<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
(AMENDMENT NO. 1)
Current Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
December 9, 1998
--------------------------------------------------------
Date of Report (Date of earliest event reported)
MESSAGEMEDIA, INC.
--------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 000-21751 33-0612860
- ---------------------------- ------------- -------------------
(State or other jurisdiction (Commission (I.R.S. Employer
of incorporation) File Number) Identification No.)
4104 Sorrento Valley Boulevard, Suite 200
San Diego, California 92121
--------------------------------------------------------
(Address of principal executive offices)
(619) 410-3700
--------------------------------------------------------
(Registrant's telephone number, including area code)
<PAGE> 2
The undersigned hereby amends sections (a) and (c) of Item 7 of its
Current Report on Form 8-K filed with the Commission on December 23, 1998 to
read as follows:
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(a) FINANCIAL STATEMENTS OF BUSINESSES ACQUIRED.
Financial Statements of Email Publishing Inc. filed as Exhibit 99.2
herewith.
Financial Statements of Distributed Bits L.L.C. filed as Exhibit 99.3
herewith.
(c) EXHIBITS.
2.1 Agreement and Plan of Reorganization dated August 20, 1998 among
the Company, EPub Holdings, Inc., Email Publishing Inc., certain
stockholders of Email Publishing Inc. and Chase Manhattan Bank &
Trust Company, National Association.(1)
2.2 Agreement and Plan of Reorganization dated November 18, 1998
among the Company, DB Acquisition Corp., Distributed Bits
L.L.C., Derek Scruggs, DBI L.L.C. and Richard Angell as the
Member Representative and Chase Manhattan Bank & Trust Company,
National Association as Escrow Agent.(2)
3.1 Certificate of Amendment to the Company's Amended and Restated
Certificate of Incorporation.(3)
99.1 Press Release dated December 16, 1998.(3)
99.2 Financial Statements of Email Publishing Inc.
99.3 Financial Statements of Distributed Bits L.L.C.
- ----------------
(1) Previously filed as an exhibit to the Company's Current Report on
Form 8-K, filed with the SEC on August 25, 1998.
(2) Previously filed as an exhibit to the Company's Current Report on
Form 8-K, filed with the SEC on November 30, 1998.
(3) Previously filed as an exhibit to the Company's Current Report on
Form 8-K, filed with the SEC on December 23, 1998.
<PAGE> 3
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.
MESSAGEMEDIA, INC.
Dated: February 19, 1999 By: /s/ BERT C. KLEIN
-----------------------------------
Bert C. Klein
Vice President of Finance and
Administration and Chief Financial
Officer
<PAGE> 4
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
<S> <C>
2.1 Agreement and Plan of Reorganization dated August 20, 1998 among
the Company, EPub Holdings, Inc., Email Publishing Inc., certain
stockholders of Email Publishing Inc. and Chase Manhattan Bank &
Trust Company, National Association.(1)
2.2 Agreement and Plan of Reorganization dated November 18, 1998
among the Company, DB Acquisition Corp., Distributed Bits
L.L.C., Derek Scruggs and DBI L.L.C. as the Member
Representative and Chase Manhattan Bank & Trust Company,
National Association.(2)
3.1 Certificate of Amendment to the Company's Amended and Restated
Certificate of Incorporation.(3)
99.1 Press Release dated December 16, 1998.(3)
99.2 Financial Statements of Email Publishing Inc.
99.3 Financial Statements of Distributed Bits L.L.C.
</TABLE>
- ----------------
(1) Previously filed as an exhibit to the Company's Current Report on
Form 8-K, filed with the SEC on August 23, 1998.
(2) Previously filed as an exhibit to the Company's Current Report on
Form 8-K, filed with the SEC on November 30, 1998.
(3) Previously filed as an exhibit to the Company's Current Report on
Form 8-K, filed with the SEC on December 23, 1998.
<PAGE> 1
EXHIBIT 99.2
REPORT OF PRICEWATERHOUSECOOPERS LLP, INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of EMAIL PUBLISHING INC.
In our opinion, the accompanying balance sheets and the related statements of
operations, of stockholders' equity and of cash flows present fairly, in all
material respects, the financial position of EMAIL PUBLISHING INC. at June 30,
1997 and 1998, and the results of its operations and its cash flows for the
period from September 11, 1996 (inception) through June 30, 1997 and the year
ended June 30, 1998, in conformity with generally accepted accounting
principles. 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 of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
/s/ PRICEWATERHOUSECOOPERS LLP
Broomfield, Colorado
August 13, 1998
<PAGE> 2
EMAIL PUBLISHING INC.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
June 30,
----------------------------- September 30,
1997 1998 1998
----------- ----------- --------------
(unaudited)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 144,023 $ 62,273 $ 92,303
Accounts receivable, net of allowance for doubtful
accounts of $874, $7,926 and $9,173 at June 30,
1997 and 1998 and September 30, 1998, respectively 34,040 138,895 194,036
Prepaid expenses 4,513 9,989 13,167
----------- ----------- -----------
Total current assets 182,576 211,157 299,506
Property and equipment, net 31,015 220,552 230,894
Other noncurrent assets 490 10,620 10,389
----------- ----------- -----------
Total assets $ 214,081 $ 442,329 $ 540,789
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,602 $ 60,911 $ 132,348
Accrued compensation and related liabilities 12,777 30,705 18,779
Other accrued liabilities -- -- 8,079
Note payable to First Virtual -- -- 100,000
Note payable to stockholder -- -- 200,000
Current portion, note payable to bank -- 47,350 31,314
Current portion of capital lease obligations 6,325 36,141 35,200
----------- ----------- -----------
Total current liabilities 21,704 175,107 525,720
Note payable, net of current portion -- 42,615 42,291
Rent payable -- -- 12,523
Capital lease obligations, net of current portion 12,103 46,225 38,602
----------- ----------- -----------
Total liabilities 33,807 263,947 619,136
Commitments and contingencies(Note 6)
Stockholders' Equity:
Series A preferred stock; $.001 par value; 400,000 shares
authorized, issued and outstanding at June 30, 1997
and 1998 and at September 30, 1998 400 400 400
Series A-1 preferred stock; $.001 par value; 350,000
shares authorized; 232,558 shares issued and
outstanding at June 30, 1997 and 1998 and at
September 30, 1998 232 232 232
Common stock; $.001 par value; 3,000,000 shares
authorized; 1,877,668, 1,896,753 and 1,906,503 shares
issued and outstanding at June 30, 1997 and 1998,
and at September 30, 1998, respectively 1,878 1,897 1,907
Additional paid-in capital 460,397 1,017,735 1,240,295
Deferred compensation (42,338) (448,131) (626,370)
Accumulated deficit (240,295) (393,751) (694,811)
----------- ----------- -----------
Total stockholders' equity 180,274 178,382 (78,347)
----------- ----------- -----------
Total liabilities and stockholders' equity $ 214,081 $ 442,329 $ 540,789
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 3
EMAIL PUBLISHING INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
September 11,
1996
(Inception) Year Ended Three months ended
through June 30, June 30, September 30, September 30,
1997 1998 1997 1998
---------------- ----------- ------------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenues $ 80,347 $ 864,030 $ 85,017 $ 340,325
Operating expenses:
Sales and marketing 19,237 271,772 34,680 116,339
Research and development 46,769 125,782 388 --
General and administrative 258,611 611,911 124,043 509,601
----------- ----------- ----------- -----------
Total operating expenses 324,617 1,009,465 159,111 625,940
----------- ----------- ----------- -----------
Loss from operations (244,270) (145,435) (74,094) (285,615)
----------- ----------- ----------- -----------
Other income (expense):
Interest expense (1,025) (11,710) (2,601) (16,923)
Interest income -- 889 -- 1,478
Miscellaneous income 5,000 2,800 1,200 --
----------- ----------- ----------- -----------
Total other income (expense) 3,975 (8,021) (1,401) (15,445)
----------- ----------- ----------- -----------
Net loss $ (240,295) $ (153,456) $ (75,495) $ (301,060)
=========== =========== =========== ===========
Basic net loss per common share $ (0.13) $ (0.08) $ (0.04) $ (0.16)
Basic weighted-average common shares
outstanding 1,871,445 1,887,012 1,877,668 1,900,896
Diluted net loss per common share $ (0.13) $ (0.08) $ (0.04) $ (0.16)
Diluted weighted-average common shares
outstanding 1,871,445 1,887,012 1,877,668 1,900,896
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 4
EMAIL PUBLISHING INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL TOTAL
----------------------- ----------------------- PAID-IN DEFERRED ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION DEFICIT EQUITY
---------- ---------- ---------- ---------- ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
September 11, 1996
(inception) ......... -- $ -- -- $ -- $ -- $ -- $ -- $ --
Issuance of Series A
preferred stock ..... 400,000 400 199,600 200,000
Issuance of Series A-1
preferred stock ..... 232,558 232 199,768 200,000
Issuance of common stock 1,867,000 1,867 16,802 18,669
Exercise of stock options 10,668 11 523 534
Deferred compensation ... 43,704 (43,704)
Amortization of deferred
compensation ........ 1,366 1,366
Net loss ................ (240,295) (240,295)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance, June 30, 1997 .. 632,558 632 1,877,668 1,878 460,397 (42,338) (240,295) 180,274
Exercise of stock options 19,085 19 1,161 1,180
Deferred compensation ... 488,822 (488,822)
Amortization of deferred
compensation ........ 83,029 83,029
Issuance of Series A-1
preferred warrants .. 67,355 67,355
Net loss ................ (153,456) (153,456)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance, June 30,
1998 ................ 632,558 $ 632 1,896,753 $ 1,897 $1,017,735 $ (448,131) $ (393,751) $ 178,382
Issuance of common stock
(unaudited) ......... 9,750 10 1,052 1,062
Deferred compensation
(unaudited) ......... 221,508 (221,508)
Amortization of deferred
compensation
(unaudited) ......... 43,269 43,269
Net loss (unaudited) .... (301,060) (301,060)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance, September 30,
1998 (unaudited) .... 632,558 $ 632 1,906,503 $ 1,907 $1,240,295 $ (626,370) $ (694,811) $ (78,347)
========== ========== ========== ========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 5
EMAIL PUBLISHING INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
September 11,
1996
(Inception) Year Ended Three months ended
through June 30, June 30, September 30, September 30,
1997 1998 1997 1998
---------------- ----------- ------------- -------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss ............................................ $(240,295) $(153,456) $ (75,495) $(301,060)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization .................. 4,038 29,158 3,626 20,536
Amortization of deferred compensation .......... 1,366 83,029 2,732 43,269
Provision for doubtful accounts ................ 874 7,052 185 1,247
Amortization of debt discount .................. -- 1,292 -- 8,418
Changes in:
Accounts receivable .......................... (34,914) (111,907) (22,545) (56,388)
Prepaid expenses ............................. (4,513) (5,476) 958 (3,178)
Other noncurrent assets ...................... (490) (10,228) -- 206
Accounts payable ............................. 2,602 58,309 24,327 71,437
Other accrued liabilities .................... -- -- -- 8,079
Accrued compensation and related liabilities . 12,777 17,928 (2,777) (11,926)
Rent payable ................................. -- -- -- 12,523
--------- --------- --------- ---------
Net cash used in operating activities ............... (258,555) (84,299) (68,989) (206,837)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment .................. (13,494) (111,032) (4,453) (30,853)
--------- --------- --------- ---------
Net cash used in investing activities ............... (13,494) (111,032) (4,453) (30,853)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of Series A preferred
stock ............................................ 200,000 -- -- --
Proceeds from issuance of Series A-1 preferred
stock ............................................ 200,000 -- -- --
Proceeds from issuance of common stock .............. 19,203 1,180 -- 1,062
Proceeds from note payable to First Virtual ......... -- -- -- 100,000
Proceeds from notes payable to stockholder .......... -- 150,000 -- 200,000
Payments on notes payable to bank ................... -- (6,972) -- (24,778)
Payments on capital lease obligations ............... (3,131) (30,627) (5,502) (8,564)
--------- --------- --------- ---------
Net cash provided by/(used in) financing
activities ....................................... 416,072 113,581 (5,502) 267,720
--------- --------- --------- ---------
Net increase (decrease) in cash and cash
equivalents ...................................... 144,023 (81,750) (78,944) 30,030
Cash and cash equivalents, beginning of
period .......................................... -- 144,023 144,023 62,273
--------- --------- --------- ---------
Cash and cash equivalents, end of period ............ $ 144,023 $ 62,273 $ 65,079 $ 92,303
========= ========= ========= =========
Supplemental Disclosure of other Cash and
Non-cash Financing Activities
Interest paid ....................................... $ 1,025 $ 11,710 $ 2,601 $ 12,921
Acquisition of equipment under capital
leases .......................................... $ 21,559 $ 94,565 $ 21,469 $ --
Acquisition of equipment with note payable .......... $ -- $ 13,000 $ -- $ --
Issuance of warrants with debt ...................... $ -- $ 67,355 $ -- $ --
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 6
EMAIL PUBLISHING INC.
NOTES TO FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Email Publishing, Inc. (the "Company") was incorporated on September 11, 1996 in
the State of Delaware to develop, market and support large-scale personalized
messaging services to periodical publishers and large corporations.
UNAUDITED INTERIM FINANCIAL INFORMATION
The financial statements as of September 30, 1998 and for the three months ended
September 30, 1998 and 1997 are unaudited. The unaudited financial statements
have been prepared on the same basis as the audited financial statements, and in
the opinion of management, include all adjustments, consisting only of normal
recurring adjustments, necessary to state fairly the financial information set
forth therein, in accordance with generally accepted accounting principles
REVENUE RECOGNITION
Revenue from service contracts is recognized monthly over the period of the
contract.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and depreciated using the
straight-line method over the estimated useful lives of the respective assets
(generally three years). Repair and maintenance costs are charged to expense
when incurred.
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, the Company considers all highly-liquid
investments purchased with an original maturity of three months or less to be
cash equivalents. All cash equivalents are carried at cost, which approximates
fair value.
STOCK OPTIONS
Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based
Compensation" ("SFAS No. 123") permits the use of either a fair-value-based
method or the method defined in Accounting Principles Board Opinion 25,
"Accounting for Stock Issued to Employees" ("APB No. 25") to account for
stock-based compensation arrangements. The Company has elected to determine the
value of stock-based compensation arrangements under the provisions of APB No.
25, and has included the pro forma disclosures required under SFAS No. 123 in
Note 4.
<PAGE> 7
EMAIL PUBLISHING INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
RESEARCH AND DEVELOPMENT AND CAPITALIZED SOFTWARE DEVELOPMENT COSTS
Research and development costs are charged to expense as incurred. Statement of
Financial Accounting Standard No. 86 "Accounting for the Costs of Computer
Software to be Sold, Leased or Otherwise Marketed" requires the capitalization
of certain software development costs once technological feasibility is
established. The capitalized cost is then amortized on a straight-line basis
over the estimated product life, or on the ratio of current revenue to total
projected product revenue, whichever is greater. Software development costs
qualifying for capitalization have been insignificant and therefore, the Company
has not capitalized any software development costs.
INCOME TAXES
Deferred tax assets and liabilities are recorded for the estimated future tax
effects of temporary differences between the tax bases of assets and liabilities
and amounts reported in the accompanying balance sheet, as well as operating
loss carryforwards. Deferred tax assets are reduced by a valuation allowance if
current evidence indicates that it is considered likely that these benefits will
not be realized.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments include cash and cash equivalents, accounts
receivable, prepaid expenses and other current assets, accounts payable and
accrued liabilities and capital lease obligations. The carrying amounts of
financial instruments approximate fair value due to their short maturities.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
<PAGE> 8
EMAIL PUBLISHING INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
EARNINGS PER COMMON SHARE
Statement of Financial Accounting Standard No. 128 "Earnings per Share" was
issued in February of 1997. This pronouncement establishes new standards for
computing and presenting earnings per share ("EPS") on a basis that is more
comparable to international standards and provides for the presentation of basic
and diluted EPS. Basic EPS is computed by dividing net income by the
weighted-average number of shares outstanding during the period. Diluted EPS is
computed by using the weighted-average number of shares outstanding plus all
dilutive potential common shares outstanding. The convertible preferred shares,
options and warrants were not included in the computation of diluted EPS for the
respective periods because they were anti-dilutive due to the net loss for all
periods presented.
RECLASSIFICATIONS
Certain amounts in the 1997 financial statements were reclassified to conform to
current year presentation.
(2) PROPERTY AND EQUIPMENT
Property and equipment consisted of the following as of years ended June 30:
<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
Office and communications equipment $ 27,826 $ 193,850
Computer software 7,227 31,806
Furniture and fixtures -- 2,666
Leasehold improvements -- 25,328
--------- ---------
35,053 253,650
Less: accumulated depreciation (4,038) (33,098)
--------- ---------
$ 31,015 $ 220,552
========= =========
</TABLE>
<PAGE> 9
EMAIL PUBLISHING INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(3) DEBT
Long-term debt consisted of the following as of the years ended June 30:
<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
Note payable to bank; interest at prime plus 1% (9.5%);
payable in monthly installments of $6,250 through June
2000; secured by business assets $ -- $ 150,000
Less unamortized discount -- (66,063)
--------- ---------
-- 83,937
Note payable to company; interest at 11.76%; payable in
monthly installments of $703 through March 1999; secured
by equipment -- 6,028
--------- ---------
-- 89,965
Less current portion -- (47,350)
--------- ---------
$ -- $ 42,615
========= =========
</TABLE>
Future maturities of long-term debt at June 30, 1998, are as follows:
<TABLE>
<S> <C>
1999 ........................................ $47,350
2000 ........................................ 42,615
-------
$89,965
=======
</TABLE>
<PAGE> 10
EMAIL PUBLISHING INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
On June 16, 1998, the Company executed a bank loan agreement of $150,000, and
issued 11,627 detachable warrants. Each warrant entitles the holder to purchase
one share of Series A-1 Preferred stock at $.86 at any time between issuance and
June 30, 2003.
On July 6, 1998, the Company signed a subordinated promissory note with
Consolidated Email, Inc. a related party, for $200,000, with an interest rate at
10%, which is due December 1998. (unaudited)
On September 24, 1998, the Company signed a subordinated promissory note for
$100,000 with First Virtual Holdings Incorporated, with an interest rate at 10%,
which is due April 15, 1999. (unaudited)
(4) PREFERRED STOCK
Each share of preferred stock is convertible into shares of common stock, at
anytime, based on the conversion rate, at the option of the holder.
Additionally, if the Company completes an initial public offering of its common
stock in which the price is at least $5 per share, and gross proceeds are at
least $10,000,000, the preferred stock will automatically convert into shares of
common stock. The conversion rate is the original preferred stock issue price
plus any declared but unpaid dividends divided by the original preferred stock
issue price, which is subject to future adjustment upon certain events taking
place. As of June 30, 1997 and 1998, the Company has reserved 632,558 shares of
common stock for issuance upon conversion of the preferred stock.
In the event of liquidation, dissolution or winding up of the Company, the
holders of preferred stock will be entitled to be repaid prior and in preference
to any payments to common stockholders. The payments shall be an amount per
share equal to the investment price plus declared but unpaid dividends. As of
June 30, 1998, the liquidation price of the preferred stock is the original
preferred stock issue price per share of $0.50 for Series A preferred and $0.86
for Series A-1 preferred, or $400,000 in total.
(5) STOCK OPTIONS AND WARRANTS
The Company maintains a stock option plan (the "Plan") which provides for the
grant of incentive stock options to directors, key employees, and consultants to
purchase common stock of the Company. The Board of Directors has reserved
400,000 shares of common stock for issuance under the Plan. The vesting period
is determined by the Board of Directors and is generally four years for
directors and key employees and options granted to consultants for services
rendered vest on the date of grant. The options expire ten years after the date
of grant.
<PAGE> 11
EMAIL PUBLISHING INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes stock option activity for the period from
September 11, 1996 (inception) through June 30, 1998:
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
SHARES EXERCISE PRICE
-------- --------------
<S> <C> <C>
Outstanding at September 11, 1996 -- $ --
Granted 98,675 .05
Exercised (10,668) .05
Forfeited -- --
-------- --------
Outstanding at June 30, 1997 88,007 .05
-------- --------
Granted 103,500 .12
Exercised (19,085) .06
Forfeited -- --
-------- --------
Outstanding at June 30, 1998 172,422 $ .09
======== ========
Vested at June 30, 1997 2,667 $ .05
======== ========
Vested at June 30, 1998 26,250 $ .10
======== ========
</TABLE>
The exercise price of all options outstanding at June 30, 1998 range from $.05
to $.15. The weighted-average remaining contractual life of common stock options
outstanding at June 30, 1998 is 9.31 years. There are 189,825 options available
for grant at June 30, 1998.
Had the Company recognized compensation cost for options granted to employees
and directors based on the fair value of the options granted as of the grant
date as prescribed, net loss would have increased by an immaterial amount.
<PAGE> 12
EMAIL PUBLISHING INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The range of weighted-average grant date fair values of common stock options
granted during the period from September 11, 1996 (inception) through June 30,
1997 and the year ended June 30, 1998 are as follows:
<TABLE>
<CAPTION>
1997 WEIGHTED-AVERAGE 1998 WEIGHTED-AVERAGE
SHARES GRANT DATE FAIR VALUE SHARES GRANT DATE FAIR VALUE
- ------ --------------------- ------ ---------------------
<S> <C> <C> <C>
53,340 $ 0.01 36,500 $ 3.70
32,000 $ 1.38 8,000 $ 3.74
13,335 $ 0.02 59,000 $ 5.54
</TABLE>
In accordance with the guidance provided under SFAS 123, fair values are based
on minimum values. The fair value of each option grant to directors or key
employees is estimated on the date of grant using a Black-Scholes-type
option-pricing model with the following weighted-average assumptions used for
grants in the period from September 11, 1996 (inception) through June 30, 1997
and the year ended June 30, 1998: dividend yield of zero; expected volatility of
zero; risk-free interest rates ranging from 5.57% to 5.87% and an expected term
of four years. The fair value of each option grant to consultants is estimated
on the date of grant using a Black-Scholes-type option pricing model with the
following weighted-average assumptions used for grants in the period from
September 11, 1996 (inception) through June 30, 1997 and the year ended June 30,
1998: dividend yield of zero; expected volatility of 55%; risk-free interest
rates ranging from 5.57% to 5.60% and an expected term of four years. The
risk-free interest rate used in the calculation is the yield on the grant date
of the U.S. Treasury Strip with maturity equal to the expected term of the
option.
Generally, stock options are granted with an exercise price not less than the
fair value of common stock as determined by the Board of Directors at the date
of grant. During the period from September 11, 1996 (inception) through June 30,
1997 and the year ended June 30, 1998, the Company recorded $43,704 and
$488,822, respectively, as deferred compensation, representing the excess of the
deemed fair value of the Company's common stock over the exercise price of
options granted during the period from September 11, 1996 (inception) through
June 30, 1997 and the year ended June 30, 1998. In July and September 1998, the
Company granted 15,500 (unaudited) and 10,750 (unaudited), respectively, stock
options to employees of the Company. The Company recorded $221,508 (unaudited)
as deferred compensation associated with these grants, representing the excess
of the deemed fair value of the Company's common stock over the exercise price
of options granted, for the three months ending September 30, 1998. Such
deferred compensation cost is being amortized over the vesting period of the
options.
<PAGE> 13
EMAIL PUBLISHING INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
On June 16, 1998, debt was issued with 11,627 detachable warrants for Series A-1
preferred stock with a weighted average exercise price and an exercise price of
$.86 per share. Based on calculations using a minimum value-pricing model, the
weighted average grant date fair value of each detachable warrant was $5.79 or
approximately $67,300 in total. The $67,300 debt discount is being amortized
over the term of the debt. The fair value of each detachable warrant is
estimated on the date of grant using a Black-Scholes-type pricing model with the
following weighted-average assumptions used for grants in the year ended June
30, 1998: dividend yield of zero; expected volatility of 55%; risk-free interest
rate 5.57% and an expected term of one year. As of June 30, 1998 there were
11,627 warrants outstanding and exercisable.
(6) LEASE COMMITMENTS
The Company maintains a non-cancelable operating lease arrangement for office
space.
Future minimum lease payments as of the year ended June 30, 1998 are as follows:
<TABLE>
<S> <C>
1999 ........................................ $ 87,543
2000 ........................................ 83,724
2001 ........................................ 83,724
2002 ........................................ 76,747
--------
$331,738
========
</TABLE>
Rent expense was $11,124 and $22,561 for the period from September 11, 1996
(inception) through June 30, 1997 and for the year ended June 30, 1998,
respectively.
<PAGE> 14
EMAIL PUBLISHING INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The Company also leases office and communications equipment, which are
capitalized for financial reporting purposes. The related capital equipment
collateralizes these agreements. Office and communications equipment under
capital leases include the following at the years ended June 30:
<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
Office and communications equipment $ 21,559 $ 116,124
Less: accumulated amortization (2,644) (19,144)
--------- ---------
$ 18,915 $ 96,980
========= =========
</TABLE>
Amortization expense for the period from September 11, 1996 (inception) through
June 30, 1997 and the year ended June 30, 1998 was $2,644 and $16,500,
respectively.
At the year ended June 30, 1998, future minimum lease payments under capital
leases are as follows:
<TABLE>
<S> <C>
1999 ...................................................... $ 46,377
2000 ...................................................... 34,706
2001 ...................................................... 14,781
2002 ...................................................... 2,822
--------
Total minimum lease payments .............................. 98,686
Less amount representing interest ......................... (16,320)
--------
Present value of future minimum lease payments ............ 82,366
Less current portion ...................................... 36,141
--------
Long-term portion ......................................... $ 46,225
========
</TABLE>
<PAGE> 15
EMAIL PUBLISHING INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(7) INCOME TAXES
At June 30, 1998, the Company has net operating loss carryforwards aggregating
approximately $247,000, which expire between 2012 and 2013. The Internal Revenue
Code places certain limitations on the annual amount of net operating loss
carryforwards which can be utilized if certain changes in the Company's
ownership occur.
The Company's net deferred tax assets are comprised of the following at June 30:
<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward $ 41,859 $ 92,128
Start-up costs 54,011 42,355
Accounts payable and accrued liabilities 2,017 28,578
Accrued salaries 3,750 5,595
--------- ---------
Total deferred tax assets 101,637 168,656
--------- ---------
Deferred tax liabilities:
Accounts receivable and prepaid expenses (14,441) (56,784)
Depreciation and capital leases (1,762) (1,752)
--------- ---------
Total deferred tax liabilities (16,203) (58,536)
--------- ---------
Net deferred tax asset 85,434 110,120
Less: net deferred tax asset valuation allowance (85,434) (110,120)
--------- ---------
Net deferred tax asset $ -- $ --
========= =========
</TABLE>
The net deferred tax assets have been reduced by a valuation allowance because
it is currently more likely than not that such benefits will not be realized.
<PAGE> 16
EMAIL PUBLISHING INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The difference between the zero provision for income taxes and the expected
amount determined by applying the federal statutory rate to loss before income
taxes results from the following:
<TABLE>
<CAPTION>
SEPTEMBER 11,
1996
(INCEPTION)
THROUGH YEAR ENDED
JUNE 30, JUNE 30,
1997 1998
------------ ----------
<S> <C> <C>
Federal income tax benefit at statutory rate .......... $(81,700) $(52,175)
Valuation allowance ................................... 85,434 24,686
State income tax benefit, net of federal effect ....... (7,930) (2,184)
Deferred compensation ................................. 464 28,230
Other ................................................. 3,732 1,443
-------- --------
$ -- $ --
======== ========
</TABLE>
(8) MAJOR CUSTOMERS
Sales to one customer accounted for 94% and 64% of total revenue for the period
from September 11, 1996 (inception) through June 30, 1997 and for the year ended
June 30, 1998, respectively. At June 30, 1997 and 1998, accounts receivable from
this customer were $34,000 and $56,365, respectively.
(9) SUBSEQUENT EVENTS (unaudited)
On October 19, 1998, a complaint was filed against Email Publishing in the
Federal District Court for the District of Colorado, alleging infringement of a
patent held by the plaintiff. The complaint seeks injunctive relief and
unspecified damages. The Company is currently unable to determine whether it
will be able to settle the complaint on terms satisfactory to the Company or the
ultimate outcome or range of possible loss in this matter. The outcome of this
uncertainty could have a material adverse effect on the Company's financial
position, results of operations or cash flows.
<PAGE> 17
EMAIL PUBLISHING INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
On October 21, 1998 and on November 20, 1998, the Company signed subordinated
promissory notes for $100,000 on each date, respectively, with First Virtual
Holdings Incorporated, with an interest rate at 10%, which is due April 15,
1999.
On December 10, 1998, MessageMedia, Inc. (formerly First Virtual Holdings
Incorporated) acquired all of the common stock and all outstanding rights to
acquire shares of common stock of Email Publishing in exchange for 5,582,685
shares of MessageMedia common stock and the assumption by MessageMedia of
options and warrants to acquire up to approximately 417,315 additional shares of
MessageMedia common stock at a weighted average exercise price of $.04 per
share. Email Publishing now operates as a wholly owned subsidiary of
MessageMedia, Inc. (Nasdaq: MAIL)
<PAGE> 1
EXHIBIT 99.3
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Management Committee
Distributed Bits L.L.C.
We have audited the accompanying balance sheets of Distributed Bits L.L.C. (a
development stage company) as of December 31, 1996 and 1997, and the related
statements of operations, members' equity (deficit) and cash flows for the
period from September 9, 1996 (inception) to December 31, 1996 and the year
ended December 31, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Distributed Bits L.L.C. (a
development stage company) at December 31, 1996 and 1997, and the results of its
operations and its cash flows for the period from September 9, 1996 (inception)
to December 31, 1996 and the year ended December 31, 1997, in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As more fully described in Note 1, at
December 31, 1997 the Company has limited working capital and will require
additional sources of financing to complete the commercialization of its
services and products. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. The accompanying financial
statements do not include any adjustments to reflect the possible future effects
on the recoverability and classification of assets or the amounts and
classification of liabilities that may result from the outcome of this
uncertainty.
/S/ ERNST & YOUNG LLP
September 1, 1998
San Diego, California
<PAGE> 2
DISTRIBUTED BITS L.L.C.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------- SEPTEMBER 30,
1996 1997 1998
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 7,090 $ -- $ --
Capital subscriptions receivable from members -- 344,092 --
Employee advance and other 6,000 6,000 10,000
Inventory -- -- 24,196
----------- ----------- -----------
Total current assets 13,090 350,092 34,196
Property and equipment, net 571 60,541 98,183
Deposit 2,500 1,500 1,500
----------- ----------- -----------
Total assets $ 16,161 $ 412,133 $ 133,879
=========== =========== ===========
LIABILITIES AND MEMBERS' EQUITY (DEFICIT)
Current liabilities:
Book overdraft $ -- $ -- $ 22,707
Accounts payable 15,225 55,331 82,144
Accrued compensation and related liabilities 7,042 26,501 39,939
Deferred revenue -- 36,000 36,000
Current portion, capital lease commitment -- -- 14,053
----------- ----------- -----------
Total current liabilities 22,267 117,832 194,843
Capital lease commitment -- -- 32,272
Members' equity (deficit):
Members capital 113,800 1,013,115 1,878,097
Deferred compensation -- -- (44,110)
Deficit accumulated during the development
stage (119,906) (718,814) (1,927,223)
----------- ----------- -----------
Net members' equity (deficit) (6,106) 294,301 (93,236)
----------- ----------- -----------
Total liabilities and members' equity
(deficit) $ 16,161 $ 412,133 $ 133,879
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
<PAGE> 3
DISTRIBUTED BITS L.L.C.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
PERIOD FROM NINE MONTHS SEPTEMBER 9, 1996
SEPTEMBER 9, 1996 ENDED (INCEPTION)
(INCEPTION) TO YEAR ENDED SEPTEMBER 30, TO
DECEMBER 31, DECEMBER 31, ----------------------------- SEPTEMBER 30,
1996 1997 1997 1998 1998
----------------- ----------- ----------- ----------- ------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cost and expenses:
Research and development $ 82,491 $ 477,738 $ 283,993 $ 611,109 $ 1,171,338
General and administrative 37,415 121,170 83,195 597,300 755,885
----------- ----------- ----------- ----------- -----------
Net loss $ (119,906) $ (598,908) $ (367,188) $(1,208,409) $(1,927,223)
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
<PAGE> 4
DISTRIBUTED BITS L.L.C.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF MEMBERS' EQUITY (DEFICIT)
FOR THE PERIOD FROM SEPTEMBER 9, 1996
(INCEPTION) THROUGH SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED
DURING THE
DEFERRED DEVELOPMENT TOTAL MEMBERS'
MEMBERS CAPITAL COMPENSATION STAGE EQUITY (DEFICIT)
--------------- ------------ ------------- ----------------
<S> <C> <C> <C> <C>
Issuance of Member Interest from
inception through
December 1996 $ 113,800 $ -- $ -- $ 113,800
Net loss -- -- (119,906) (119,906)
----------- ----------- ----------- -----------
Balance at December 31, 1996 113,800 -- (119,906) (6,106)
Issuance of Member Interest
throughout 1997 899,315 -- -- 899,315
Net loss -- -- (598,908) (598,908)
----------- ----------- ----------- -----------
Balance at December 31, 1997 1,013,115 -- (718,814) 294,301
Issuance of Member Interest from
January through September 1998
(unaudited) 752,372 -- -- 752,372
Issuance of unit options for services
(unaudited) 24,500 -- -- 24,500
Deferred compensation (unaudited) 88,110 (88,110) -- --
Amortization of deferred compensation
(unaudited) -- 44,000 -- 44,000
Net loss (unaudited) -- -- (1,208,409) (1,208,409)
----------- ----------- ----------- -----------
Balance at September 30, 1998
(unaudited) $ 1,878,097 $ (44,110) $(1,927,223) $ (93,236)
=========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
<PAGE> 5
DISTRIBUTED BITS L.L.C.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
SEPTEMBER 9, 1996 NINE MONTHS SEPTEMBER 9, 1996
(INCEPTION) TO YEAR ENDED ENDED SEPTEMBER 30, (INCEPTION) TO
DECEMBER 31, DECEMBER 31, ----------------------------- SEPTEMBER 30,
1996 1997 1997 1998 1998
----------------- ----------- ----------- ----------- -----------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $ (119,906) $ (598,908) $ (367,188) $(1,208,409) $(1,927,223)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation 114 11,661 628 41,934 53,709
Amortization of deferred
compensation -- -- -- 44,000 44,000
Unit options issued for services
rendered -- -- -- 24,500 24,500
Changes in operating assets and
liabilities:
Employee advance and
other (6,000) -- -- (4,000) (10,000)
Inventory -- -- -- (24,196) (24,196)
Book overdraft -- -- -- 22,707 22,707
Accounts payable 15,225 40,106 (5,597) 26,813 82,144
Accrued compensation and related
liabilities 7,042 19,459 (7,042) 13,438 39,939
Deferred revenue -- 36,000 36,000 -- 36,000
----------- ----------- ----------- ----------- -----------
Net cash used in operating
activities (103,525) (491,682) (343,199) (1,063,213) (1,658,420)
INVESTING ACTIVITIES
Acquisition of property and
equipment (685) (71,631) (40,142) (26,096) (98,412)
Deposits (2,500) 1,000 (1,500) -- (1,500)
----------- ----------- ----------- ----------- -----------
Net cash used in investing
activities (3,185) (70,631) (41,642) (26,096) (99,912)
FINANCING ACTIVITIES
Payments on capital lease
commitments -- -- -- (7,155) (7,155)
Proceeds from issuance of
member interest 113,800 555,223 366,164 752,372 1,421,395
Proceeds from capital subscriptions
receivable from members -- -- -- 344,092 344,092
----------- ----------- ----------- ----------- -----------
Net cash provided by financing
Activities 113,800 555,223 366,164 1,089,309 1,758,332
Increase (decrease) in cash and cash
equivalents 7,090 (7,090) (18,677) -- --
Cash and cash equivalents at beginning
of period -- 7,090 7,090 -- --
----------- ----------- ----------- ----------- -----------
Cash and cash equivalents at end of
period $ 7,090 $ -- $ (11,587) $ -- $ --
=========== =========== =========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF NON-CASH
FINANCING ACTIVITIES
Capital subscriptions receivable from
members $ -- $ 344,092 $ -- $ -- $ --
=========== =========== =========== =========== ===========
Capital lease commitment entered into
for equipment $ -- $ -- $ -- $ 53,480 $ 53,840
=========== =========== =========== =========== ===========
</TABLE>
<PAGE> 6
DISTRIBUTED BITS L.L.C.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1997 AND PERTAINING TO
SEPTEMBER 30, 1998 AND THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND
1998 IS UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Distributed Bits L.L.C. (the Company) develops customer e-mail management
systems and solutions. The Company was formed on September 9, 1996, as a limited
liability company in accordance with the Limited Liability Company Act (LLCA) of
the State of Illinois. Under the terms of the LLCA, the Company will dissolve
upon the earlier of December 31, 2006, or unanimous agreement of all members.
BASIS OF PRESENTATION
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. This basis of accounting contemplates
the recovery of the Company's assets and the satisfaction of its liabilities in
the normal course of conducting business. Since inception, the Company has been
primarily engaged in organizational activities, including raising capital,
recruiting personnel and the engaging in research and development activities. As
of December 31, 1997, the Company has not realized significant revenues and
therefore is considered to be in the development stage.
The Company's ability to transition from the development stage and ultimately to
attain profitable operations is dependent upon its ability to raise additional
capital through debt or equity financing and the successful market acceptance of
its products and services. There can be no assurances that the Company's
products and services or its efforts to raise additional capital will be
successful. The accompanying financial statements do not include any adjustments
to reflect the possible future effects on the recoverability and classification
of assets or the amounts and classification of liabilities that may result from
the outcome of this uncertainty.
INTERIM FINANCIAL INFORMATION
The financial statements for the nine months ended September 30, 1997 and 1998
and for the period from September 9, 1996 (inception) to September 30, 1998 are
unaudited. The unaudited financial statements have been prepared on the same
basis as the audited financial statements, and in the opinion of management,
include all adjustments, consisting only of normal recurring adjustments,
necessary to state fairly the financial information set forth therein, in
accordance with generally accepted accounting principles.
<PAGE> 7
DISTRIBUTED BITS L.L.C.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1997 AND PERTAINING TO
SEPTEMBER 30, 1998 AND THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND
1998 IS UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The results of operations for the interim period ended September 30, 1998 are
not necessarily indicative of the results which may be reported for any other
interim period or for the year ended December 31, 1998.
FISCAL YEAR END
The Company's fiscal year end is December 31.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a remaining maturity
of three months or less when acquired to be cash equivalents.
INVENTORY
Inventory is stated at the lower of cost or market and consist of finished
goods.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost, less accumulated depreciation, and is
depreciated over the estimated useful lives (three to five years) of the assets
using straight line methods.
IMPAIRMENT OF LONG-LIVED ASSETS
Statement of Financial Accounting Standards (SFAS) No. 121, Accounting for
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,
establishes the accounting for the impairment of long-lived assets, identifiable
intangibles and goodwill related to those assets. To date the Company has not
identified any indicators of impairment nor recorded any impairment losses.
INCOME TAXES
Losses of the Company are allocated to, and included in the individual returns
of members.
<PAGE> 8
DISTRIBUTED BITS L.L.C.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1997 AND PERTAINING TO
SEPTEMBER 30, 1998 AND THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND
1998 IS UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
UNIT OPTIONS
SFAS No. 123, Accounting for Stock-Based Compensation, establishes the use of
the fair value based method of accounting for equity-based compensation
arrangements, under which compensation cost is determined using the fair value
of equity-based compensation determined as of the grant date, and is recognized
over the periods in which the related services are rendered. SFAS No. 123 also
permits companies to elect to continue using the current intrinsic value
accounting method specified in Accounting Principles Board (APB) Opinion No. 25
to account for equity-based compensation. The Company has decided to use the
intrinsic value based method, and will disclose the pro forma effect of using
the fair value based method to account for its equity-based compensation.
REVENUE RECOGNITION
Through December 31, 1997, the Company recognizes revenue in accordance with
American Institute of Certified Public Accountants (AICPA) Statement of Position
on Software Revenue Recognition No. 91-1. Initial license fee revenue is
recognized upon shipment of the product to customers if no significant Company
obligations remain and collection of the receivable is deemed probable. The
portion of the initial license fee revenue which represents the software support
for the first year is deferred and recognized ratably over the contract period.
In subsequent years, customers pay annual license fees for continued use and
support of licensed software. Annual renewal license and support fees revenue is
deferred and recognized ratably over the contract period.
RESEARCH AND DEVELOPMENT COSTS
Costs incurred in connection with research and development are charged to
operations as incurred.
SOFTWARE DEVELOPMENT COSTS
Financial accounting standards provide for the capitalization of certain
software development costs after technological feasibility of the software is
attained. No such costs have been capitalized to date because costs incurred
subsequent to reaching technological feasibility have not been material.
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
<PAGE> 9
DISTRIBUTED BITS L.L.C.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1997 AND PERTAINING TO
SEPTEMBER 30, 1998 AND THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND
1998 IS UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NEW ACCOUNTING PRONOUNCEMENTS
The AICPA's Statement of Position, Software Revenue Recognition (SOP 97-2),
provides guidance for recognizing revenue related to sales by software vendors.
SOP 97-2 is effective for the Company beginning on January 1, 1998. The Company
does not believe the adoption of SOP 97-2 has had a significant impact on its
revenue recognition policy.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
Reporting Comprehensive Income which establishes rules for reporting and
displaying comprehensive income. The Statement is effective for fiscal years
beginning after December 15, 1997. There was no difference between the Company's
net loss for the nine months ended September 30, 1998, the year ended December
31, 1997, or the period from September 9, 1996 (inception) to December 31, 1996.
2. EMPLOYEE ADVANCE
The Company has a non-interest bearing note receivable from the Chief Executive
Officer totaling $6,000. The note is payable on demand by the Company.
<PAGE> 10
DISTRIBUTED BITS L.L.C.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1997 AND PERTAINING TO
SEPTEMBER 30, 1998 AND THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND
1998 IS UNAUDITED)
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1996 1997
-------- --------
<S> <C> <C>
Software $ -- $ 11,131
Computer equipment 685 56,959
Office equipment -- 4,226
-------- --------
685 72,316
Less accumulated depreciation (114) (11,775)
-------- --------
$ 571 $ 60,541
======== ========
</TABLE>
4. DEFERRED REVENUE
In March 1997, the Company entered into an agreement to develop and license
software to a customer totaling $36,000. The agreement provides for support
services at an annual fee of $5,400. At December 31, 1997, the Company recorded
amounts received under the agreement as deferred revenue pending completion of
significant development obligations.
5. COMMITMENTS
The Company leases its office facilities under a month-to-month operating lease.
Total rent expense was $5,000 for the period from September 9, 1996 to December
31, 1996 and $27,000 for the year ended December 31, 1997.
In April 1998, the Company entered into a three year non-cancellable capital
lease commitment for computer equipment requiring monthly payments of $1,752.
<PAGE> 11
DISTRIBUTED BITS L.L.C.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1997 AND PERTAINING TO
SEPTEMBER 30, 1998 AND THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND
1998 IS UNAUDITED)
6. MEMBERS' EQUITY
As of December 31, 1997 the Company had issued Member Interest to six
individuals. In accordance with the Operating Agreement (the "Agreement"), these
individuals are required to contribute total capital of $1,049,115 of which
$705,023 had been received by the Company as of December 31, 1997. The Company
has recorded the remaining $344,092 to be received under the Agreement as
capital subscriptions receivable in the accompanying balance sheet. The
outstanding subscription amounts were received as of June 30, 1998. The transfer
of Member Interest is restricted as defined in the Agreement. Members are not
entitled to demand or receive from the Company the liquidation of such. There is
one class of members.
Member Interest in the Company will be until the Company is dissolved in
accordance with the provisions of the Agreement. Profits and losses of the
Company for each fiscal year shall be allocated to the members in proportion as
described in the Agreement.
Upon dissolution of the Company, existing assets of the Company will be used to
settle liabilities owed to creditors prior to any distribution to holders of
Member Interest.
On April 1, 1998 the Manager and Members adopted the Company's Unit Option Plan
(the Plan), which provides for the issuance of unit options consisting of
membership interests of the Company to eligible employees and consultants of the
Company. The initial maximum number of unit options which may be issued,
pursuant to the Plan, shall be 2,000 unit options (representing 20% of the total
ownership interest in the Company at June 30, 1998) unless increased by an
appropriate action of the Manager. Under the Plan, the terms and conditions of
the unit options are determined at the discretion of the Manager or the
management committee.
Through September 30, 1998, the Company granted 267 unit options representing
approximately 3% ownership interest at exercise prices of $20 per unit option.
At September 30, 1998, none of the unit options were exercised and 72 unit
options were vested and exercisable. The deemed weighted-average fair value of
unit options granted in the nine months ended September 30, 1998 was $350.
<PAGE> 12
DISTRIBUTED BITS L.L.C.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1997 AND PERTAINING TO
SEPTEMBER 30, 1998 AND THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND
1998 IS UNAUDITED
Through December 31, 1997, the Company recorded deferred compensation for the
difference between the exercise price of unit options granted and the deemed
fair value for financial statement presentation purposes of the Company's Member
Interest at the date of issuance or grant. The deferred compensation will be
amortized over the vesting period of the related unit options which is generally
four years. Gross deferred compensation at September 30, 1998 totaled $88,110,
and related amortization expense totaled $44,000 for the nine months ended
September 30, 1998.
During 1998, the Company granted 70 unit options to two consultants outside the
Plan. The unit options are exercisable at $.01 per unit option and all were
vested and exercisable at September 30, 1998. The Company recorded a $24,500
charge to general and administrative expense in the nine months ended September
30, 1998 representing the deemed fair value of these unit options.
7. RECENT DEVELOPMENTS (UNAUDITED)
On December 11, 1998, the Company was acquired by MessageMedia, Inc. (Nasdaq:
MAIL) formerly First Virtual Holdings Incorporated (Nasdaq:FVHI). MessageMedia
acquired all assets, liabilities and equity interests, including the unit
options in the Company, in exchange for 1,350,000 shares of MessageMedia common
stock and warrants to purchase an additional 500,000 shares of MessageMedia
common stock. The warrants will be exercisable (i) as to 50% of the underlying
shares at a cash exercise price of $6.00 per share for a period of 30 months and
(ii) as to the remaining underlying shares at a cash exercise price of $8.00 per
share for a period of 42 months.
8. YEAR 2000 COMPLIANCE (UNAUDITED)
Many currently installed computer systems and software products are coded to
accept only two-digit entries in the date code field. Beginning in the year
2000, these date code fields will need to accept four-digit entries to
distinguish 21st century dates from 20th century dates. As a result, in
approximately one and one-quarter years, computer systems and/or software used
by many companies may need to be upgraded to comply with such "Year 2000"
requirements.
Significant uncertainty exists concerning the potential effects associated with
compliance. Although the Company believes that it is Year 2000 compliant, there
can be no assurance that coding errors or other defects will not be discovered
in the future. Any Year 2000 compliance problem of the Company, its service
providers, its customers or the Internet infrastructure could result in a
material adverse effect on the Company's business, operating results and
financial conditions.
