2001, the FASB issued Statement No. 141, BUSINESS COMBINATIONS, and Statement No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS. Statement 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001, as well as all purchase method business combinations completed after June 30, 2001. Statement 141 also specifies criteria that intangible assets acquired in a purchase method business combination must meet to be recognized and reported apart from goodwill, nothing that any purchase price allocable to an assembled workforce may not be accounted for separately. Statement 142 will require that goodwill and intangible assets with indefinite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for 25 impairment in accordance with FASB Statement No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF. The Company is required to adopt the provisions of Statement 141 immediately, and Statement 142 effective January 1, 2002. Furthermore, goodwill and intangible assets determined to have an indefinite useful like acquired in a purchase business combination completed after June 30, 2001, but before Statement 142 is adopted in full, will not be amortized, but will continue to be evaluated for impairment in accordance with the appropriate pre-Statement 142 accounting literature prior to the full adoption of Statement 142. Statement 141 will require, upon adoption of Statement 142, that the Company evaluate its existing intangible assets and goodwill that were acquired in a prior purchase business combination, and to make any necessary reclassifications in order to conform with the new criteria in Statement 141 for recognition apart from goodwill. Upon adoption of Statement 142, the Company will be required to reassess the useful lives and residual values of all intangible assets acquired, and make any necessary amortization period adjustments by the end of the first interim period after adoption. In addition, to the extent an intangible asset is identified as having an indefinite useful life, the Company will be required to test the intangible asset for impairment in accordance with the provisions of Statement 142 within the first interim period. Any impairment loss will be measured as of the date of adoption and recognized as the cumulative effect of a change in accounting principle in the first interim period. In connection with Statement 142's transitional goodwill impairment evaluation, the Statement will require the Company to perform an assessment of whether there is an indication that goodwill is impaired as of the date of adoption. To accomplish this, the Company must identify its reporting units and determine the carrying value of each reporting unit by assigning the assets and liabilities, including the existing goodwill and intangible assets, to those reporting units as of the date of adoption. The Company will then have up to six months from the date of adoption to determine the fair value of each reporting unit and compare it to the carrying amount of the reporting unit. To the extent the carrying amount of a reporting unit exceeds the fair value of the reporting unit, an indication exists that the reporting unit goodwill may be impaired and the Company must perform the second step of the transitional impairment test. In the second step, the Company must compare the implied fair value of the reporting unit goodwill with the carrying amount of the reporting unit goodwill, both of which would be measured as of the date of adoption. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit of all of the assets (recognized and unrecognized) and liabilities of the reporting unit in a manner similar to a purchase price allocation, in accordance with Statement 141. The residual fair value after this allocation is the implied fair value of the reporting unit goodwill. This second step is required to be completed as soon as possible, but no later than the end of the year of adoption. Any transitional impairment loss will be recognized as the cumulative effect of a change in accounting principle in the Company's statement of operations. And finally, any unamortized negative goodwill (and equity method negative goodwill) existing at the date of Statement 142 adopted must be written off as the cumulative effect of a change in accounting principle. Because of the extensive effort needed to comply with adopting Statements 141 and 142, it is not practicable to reasonably estimate the impact of adopting these Statements on the Company's financial statements at the date of this report, including whether it will be required to recognize any transitional impairment losses as the cumulative effect of a change in accounting principle. In August 2001, the Financial Accounting Standards Board issued FASB Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (Statement 144), which supersedes both FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of (Statement 121) and the accounting and reporting provisions of APB Opinion No. 30, Reporting the Results of Operations--Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions (Opinion 30), for the disposal of a segment of a business (as previously defined in that Opinion). Statement 144 retains the fundamental provisions in Statement 121 for recognizing and measuring impairment losses on long-lived assets held for use and long-lived assets to be disposed of by sale, while also resolving significant implementation issues associated with Statement 121. For 26 example, Statement 144 provides guidance on how a long-lived asset that is used as part of a group should be evaluated for impairment, establishes criteria for when a long-lived asset is held for sale, and prescribes the accounting for a long-lived asset that will be disposed of other than by sale. Statement 144 retains the basic provisions of Opinion 30 on how to present discontinued operations in the income statement but broadens that presentation to include a component of an entity (rather than a segment of a business). Unlike Statement 121, an impairment assessment under Statement 144 will never result in a write-down of goodwill. Rather, goodwill is evaluated for impairment under Statement No. 142, Goodwill and Other Intangible Assets. Goodwill is excluded from the scope of Statement No. 144. That is, a goodwill impairment write-down will never occur as a result of applying Statement 144. However, it is possible for a long-lived asset group under Statement 144 to include goodwill. Goodwill will be included in the carrying amount of a Statement 144 asset group if that group is, or includes, a reporting unit under Statement 142. This scenario is unlikely for large companies, however, it could be encountered for small companies. When impairment is measured under Statement 144, the carrying amount of the asset group is compared to the group's fair value. Any shortfall is recognized as a reduction to the carrying amounts of only the long-lived assets in the group. The carrying amount of goodwill is then evaluated for impairment under Statement No. 142, Goodwill and Other Intangible Assets, once Statement No. 142 is adopted. Companies are required to adopt Statement No. 142 no later than the year beginning after December 15, 2001. The Company is required to adopt Statement 144 no later than the year beginning after December 15, 2001, and plans to adopt its provisions for the quarter ending March 31, 2002. Management does not expect the adoption of Statement 144 for long-lived assets held for use to have a material impact on the Company's financial statements because the impairment assessment under Statement 144 is largely unchanged from Statement 121. The provisions of the Statement for assets held for sale or other disposal generally are required to be applied prospectively after the adoption date to newly initiated disposal activities. Therefore, management cannot determine the potential effects that adoption of Statement 144 will have on the Company's financial statements. 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 WILL NEED TO RAISE ADDITIONAL FUNDS TO CONTINUE OPERATIONS AND OUR RECURRING OPERATING LOSSES RAISE SUBSTANTIAL DOUBT ABOUT OUR ABILITY TO CONTINUE AS A GOING CONCERN. We believe that our current cash may not be sufficient to meet our anticipated operating cash needs for the 12 months commencing October 1, 2001 and there can be no assurance that new funds can be secured when needed. The support of our vendors, customers, stockholders and employees will continue to be key to our future success. There can be no assurance that we will be able to monetize our non-core assets, raise additional financing to meet our cash and operational needs or reduce our operating expenses to address this going concern issue. Since our inception, we have incurred significant operating losses and we believe we will continue to incur operating losses for the foreseeable future. We also expect to incur negative cash flows for the foreseeable future as a result of our operating losses and our need to fund future capital expenditures. We have received a report from our independent accountants on our December 31, 2000 consolidated financial statements containing an explanatory "going concern" paragraph stating that our recurring losses from operations since inception raises substantial doubt about our ability to continue our business as a going concern. Management's plans to continue as a going concern rely heavily on achieving revenue targets, further rationalizations, our ability to monetize our non-core assets which includes selling certain divisions and or raising additional financing, as well as, reducing operating expenses. Management is currently exploring a number of strategic alternatives and is also continuing to identify and implement internal actions to improve our liquidity. These alternatives may include selling core assets, which could result in significant changes in our business plan. 27 To the extent we encounter additional opportunities to raise cash, to do so 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. Stockholders may experience extreme dilution due to our current stock price and the significant amount of financing we need to raise and these securities may have rights senior to those of holders of our common stock. We do not have any contractual restrictions on our ability to incur debt. Any indebtedness could contain covenants, which restrict our operations. We have extremely limited access, if any, to the capital markets to raise capital. The capital markets have been unpredictable in the past, especially for early stage companies such as ours. In addition, it is difficult to raise capital in the current market conditions. The amount of capital that a company such as ours is able to raise often depends on variables that are beyond our control, such as share price of our stock and its trading volume. As a result, there is no guarantee that our efforts to secure financing will be available on terms attractive to us, or at all. Due to our operating losses, it will be difficult to obtain debt financing. If we are able to consummate a financing arrangement, there is no guarantee that the amount raised will be sufficient to meet our future needs. If adequate funds are not available on acceptable terms, when needed, or at all, our business, results of operation, financial condition and continued viability will be materially adversely effected. THE LOW PRICE OF OUR COMMON STOCK COULD RESULT IN ITS DELISTING FROM THE NASDAQ NATIONAL MARKET. The shares of our common stock are currently listed on the Nasdaq national market. Due to the recent decline in the share price of our common stock and our continued operating losses in April 2001, we received a letter from Nasdaq stating that they have determined that we have failed to meet Nasdaq's minimum listing requirements and as a result, our common stock could be delisted if we do not satisfy these requirements by July 5, 2001. On August 31, 2001, the Company announced that, in order to seek to increase the price per share of its common stock and regain compliance with Nasdaq requirements, it intended to recommend to its stockholders approval of a reverse stock split of its common stock, which would result in stockholders being issued one new share for each ten to 20 shares previously held. In September 2001 the Company received notice from Nasdaq that due to the recent events Nasdaq was suspending its minimum share bid price and market capitalization requirements through at least December 31, 2001. It is currently the expectation of management that Nasdaq will reinstate its bid price and market capitalization requirements in some form as of January 2, 2002, and that, if the Company's stock price remains below $1.00 through May 2002, the Company will again have to consider a reverse stock split in order to regain compliance with Nasdaq requirements. There can be no assurance that the Company will be able to maintain its Nasdaq listing in the future. Our failure to meet NASDAQ's maintenance criteria may result in the delisting of our common stock from Nasdaq. In such event, trading, if any, in the securities may then continue to be conducted in the non-NASDAQ over-the-counter market in what are commonly referred to as the electronic bulletin board and the "pink sheets". As a result, an investor may find it more difficult to dispose of or obtain accurate quotations as to the market value of the securities. In addition, we would be subject to a Rule promulgated by the Securities and Exchange Commission that, if we fail to meet criteria set forth in such Rule, imposes various practice requirements on broker-dealers who sell securities governed by the Rule to persons other than established customers and accredited investors. For these types of transactions, the broker-dealer must make a special suitability determination for the purchaser and have received the purchaser's written consent to the transactions prior to sale. Consequently, the Rule may have a materially adverse effect on the ability of broker-dealers to sell the securities, which may materially affect the ability of shareholders to sell the securities in the secondary market. Delisting could make trading our shares more difficult for investors, potentially leading to further declines in share price. It would also make it more difficult for us to raise additional capital. We would also incur additional costs under state blue sky laws to sell equity if we are delisted. 28 HIGH VOLATILITY OF STOCK PRICE. The market price of our common stock has fluctuated in the past and may continue to be volatile. In addition, the stock market has experienced extreme price and volume fluctuations. The market prices of the securities of Internet-related companies have been especially volatile. Investors may be unable to resell their shares of our common stock at or above the purchase price. In the past, following periods of volatility in the market price of a particular company's securities, securities class action litigation has often been brought against that company. Many companies in our industry have been subject to this type of litigation in the past. We may also become involved in this type of litigation. Litigation is often expensive and diverts management's attention and resources, which could materially and adversely affect our business, financial condition and results of operations. REVENUE GROWTH IN PRIOR PERIODS MAY NOT BE INDICATIVE OF FUTURE GROWTH. At times in the past and in certain segments, our revenues have grown significantly. Our limited operating history makes prediction of future revenue growth difficult. Accurate predictions of future revenue growth are also difficult because of the rapid changes in our markets and the possible need by us to sell assets to fund operations. Accordingly, investors should not rely on past revenue growth rates as a prediction of future revenue growth. WE HAVE A LIMITED OPERATING HISTORY ON WHICH AN INVESTOR CAN EVALUATE OUR BUSINESS. We were formed as a result of the combination 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: - develop new relationships and maintain existing relationships with our Web sites, advertisers, and other third parties; - further develop and upgrade our technology; - respond to competitive developments; - implement and improve operational, financial and management information systems; and - attract, retain and motivate qualified employees. WE ANTICIPATE CONTINUED LOSSES AND WE MAY NEVER BE PROFITABLE. We have not achieved profitability in any period and we may not be able to achieve or sustain profitability in the future. We incurred net losses of $163.4 million and $102.8 million for the nine months ended September 30, 2001 and 2000, 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. 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 have fluctuated and may continue to fluctuate significantly in the future as a result of a variety of factors, many of which are beyond our control. These factors include: 29 - the addition of new or loss of existing clients; - changes in fees paid by advertisers and direct marketers or other clients; - 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; - the demand by advertisers, Web publishers and direct marketers for our advertising solutions; - the introduction of new Internet marketing services by us or our competitors; - variations in the levels of capital or operating expenditures and other costs relating to the maintenance or expansion of our operations, including personnel costs; - changes in governmental regulation of the Internet; and - general economic conditions. Our future revenues and results of operations may be difficult to forecast due to the above factors. In addition, our expense levels are based in large part on our investment plans and estimates of future revenues. Any increased expenses may precede or may not be followed by increased revenues, as we may be unable to, or may elect not to, adjust spending in a timely manner to compensate for any unexpected revenue shortfall. As a result, we believe that period-to-period comparisons of our results of operations may not be meaningful. You should not rely on past periods as indicators of future performance. In future periods, our results of operations may fall below the expectations of securities analysts and investors, which could adversely affect the trading price of our common stock. OUR FINANCIAL PERFORMANCE AND REDUCTION OF OUR WORKFORCE MAY AFFECT THE MORALE AND PERFORMANCE OF OUR PERSONNEL. We have incurred significant net losses since our inception. In an effort to reduce our cash expenses, we began to implement certain restructuring initiatives and cost reductions. In the past nine months, we reduced our workforce by over 1,000 employees. We have also left positions unfilled when certain employees have left the company. In addition, recent trading levels of our common stock have decreased the value of the stock options granted to employees pursuant to our stock option plan. As a result of these factors, our remaining personnel may seek employment with larger, more stable companies they perceive to have better prospects. Our failure to retain qualified employees to fulfill our current and future needs could impair our future growth and have a material adverse effect on our business. OUR CLOSING OF SEVERAL OFFICES AND CONSOLIDATION OF FUNCTIONS MAY IMPAIR OPERATIONS. As a result of our efforts to reduce expenses and sell non-core assets, several critical functions have been moved from one of our offices to another, often with new personnel discharging the function. Key functions that have been moved included the finance department of our 24/7 Mail business and our Website Results business. If the transition of these operations encounters unexpected difficulties, they could adversely affect the financial results of the Company. OUR FINANCIAL PERFORMANCE MAY AFFECT OUR ABILITY TO ENTER INTO NEW BUSINESS RELATIONSHIPS AND TO COLLECT REVENUES. The publicity we receive in connection with our financial performance and our measures to remedy this performance generate negative publicity, which may negatively affect our reputation and our business partners' and other market participants' perception of our company. If we are unable to maintain the existing relationships and develop new ones, our revenues and collections could suffer materially. 30 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 continues to remain soft or fails to develop in the near future. 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. OUR BUSINESS MAY SUFFER IF WE ARE UNABLE TO SUCCESSFULLY IMPLEMENT OUR BUSINESS MODEL A significant part of our business model is to generate revenue by providing interactive marketing solutions to advertisers, ad agencies and Web publishers. The profit potential for this business model is unproven. To be successful, both Internet advertising and our solutions will need to achieve broad market acceptance by advertisers, ad agencies and Web publishers. Our ability to generate significant revenue from advertisers will depend, in part, on our ability to contract with Web publishers that have Web sites with adequate available ad space inventory. Further, these Web sites must generate sufficient user traffic with demographic characteristics attractive to our advertisers. The intense competition among Internet advertising sellers has led to the creation of a number of pricing alternatives for Internet advertising. These alternatives make it difficult for us to project future levels of advertising revenue and applicable gross margin that can be sustained by us or the Internet advertising industry in general. Intensive marketing and sales efforts may be necessary to educate prospective advertisers regarding the uses and benefits of, and to generate demand for, our products and services, including our newer products and services such as Website Results. 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 business 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 these clients. Acceptance of our new solutions will depend on the continued emergence of Internet commerce, communication and advertising, and demand for its solutions. We cannot assure you that demand for its new solutions will emerge or become sustainable. BANNER ADVERTISING, FROM WHICH WE CURRENTLY DERIVE MUCH OF OUR REVENUE, MAY NOT BE AN EFFECTIVE ADVERTISING METHOD IN THE FUTURE. The majority of our revenues are derived from the delivery of banner advertisements. Online banner advertising has dramatically decreased since the middle of 2000 and has continued to decline throughout 2001 and is expected to continue through the second quarter of 2002, which could have a material adverse effect on our business. 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. In addition, many online advertisers have been experiencing financial difficulties, which could materially impact our revenues and our ability to collect our receivables. 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 31 business model. Intensive marketing and sales efforts may be necessary to educate prospective advertisers regarding the uses and benefits of our products and services to generate demand for our direct marketing services. Enterprises may be reluctant or slow to adopt a new approach that may replace, limit, or compete with their existing direct marketing systems. In addition, since online direct marketing is emerging as a new and distinct market apart from online advertising, potential adopters of online direct marketing services will increasingly demand functionality tailored to their specific requirements. We may be unable to meet the demands of our clients. LOSS OF OUR MAJOR WEB SITES WOULD SIGNIFICANTLY REDUCE OUR REVENUES. The 24/7 Network generates a substantial portion of our revenues, and we expect that the 24/7 Network will continue to account for a substantial portion of our revenue for the foreseeable future. The 24/7 Network consists of a limited number of our Web sites that have contracted for our services under agreements cancelable generally upon a short notice period. For the three month periods ended September 30, 2001 and 2000, approximately 25% and 13%, respectively, of our total revenues were derived from advertisements on our top ten Web sites. For the three month period ended September 30, 2001, the top ten Web sites included Earthlink, Inc., AT&T WorldNet Service, Epipo, Inc. (180 Solutions), MusicCity.com, 2GK Inc. (Quotetracker), Spedia.com, Inc., Yifan Communications, Inc., Infogames Inc. (Games.com), Cydoor Desktop Medai and AdOrigin Corp. We experience turnover from time to time among our Web sites, and we cannot be certain that the Web sites named above will remain associated with us or that such Web sites will not experience a reduction in online traffic on their sites. We cannot assure you that we will be able to replace any departed Web site in a timely and effective manner with a Web site with comparable traffic patterns and user demographics. 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 MAJOR CUSTOMERS WOULD REDUCE OUR REVENUES. We generate a significant portion of our revenues from a limited number of customers. We expect that a limited number of these entities may continue to account for a significant percentage of our revenues for the foreseeable future. For the three month period ended September 30, 2001, our top ten customers accounted for approximately 40% of our total revenues. Customers typically purchase advertising or services under agreements on a short term basis. 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 customers will continue to purchase advertising or services from us or that we will be able to attract additional customers successfully, or that customers 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 business, results of operations and financial condition would be materially adversely affected by the loss of one or more of our customers that account for a significant portion of our revenue. WE HAVE GROWN OUR BUSINESS THROUGH ACQUISITION. We were formed in February 1998 to consolidate three Internet advertising companies and have since acquired thirteen 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 may 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: 32 - the difficulties in the integration and assimilation of the operations, technologies, products and personnel of an acquired business; - the diversion of management's attention from other business concerns; - the availability of favorable acquisition financing for future acquisitions; and - the potential loss of key employees of any acquired business. Our inability to successfully integrate any acquired company could adversely affect our business. OUR ADVERTISING CUSTOMERS AND THE COMPANIES WITH WHICH WE HAVE STRATEGIC RELATIONSHIPS MAY EXPERIENCE ADVERSE BUSINESS CONDITIONS THAT COULD ADVERSELY AFFECT OUR BUSINESS. As a result of unfavorable conditions in the public equity markets, some of our customers may have difficulty raising sufficient capital to support their long-term operations. As a result, these customers have reduced their spending on Internet advertising, which has materially and adversely affected our business, financial condition and results of operations. In addition, from time to time, we have entered into strategic business relationships with other companies, the nature of which varies, but generally in the context of customer relationships. These companies may experience similar adverse business conditions that may render them unable to meet our expectations for the strategic business relationship or to fulfill their contractual obligations to us. Such an event could have a material adverse impact on our business, financial condition and results of operations. 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. Furthermore, Internet user traffic typically drops during the summer months, which reduces the number of advertisements to sell and deliver. 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. Due to such risks, you should not rely on quarter-to-quarter comparisons of our results of operations as an indicator of our future results. OUR TECHNOLOGY SOLUTIONS 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 launched 24/7 Connect in early 2000, and we must, among other things, ensure that this technology will function efficiently at high volumes, interact properly with our 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. Our 24/7 Connect technology resides on a computer system located in our data centers in Virginia. These systems' continuing and uninterrupted performance is critical to our success. Customers may become dissatisfied by any system failure that interrupts our ability to provide our services to them, including failures affecting our ability to deliver advertisements without significant delay to the viewer. Sustained or repeated system failures would reduce the attractiveness of our solutions to advertisers, ad agencies and Web publishers and result in contract terminations, fee rebates and make goods, thereby reducing revenue. Slower response time or system failures may also result from straining the capacity of our deployed software or hardware due to an increase in the volume of advertising delivered through our servers. To the extent that we do not effectively address any capacity constraints or system failures, our business, results of operations and financial condition could be materially and adversely affected. Our operations are dependent on our ability to protect our computer systems against damage from fire, power loss, water damage, telecommunications 33 failures, vandalism and other malicious acts, and similar unexpected adverse events. In addition, interruptions in our solutions could result from the failure of our telecommunications providers to provide the necessary data communications capacity in the time frame we require. Despite precautions that we have taken, unanticipated problems affecting our systems have from time to time in the past caused, and in the future could cause, interruptions in the delivery of our solutions. Our business, results of operations and financial condition could be materially and adversely affected by any damage or failure that interrupts or delays our operations. FUTURE SALES OF OUR COMMON STOCK MAY AFFECT THE MARKET PRICE OF OUR COMMON STOCK. As of November 9, 2001, we had 49,507,662 shares of common stock outstanding. We cannot predict the effect, if any, that future sales of common stock or the availability of shares of common stock for future sale, will have on the market price of our common stock prevailing from time to time. Sales of substantial amounts of common stock (including shares issued upon the exercise of stock options), or the perception that such sales could occur, may materially and adversely affect prevailing market prices for our common stock. OUR FAILURE TO SUCCESSFULLY COMPETE MAY HINDER OUR GROWTH. The markets for Internet advertising and related products and services are intensely competitive and such competition is expected to increase. Our failure to successfully compete may hinder our growth. We believe that our ability to compete depends upon many factors both within and beyond our control, including: - the timing and market acceptance of new products and enhancements of existing services developed by us and our competitors; - changing demands regarding customer service and support; - shifts in sales and marketing efforts by us and our competitors; and - the ease of use, performance, price and reliability of our services and products. Many of our competitors have longer operating histories, greater name recognition, larger customer bases and significantly greater financial, technical and marketing resources than ours. 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. CHANGES IN LAWS AND STANDARDS RELATING TO DATA COLLECTION AND USE PRACTICES AND THE PRIVACY OF INTERNET USERS AND OTHER INDIVIDUALS COULD HARM OUR BUSINESS. The U.S. federal and various state governments have recently proposed limitations on the collection and use of information regarding Internet users. In October 1998, the European Union adopted a directive that may limit our collection and use of information regarding Internet users in Europe. The effectiveness of our 24/7 Connect technology could be limited by any regulation limiting the collection or use of information regarding Internet users. Since many of the proposed laws or regulations are just being developed, we cannot yet determine the impact these regulations may have on its business. In addition, growing public concern about privacy and the collection, distribution and use of information about individuals has led to self-regulation of these practices by the Internet advertising and direct marketing industry and to increased federal and state regulation. The Network Advertising Initiative, or NAI, of which 24/7 Media is a member along with other Internet advertising companies, has developed self-regulatory principles for online preference marketing. These principles were recently endorsed by the Federal Trade Commission, and are 34 in the process of being adopted by the NAI companies. The Direct Marketing Association, or DMA, the leading trade association of direct marketers, has adopted guidelines regarding the fair use of this information which it recommends participants, such as us, through our services, in the direct marketing industry follow. We are also subject to various federal and state regulations concerning the collection, distribution and use of information regarding individuals. These laws include the Children's Online Privacy Protection Act, and state laws that limit or preclude the use of voter registration and drivers license information, as well as other laws that govern the collection and use of consumer credit information. Although our compliance with the DMA's guidelines and applicable federal and state laws and regulations has not had a material adverse effect on us, we cannot assure you that the DMA will not adopt additional, more burdensome guidelines or that additional, more burdensome federal or state laws or regulations, including antitrust and consumer privacy laws, will not be enacted or applied to us or our clients, which could materially and adversely affect our business, financial condition and results of operations. IF WE LOSE OUR CEO OR OTHER SENIOR MANAGERS OUR BUSINESS WILL BE ADVERSELY EFFECTED. Our success depends, to a significant extent, upon our senior management and key sales and technical personnel, particularly David J. Moore, Chief Executive Officer. The loss of the services of one or more of these persons could materially adversely affect our ability to develop our business. Our success also depends on our ability to attract and retain qualified technical, sales and marketing, customer support, financial and accounting, and managerial personnel. Competition for such personnel in the Internet industry is intense, and we cannot be certain that we will be able to retain our key personnel or that we can attract, integrate or retain other highly qualified personnel in the future. We have experienced in the past, and may continue to experience in the future, difficulty in hiring and retaining candidates with appropriate qualifications, especially in sales and marketing positions. OUR CESSATION OF INTERNATIONAL OPERATIONS MAY POSE LEGAL CHALLENGES. On August 5, 2001, we advised our 24/7 Europe subsidiary that we intended not to provide them with any additional funding. As a result of this decision, 24/7 Europe may not have sufficient resources to fund its operations and may commence insolvency proceedings. Although it is generally the case that shareholders of European corporations are not liable for the debts and other obligations of the corporations, there can be no assurance that creditors of our European subsidiaries will not seek to impose liability on the Company. DEPENDENCE ON PROPRIETARY RIGHTS AND RISK OF INFRINGEMENT. Our success and ability to compete are substantially dependent on our internally developed technologies and trademarks, which we protect through a combination of patent, copyright, trade secret and trademark law. We have received two patents in the United States, and have filed and intend to file additional patent applications in the United States. In addition, we apply to register our trademarks in the United States and internationally. We cannot assure you that any of our patent applications or trademark applications will be approved. Even if they are approved, such patents or trademarks may be successfully challenged by others or invalidated. If our trademark registrations are not approved because third parties own such trademarks, our use of such trademarks will be restricted unless we enter into arrangements with such third parties that may be unavailable on commercially reasonable terms. We generally enter into confidentiality or license agreements with our employees, consultants and corporate partners, and generally control access to and distribution of our technologies, documentation and other proprietary information. Despite our efforts to protect our proprietary rights from unauthorized use or disclosure, parties may attempt to disclose, obtain or use our solutions or technologies. We cannot assure you that the steps we have taken will prevent misappropriation of our solutions or technologies, particularly in foreign countries where laws or law enforcement practices may not protect our proprietary rights as fully as in the United States. We have licensed, and we may license in the future, elements of our trademarks, trade dress and similar proprietary rights to third parties. While we attempt to ensure that the quality of our brand is maintained by these business partners, such partners may take actions that could materially and adversely affect the value 35 of our proprietary rights or our reputation. We cannot assure you that any of our proprietary rights will be viable or of value in the future since the validity, enforceability and scope of protection of certain proprietary rights in Internet-related industries is uncertain and still evolving. We may be subject to claims of alleged infringement of the trademarks and other intellectual property rights of third parties by us or the Web publishers with Web sites in the 24/7 Network. Such claims and any resultant litigation could subject us to significant liability for damages and could result in the invalidation of our proprietary rights. In addition, even if we prevail, such litigation could be time-consuming and expensive to defend, and could result in the diversion of our time and attention, any of which could materially and adversely affect our business, results of operations and financial condition. Any claims or litigation from third parties may also result in limitations on our ability to use the trademarks and other intellectual property subject to such claims or litigation unless we enter into arrangements with the third parties responsible for such claims or litigation which may be unavailable on commercially reasonable terms. INTELLECTUAL PROPERTY LIABILITY. We may be liable for content available or posted on the Web sites of our publishers. We may be liable to third parties for content in the advertising we serve if the music, artwork, text or other content involved violates the copyright, trademark or other intellectual property rights of such third parties or if the content is defamatory. Any claims or counterclaims could be time consuming, result in costly litigation or divert management's attention. PRIVACY CONCERNS MAY PREVENT US FROM COLLECTING DEMOGRAPHIC OR OTHER CONSUMER DATA. Growing concerns about the use of "cookies" and data collection may limit our ability to develop user profiles. Web sites typically place small files of information commonly known as "cookies" on a user's hard drive, generally without the user's knowledge or consent. Cookie information is passed to the Web site through the Internet user's browser software. Our 24/7 Connect technology targets advertising to users through the use of identifying data, or "cookies" and other non-personally-identifying information. 24/7 Connect enables the use of cookies to deliver targeted advertising, to help compile demographic information, and to limit the frequency with which an advertisement is shown to the user. Most currently available Internet browsers allow users to modify their browser settings to prevent cookies from being stored on their hard drive, and a small minority of users are currently choosing to do so. Users can also delete cookies from their hard drive at any time. Some Internet commentators and privacy advocates have suggested limiting or eliminating the use of cookies. Any reduction or limitation in the use of cookies could limit the effectiveness of our sales and marketing efforts and impair our targeting capabilities. Recently, Microsoft Corporation announced that it intends to change the design and instrumentation of its Web browser in such a way as to give users the option to accept or reject third party cookies. Giving users the option to decline such cookies could result in a reduction of the number of Internet users we are capable of profiling anonymously. Such changes also could adversely affect our ability to determine the reach of advertising campaigns sold and delivered by us and the frequency with which users of sites in the 24/7 Network see the same advertisement. A change, such as that announced by Microsoft, would primarily affect third-party ad networks like the 24/7 Network, potentially making portal web sites such as Yahoo.com and MSN.com a relatively more attractive advertising venue. If the use or effectiveness of cookies is limited, we would likely have to switch to other technology that would allow us to gather demographic and behavioral information. While such technology currently exists, it is substantially less effective than cookies. Replacement of cookies could require significant reengineering time and resources, might not be completed in time to avoid negative consequences to our business, financial condition or results of operations, and might not be commercially feasible. In addition, privacy concerns may cause some Web users to be less likely to visit Web sites that contribute data to our databases. This could have a material adverse effect on our financial condition. In addition, we are developing our database to collect data derived from user activity on our networks and from other sources. We collect and compile information in databases for the product offerings of all our businesses. Individuals or entities may claim in the future, that our collection of this information is illegal. Although we believe 36 that we have the right to use and compile the information in these databases, we cannot assure you that our ability to do so will remain lawful, that any trade secret, copyright or other intellectual property protection will be available for our databases, or that statutory protection that is or becomes available for databases will enhance our rights. In addition, others may claim rights to the information in our databases. Further, pursuant to our contracts with Web publishers using our solutions, we are obligated to keep certain information regarding each Web publisher confidential and, therefore, may be restricted from further using that information in our business. WE MAY HAVE TO CHANGE OUR BUSINESS PLANS BASED UPON CHANGES IN INFORMATION COLLECTION PRACTICES. There has been public debate about how fair information collection practices should be formulated for the online and offline collection, distribution and use of information about a consumer. Some of the discussion has focused on the fair information collection practices that should apply when information about an individual that is collected in the offline environment is associated with information that is collected over the Internet about that individual. We are working with industry groups, such as the NAI and the Online Privacy Alliance, to establish such standards with the U.S. government regarding the merger of online and offline consumer information. We cannot assure you that we will be successful in establishing industry standards acceptable to the U.S. government or the various state governments, or that the standards so established will not require material changes to our business plans. We also cannot assure you that our business plans, or any U.S. industry standards that are established, will either be acceptable to any non-U.S. government or conform to foreign legal and business practices. As a consequence of governmental legislation or regulation or enforcement efforts or evolving standards of fair information collection practices, we may be required to make changes to our products or services in ways that could diminish the effectiveness of the product or service or their attractiveness to potential customers. In addition, given the heightened public discussion about consumer online privacy, we cannot assure you that our products and business practices will gain market acceptance, even if they do conform to industry standards. CHANGES IN GOVERNMENT REGULATION COULD DECREASE OUR REVENUES AND INCREASE OUR COSTS. Laws and regulations directly applicable to Internet communications, commerce and advertising are becoming more prevalent, and new laws and regulations are under consideration by the United States Congress and state legislatures. Any legislation enacted or restrictions arising from current or future government investigations or policy could dampen the growth in use of the Internet generally and decrease the acceptance of the Internet as a communications, commercial and advertising medium. State governments or governments of foreign countries might attempt to regulate our transmissions or levy sales or other taxes relating to our activities. The European Union has enacted its own privacy regulations that may result in limits on the collection and use of certain user information by us. The laws governing the Internet, however, remain largely unsettled, even in areas where there has been some legislative action. It may take years to determine whether and how existing laws such as those governing intellectual property, privacy, libel and taxation apply to the Internet and Internet advertising. In addition, the growth and development of Internet commerce may prompt calls for more stringent consumer protection laws, both in the United States and abroad, that may impose additional burdens on companies conducting business over the Internet. Our business, results of operations and financial condition could be materially and adversely affected by the adoption or modification of laws or regulations relating to the Internet. DEPENDENCE ON THE WEB INFRASTRUCTURE. Our success will depend, in large part, upon the maintenance of the Web infrastructure, such as a reliable network backbone with the necessary speed, data capacity and security, and timely development of enabling products such as high speed modems, for providing reliable Web access and services and improved content. We cannot assure you that the Web infrastructure will continue to effectively support the demands placed on it as the Web continues to experience increased numbers of users, frequency of use or increased bandwidth requirements of users. Even if the necessary infrastructure or technologies are developed, we may have to spend considerable amounts to adapt our solutions accordingly. Furthermore, the Web has experienced a variety of outages and other delays due to damage to portions of its 37 infrastructure. Such outages and delays could impact the clients using our solutions and the level of user traffic on Web sites on our networks. RISKS ASSOCIATED WITH TECHNOLOGICAL CHANGE. The Internet and Internet advertising markets are characterized by rapidly changing technologies, evolving industry standards, frequent new product and service introductions, and changing customer demands. Our future success will depend on our ability to adapt to rapidly changing technologies and to enhance existing solutions and develop and introduce a variety of new solutions to address our customers' changing demands. We may experience difficulties that could delay or prevent the successful design, development, introduction or marketing of our solutions. In addition, our new solutions or enhancements must meet the requirements of our current and prospective customers and must achieve significant market acceptance. Material delays in introducing new solutions and enhancements may cause customers to forego purchases of our solutions and purchase those of our competitors. EFFECTS OF ANTI-TAKEOVER PROVISIONS COULD INHIBIT THE ACQUISITION OF OUR COMPANY. Some of the provisions of our certificate of incorporation, our bylaws and Delaware law could, together or separately: - discourage potential acquisition proposals; - delay or prevent a change in control; - impede the ability of our stockholders to change the composition of our board of directors in any one year; and - limit the price that investors might be willing to pay in the future for shares of our common stock. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Interest Rate Risk, Market Risk and Currency Rate Fluctuations. Cash and cash equivalents are investments with original maturities of three months or less. Therefore, changes in the market's interest rates do not affect the value of the investments as recorded by 24/7 Media. Our accounts receivable are subject, in the normal course of business, to collection risks. We regularly assess these risks and have established policies and business practices to protect against the adverse effects of collection risks. Due to the current economic environment, although we believe that we have sufficiently provided for any material losses in this area. There can be no assurance that unanticipated material losses may not result. As a result of our acquisition of Real Media, we continue to transact business in various foreign countries. Accordingly, we are subject to exposure from adverse movements in foreign currency exchange rates. This exposure is primarily related to revenue and operating expenses in the countries in which the currency is the Euro. The effect of foreign exchange rate fluctuations for 2001 and 2000 has not been material. We do not use derivative financial instruments to limit our foreign currency risk exposure. 38 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS None. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS None. ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits. None. (b) Reports on Form 8-K. None. ITEM 7. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. 24/7 Real Media, Inc. Date: November 14, 2001 By: /s/ David J. Moore ------------------- David J. Moore President and Chief Executive Officer By: /s/ Stuart D. Shaw ------------------- Stuart D. Shaw SVP of Finance & Administration 39 -----END PRIVACY-ENHANCED MESSAGE-----