-----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, UZJgTrCdGDJEYudgJBuMjxvGFIyG+qWEivtUlNkQ4MWkrcoXhThi3cEwRsdelfVV TH8ZrxtNrL1PK052av3njg== 0000912057-99-002836.txt : 19991101 0000912057-99-002836.hdr.sgml : 19991101 ACCESSION NUMBER: 0000912057-99-002836 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990817 ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 19991029 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: 8-K/A SEC ACT: SEC FILE NUMBER: 000-29768 FILM NUMBER: 99737699 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 8-K/A 1 8-K/A SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K/A CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report (Date of Earliest Event Reported): August 17, 1999 Commission File Number- 0-29768 24/7 MEDIA, INC. (Exact name of registrant as specified in its charter) Delaware 13-3995672 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1250 Broadway 28th Floor New York, New York 10001 (Address of principal executive offices) Registrant's telephone number, including area code: (212) 231-7100 Item 2. Acquisition of Assets This Form 8-K/A amends the Current Report of 24/7 Media, Inc. on Form 8-K filed on August 17, 1999 to incorporate Item 7 (a), the Financial Statements of Business Acquired. On August 10, 1999, 24/7 Media, Inc. ("24/7 Media" or "we") announced the $52.9 million acquisition of Music Marketing Network Inc. (d/b/a/ ConsumerNet), a privately-held New Jersey Corporation and a provider of email marketing solutions and database services. On August 17, 1999, we acquired all of the issued and outstanding shares of capital stock of ConsumerNet in a merger transaction whereby a subsidiary of 24/7 Media was merged with and into ConsumerNet. 24/7 Media also assumed all of the outstanding stock options of ConsumerNet under our stock incentive plan. Pursuant to the Agreement and Plan of Merger dated August 10, 1999 among 24/7 Media, Cloop Acquisition Corp. and ConsumerNet, 24/7 Media exchanged approximately 1,700,000 shares of its common stock, par value $.01 per share (the "24/7 Common Stock"), for all of the outstanding shares of capital stock of ConsumerNet. In connection with the merger, 24/7 Media also incurred transaction costs of approximately $320,000 and retired debt of approximately $2.6 million. The merger will be accounted for as a purchase business combination. The consideration payable by 24/7 Media was determined as a result of negotiation by and between 24/7 Media and ConsumerNet. The number of shares of 24/7 Media Common Stock issued to the holders of ConsumerNet common stock was determined based on an exchange rate of 0.312174547 shares of 24/7 Media Common Stock for each share of ConsumerNet common stock. The number of shares of 24/7 Media Common Stock issued to the holders of ConsumerNet preferred stock was determined based on an exchange rate of 113.698333 shares of 24/7 Media Common Stock for each share of ConsumerNet preferred stock through the issuance of common stock and cash of $1.6 million. Funds for such payment will be provided from 24/7 Media's cash on hand. The net assets of ConsumerNet acquired by 24/7 Media as a result of the merger transaction consisted of equipment, intellectual property, and other physical property. These assets are used in connection with the operation of ConsumerNet's email based direct marketing service. 24/7 Media intends to operate the business and use the assets as previously operated and used by ConsumerNet, provided that changing business conditions or strategic plans may lead to changes in ConsumerNet's operations in the future. The Agreement and Plan of Merger dated August 10, 1999 among 24/7 Media, Cloop Acquisition Corp. and ConsumerNet was filed with the Current Report on Form 8-K filed on August 17, 1999 as Exhibit 5.1 and is incorporated herein by reference. The press release dated August 10, 1999 was filed with the Current Report on Form 8-K filed on August 17, 1999 as Exhibit 99.1 and is incorporated herein by reference. Item 7. Financial Statements, Pro Forma Financial Information and Exhibits (a) Reference is made to the audited financial statements of ConsumerNet required by this Form 8-K/A as listed under the heading Financial Statements of Music Marketing Network Inc. (b) Reference is made to the pro forma financial statements of 24/7 Media, Inc. required by this Form 8-K/A as listed under the heading Unaudited Pro Forma Combined Financial Statements. (c) Exhibits. 5.1 Agreement and Plan of Merger, dated August 10, 1999, between the Company, Cloop Acquisition Corporation and Music Marketing Network Inc. (filed as Exhibit 5.1 to 24/7 Media, Inc.'s current report on Form 8-K for an event dated August 17, 1999 and incorporated herein by reference) 23.1 Consent of Arthur Andersen LLP 99.1 Press Release, dated August 10, 1999, regarding ConsumerNet (filed as Exhibit 99.1 to 24/7 Media, Inc.'s current report on Form 8-K for an event dated August 17, 1999 and incorporated herein by reference) SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. 24/7 MEDIA, INC. Date: October 28, 1999 By: /s/ Mark E. Moran ----------------------------------- Name: Mark E. Moran Title: Senior Vice President and General Counsel EXHIBIT INDEX Exhibit Number Description -------------- ----------- 5.1 Agreement and Plan of Merger, dated August 10, 1999, between 24/7 Media, Inc., Cloop Acquisition Corporation and Music Marketing Network Inc. (incorporated herein by reference to the Current Report on Form 8-K for an event dated August 17, 1999 and incorporated herein by reference) 23.1 Consent of Arthur Andersen LLP 99.1 Press Release, dated August 10, 1999, regarding ConsumerNet. (incorporated herein by reference to the Current Report on Form 8-K for an event dated August 17, 1999 and incorporated herein by reference) UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION The Unaudited Pro Forma Combining Balance Sheet as of June 30, 1999 gives effect to the acquisition of ConsumerNet as if the acquisition had occurred on that date. The unaudited Pro Forma Combining Statements of Operations for the six months ended June 30, 1999 and the year ended December 31, 1998 gives effect to the acquisition of ConsumerNet as if it had occurred at the beginning of the periods presented. Under the terms of the transaction, the holders of ConsumerNet common stock received shares of 24/7 Media common stock on the basis of an exchange ratio of 0.312174547 shares of 24/7 Media Common Stock for each share of ConsumerNet common stock. The number of shares of 24/7 Media Common Stock issued to the holders of ConsumerNet preferred stock was determined on the basis of an exchange ratio of 113.698333 shares of 24/7 Common Stock for each share of ConsumerNet preferred stock. The conversion ratio was determined through arm's length negotiations. The consideration paid by 24/7 Media in connection with the acquisition of approximately $51.8 million consisted of the following; o The issuance of approximately 1.7 million shares of 24/7 Media Common Stock valued at approximately $45.0 million as consideration for all ConsumerNet shares outstanding; o the repayment of ConsumerNet's debt of approximately $2.5 milllion as well as accrued interest of $109,000 through the issuance of approximately 33,000 shares of 24/7 Media Common Stock and cash of approximately $1.6 million; o the payment of accrued preferred stock dividends amounting to $360,000 to ConsumerNet's preferred stockholders as of June 30, 1999; o the payment of employee bonuses triggered by the transaction, through the issuance of approximately 39,000 shares of 24/7 Media common stock valued at approximately $1.0 million and cash of approximately $700,000; o the value of the ConsumerNet options exchanged for 24/7 options of approximately $1.9 million; and o estimated transaction costs of $320,000. We will record the merger as a purchase transaction. For accounting purposes, 24/7 Media, will be deemed to be the surviving corporation in the merger. The pro forma adjustments are based upon currently available information and upon assumptions that management of each of 24/7 Media and ConsumerNet believes are reasonable. We will account for the merger based upon the estimated fair market value of the net tangible and intangible assets (liabilities) acquired at the date of acquisition. The adjustments included in the Unaudited Pro Forma Combining Financial Statements represent the preliminary determination of these adjustments based upon available information. We cannot assure you that the actual adjustments will not differ significantly from the pro forma adjustments reflected in the pro forma financial information. We have allocated a portion of the purchase price to the net book value of the acquired assets and liabilities of ConsumerNet as of the date of acquisition. The excess of the purchase price over the net book value of the acquired assets and liabilities of ConsumerNet has preliminarily been allocated to goodwill and other intangibles. Goodwill and other intangibles will be amortized over a period of 4 years, the estimated expected period of benefit. The allocation is preliminary and may be subject to change upon further evaluation of fair value of the acquired assets and liabilities of ConsumerNet at the date of acquisition as well as potential identification of certain intangible assets. The Unaudited Pro Forma Combining Financial Statements are intended for informational purposes only and are not necessarily indicative of either future results of operations or results that might have been achieved if the foregoing transactions had been consummated as of the indicated dates. The Unaudited Pro Forma Combining Financial Statements should be read in conjunction with and are qualified by the historical financial statements and supplemental financial statements of 24/7 Media and historical financial statements of ConsumerNet, together with the related notes thereto. We have included the historical financial statements of ConsumerNet elsewhere in this document. 24/7 MEDIA, INC. UNAUDITED PRO FORMA COMBINING BALANCE SHEETS AS OF JUNE 30, 1999
PROFORMA 24/7 MEDIA CONSUMERNET MERGER PROFORMA HISTORICAL HISTORICAL ADJUSTMENTS COMBINED ---------- ----------- ----------- -------- ASSETS Current Assets: Cash and cash equivalents............ $ 97,116,000 $ 58,000 $(1,579,000) (1) $ 94,430,000 (360,000) (1) (109,000) (1) (696,000) (1) Accounts receivable, net............. 18,061,000 636,000 18,697,000 Prepaid expenses and other current assets............................ 1,979,000 45,000 2,024,000 ------------- ------------- ----------- ------------- Total current assets........ 117,156,000 739,000 (2,744,000) 115,151,000 ------------- ------------- ----------- ------------- Property and equipment, net........... 9,595,000 122,000 9,717,000 Goodwill, net......................... 8,392,000 -- 52,868,000 (1) 61,260,000 Investments........................... 42,971,000 -- 42,971,000 Deferred compensation to third parties............................. 3,244,000 -- 3,244,000 Other Assets.......................... 467,000 32,000 499,000 ------------- ------------- ----------- ------------- Total assets................ $ 181,825,000 $ 893,000 $50,124,000 $ 232,842,000 ------------- ------------- ----------- ------------- ------------- ------------- ----------- ------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable..................... $ 12,687,000 $ 892,000 $(109,000) (1) $ 13,470,000 Accrued liabilities.................. 2,897,000 1,326,000 (360,000) (1) 4,183,000 320,000 (1) Loans payable........................ -- 170,000 (170,000) (1) -- Short term credit line............... -- 300,000 (300,000) (1) -- Current installments - capital leases............................. 22,000 -- 22,000 Deferred revenue..................... 758,000 90,000 848,000 ------------- ------------- ----------- ------------- Total current liabilities.... 16,364,000 2,778,000 (619,000) 18,523,000 ------------- ------------- ----------- ------------- Obligations -capital leases, excluding current.................... 49,000 -- 49,000 Long-term debt......................... 2,000,000 (2,000,000)(1) -- Stockholders' equity: Preferred Stock..................... -- -- -- Common Stock........................ 202,000 42,000 17,000 (1) 219,000 (42,000)(1) Additional paid-in capital........... 220,620,000 3,456,000 46,926,000 (1) 269,461,000 (3,456,000)(1) 1,915,000 (1) Deferred stock compensation.......... (288,000) -- (288,000) Accumulated comprehensive income (loss)...................... 20,000 20,000 Accumulated deficit.................. (55,142,000) $ (7,383,000) 7,383,000 (1) (55,142,000) ------------- ------------- ----------- ------------- Total stockholders' equity... 165,412,000 (3,885,000) 52,743,000 214,270,000 ------------- ------------- ----------- ------------- Commitments and contingencies Total liabilities and stockholders' equity....... $ 181,825,000 $ 893,000 $50,124,000 $ 232,842,000 ------------- ------------- ------------- ------------- ------------- ------------- ------------- -------------
See accompanying notes to unaudited proforma financial statements. 24/7 MEDIA, INC. UNAUDITED PRO FORMA COMBINING STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1999 ------------------------------------------------------------------ PROFORMA 24/7 MEDIA CONSUMERNET MERGER PROFORMA HISTORICAL HISTORICAL ADJUSTMENTS COMBINED ---------- ----------- ----------- ----------- Total revenues......................... $28,605,000 $ 1,673,000 $ $30,278,000 Cost of revenues....................... 21,858,000 1,062,000 22,920,000 ------------ ------------ ----------- ----------- Gross profit.................... 6,747,000 611,000 7,358,000 ------------ ------------ ----------- ----------- Operating expenses: Sales and marketing................ 7,948,000 185,000 8,133,000 General and administrative......... 8,732,000 1,212,000 9,944,000 Product development................ 1,242,000 - 1,242,000 Amortization of goodwill........... 4,380,000 - 6,609,000 (3) 10,989,000 ------------ ------------ ----------- ----------- Total operating expenses........ 22,302,000 1,397,000 6,609,000 30,308,000 ------------ ------------ ----------- ----------- Loss from operations............ (15,555,000) (786,000) (6,609,000) (22,950,000) Interest income........................ 1,203,000 - 1,203,000 Interest expense....................... (55,000) (135,000) 135,000 (2) (55,000) ------------ ------------ ----------- ------------ Net Loss........................ (14,407,000) (921,000) (6,474,000) (21,802,000) Cummulative dividends on preferred stock................................ - (112,000) 112,000 (5) - ------------ ------------ ----------- ------------ Net loss attributable to common stockholders......................... $(14,407,000) $ (1,033,000) $(6,362,000) (21,802,000) ------------ ------------ ----------- ------------ ------------ ------------ ----------- ------------ Net loss per share attributable to common stockholders- basic and diluted.............................. $ (0.80) $ - $ (1.10) ------------ ----------- ------------ ------------ ----------- ------------ Weighted average shares outstanding.......................... 18,053,643 1,738,000 (4) 19,791,643 ------------ ----------- ------------ ------------ ----------- ------------
See accompanying notes to unaudited proforma financial statements. 24/7 MEDIA, INC. UNAUDITED PRO FORMA COMBINING STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998 ----------------------------------------------------------------------- PROFORMA 24/7 MEDIA CONSUMERNET MERGER PROFORMA HISTORICAL HISTORICAL ADJUSTMENTS COMBINED ----------- ----------- ----------- -------- Total revenues......................... $ 20,866,000 $ 2,430,000 $ $ 23,296,000 Cost of revenues....................... 16,149,000 2,043,000 18,192,000 ----------- ----------- ------------- ------------ Gross profit.................. 4,717,000 387,000 5,104,000 ----------- ----------- ------------- ------------ Operating expenses: Sales and marketing................ 8,235,000 483,000 8,718,000 General and administrative......... 9,396,000 2,133,000 11,529,000 Product development................ 2,097,000 - 2,097,000 Write-off of property and equipment........................ 5,000,000 5,000,000 Amortization of goodwill........... 5,722,000 - 13,217,000 (3) 18,939,000 ----------- ----------- ---------- ------------- Total operating expenses...... 30,450,000 2,616,000 13,217,000 46,283,000 ----------- ----------- ------------- ------------- Loss from operations.......... (25,733,000) (2,229,000) (13,217,000) (41,179,000) Interest income........................ 886,000 - 886,000 Interest expense....................... (310,000) (147,000) 147,000 (2) (310,000) ----------- ----------- ------------- ------------- Net loss........... (25,157,000) (2,376,000) (13,070,000) (40,603,000) Cumulative dividends on preferred stock............................... (276,000) (300,000) 300,000 (5) (276,000) ----------- ----------- ------------- ------------- Net loss attributable to common stockholders........................ $(25,433,000) $(2,676,000) $(12,770,000) $(40,879,000) ----------- ----------- ------------- ------------- ----------- ----------- ------------- ------------- Net loss per share attributable to common stockholders - basic and diluted............................. $ (2.48) $ - $ (3.41) ----------- ------------- ------------- ----------- ------------- ------------- Weighted average shares outstanding.... 10,248,677 1,738,000 (4) 11,986,677 ----------- ------------- ------------- ----------- ------------- -------------
See accompanying notes to unaudited proforma financial statements. 24/7 Media, Inc. NOTES TO UNAUDITED PRO FORMA COMBINING FINANCIAL STATEMENTS (1) Reflects the acquisition by 24/7 Media of ConsumerNet at June 30, 1999 as follows: (i) the issuance of approximately 1.7 million common shares of 24/7 Media using an exchange ratio of .312174547 shares of 24/7 Media for each common share of ConsumerNet and an exchange ratio of 113.698333 shares of 24/7 Media for each preferred share of ConsumerNet; (ii) the repayment of ConsumerNet's debt of approximately $2.5 million as well as accrued interest of $109,000 through the issuance of approximately 33,000 shares of 24/7 Media common stock and cash of approximately $1.6 million; (iii) the payment of accrued preferred stock dividends of $360,000 to ConsumerNet preferred stockholders as of June 30, 1999 in cash; (iv) the payment of employee bonuses triggered by the transaction, through the issuance of approximately 39,000 shares of 24/7 Media common stock and cash of approximately $700,000; (v) the value of options exchanged for outstanding ConsumerNet options. Such value has been determined using the Black-Scholes method assuming 150% volatility, an average risk free interest rate of 5.8%, and an average exercise period of 3 years; (vi) estimated transaction costs of $320,000; and (vii) the elimination of historical net liabilities acquired comprised of ConsumerNet historical stockholders' equity, historical debt and related interest repaid in the merger, and accrued dividends paid. Issuance of Common Stock: (i) Shares issued to acquire all ConsumerNet shares outstanding......... 1,666,000 (ii) Shares issued for repayment of debt................................ 33,000 (iv) Shares issued for bonus liability................................... 39,000 ------------ Number of shares issued to acquire ConsumerNet............................ 1,738,000 Per share price........................................................... $ 27.01 ------------ Value of shares issued.................................................... $46,943,000 (ii) Repayment of debt and interest............................................ 1,579,000 (iii) Repayment of accrued dividends............................................ 360,000 (iv) Payment of employee bonus liability....................................... 696,000 (v) Value of options exchanged................................................ 1,915,000 (vi) Estimated transaction costs............................................... 320,000 ------------ Purchase price............................................................ 51,813,000 (vii) Add: Net liabilities assumed.............................................. (3,885,000) ConsumerNet debt and interest repaid per above............................ 2,470,000 ConsumerNet accrued dividends per above................................... 360,000 ------------- (1,055,000) Excess of cost over historical net assets acquired........................ $52,868,000 ------------ ------------
24/7 Media has made a preliminary allocation of excess cost over estimated net assets acquired to goodwill and other intangibles as ConsumerNet's assets and liabilities are estimated to approximate fair value. (2) Reflects the elimination of interest expense attributable to ConsumerNet's debt repaid in the acquisition. (3) Reflects amortization expense of the goodwill and other intangibles by use of the straight-line method over the estimated expected period of benefit of 4 years. The allocation is preliminary and may be subject to change upon further evaluation of fair value of the acquired assets and liabilities of ConsumerNet at the date of acquisition as well as potential identification of certain intangible assets. (4) The average common shares outstanding used in calculating pro forma basic net loss per common share is calculated assuming that the estimated number of shares of 24/7 Media's common stock to be issued in the merger were outstanding from the beginning of the periods presented. Options to purchase shares of common stock were not included in computing pro forma diluted earnings per common share because their inclusion would be antidilutive. (5) The elimination of ConsumerNet's accrued dividends on preferred shares. MUSIC MARKETING NETWORK, INC. (D/B/A CONSUMERNET) FINANCIAL STATEMENTS AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998 TOGETHER WITH REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders of Music Marketing Network Inc.: We have reviewed the accompanying balance sheets of Music Marketing Network Inc. (the Company) as of June 30, 1999 and 1998, and the related statements of operations, shareholders' deficit and cash flows for the six months then ended. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the financial statements referred to above for them to be in conformity with generally accepted accounting principles. Roseland, New Jersey September 9, 1999 MUSIC MARKETING NETWORK (D/B/A CONSUMERNET) BALANCE SHEETS AS OF JUNE 30, 1999 AND 1998 (UNAUDITED)
ASSETS 1999 1998 ----------- ----------- CURRENT ASSETS: Cash and cash equivalents $ 58,115 $ 170,009 Accounts receivable, less allowance for doubtful accounts of $222,819 and $31,526, as of June 30, 1999 and 1998, respectively 636,430 693,320 Prepaid and other current assets 45,104 52,075 ----------- ----------- Total current assets 739,649 915,404 PROPERTY AND EQUIPMENT, net 121,778 177,058 OTHER ASSETS 31,643 32,266 ----------- ----------- Total assets $ 893,070 $ 1,124,728 =========== =========== LIABILITIES AND SHAREHOLDERS' DEFICIT LIABILITIES: Current liabilities- Convertible note payable $ -- $ 1,770,000 Loan payable 20,000 -- Short-term borrowings 300,000 -- Note payable 150,000 150,000 Accounts payable 892,008 771,647 Accrued liabilities 1,326,301 642,269 Deferred revenue 90,113 -- ----------- ----------- Total current liabilities 2,778,422 3,333,916 LONG-TERM DEBT 2,000,000 -- SHAREHOLDERS' DEFICIT: Common stock, $.01 par value - 10,000,000 shares authorized, 4,207,203 shares issued and outstanding at June 30, 1999; 5,000,000 shares authorized, 2,609,126 shares issued and outstanding at June 30, 1998 42,072 26,091 Convertible preferred stock, Series A, $0.01 par value, 2,500 shares authorized, 0 issued and outstanding at June 30, 1999; 2,500 shares authorized, issued and outstanding at June 30, 1998 -- 25 Convertible preferred stock, Series B, $0.01 par value, 500 shares authorized, 0 issued and outstanding at June 30, 1999; 500 shares authorized, issued and outstanding at June 30, 1998 -- 5 Convertible preferred stock, Series C, $0.01 par value, 3,000 shares authorized, issued and outstanding at June 30, 1999; 2,000 shares authorized, 0 issued and outstanding at June 30, 1998 30 -- Additional paid-in capital 3,455,256 3,226,405 Accumulated deficit (7,382,710) (5,461,714) ----------- ----------- Total shareholders' deficit (3,885,352) (2,209,188) ----------- ----------- Total liabilities and shareholders' deficit $ 893,070 $ 1,124,728 =========== ===========
The accompanying notes are an integral part of these balance sheets. MUSIC MARKETING NETWORK (D/B/A CONSUMERNET) STATEMENTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
1999 1998 ----------- ----------- REVENUES $ 1,673,166 $ 1,279,599 ----------- ----------- COST OF REVENUES 1,062,339 1,091,845 ----------- ----------- Gross profit 610,827 187,754 OPERATING EXPENSES: Sales and marketing 185,492 282,525 General and administrative 1,016,758 1,220,955 Noncash compensation expense 195,000 -- ----------- ----------- Total operating expenses 1,397,250 1,503,480 ----------- ----------- Loss from operations (786,423) (1,315,726) INTEREST EXPENSE 135,410 58,845 ----------- ----------- Loss before income from discontinued operations and provision for income taxes (921,833) (1,374,571) INCOME FROM DISCONTINUED OPERATIONS 5,234 223,813 ----------- ----------- Loss before provision for income taxes (916,599) (1,150,758) PROVISION FOR INCOME TAXES 2,062 1,045 ----------- ----------- Net loss $ (918,661) $(1,151,803) =========== ===========
The accompanying notes are an integral part of these statements. MUSIC MARKETING NETWORK (D/B/A CONSUMERNET) STATEMENTS OF SHAREHOLDERS' DEFICIT FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
Convertible Preferred Stock Additional Common -------------------------------------- Paid-in Accumulated Stock Series A Series B Series C Capital Deficit ------- -------- -------- ------- ----------- ----------- BALANCE AS OF JANUARY 1, 1998 $26,091 $ 25 $ 5 $ -- $ 3,226,405 $(4,161,144) Dividends on Series A and Series B preferred stock -- -- -- -- -- (148,767) Net loss -- -- -- -- -- (1,151,803) ------- -------- -------- ------- ----------- ----------- BALANCE AS OF JUNE 30, 1998 $26,091 $ 25 $ 5 $ -- $ 3,226,405 $(5,461,714) ======= ======== ======== ======= =========== =========== BALANCE AS OF JANUARY 1, 1999 $26,091 $ 25 $ 5 $ -- $ 3,226,405 $(6,675,007) Conversion of Series A preferred stock into Series C -- (25) -- 25 -- -- Conversion of Series B preferred stock into Series C -- -- (5) 5 -- -- Conversion of loan payable into common stock 15,981 -- -- -- 114,019 -- Conversion of shareholder contribution into debt -- -- -- -- (80,168) -- Dividends on Series A and Series B preferred stock -- -- -- -- -- (111,782) Cancellation of dividends in connection with Series C issuance (Note 9) -- -- -- -- -- 322,740 Noncash compensation expense -- -- -- -- 195,000 -- Net loss -- -- -- -- -- (918,661) ------- -------- -------- ------- ----------- ----------- BALANCE AS OF JUNE 30, 1999 $42,072 $ -- $ -- $ 30 $ 3,455,256 $(7,382,710) ======= ======== ======== ======= =========== ===========
The accompanying notes are an integral part of these statements. MUSIC MARKETING NETWORK (D/B/A CONSUMERNET) STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
1999 1998 --------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(918,661) $(1,151,803) Adjustments to reconcile net loss to net cash used in operating activities- Depreciation and amortization 54,664 40,248 Noncash compensation expense 195,000 -- Changes in operating assets and liabilities- Increase in accounts receivable (196,620) (274,166) Decrease (increase) in prepaids and other current assets 14,506 (22,883) Decrease in net assets from discontinued operations -- 64,188 Decrease in other assets 1,601 17,684 Increase in accounts payable 15,918 401,487 Increase (decrease) in accrued liabilities 528,087 (623,319) Increase (decrease) in deferred revenue 55,766 (30,197) --------- ----------- Net cash used in operating activities (249,739) (1,578,761) --------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES -- Purchases of property and equipment (27,993) (28,515) --------- ----------- Net cash used in investing activities (27,993) (28,515) --------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from convertible note payable -- 1,620,000 Proceeds from note payable -- 150,000 Proceeds from short term borrowings 300,000 -- --------- ----------- Net cash provided by financing activities 300,000 1,770,000 --------- ----------- Net increase in cash and cash equivalents 22,268 162,724 CASH AND CASH EQUIVALENTS, beginning of period 35,847 7,285 --------- ----------- CASH AND CASH EQUIVALENTS, end of period $ 58,115 $ 170,009 ========= =========== -2- 1999 1998 -------- -------- SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid during the period for- Interest $ 18,243 $ 1,928 Taxes -- -- ======== ======== Noncash financing activities- Conversion of loans payable to equity $130,000 $ -- ======== ======== Dividends declared but not paid $111,782 $148,767 ======== ======== Dividends cancelled in connection with recapitalization (see Note 9) $322,740 $ -- ======== ========
The accompanying notes are an integral part of these statements. MUSIC MARKETING NETWORK (D/B/A CONSUMERNET) NOTES TO FINANCIAL STATEMENTS JUNE 30, 1999 AND 1998 (UNAUDITED) (1) NATURE OF OPERATIONS: Music Marketing Network, Inc. (d/b/a ConsumerNet) (the "Company") was incorporated on February 3, 1992 as a C corporation and has no subsidiaries. The Company originally operated solely in the music industry. The Company has the following two principal divisions: marketing services, which includes consumer merchandising, and consumer information management. As discussed in Note 10, a decision was made in January 1998 to discontinue consumer merchandising. The Company provides a wide variety of integrated services to music artists, record labels, distributors, retailers, publishers and other entertainment companies. During 1998, the Company entered into e-mail marketing and is now a leading provider of e-mail marketing solutions. The Company acquires, manages and markets self-reported consumer preference information from both online and offline data sources, creating one of the industry's largest "opt-in" cooperative database of demographic and psychographic consumer preference information. The Company's database consists of consumers who have provided self-reported information in more than 20 major categories. Merging its technological and database management expertise, the Company generates in-depth consumer profiles that reveal behavioral purchasing patterns. These findings enable the Company's clients to target promotions to consumers. In June 1999, the Company entered into a recapitalization agreement with Metromail Corp. ("Metromail") whereby the outstanding Series A and Series B Convertible Preferred Stock were converted into 3,000 shares of Series C Convertible Preferred Stock. The terms of the Series C are more fully described in Note 8. In connection with the recapitalization, the accumulated and unpaid dividends on the Series A and Series B were reduced by 50%. (2) SIGNIFICANT ACCOUNTING POLICIES: FINANCIAL INSTRUMENTS- The fair value of financial instruments, consisting of investments in cash and cash equivalents, receivables, obligations under accounts payable and debt instruments, approximates fair value at June 30, 1999 and 1998. -2- USE OF ESTIMATES- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. REVENUE RECOGNITION- Revenue is recognized as earned, which coincides with the completion of projects. CASH AND CASH EQUIVALENTS- The Company considers all highly liquid investments with a maturity of three months or less to be cash equivalents. PROPERTY AND EQUIPMENT- Property and equipment are recorded at cost and depreciated over the estimated useful lives of the assets using principally the straight-line method over three to seven years. Property and equipment at June 30, 1999 and 1998 are as follows- 1999 1998 --------- --------- Machinery and equipment $ 337,594 $ 310,443 Furniture and fixtures 23,789 9,412 Accumulated depreciation (239,605) (142,797) --------- --------- $ 121,778 $ 177,058 ========= ========= Depreciation expense was $54,664 and $40,248 for the six months ended June 30, 1999 and 1998, respectively. RECENTLY ISSUED ACCOUNTING STANDARDS- In June 1997, SFAS No. 130, "Reporting Comprehensive Income" and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" were issued and are effective for periods beginning after December 15, 1997. SFAS No. 130 establishes standards for reporting comprehensive income and its components. SFAS No. 131 establishes standards for reporting financial and descriptive information regarding an enterprise's operating segments. These standards increase financial reporting disclosures and had no impact on the Company's financial position or results of operations. In April 1998, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued Statement of Position 98-5 ("SOP 98-5") "Reporting on the Costs of Start-Up Activities." SOP 98-5 is effective for fiscal years beginning after December 15, 1998. The adoption of SOP 98-5 did not have a material impact on the financial position or results of operations for the period ending June 30, 1999. -3- (3) CONVERTIBLE NOTE PAYABLE: On December 29, 1997, Metromail agreed to lend to the Company up to $1,500,000 under a convertible note payable (the "Note"). Advances under the note were payable on demand and bore interest at 10%. The Note was convertible at the holder's option into shares of common stock based on the then conversion price, as defined, on the date of conversion. As of June 30, 1998, $1,500,000 was outstanding under the note. Also as of June 30, 1998, Metromail advanced an additional $270,000 to the Company resulting in total borrowings from Metromail of $1,770,000. In connection with the borrowings under the Note, the Company issued 1,058,869 warrants to purchase common stock of the Company at an exercise price of $1.00 per share, which was in excess of fair market value at the time of issuance. At the time of the borrowings, the Company attributed no value to these warrants. In 1999, all of the outstanding warrants were cancelled in connection with the Company's recapitalization. In February 1999, the Note plus accrued interest and approximately $80,000 of shareholder contributions were converted into a $2,000,000 promissory note due at various dates through 2005, bearing interest at 10% and collateralized by all of the assets of the Company. The promissory note will be subordinated to any amount owing by the Company up to $550,000 with a lender for the purpose of obtaining working capital. The promissory note was paid in cash and stock in August 1999. (4) LOANS PAYABLE: During 1998, one stockholder and two investors advanced $150,000 to the Company under a loan payable. The loans matured on March 15, 1999. The loans bore interest at a stated amount of $15,000 in total. During the six months ended June 30, 1999, one of the stockholders and one investor converted $100,000 and $30,000 of their loans payable into 1,500,000 and 98,077 shares of common stock, respectively. The conversion of the $100,000 loan was deemed to have been done at less than fair market value of the Company's common stock at the conversion date. As a result, the Company recognized $195,000 of noncash compensation expense in connection with this conversion during the six months ended June 30, 1999. (5) NOTE PAYABLE: On January 30, 1998, the Company entered into a $150,000 demand note with Atlas Communications, Ltd. The demand note bears interest at a variable rate equal to the prime rate plus 2% (7.75% at June 30, 1999) per annum. The demand note was to be utilized for potential joint ventures with Atlas. -4- (6) SHORT-TERM BORROWINGS: During 1999, the Company entered into a short-term borrowing arrangement with a lender which permitted borrowings up to $500,000 for working capital purposes based on certain assets of the Company. Borrowings under this arrangement are senior to all other outstanding borrowings of the Company and bear interest at 17%. The arrangement expires in February 2000. In connection with this arrangement, the Company and the lender entered into an enhancement option agreement. This agreement provides for a cash enhancement fee of not less than $24,000 and not more than $75,000. The lender may choose to convert the cash fee into a stock option that will be exercisable at $1.00 per share. No value has been ascribed to this option. The short-term borrowings were paid in full subsequent to the sale of the Company (see Note 11) and the arrangement was terminated. (7) INCOME TAXES: The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," which utilizes the asset and liability approach to measure income tax expense. The asset and liability approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial statement carrying amounts and the tax basis of certain assets and liabilities. The components of the Company's net deferred income tax assets at June 30, 1999 and 1998 are primarily net operating loss carryforwards, allowance for doubtful accounts and depreciation. The net operating loss carryforwards at December 31, 1998 amounted to approximately $5,300,000 and expire at various dates through the year 2018. Based upon the Company's historical taxable income record, management does not believe that it is more likely than not that the Company will realize any benefit of the net deferred tax assets at June 30, 1999 and 1998. Accordingly, a full valuation allowance has been recorded against the net deferred tax asset at June 30, 1999 and 1998. (8) OPERATING LEASES: The Company leases its office and warehouse facilities and certain equipment under noncancelable lease agreements. The lease on the Company's main office facilities expires in 2003; all other leases expire through 2001. The typical lease period is one to five years and most leases contain renewal options. Rent expense for operating leases was $77,074 and $130,339 for the six months ended June 30, 1999 and 1998, respectively. Commitments for all noncancelable operating leases at June 30, 1999 are as follows- 2000 $205,254 2001 177,464 2002 176,775 2003 45,075 -------- Total minimum lease commitments $604,568 ======== -5- (9) SHAREHOLDERS' DEFICIT: On January 2, 1997, the Initial Closing under the Purchase Agreement for the issuance of Series A Convertible Preferred Stock (the "Series A") was executed via the conversion of the Company's $700,000 bridge note payable, net of $87,200 of deferred financing costs, to Metromail into Series A and receipt of $1,800,000 in cash. In October 1997, Metromail purchased 500 shares of Series B Convertible Preferred Stock (the "Series B") for $500,000 cash. In conjunction with the Initial Closing, the Company also amended its articles of incorporation to increase the number of authorized common shares from 100 to 5,000,000. The Series A and Series B were convertible into common stock at a conversion rate of $3.8351 and $2.2953 per share, respectively. The Series A and Series B were convertible at any time at the option of the holder. The Series A and Series B accumulated dividends at a rate of 10% per share. During the six months ended June 30, 1999 and the six months ended June 30, 1998, the Company accumulated $111,782 and $148,767 of preferred dividends related to the Series A and Series B. As discussed in Note 1, the holders of the Series A and Series B had 50% of the accumulated dividends cancelled as part of their conversion of Series A and Series B preferred stock into Series C Preferred Stock in June 1999. In June 1999, the Company amended its Restated Certificate of Incorporation to increase its authorized shares of common stock $0.01 par value from 5,000,000 to 10,000,000. In addition, the Company authorized 3,000 shares of $0.01 par value Series C Preferred Stock (the "Series C"). The Series C accrue dividends cumulatively at 10% per year. The Company shall redeem, at the request of the holder on or after March 31, 2004, 50% of the total number of shares of Series C and on or after March 31, 2005, 100% of the total number of shares at a rate of $500 multiplied by the number of Series C shares and dividing it by the conversion price of $1.4351512. The conversion price is adjustable based upon certain events described under the terms of the Series C. The liquidation value of the Series C is $500 per share. In connection with the sale of the Company in August 1999, all of these shares were converted into common stock of 24/7 Media, Inc. (see Note 11). Additionally, the Company entered into a Data Rights Agreement with Metromail on January 2, 1997, the terms of which included certain database technical support and consulting services by Metromail to the Company. During 1997, Metromail contributed approximately $151,000 of certain hardware pursuant to the Data Rights Agreement which was reflected as a capital contribution. The Data Rights Agreement was terminated in February 1999. STOCK OPTIONS- During 1997, the Company adopted the 1997 Stock Option Plan (the "Plan"). Under the Plan, 289,903 shares of common stock of the Company have been reserved for incentive stock options and nonqualified stock options. Awards may be granted to such directors, employees and consultants of the Company as the Compensation Committee of the Board of Directors shall in its discretion select. Options granted under the Plan have a ten year term. In general, options vest 25% on the date of grant and 25% on each anniversary date thereafter. -6- The following is a summary of the Plan's stock option activity during the six months ending June 30, 1999 and 1998-
Weighted Average Exercise Shares Price --------- ------------- Outstanding as of January 1, 1998 96,678 $ 3.88 Granted 20,000 2.00 Exercised -- -- Cancelled -- -- --------- ------------- Outstanding as of June 30, 1998 116,678 $ 3.56 ========= ============= Outstanding as of January 1, 1999 207,834 $ 2.47 Granted 130,750 0.98 Exercised -- -- Cancelled 43,882 3.19 --------- ------------- Outstanding as of June 30, 1999 294,702 $ 1.70 ========= ============= Options Exercisable as of June 30, 1999 182,414 $ 1.34 ========= =============
As discussed in Note 2, the Company has adopted the disclosure provisions of SFAS No. 123 and continues to account for its stock options in accordance with APB Opinion No. 25. Had compensation for the Plan been determined consistent with the provisions of SFAS No. 123, the effect on the Company's net loss during the six months ended June 30, 1999 and 1998 would have been the following-
1999 1998 --------- ------------- Net loss, as reported $(918,661) $ (1,151,803) ========= ============= Net loss, pro forma $(942,155) $ (1,176,461) ========= =============
The weighted average fair value on the date of grant was $0.54 and $0.48 for options granted during 1999 and 1998, respectively. The fair value of each option grant has been estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions for both 1999 and 1998- Expected option lives 5 years Risk-free interest rates 5.5% Expected volatility 0% Dividend yield 0% -7- (10) BUSINESS RESTRUCTURING: In January 1998, the Company made a decision to discontinue the consumer merchandising division. The net income of this line of business was $5,234 and $223,813 for the six months ended June 30, 1999 and 1998, respectively. Substantially all of the assets disposed of were accounts receivable and inventory. In addition, the Company had certain accounts payable and accrued expenses related to this operation. The entire net amount was realized during the year ended December 31, 1998. (11) SALE OF BUSINESS: On August 17, 1999, 24/7 Media, Inc. acquired all of the outstanding capital stock of the Company for $52 million of 24/7 Media, Inc. stock. The number of shares issued was based on an exchange rate of 0.312174547 per common share and 113.698333 per preferred share of the Company. As a result of the acquisition, the Company will be merged with 24/7 Mail, an independent subsidiary of 24/7 Media, Inc. MUSIC MARKETING NETWORK, INC. (D/B/A CONSUMERNET) FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 TOGETHER WITH REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders of Music Marketing Network, Inc.: We have audited the accompanying balance sheets of Music Marketing Network, Inc. (the Company) as of December 31, 1998 and 1997, and the related statements of operations, shareholders' deficit and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 1998 and 1997, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. Roseland, New Jersey September 9, 1999 MUSIC MARKETING NETWORK, INC. (D/B/A CONSUMERNET) BALANCE SHEETS AS OF DECEMBER 31, 1998 AND 1997
ASSETS 1998 1997 ------ ----------- ----------- CURRENT ASSETS: Cash and cash equivalents $ 35,847 $ 7,285 Accounts receivable, less allowance for doubtful accounts of $112,971 and $30,662, as of December 31, 1998 and 1997, respectively 439,810 419,154 Prepaid and other current assets 59,610 29,192 Net assets from discontinued operations -- 64,188 ----------- ----------- Total current assets 535,267 519,819 PROPERTY AND EQUIPMENT, net 148,449 188,791 OTHER ASSETS 33,244 49,950 ----------- ----------- Total assets $ 716,960 $ 758,560 =========== =========== LIABILITIES AND SHAREHOLDERS' DEFICIT LIABILITIES: Current liabilities- Convertible note payable $ 1,770,000 $ 150,000 Loans payable 150,000 -- Note payable 150,000 -- Accounts payable 876,090 370,160 Accrued liabilities 1,159,004 1,116,821 Deferred revenue 34,347 30,197 ----------- ----------- Total current liabilities 4,139,441 1,667,178 ----------- ----------- SHAREHOLDERS' DEFICIT: Common stock, $.01 par value - 5,000,000 shares authorized, 2,609,126 shares issued and outstanding 26,091 26,091 Convertible preferred stock, Series A, $0.01 par value, 2,500 shares authorized, 2,500 issued and outstanding 25 25 Convertible preferred stock, Series B, $0.01 par value, 500 shares authorized, 500 issued and outstanding 5 5 Additional paid-in capital 3,226,405 3,226,405 Accumulated deficit (6,675,007) (4,161,144) ----------- ----------- Total shareholders' deficit (3,422,481) (908,618) ----------- ----------- Total liabilities and shareholders' deficit $ 716,960 $ 758,560 =========== ===========
The accompanying notes are an integral part of these balance sheets. MUSIC MARKETING NETWORK, INC. (D/B/A CONSUMERNET) STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
1998 1997 ----------- ----------- REVENUES $ 2,430,703 $ 1,788,430 ----------- ----------- COST OF REVENUES 2,043,168 1,403,013 ----------- ----------- Gross profit 387,535 385,417 OPERATING EXPENSES: Sales and marketing 482,941 463,580 General and administrative 2,133,419 2,502,879 ----------- ----------- Total operating expenses 2,616,360 2,966,459 ----------- ----------- Loss from operations (2,228,825) (2,581,042) INTEREST EXPENSE (INCOME) 146,885 (6,466) ----------- ----------- Loss before discontinued operations and provision for income taxes (2,375,710) (2,574,576) INCOME (LOSS) FROM DISCONTINUED OPERATIONS 165,918 (488,028) ----------- ----------- Loss before provision for income taxes (2,209,792) (3,062,604) PROVISION FOR INCOME TAXES 4,071 2,183 ----------- ----------- Net loss $(2,213,863) $(3,064,787) =========== ===========
The accompanying notes are an integral part of these statements. MUSIC MARKETING NETWORK, INC. (D/B/A CONSUMERNET) STATEMENTS OF SHAREHOLDERS' DEFICIT FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
Convertible Preferred Stock Additional Common ----------------------- Paid-in Accumulated Stock Series A Series B Capital Deficit -------- -------- ---------- ----------- ----------- BALANCE AS OF JANUARY 1, 1997 $ 26,091 $ -- $ -- $ 161,909 $ (824,850) Conversion of note payable into Series A Preferred Stock -- 7 -- 612,793 -- Contributions from shareholders for Series A Preferred Stock -- 18 -- 1,799,982 -- Contributions from shareholders for Series B Preferred Stock -- -- 5 499,995 -- Contributions under data rights agreement -- -- -- 151,726 -- Dividends on Series A and Series B Preferred Stock -- -- -- -- (271,507) Net loss -- -- -- -- (3,064,787) -------- -------- ---------- ----------- ----------- BALANCE AS OF DECEMBER 31, 1997 26,091 25 5 3,226,405 (4,161,144) Dividends on Series A and Series B Preferred Stock -- -- -- -- (300,000) Net loss -- -- -- -- (2,213,863) -------- -------- ---------- ----------- ----------- BALANCE AS OF DECEMBER 31, 1998 $ 26,091 $ 25 $ 5 $ 3,226,405 $(6,675,007) ======== ======== ========== =========== ===========
The accompanying notes are an integral part of these statements. MUSIC MARKETING NETWORK, INC. (D/B/A CONSUMERNET) STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
1998 1997 ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(2,213,863) $(3,064,787) Adjustments to reconcile net loss to net cash used in operating activities- Depreciation and amortization 82,390 49,158 Changes in operating assets and liabilities- (Increase) decrease in accounts receivable (20,656) 355,623 Decrease in inventory -- 15,003 Increase in prepaids and other current assets (30,418) (17,074) Decrease (increase) in net assets from discontinued operations 64,188 (64,188) Decrease (increase) in other assets 16,706 (25,000) Increase in accounts payable 505,930 122,637 (Decrease) increase in accrued liabilities (257,817) 281,599 Increase (decrease) in deferred revenue 4,150 (7,784) ----------- ----------- Net cash used in operating activities (1,849,390) (2,354,813) ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment (42,048) (32,870) ----------- ----------- Net cash used in investing activities (42,048) (32,870) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Repayment of note payable -- (200,000) Contributions from preferred shareholders -- 2,300,000 Proceeds from convertible note payable 1,620,000 150,000 Proceeds from loans payable 150,000 -- Proceeds from note payable 150,000 -- Payment of notes payable to shareholders -- (48,000) ----------- ----------- Net cash provided by financing activities 1,920,000 2,202,000 ----------- ----------- Net increase (decrease) in cash and cash equivalents 28,562 (185,683) CASH AND CASH EQUIVALENTS, beginning of year 7,285 192,968 ----------- ----------- CASH AND CASH EQUIVALENTS, end of year $ 35,847 $ 7,285 =========== =========== -2- 1998 1997 ----------- ----------- SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid during the year for- Interest $ 8,385 $ 6,466 Taxes -- -- =========== =========== Noncash financing activities- Conversion of notes payable to equity, net of deferred financing costs $ -- $ 612,800 =========== =========== Dividends declared but not paid $ 300,000 $ 271,507 =========== ===========
The accompanying notes are an integral part of these statements. MUSIC MARKETING NETWORK, INC. (D/B/A CONSUMERNET) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1998 AND 1997 (1) NATURE OF OPERATIONS: Music Marketing Network, Inc. (d/b/a ConsumerNet) (the "Company") was incorporated on February 3, 1992 as a C corporation and has no subsidiaries. The Company originally operated solely in the music industry. The Company has the following two principal divisions: marketing services, which includes consumer merchandising, and consumer information management. As discussed in Note 10, a decision was made in January 1998 to discontinue consumer merchandising. The Company provides a wide variety of integrated services to music artists, record labels, distributors, retailers, publishers and other entertainment companies. During 1998, the Company entered into e-mail marketing and is now a leading provider of e-mail marketing solutions. The Company acquires, manages and markets self-reported consumer preference information from both online and offline data sources, creating one of the industry's largest "opt-in" cooperative database of demographic and psychographic consumer preference information. The Company's database consists of consumers who have provided self-reported information in more than 20 major categories. Merging its technological and database management expertise, the Company generates in-depth consumer profiles that reveal behavioral purchasing patterns. These findings enable the Company's clients to target promotions to consumers. (2) SIGNIFICANT ACCOUNTING POLICIES: FINANCIAL INSTRUMENTS- The fair value of financial instruments, consisting of investments in cash and cash equivalents, receivables, obligations under accounts payable and debt instruments, approximates fair value at December 31, 1998 and 1997. USE OF ESTIMATES- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. -2- REVENUE RECOGNITION- Revenue is recognized as earned, which coincides with the completion of projects. CASH AND CASH EQUIVALENTS- The Company considers all highly liquid investments with a maturity of three months or less to be cash equivalents. CONCENTRATIONS OF CREDIT RISK- In 1998, the two largest customers accounted for 13% and 10% of revenues, respectively. PROPERTY AND EQUIPMENT- Property and equipment are recorded at cost and depreciated over the estimated useful lives of the assets using principally the straight-line method over three to seven years. Property and equipment at December 31, 1998 and 1997 are as follows- 1998 1997 --------- --------- Machinery and equipment $ 323,978 $ 284,098 Furniture and fixtures 9,412 7,242 Accumulated depreciation (184,941) (102,549) --------- --------- $ 148,449 $ 188,791 ========= ========= Depreciation expense for the year ended December 31, 1998 and 1997 was $82,390 and $49,158, respectively. RECENTLY ISSUED ACCOUNTING STANDARDS- In June 1997, SFAS No. 130, "Reporting Comprehensive Income" and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" were issued and are effective for periods beginning after December 15, 1997. SFAS No. 130 establishes standards for reporting comprehensive income and its components. SFAS No. 131 establishes standards for reporting financial and descriptive information regarding an enterprise's operating segments. These standards increase financial reporting disclosures and had no impact on the Company's financial position or results of operations. In April 1998, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued Statement of Position 98-5 ("SOP 98-5"). "Reporting on the Costs of Start-Up Activities." SOP 98-5 is effective for fiscal years beginning after December 15, 1998. The Company does not believe that adoption of SOP 98-5 will have a material impact on the financial position or results of operations. -3- (3) CONVERTIBLE NOTE PAYABLE: On December 29, 1997, Metromail Corp. ("Metromail") agreed to lend to the Company up to $1,500,000 under a convertible note payable (the "Note"). Advances under the Note are payable on demand and bear interest at 10%. The Note is convertible at the holder's option into shares of common stock based on the then conversion price, as defined, on the date of conversion. The Note automatically converts to common stock upon an initial public offering. As of December 31, 1997, $150,000 was outstanding under the Note. During the year ended December 31, 1998, Metromail advanced $1,350,000 of the remaining amounts under the Note. Also, during 1998, Metromail advanced an additional $270,000 to the Company resulting in total borrowings from Metromail of $1,770,000 (collectively, "The Notes") as of December 31, 1998. In connection with the borrowings under the Note, the Company issued 1,058,869 warrants to purchase common stock of the Company at an exercise price of $1.00 per share, which was in excess of fair market at the time of issuance. At the time of the borrowings, the Company attributed no value to these warrants. In 1999, all of the outstanding warrants were cancelled in connection with the Company's recapitalization. In February 1999, the Note plus accrued interest and approximately $80,000 of shareholders contributions were converted into a $2,000,000 promissory note due at various dates through 2005, bearing interest at 10% and collateralized by all of the assets of the Company. The promissory note was subordinated to any amount owing by the Company up to $550,000 with a lender for the purpose of obtaining working capital. The promissory note was paid in cash and stock in August 1999. (4) LOANS PAYABLE: During 1998, one stockholder and two investors advanced $150,000 to the Company under a loan payable. The loans matured on March 15, 1999. The loans bore interest at a stated amount of $15,000 in total. During 1999, $130,000 of these loans were converted into common stock. The remaining $20,000 was paid in full. (5) NOTE PAYABLE: On January 30, 1998, the Company entered into a $150,000 demand note with Atlas Communications, Ltd. The demand note bears interest at a variable rate equal to the prime rate plus 2% (7.75% at December 31, 1998) per annum. The demand note was to be utilized for potential joint ventures with Atlas. (6) INCOME TAXES: The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," which utilizes the asset and liability approach to measure income tax expense. The asset and liability approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial statement carrying amounts and the tax basis of certain assets and liabilities. -4- The components of the Company's net deferred income tax assets at December 31, 1998 and 1997 are primarily net operating loss carryforwards, allowance for doubtful accounts and depreciation. The net operating loss carryforwards at December 31, 1998 amounted to approximately $5,300,000 and expire at various dates through the year 2018. Based upon the Company's historical taxable income record, management does not believe that it is more likely than not that the Company will realize any benefit of the net deferred tax assets at December 31, 1998 and 1997. Accordingly, a full valuation allowance has been recorded against the net deferred tax asset at December 31, 1998 and 1997. (7) OPERATING LEASES: The Company leases its office and warehouse facilities and certain equipment under noncancelable lease agreements. The lease on the Company's main office facilities expires in 2003; all other leases expire through 2001. The typical lease period is one to five years and most leases contain renewal options. Rent expense for operating leases was $241,878 and $225,464 for the years ended December 31, 1998 and 1997, respectively. Commitments for all noncancelable operating leases are as follows- 1999 $ 211,253 2000 193,210 2001 170,066 2002 135,225 ------------- Total minimum lease commitments $ 709,754 ============= (8) SHAREHOLDERS' DEFICIT: On January 2, 1997, the Initial Closing under the Purchase Agreement for the issuance of 2,500 shares of Series A Convertible Preferred Stock (the "Series A") was executed via the conversion of the Company's $700,000 bridge note payable, net of approximately $87,200 of deferred financing costs, to Metromail into Series A and receipt of approximately $1,800,000 in cash. In October 1997, Metromail purchased 500 shares of Series B Convertible Preferred Stock (the "Series B") for $500,000 cash. In conjunction with the Initial Closing, the Company also amended its articles of incorporation to increase the number of authorized common shares from 100 to 5,000,000. The Series A and Series B are convertible into common stock at a conversion rate of $3.8351 and $2.2953 per share, respectively. The Series A and Series B are convertible at any time at the option of the holder. The Series A and Series B accumulate dividends at a rate of 10% per share. During 1998 and 1997, the Company accumulated $300,000 and $271,507 of preferred dividends related to the Series A and Series B (see Note 10). -5- In June 1999, the Company amended its Restated Certificate of Incorporation to increase its authorized shares of common stock $0.01 par value from 5,000,000 to 10,000,000. In addition, the Company authorized 3,000 shares of $0.01 par value Series C Preferred Stock (the Series C). The Series C accrue dividends cumulatively at 10% per year. The Company shall redeem, at the request of the holder on or after March 31, 2004, 50% of the total number of shares of Series C and on or after March 31, 2005, 100% of the total number of shares outstanding of Series C. The Series C shares are also convertible into common stock at a rate of $500 multiplied by the number of Series C shares and dividing it by the conversion price of $1.4351512. The conversion price is adjustable based upon certain events described under the terms of the Series C. The liquidation value of the Series C is $500 per share. Additionally, the Company entered into a Data Rights Agreement with Metromail on January 2, 1997, the terms of which included certain database technical support and consulting services by Metromail to the Company. During 1997, Metromail contributed approximately $150,000 of certain hardware pursuant to the Data Rights Agreement that was capitalized in fixed assets and reflected as a capital contribution within equity. The Data Rights Agreement was terminated in February 1999. STOCK OPTIONS- During 1997, the Company adopted the 1997 Stock Option Plan (the "Plan"). Under the Plan, 289,903 shares of common stock of the Company have been reserved for incentive stock options and nonqualified stock options. Awards may be granted to such directors, employees and consultants of the Company as the Compensation Committee of the Board of Directors shall in its discretion select. Options granted under the Plan have a ten year term. In general, options vest 25% on the date of grant and 25% on each anniversary date thereafter. The following is a summary of the Plan's stock option activity-
Weighted Average Exercise Shares Price ------ ----------------- Outstanding as of January 1, 1997 -- $ -- Granted 96,678 3.88 Exercised -- -- Cancelled -- -- ------- ----- Outstanding as of December 31, 1997 96,678 3.88 Granted 156,200 2.00 Exercised -- -- Cancelled 45,044 3.88 ------- ----- Outstanding as of December 31, 1998 207,834 $2.47 ======= ===== Options Exercisable as of December 31, 1998 77,976 $2.47 ======= =====
-6- As discussed in Note 2, the Company has adopted the disclosure provisions of SFAS No. 123 and continues to account for its stock options in accordance with APB Opinion No. 25. Had compensation for the Plan been determined consistent with the provisions of SFAS No. 123, the effect on the Company's net loss would have been the following- 1998 1997 ----------- ----------- Net loss, as reported $(2,213,863) $(3,064,787) =========== =========== Net loss, pro forma $(2,258,860) $(3,087,069) =========== =========== The weighted average fair value on the date of grant was $0.92 and $0.48 for options granted during 1998 and 1997, respectively. The fair value of each option grant has been estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions for both 1998 and 1997- Expected option lives 5 years Risk-free interest rates 5.5% Expected volatility 0% Dividend yield 0% (9) BUSINESS RESTRUCTURING: In January 1998, the Company made a decision to discontinue the consumer merchandising division. The net income (loss) of this line of business were $165,918 and ($488,028) for the year ended December 31, 1998 and 1997, respectively. Substantially all of the assets disposed of were accounts receivable and inventory. In addition, the Company had certain accounts payable and accrued expenses related to this operation. The net amount of approximately $64,000 has been reflected in the accompanying balance sheets as net assets discontinued operations as of December 31, 1997. This entire amount was realized during the year ended December 31, 1998. (10) RECAPITALIZATION: In June 1999, the Company entered into a recapitalization agreement with Metromail whereby all of the outstanding Series A and Series B Convertible Preferred Stock were converted into 3,000 shares of Series C Convertible Preferred Stock. The terms of the Series C are more fully described in Note 8. In connection with this recapitalization, the accumulated and unpaid dividends on the Series A and Series B were reduced by 50%. (11) SALE OF BUSINESS: On August 17, 1999, 24/7 Media, Inc., acquired all of the outstanding capital stock of the Company for approximately $52 million of 24/7 Media, Inc. common stock. The number of shares issued was based on an exchange rate of 0.312174547 per common share and 113.698333 per preferred share of the Company. As a result of the acquisition, the Company will be merged with 24/7 Mail, an independent subsidiary of 24/7 Media, Inc. EX-23.1 2 EXHIBIT 23.1 EXHIBIT 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use of our report dated September 9, 1999 on the Music Marketing Network, Inc. financial statements and to all references to our Firm included in or made part of this registration statement. ARTHUR ANDERSEN LLP Roseland, New Jersey October 28, 1999 -----END PRIVACY-ENHANCED MESSAGE-----