<PAGE>
================================================================================
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
August 30, 1999
-------------------------------------------------------------------
Date of Report (Date of earliest event reported)
FLYCAST COMMUNICATIONS CORPORATION
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 000-25467 77-0431028
- --------------------------------------------------------------------------------
(State or other jurisdiction of (Commission File Number) (I.R.S. Employer
incorporation or organization) Identification Number)
181 Fremont Street
San Francisco, California 94105
-------------------------------------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code: (415) 977-1000
Not Applicable
- --------------------------------------------------------------------------------
(Former name or former address, if changed since last report)
================================================================================
<PAGE>
Item 2. ACQUISITION OR DISPOSITION OF ASSETS
The undersigned Registrant hereby amends the Current Report on Form 8-K filed on
September 9, 1999 to incorporate Item 7(a), the Financial Statements of Business
Acquired and Item 7(b), the Pro Forma Financial Information and provide Item
5(a), the Consolidated Financial Statements of Flycast Communications
Corporation as of December 31, 1997 and 1998 and for Each of the Three Years in
the Period Ended December 31, 1998.
On August 30, 1999, Flycast Communications Corporation, a Delaware corporation
("Flycast") acquired InterStep, Inc., a Massachusetts corporation ("InterStep"),
pursuant to the merger of Fremont Acquisition Corporation ("Merger Sub"), a
Massachusetts corporation and wholly owned subsidiary of Flycast with and into
InterStep. As a result of the merger, InterStep became a wholly owned subsidiary
of Flycast. In the transaction, which has been accounted for as a pooling of
interests, Flycast issued 480,337 shares of common stock to InterStep
shareholders. Of the 480,337 shares of common stock, 47,558 shares are held by
an escrow agent to serve as security for the indemnity provided by certain
shareholders of InterStep. The Consolidated Financial Statements provided in
Item 5(a) have been restated to give retroactive effect to the acquisition of
InterStep.
Item 5. Other
(a) Consolidated Financial Statements of Flycast Communications
Corporation as of December 31, 1997 and 1998 and for Each of the
Three Years in the Period Ended December 31, 1998 (attached hereto
as Exhibit 99.1)
(1) Independent Auditors' Report
(2) Consolidated Balance Sheets as of December 31, 1997 and 1998
(3) Consolidated Statements of Operations For the Years Ended December
31, 1996, 1997 and 1998
(4) Consolidated Statements of Changes in Stockholders' Equity (Deficit)
For the Years Ended December 31, 1996, 1997 and 1998
(5) Consolidated Statements of Cash Flows For the Years Ended December
31, 1996, 1997 and 1998
(6) Notes to Consolidated Financial Statements
<PAGE>
Item 7. Financial Statements and Exhibits.
(a) Financial Statements of Business Acquired.
The following financial statements for InterStep, Inc. are attached hereto
as Exhibit 99.2:
(1) Independent Auditors' Report
(2) Balance Sheets as of December 31, 1997, 1998 and June 30, 1999
(unaudited)
(3) Statements of Operations For the Years Ended December 31, 1997 and
1998 and the Six Months Ended June 30, 1998 (unaudited) and June 30,
1999 (unaudited)
(4) Statements of Changes in Stockholders' Equity For the Years Ended
December 31, 1997 and 1998 and the Six Months Ended June 30, 1999
(unaudited)
(5) Statements of Cash Flows For the Years Ended December 31, 1997 and
1998 and the Six Months Ended June 30, 1998 (unaudited) and June 30,
1999 (unaudited)
(6) Notes to Financial Statements
(b) Pro Forma Financial Information.
Pro Forma Financial Information has not been included herein as all
necessary information has been provided in Form 10-Q for the Three and
Nine Months Ended September 30, 1998 and 1999, and the Consolidated
Financial Statements of Flycast Communications Corporation as of December
31, 1997 and 1998 and for Each of the Three Years in the Period Ended
December 31, 1998 included in Item 5(a) above.
(c) Exhibits.
99.1 Consolidated Financial Statements of Flycast Communications
Corporation as of December 31, 1997 and 1998 and for Each of the
Three Years in the Period Ended December 31, 1998 reflecting the
acquisition of InterStep, Inc., including the notes to the
consolidated financial statements
99.2 Financial Statements of InterStep, Inc. as of December 31, 1997 and
1998 (audited) and June 30, 1999 (unaudited) and for the years ended
December 31, 1997 and 1998 (audited) and for the six months ended
June 30, 1998 and 1999 (unaudited)
<PAGE>
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.
FLYCAST COMMUNICATIONS CORPORATION
A Delaware Corporation
By: /s/ Thomas L. Marcus
----------------------------------------
Thomas L. Marcus, Executive Vice President of
Finance, Administration and Corporate
Development
Date: November 10, 1999
<PAGE>
EXHIBIT INDEX
Exhibit Number Description of Exhibit
- -------------- --------------------------------------------------------
99.1 Consolidated Financial Statements of Flycast
Communications Corporation as of December 31, 1997 and
1998 and for Each of the Three Years in the Period Ended
December 31, 1998 reflecting the acquisition of
InterStep, Inc., including the notes to the consolidated
financial statements
99.2 Financial Statements of InterStep, Inc. as of December
31, 1997 and 1998 (audited) and June 30, 1999 (unaudited)
and for the years ended December 31, 1997 and 1998
(audited) and for the six months ended June 30, 1998 and
1999 (unaudited)
<PAGE>
EXHIBIT 99.1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Flycast Communications Corporation:
We have audited the accompanying consolidated balance sheets of Flycast
Communications Corporation and subsidiary (the "Company") as of December 31,
1997 and 1998, and the related consolidated statements of operations, common
stockholders' equity (deficit) and cash flows for each of the three years in the
period ended December 31, 1998. 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. The consolidated
financial statements give retroactive effect to the merger of InterStep, Inc.
with and into Flycast Communications Corporation on August 30, 1999, which has
been accounted for as a pooling-of-interests as described in Note 9 to the
consolidated financial statements.
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, such consolidated financial statements present fairly, in all
material respects, the financial position of Flycast Communications Corporation
and subsidiary at December 31, 1997 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
San Jose, California
October 18, 1999
<PAGE>
FLYCAST COMMUNICATIONS CORPORATION
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share and Per Share Amounts)
================================================================================
<TABLE>
<CAPTION>
1997 1998
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 3,593 $ 5,197
Investments 183
Accounts receivable, net of allowance for doubtful accounts of
$12 and $178, respectively 531 3,802
Prepaid expenses and other assets 40 267
-------- --------
Total current assets 4,164 9,449
PROPERTY AND EQUIPMENT, NET 703 1,945
OTHER ASSETS 18 108
-------- --------
TOTAL ASSETS $ 4,885 $ 11,502
======== ========
LIABILITIES, MANDATORILY REDEEMABLE PREFERRED STOCK
AND COMMON STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable $ 361 $ 2,561
Accrued liabilities 82 375
Accrued compensation and related expenses 63 460
Notes payable to stockholders 58 62
Short-term capital lease obligations 31 490
Short-term debt 983
-------- --------
Total current liabilities 595 4,931
LONG-TERM CAPITAL LEASE OBLIGATIONS 40 1,041
LONG-TERM DEBT 3,682
-------- --------
Total liabilities 635 9,654
-------- --------
MANDATORILY REDEEMABLE PREFERRED STOCK:
Mandatorily redeemable convertible preferred stock, $0.0001 par value,
9,904,000 shares authorized:
Series A, 920,000 shares designated, 911,295 shares issued and
outstanding in 1997 and 1998 (aggregate liquidation preference $911) 951 1,027
Series B, 5,500,000 shares designated, 5,324,532 shares issued and
outstanding in 1997 and 1998 (aggregate liquidation preference $7,082) 7,244 7,824
Series C, 3,484,000 shares designated, 497,785 shares issued and
outstanding in 1998 (aggregate liquidation preference $4,500) 5,004
-------- --------
Total mandatorily redeemable preferred stock 8,195 13,855
-------- --------
COMMON STOCKHOLDERS' EQUITY (DEFICIT):
Common stock, $0.0001 par value, 20,000,000 shares authorized, 2,827,615
and 3,132,219 shares issued and outstanding in 1997 and 1998, respectively 247 922
Common stock options 2,929
Deferred stock compensation (1,771)
Notes receivable from stockholders (227) (606)
Accumulated deficit (3,965) (13,481)
-------- --------
Total common stockholders' equity (deficit) (3,945) (12,007)
-------- --------
TOTAL LIABILITIES, MANDATORILY REDEEMABLE PREFERRED STOCK
AND COMMON STOCKHOLDERS' EQUITY (DEFICIT) $ 4,885 $ 11,502
======== ========
</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
FLYCAST COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousand, Except Per Share Amounts)
================================================================================
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------------
1996 1997 1998
<S> <C> <C> <C>
REVENUE $ 123 $ 934 $ 9,282
COST OF REVENUE 5 600 6,118
-------- -------- --------
GROSS PROFIT 118 334 3,164
-------- -------- --------
OPERATING EXPENSES:
Sales and marketing 111 1,393 5,228
Research and development 218 1,473 3,010
General and administrative 183 807 2,216
Stock-based compensation 1,158
-------- -------- --------
Total operating expenses 512 3,673 11,612
-------- -------- --------
OPERATING LOSS (394) (3,339) (8,448)
INTEREST INCOME 1 95 98
INTEREST EXPENSE (2) (102) (510)
-------- -------- --------
NET LOSS $ (395) $ (3,346) $ (8,860)
======== ======== ========
ACCRETION OF MANDATORILY
REDEEMABLE PREFERRED STOCK (206) (656)
-------- -------- --------
LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS $ (395) $ (3,552) $ (9,516)
======== ======== ========
BASIC AND DILUTED LOSS PER SHARE $ (0.83) $ (6.03) $ (7.26)
======== ======== ========
SHARES USED IN BASIC AND DILUTED LOSS PER SHARE 476 589 1,311
======== ======== ========
PRO FORMA BASIC AND DILUTED LOSS PER SHARE (Note 1) $ (1.25)
========
SHARES USED IN PRO FORMA BASIC
AND DILUTED LOSS PER SHARE (Note 1) 7,589
========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
FLYCAST COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY (DEFICIT) (In Thousands)
================================================================================
<TABLE>
<CAPTION>
Common Stock Deferred
----------------------- Common Stock Notes Accumulated
Shares Amount Stock Options Compensation Receivable Deficit Total
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1996 475 $ 10 $ $ $ $ (18) $ (8)
ISSUANCE OF COMMON STOCK FOR CASH
AND NOTES RECEIVABLE 1 611 (16) 595
NET LOSS (395) (395)
-------- -------- -------- -------- --------- --------- --------
BALANCE, DECEMBER 31, 1996 476 621 (16) (413) 192
CONVERSION OF COMMON STOCK TO
SERIES A PREFERRED STOCK (1) (611) 16 (595)
ISSUANCE OF COMMON STOCK FOR CASH
AND NOTES RECEIVABLE 2,284 228 (227) 1
EXERCISE OF COMMON STOCK OPTIONS 68 7 7
ISSUANCE OF COMMON WARRANTS IN
CONNECTION WITH ISSUANCE OF DEBT 2 2
ACCRETION OF MANDATORILY
REDEEMABLE PREFERRED STOCK (206) (206)
NET LOSS (3,346) (3,346)
-------- -------- -------- -------- --------- --------- --------
BALANCE, DECEMBER 31, 1997 2,827 247 (227) (3,965) (3,945)
EXERCISE OF COMMON STOCK OPTIONS 686 492 (446) 46
REPURCHASE OF COMMON STOCK (425) (42) 42
PAYMENT ON NOTES RECEIVABLE 25 25
ISSUANCE OF COMMON STOCK
FOR SERVICES 44 47 47
COMPENSATORY STOCK ARRANGEMENTS 2,929 (2,929)
AMORTIZATION OF DEFERRED STOCK
COMPENSATION 1,158 1,158
ISSUANCE OF COMMON STOCK OPTIONS
AND WARRANTS FOR SERVICES 178 178
ACCRETION OF MANDATORILY
REDEEMABLE PREFERRED STOCK (656) (656)
NET LOSS (8,860) (8,860)
-------- -------- -------- -------- --------- --------- --------
BALANCE, DECEMBER 31, 1998 3,132 $ 922 $ 2,929 $ (1,771) $ (606) $ (13,481) $(12,007)
======== ======== ======== ======== ========= ========= ========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
FLYCAST COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS ( In Thousands)
================================================================================
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------
1996 1997 1998
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (395) $ (3,346) $ (8,860)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation $ 30 $ 204 $ 585
Provision for bad debts 12 236
Loss on sale of property and equipment 5
Stock and warrants issued for services 225
Noncash interest expense 71 248
Stock-based compensation expense 1,158
Changes in operating assets and liabilities:
Accounts receivable (50) (493) (3,507)
Prepaid expenses and other assets (4) (54) (317)
Accounts payable 40 321 2,200
Accrued liabilities 30 121 694
------- ------- -------
Net cash used in operating activities (349) (3,164) (7,333)
------- ------- -------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchases of property and equipment (252) (569) (132)
Proceeds from sale of property and equipment 4
Purchases of short term investments (183)
------- ------- -------
Net cash used in investing activities (252) (569) (311)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long term debt 5,100
Payments on long term debt (179)
Payments on capital leases (28) (244)
Proceeds from notes payable to shareholders 19
Payment on notes payable to shareholders (5)
Proceeds from payment of notes receivable from stockholders 16 25
Proceeds from issuance of common stock 595 8 46
Proceeds from issuance of preferred stock 7,308 4,500
------- ------- -------
Net cash provided by financing activities 614 7,299 9,248
------- ------- -------
NET INCREASE IN CASH AND CASH EQUIVALENTS 13 3,566 1,604
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 14 27 3,593
------- ------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 27 $ 3,593 $ 5,197
======= ======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $ 27 $ 258
======= =======
Noncash financing and investing activities:
Purchase of equipment under capital lease $ 100 $ 1,704
======= =======
Issuance of common stock for notes receivable $ 16 $ 228 $ 446
======= ======= =======
Repurchase of common stock for extinguishment of debt $ 42
=======
Conversion of common stock to preferred stock $ 611
=======
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
FLYCAST COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization - Flycast Communications Corporation ("Flycast") commenced
operations on April 14, 1996 (inception). Flycast is a leading provider of
Web-based advertising solutions designed to maximize the return on
investment for direct response advertisers and e-commerce companies.
Flycast is headquartered in San Francisco.
Basis of Presentation - On August 30, 1999, Flycast completed a merger
with InterStep, Inc. ("InterStep") a Massachusetts corporation which
commenced operations in 1995. The transaction has been accounted for as a
pooling of interests and, accordingly, the consolidated financial
statements of the Company for all periods presented have been restated to
include the accounts of InterStep (see Note 9). No adjustments were
required to conform accounting policies of the entities. There were no
significant intercompany transactions requiring elimination for any
periods presented.
Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates. The Company performs ongoing credit evaluations of its
customers' respective financial conditions, and, generally, requires no
collateral from its customers. The Company maintains an allowance for
uncollectible accounts receivable based on the expected collectibility of
accounts receivable.
Cash equivalents consist of money market funds and certificates of deposit
with original maturities of three months or less at the time of
acquisition.
Investments consist of certificates of deposit with an original maturity
date of greater than three months at the time of acquisition. Such
investments are considered available for sale and have carrying values
which approximate fair value.
Property and Equipment - Property and equipment are stated at cost.
Equipment held under capital leases is stated at the present value of
minimum lease payments. Depreciation on property and equipment is
calculated on the straight- line method over the estimated useful lives of
the assets. Equipment held under capital leases is amortized on the
straight-line method over the shorter of the lease term or the estimated
useful life of the asset.
Revenue Recognition - Revenues derived from the delivery of advertising
impressions through third-party Web sites and delivery of e-mail content
are recognized in the period the advertising impressions or e-mail
contents are delivered provided collection of the resulting receivable is
probable. Revenues from list management and distribution services are
recognized when services have been performed. Amounts payable to third
party Web sites for advertisements displayed on such sites are recorded as
cost of revenue in the period the advertising impressions or e-mails are
delivered.
6
<PAGE>
Advertising expenses are charged to operations as incurred. Advertising
expenses were not significant in 1996 or 1997 and were $634,000 in 1998.
Research and development expenses are charged to operations as incurred.
Income Taxes - Deferred tax liabilities are recognized for future taxable
amounts, and deferred tax assets are recognized for future deductions, net
of a valuation allowance to reduce net deferred tax assets to amounts that
are more likely than not to be realized.
Concentration of Credit Risk - Financial instruments that potentially
subject the Company to concentration of credit risk consist of trade
receivables. The Company's credit risk is mitigated by the Company's
credit evaluation process and the reasonably short collection terms. The
Company does not require collateral or other security to support accounts
receivable and maintains reserves for potential credit losses.
Financial Instruments - The Company's financial instruments include cash
and cash equivalents, short-term investments, notes receivable from
stockholders and long-term debt. At December 31, 1997 and 1998, the fair
values of these instruments approximated their financial statement
carrying amounts.
Stock-Based Compensation - The Company accounts for its employee stock
option plan in accordance with the provisions of Accounting Principles
Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees."
Accordingly, no accounting recognition is given to stock options granted
to employees (including directors) at fair market value until they are
exercised. Upon exercise, the net proceeds are credited to stockholders'
equity (deficit). Compensation expense is recognized for stock options
granted to employees (including directors) at less than fair market value.
The Company accounts for stock options issued to non-employees in
accordance with the provisions of Statement of Financial Accounting
Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation" and
Emerging Issues Task Force Issue No. 96-18 under the fair value based
method.
Impairment of Long-Lived Assets and Long-Lived Assets To Be Disposed Of -
The Company evaluates its long-lived assets for impairment whenever events
or changes in circumstances indicate that the carrying amount of such
assets or intangibles may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an
asset to future undiscounted net cash flows expected to be generated by
the asset. If such assets are considered to be impaired, the impairment to
be recognized is measured by the amount by which the carrying amount of
the assets exceeds the fair value of the assets. Assets to be disposed of
are reported at the lower of the carrying amount or fair value less costs
to sell.
Loss per Common Share - Basic loss per common share excludes dilution and
is computed by dividing loss attributable to common stockholders by the
weighted average number of common shares outstanding for the period
(excluding shares subject to repurchase). Diluted loss per common share
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common
stock. Common share equivalents are excluded from the computation in loss
periods as their effect would be antidilutive.
Pro Forma Net Loss per Common Share - Pro forma basic and diluted loss per
common share is computed by dividing loss attributable to common
stockholders by the weighted average number of
7
<PAGE>
common shares outstanding for the period (excluding shares subject to
repurchase) and the weighted average number of common shares resulting
from the assumed conversion of outstanding shares of mandatorily
redeemable preferred stock.
Recently Issued Accounting Standards - In June 1997, the Financial
Accounting Standards Board (FASB) issued SFAS No. 130, "Reporting
Comprehensive Income," which requires an enterprise to report, by major
components and as a single total, the change in its net assets during the
period from nonowner sources; and SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information," which establishes
annual and interim reporting standards for an enterprise's business
segments and related disclosures about its products, services, geographic
areas and major customers. The Company had no comprehensive income items
to report for the three years in the period ended December 31, 1998. The
Company currently operates one reportable segment under SFAS No. 131.
Adoption of these statements in 1998 did not impact the Company's
financial position, results of operations or cash flows.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which defines derivatives, requires
that all derivatives be carried at fair value, and provides for hedge
accounting when certain conditions are met. SFAS No. 133 is effective for
the Company in fiscal 2001. Although the Company has not fully assessed
the implications of SFAS No. 133, the Company does not believe that
adoption of this statement will have a material impact on the Company's
financial position or results of operations.
2. PROPERTY AND EQUIPMENT
Property and equipment as of December 31, 1997 and 1998 consisted of the
following (in thousands):
1997 1998
Computer equipment and purchased software $ 810 $ 904
Computer equipment under capital lease 100 1,796
Furniture, fixtures and office equipment 29 60
------- -------
Total 939 2,760
Less accumulated depreciation (236) (815)
------- -------
Net $ 703 $ 1,945
======= =======
The accumulated depreciation associated with computer equipment under
capital lease was $24,000 and $312,000 at December 31, 1997 and 1998,
respectively.
3. NOTES PAYABLE TO STOCKHOLDERS
The Company has notes payable to two stockholders, payable on demand, with
interest of 6.74%. The outstanding amount as of December 31, 1997 and 1998
is $58,000 and $62,000, respectively.
8
<PAGE>
4. DEBT
In 1998, the Company borrowed $600,000 from a lending institution at an 8%
interest rate. Principal and interest payments are due in monthly
installments through July 2001. As of December 31, 1998, the outstanding
obligation was $445,000.
In 1998, the Company obtained a $175,000 letter of credit as a security
deposit on office space leased. The letter of credit is collateralized by
all assets of the Company.
In 1998, the Company entered into a financing agreement with a preferred
stockholder and lender for $2,500,000, due in April 2002 with interest at
11% per annum, and for an additional $5,000,000, due in August 2001 with
interest at 14%. The Company granted this lender Series C preferred stock
warrants to purchase 55,409 shares at $4.51 per share, and 72,324 shares
of preferred stock at $4.42 per share. The estimated fair value allocated
to the warrants of $304,000 is being accreted over the life of the
financing agreements. As of December 31, 1998, the recorded obligation
totaled $4,220,000 and $3,000,000 is available for future borrowing.
Debt outstanding excluding capital lease obligations (Note 8) as of
December 31, 1998 will be due in annual principal payments of $983,000,
$1,876,000, $1,646,000 and $160,000 in 1999, 2000, 2001 and 2002,
respectively.
5. INCOME TAXES
The Company's deferred income tax assets are comprised of the following
(in thousands):
<TABLE>
<CAPTION>
1997 1998
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 1,368 $ 4,239
Reserves and accruals not currently deductible 28 807
Research and development tax credit 40 135
Other 23 28
------- -------
Total gross deferred tax assets before valuation allowance 1,459 5,209
Valuation allowance (1,452) (4,945)
------- -------
7 264
Deferred tax liabilities:
Accrual to cash adjustments (264)
Other (7)
------- -------
Total gross deferred liabilities (7) (264)
------- -------
Net deferred tax assets $ - $ -
======= =======
</TABLE>
The Company established 100% valuation allowance at December 31, 1996,
1997 and 1998 due to the uncertainty of realizing future tax benefits from
its net operating loss carryforwards and other deferred tax assets.
At December 31, 1998, the Company had net operating loss ("NOL")
carryforwards of approximately $11,000,000 for federal and state income
tax purposes. These carryforwards begin to expire in 2004 for state and
2011 for federal purposes. The Company also has available federal and
state research and
9
<PAGE>
development tax credit carryforwards of $77,000 and $58,000, respectively,
which had no expiration date as of December 31, 1998.
Internal Revenue Code Section 382 and similar California rules place a
limitation on the amount of taxable income which can be offset by NOL
carryforwards after a change in control (generally greater than 50% change
in ownership). Due to these provisions, utilization of the NOL and tax
credit carryforwards may be limited.
6. STOCKHOLDERS' EQUITY (DEFICIT)
Common Stock Reserved For Future Issuance
At December 31, 1998, the Company has reserved the following shares of
common stock for issuance in connection with:
Conversion of Series A preferred stock 911,295
Conversion of Series B preferred stock 5,324,532
Conversion of Series C preferred stock 497,785
Warrants issued and outstanding 386,237
Options issued and outstanding 1,938,705
Options available under stock option plans 132,230
---------
Total 9,190,784
=========
Mandatorily Redeemable Preferred Stock
In July 1997, the Company issued 611,295 shares of Series A redeemable
convertible stock in exchange for all 1,000 shares of outstanding common
stock. Additionally, in July 1997, 300,000 shares of Series A preferred
stock were issued upon conversion of $300,000 of convertible notes. In
July, August and December 1997, the Company issued 5,324,532 shares of
Series B preferred stock for $1.33 per share. In December 1998, the
Company issued 497,785 shares of Series C preferred stock for $9.04 per
share.
Significant terms of the Series A, B and C redeemable convertible
preferred stock are as follows (see Note 9):
o At the option of the holder, each share of preferred stock is
convertible at any time into one share of common stock,
subject to adjustment for certain dilutive issuances. As of
December 31, 1998, no such adjustments had occurred. Shares
automatically convert into common stock upon the earlier of
(a) completion of a public offering with aggregate proceeds
greater than $15,000,000 at not less than $8.00 per share or
(b) upon the consent of more than 50% of the holders of the
preferred stock, voting together as a single class.
o Series A, B and C convertible preferred stock are entitled to
annual noncumulative cash dividends of $0.08, $0.106 and
$0.723 per share, respectively, when and if declared by the
Board of Directors.
o In the event of any liquidation of the Company (which includes
the acquisition of the Company by another entity), the holders
of Series B and Series C preferred stock have a liquidation
10
<PAGE>
preference over common stock and Series A preferred stock of
$1.33 per share and $9.04 per share, respectively, plus all
declared but unpaid dividends. After such payment, the holders
of Series A preferred stock have a liquidation preference of
$1.00 per share plus any declared but unpaid dividends. Upon
payment of all preferred stock liquidation preferences, any
remaining proceeds will be allocated to the common
stockholders.
o Any time after May 31, 2002, upon the vote of at least
two-thirds of the then outstanding redeemable convertible
preferred stock, the Company will be required to redeem all of
the redeemable convertible preferred stock at the liquidation
preference plus an amount equal to $0.08, $0.106 and $0.723
per share per year compounded annually for Series A, B and C,
respectively, less any cash dividends paid. As a result, the
Company has recorded an increase to the carrying values by the
accretion of the mandatorily redeemable preferred stock of
$206,000 in 1997 and $656,000 in 1998.
o Holders of preferred stock have the same voting rights as the
holders of common stock.
Preferred Stock Warrants
In 1997, in connection with certain loan arrangements, the Company issued
five year warrants to purchase 33,834 shares of Series B preferred stock
at $1.33 per share and 7,500 shares of Series A preferred stock at $1.00
per share to a bank. The warrants expire in 2002. The fair value of these
warrants of $33,000 was recognized as interest expense in 1997.
Also in 1997, in connection with a bridge loan arrangement, the Company
issued a five year warrant to purchase 43,854 shares of Series B preferred
stock at $1.33 per share. The warrant expires in 2002 or upon closing of
an underwritten public offering. The fair value of these warrants of
$36,000 was recognized as interest expense in 1997.
As discussed in Note 4, in 1998, the Company granted a lender Series C
preferred stock warrants to purchase 55,409 shares at $4.51 per share, and
72,324 shares at $4.42 per share. The warrants expire upon the earlier of
five years from the grant date or two years from closing of an
underwritten public offering. The fair value of the warrants of $304,000
is being accreted to interest expense over the life of the financing
agreements.
In 1998, in connection with certain bridge loan arrangements, the Company
issued warrants to purchase 132,840 shares of Series C preferred stock at
$9.04 per share to various lenders. The warrants expire in 2003 or upon
closing of an underwritten public offering. The fair value of these
warrants of $200,000 was recognized as interest expense in 1998.
Notes Receivable from Stockholders
In July 1997, the Company issued an aggregate of 2,275,011 shares of
common stock to officers and members of the Board of Directors. In
connection with such issuance, the Company's board members paid for the
stock by issuing notes payable (secured by the shares of the Company's
common stock purchased) to the Company. The secured note payable bears
interest at 6.65% per annum with the entire principal balance of the note,
together with all accrued and unpaid interest, due and payable on the
earlier of (a) nine months after the closing of an initial public offering
of the Company's common stock or (b) July 2002 or (c) termination of
employment. The shares vest over a four year period. Any unvested shares
purchased are subject to repurchase rights by the Company upon occurrence
of certain events or conditions, such as employment termination, at the
original purchase price. Of such shares,
11
<PAGE>
there were 1,990,635 and 997,500 shares subject to repurchase at December
31, 1997 and 1998, respectively.
Additionally, in September 1998, two officers of the Company exercised
options to purchase 357,000 shares with an exercise price of $1.25 by
issuing notes payable (secured by the shares of the Company's common stock
purchased). The secured note payable bear interest at 5.54% per annum with
the entire principal balances of the notes, together with all accrued and
unpaid interest, due and payable on the earlier of (a) nine months after
the closing of an underwritten public offering, (b) September 2003 or (c)
termination of employment.
Stock Option Plans
The Company's stock option plans (the "Plans") provide for the grant of up
to 2,850,000 incentive or nonstatutory options to employees, directors and
consultants of the Company at the fair market value of the common stock on
the date of grant as determined by the Board of Directors. Options granted
under the Plans generally vest ratably over periods of up to four years
and expire ten years from the date of grant. The Plans also provide for
early exercise of options prior to full vesting. Any unvested shares
purchased are subject to repurchase rights by the Company upon occurrence
of certain events or conditions, such as employment termination, at the
original purchase price. There were 528,289 shares subject to repurchase
at December 31, 1998.
Options and Warrants Granted to Nonemployees
In 1998, the Company granted options and warrants for common stock to
nonemployees for services performed and to be performed through 2002. In
connection with these awards, the Company recognized $178,000 in
stock-based compensation expense related to such options which vested
during 1998. At December 31, 1998, unvested options granted to
nonemployees totaled 24,479 shares.
Stock-Based Compensation
During 1998, the Company issued common stock options at less than the fair
value of its common stock. The fair value of the common stock, weighted
based on options granted in 1998, was $2.75 per share. Accordingly, the
Company recorded $2,929,000 as the value of such options in 1998.
Stock-based compensation of $1,158,000 was amortized to expense in 1998
and at December 31, 1998, the Company had $1,771,000 in deferred stock
compensation related to such options, which will be amortized to expense
through 2002.
During 1997, the Company issued common stock options at exercise prices
equal to the fair value of its common stock. Accordingly, no stock-based
compensation was recorded for that period.
Stock Option Activity
A summary of the Company's stock option activity follows (in thousands):
12
<PAGE>
Weighted
Average
Outstanding Exercise
Options Price
Balance, January 1, 1997
Granted 497,125 $ 0.11
Exercised (68,020) 0.10
Canceled or expired (27,605) 0.10
---------
Balance, December 31, 1997 (68,503 shares
vested at a weighted average exercise
price of $0.11) 401,500 0.11
Granted 2,551,756 1.61
Exercised (686,076) 0.73
Canceled or expired (328,475) 0.24
---------
Balance, December 31, 1998 1,938,705 $ 1.85
=========
Available for grant at December 31, 1998 132,230
=========
The following table summarizes information about currently outstanding and
vested stock options at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Vested
------------------------------------------- --------------------------
Weighted
Average Weighted Weighted
Range of Number of Remaining Average Number of Average
Exercise Price Shares Contractual Life Exercise Price Shares Exercise Price
<S> <C> <C> <C> <C> <C>
$0.10 to $0.13 416,799 8.76 $ 0.12 333,348 $ 0.12
1.25 866,500 9.46 1.25 176,135 1.25
1.40 270,400 9.67 1.40 24,871 1.40
1.48 4,506 9.67 1.48 250 1.48
1.75 156,050 9.75 1.75 9,753 1.75
8.00 224,450 9.92 8.00 4,676 8.00
--------- ------ ------- ------
1,938,705 $ 1.85 549,033 $ 0.64
========= ====== ======= ======
</TABLE>
Additional Stock Plan Information
As discussed in Note 1, the Company accounts for its stock-based awards to
employees using the intrinsic value method in accordance with APB Opinion
No. 25, "Accounting for Stock Issued to Employees," and its related
interpretations.
SFAS No. 123, "Accounting for Stock-Based Compensation," requires the
disclosure of pro forma net income (loss) and earnings (loss) per share
had the Company adopted the fair value method since the Company's
inception. Under SFAS No. 123, the fair value of stock-based awards to
employees is calculated through the use of option pricing models, even
though such models were developed to estimate the fair value of freely
tradable, fully transferable options without vesting restrictions, which
significantly differ from the Company's stock option awards.
The Company's calculations for employee grants were made using the minimum
value option pricing model with the following weighted average
assumptions:
13
<PAGE>
Year Ended December 31,
-----------------------
1997 1998
Dividend yield None None
Risk free interest rate 6.1% 5.2%
Expected term, in years 2.5 2.5
The weighted average minimum value per option as of the date of grant for
options granted during 1997 and 1998 was $0.02 and $1.31, respectively.
If the computed minimum values of the Company's stock-based awards to
employees had been amortized to expense over the vesting period of the
awards as specified under SFAS No. 123, loss attributable to common
stockholders and basic and diluted loss per share on a pro forma basis (as
compared to such items as reported) would have been (in thousands):
Year Ended December 31,
-----------------------
1997 1998
Loss attributable to common stockholders:
As reported $ (3,552) $ (9,516)
Pro forma $ (3,555) $ (9,640)
Basic and diluted net loss per share:
As reported $ (6.03) $ (7.26)
Pro forma $ (6.03) $ (7.35)
7. NET LOSS PER SHARE
The following is a reconciliation of the denominators used in computing
basic and diluted net loss per share.
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1997 1998
------- ---------- ----------
<S> <C> <C> <C>
Shares (denominator):
Weighted average common shares outstanding 476,584 1,644,053 2,834,981
Weighted average common shares outstanding
subject to repurchase 0 (1,054,562) (1,524,202)
------- ---------- ----------
Shares used in computation, basic and diluted 476,584 589,491 1,310,779
======= ========== ==========
</TABLE>
For the three years ended December 31, 1996, 1997 and 1998, the Company
had securities outstanding which could potentially dilute basic earnings
per share in the future, but were excluded in the computation of diluted
net loss per share in the periods presented, as their effect would have
been antidilutive. Such outstanding securities consist of the following at
December 31, 1998: 6,733,612 shares of convertible preferred stock,
warrants to purchase 345,761 shares of preferred stock, and options and
warrants to purchase 1,979,181 shares of common stock. There were
1,990,635 and 1,525,789 shares subject to repurchase by the Company at
December 31, 1997 and 1998, respectively.
14
<PAGE>
8. COMMITMENTS AND CONTINGENCIES
Leases
Future minimum net lease payments under noncancellable operating leases
(with initial or remaining lease terms in excess of one year) and future
minimum capital lease payments as of December 31, 1998 are as follows (in
thousands):
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
<S> <C> <C>
Year ending December 31:
1999 $ 598 $ 366
2000 561 369
2001 464 343
2002 34 322
2003 319
Thereafter 346
------- -------
Total 1,657 $ 2,065
=======
Less amount representing interest (126)
-------
Present value of net minimum capital lease payments 1,531
Less current installments of obligations under capital leases (490)
-------
Obligations under capital leases, excluding current installment $ 1041
=======
</TABLE>
Total rent expense under operating leases for the years ended 1996, 1997
and 1998 was $22,000, $127,000 and $400,000, respectively.
Legal Matters
In connection with the termination of employment of an officer, the
Company foreclosed on 264,560 shares of the Company's common stock
securing a promissory note from that officer. If that officer should elect
to legally contest the number of shares issued to him, and if additional
shares are ultimately issued, the Company could incur a charge equal to
the fair market value of such shares. The ultimate outcome of this matter
cannot be determined at this time.
Additionally, the Company is involved in various other claims and legal
actions. Management does not expect that the outcome of these other claims
and actions will have a material effect on the Company's financial
position or results of operations.
9. SUBSEQUENT EVENTS
In January 1999, the Company sold 1,496,347 shares of Series C preferred
stock at $9.04 per share for proceeds of $13,527,000.
On January 4, 1999, the Board of Directors adopted, subject to stockholder
approval, the 1999 Stock Option Plan (the "1999 Stock Plan"). The 1999
Stock Plan will serve as the successor equity incentive
15
<PAGE>
program to the Company's existing 1997 Stock Option Plan. A total of
2,000,000 shares of common stock were initially reserved for issuance
under the 1999 Stock Plan. On March 30, 1999, the Board of Directors
adopted an amendment to the 1999 Stock Plan that increased the shares of
common stock reserved for issuance to 3,500,000. The number of shares
reserved will increase for each of the next five years by the lesser of
1,000,000 shares or 3% of the number of shares of common stock outstanding
at the beginning of the year.
On January 28, 1999, the Board of Directors adopted, subject to
stockholder approval, the 1999 Directors' Stock Option Plan (the
"Directors' Plan"). Under the Directors' Plan, each person who becomes a
nonemployee director after the effective date of the Directors' Plan may
be granted nonstatutory stock options. A total of 200,000 shares of common
stock have initially been reserved for issuance under the Directors' Plan.
On January 28, 1999, the Board of Directors approved, subject to
stockholder approval, the reincorporation of the Company in the State of
Delaware and the associated exchange of one share of common stock or
preferred stock of the Company for every share of common stock or
preferred stock, as the case may be, of the Company's California
predecessor. Such reincorporation and stock exchange will become effective
prior to the effective date of the initial public offering contemplated by
the Company.
Additionally, on January 28, 1999, the Board of Directors adopted, subject
to stockholder approval, the 1999 Employee Stock Purchase Plan (the
"Purchase Plan"). Under the Purchase Plan, eligible employees are allowed
to have salary withholdings of up to 10% of their base compensation to
purchase shares of common stock at a price equal to 85% of the lower of
the market value of the stock at the beginning or end of defined purchase
periods. The initial purchase period commences upon the effective date for
the initial public offering of the Company's common stock. The Company has
initially reserved 350,000 shares of common stock for issuance under this
plan, and the number of shares reserved will increase for each of the next
five years by the lesser of 75,000 shares or 0.5% of the shares of common
stock outstanding at the beginning of the year.
On May 4, 1999, Flycast completed an initial public offering of 3,000,000
shares of the Flycast's common stock. In addition, on June 4, 1999, the
Company sold an additional 200,000 shares under the underwriters'
overallotment option. Total net proceeds were $74.4 million. Upon the
closing of the initial public offering, Flycast's mandatorily redeemable
preferred stock converted into 6.9 million shares of common stock.
On August 30, 1999, Flycast completed a merger with InterStep, Inc., a
Massachusetts corporation which commenced operations in 1995. InterStep
provides publishers with e-mail content management, list management and
distribution services on an outsourced basis. In the transaction, Flycast
issued 480,337 shares of common stock to InterStep's stockholders, of
which 47,558 shares are held by an escrow agent to serve as security for
the indemnity provided by stockholders of InterStep. The Company also
assumed all outstanding InterStep common stock options, which were
converted to options to purchase approximately 10,012 shares of the
Company's common stock. No adjustments were required to conform accounting
policies of the entities. There were no significant intercompany
transactions requiring elimination for any periods presented.
The above transaction has been accounted for as a pooling of interests
and, accordingly, the supplemental consolidated financial statements of
the Company for all periods presented have been restated to include the
accounts of InterStep.
16
<PAGE>
Revenue and net income (loss) of the separate companies for the periods
preceding the acquisition were as follows (in thousands):
Net
Income
Revenue (Loss)
Fiscal year ended December 31, 1998
Flycast $ 8,029 $(9,306)
InterStep 1,253 446
------- -------
Combined $ 9,282 $(8,860)
======= =======
Fiscal year ended December 31, 1997
Flycast $ 630 $(3,417)
InterStep 304 71
------- -------
Combined $ 934 $(3,346)
======= =======
Fiscal year ended December 31, 1996
Flycast $ -- $ (445)
InterStep 123 50
------- -------
Combined $ 123 $ (395)
======= =======
On September 30, 1999, the Company announced that a definitive agreement
was entered into to be acquired by CMGI, Inc. ("CMGI") in a
stock-for-stock merger. Under the terms of the agreement, CMGI will issue
.4738 CMGI shares for every Flycast share held on the closing date of the
transaction. Closing of the merger is subject to customary conditions,
including formal approval by the Company's shareholders. In connection
with the merger, the Company also entered into a Stock Option Agreement
dated as of September 29, 1999, whereby the Company granted CMGI an option
to purchase up to 19.9% of the outstanding shares of the Company common
stock, which option may be exercised in the event that the Merger
Agreement is terminated under certain circumstances. Related to the
acquisition, the Company incurred $1,350,000 in financial advisory
services expenses in the quarter ended September 30, 1999.
* * * *
17
<PAGE>
EXHIBIT 99.2
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
InterStep, Inc.:
We have audited the accompanying balance sheets of InterStep, Inc. (the
"Company") as of December 31, 1997 and 1998, and the related statements of
operations, stockholders' equity, 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 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, such financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 1997 and
1998, and the results of its operations and its cash flows for the years then
ended in conformity with generally accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
Boston, Massachusetts
October 18, 1999
<PAGE>
INTERSTEP, INC.
BALANCE SHEETS
DECEMBER 31, 1997 AND 1998
AND JUNE 30, 1999 (UNAUDITED)
================================================================================
<TABLE>
<CAPTION>
June 30,
1999
(Unaudited)
ASSETS 1997 1998 (Note 1)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 32,952 $ 187,277 $ 302,039
Accounts receivable 133,820 352,564 197,587
Prepaid expenses and other current assets 913 11,369 14,753
--------- --------- ---------
Total current assets 167,685 551,210 514,379
PROPERTY AND EQUIPMENT, Net 42,803 160,080 152,598
--------- --------- ---------
TOTAL ASSETS $ 210,488 $ 711,290 $ 666,977
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 35,347 $ 40,477 $ 31,430
Accrued liabilities 3,552 5,726 16,395
Note payable to stockholders 57,881 61,782 63,666
Short-term capital lease obligations -- 13,006 13,603
--------- --------- ---------
Total current liabilities 96,780 120,991 125,094
LONG-TERM CAPITAL LEASE OBLIGATIONS -- 19,258 16,716
--------- --------- ---------
Total liabilities 96,780 140,249 141,810
--------- --------- ---------
COMMITMENTS AND CONTINGENCIES - (Note 8)
STOCKHOLDERS' EQUITY:
Common stock, $0.0001 par value, 1,250,000 shares authorized;
1,000,000 shares issued and outstanding in 1997 and 1998 9,500 9,500 9,595
Additional paid-in capital -- -- 104,131
Common stock options -- 92,078 190,288
Deferred stock compensation -- (80,848) (113,654)
Retained earnings 104,208 550,311 334,807
--------- --------- ---------
Total stockholders' equity 113,708 571,041 525,167
--------- --------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 210,488 $ 711,290 $ 666,977
========= ========= =========
</TABLE>
See notes to financial statements.
- 2 -
<PAGE>
INTERSTEP, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997 AND 1998
AND SIX MONTHS ENDED JUNE 30, 1998 AND 1999 (UNAUDITED)
================================================================================
<TABLE>
<CAPTION>
Years Ended Six Months
December 31, Ended June 30,
--------------------------- --------------------------
1997 1998 1998 1999
(Unaudited)
<S> <C> <C> <C> <C>
REVENUE $ 304,150 $ 1,253,204 $ 446,651 $ 438,588
COST OF REVENUE 44,305 173,155 74,616 3,321
----------- ----------- ----------- -----------
GROSS PROFIT 259,845 1,080,049 372,035 435,267
----------- ----------- ----------- -----------
OPERATING EXPENSES:
Sales and marketing 9,237 48,158 23,410 85,562
Research and development 97,120 388,545 138,085 185,942
General and administrative 81,309 184,962 40,052 138,670
Stock-based compensation -- 11,230 -- 169,630
----------- ----------- ----------- -----------
Total operating expenses 187,666 632,895 201,547 579,804
----------- ----------- ----------- -----------
OPERATING INCOME (LOSS) 72,179 447,154 170,488 (144,537)
----------- ----------- ----------- -----------
OTHER INCOME (EXPENSE):
Interest income 3,133 5,557 1,153 3,085
Interest expense on note payable
to shareholders (3,813) (6,152) (2,591) (6,024)
----------- ----------- ----------- -----------
Total other expense (680) (595) (1,438) (2,939)
----------- ----------- ----------- -----------
NET INCOME (LOSS) BEFORE
INCOME TAXES 71,499 446,559 169,050 (147,476)
INCOME TAXES 456 456 228 228
----------- ----------- ----------- -----------
NET INCOME (LOSS) $ 71,043 $ 446,103 $ 168,822 $ (147,704)
=========== =========== =========== ===========
PRO FORMA INFORMATION (UNAUDITED):
Net income (loss) $ 446,103 $ (147,704)
Pro forma incremental C corporation income
tax provision 186,000 128,000
----------- -----------
PRO FORMA NET INCOME (LOSS) $ 260,103 $ (275,704)
=========== ===========
</TABLE>
See notes to financial statements.
- 3 -
<PAGE>
INTERSTEP, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997 AND 1998
AND SIX MONTHS ENDED JUNE 30, 1999 (UNAUDITED)
================================================================================
<TABLE>
<CAPTION>
Additional Common Deferred Total
Common Stock Paid-in Stock Stock Retained Stockholders'
Shares Amount Capital Options Compensation Earnings Equity
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1997 950,000 $ 9,500 $ -- $ -- $ -- $ 33,165 $ 42,665
Net income -- -- -- -- -- 71,043 71,043
--------- --------- --------- --------- --------- --------- ---------
BALANCE, DECEMBER 31, 1997 950,000 9,500 -- -- -- 104,208 113,708
Issuance of common stock options -- -- -- 92,078 (92,078) -- --
Amortization of deferred stock compensation -- -- -- -- 11,230 -- 11,230
Net income -- -- -- -- -- 446,103 446,103
--------- --------- --------- --------- --------- --------- ---------
BALANCE, DECEMBER 31, 1998 950,000 9,500 -- 92,078 (80,848) 550,311 571,041
Issuance of common stock for service 9,500 95 104,131 -- -- -- 104,226
Issuance of common stock options -- -- -- 98,210 (98,210) -- --
Amortization of deferred stock compensation -- -- -- -- 65,404 -- 65,404
Subchapter S distribution -- -- -- -- -- (67,800) (67,800)
Net loss -- -- -- -- -- (147,704) (147,704)
--------- --------- --------- --------- --------- --------- ---------
BALANCE, JUNE 30, 1999 959,500 $ 9,595 $ 104,131 $ 190,288 $(113,654) $ 334,807 $ 525,167
========= ========= ========= ========= ========= ========= =========
</TABLE>
See notes to financial statements.
- 4 -
<PAGE>
INTERSTEP, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997 AND 1998
AND SIX MONTHS ENDED JUNE 30, 1998 AND 1999 (UNAUDITED)
================================================================================
<TABLE>
<CAPTION>
Years Ended December 31 Six Months Ended June 30,
----------------------- -------------------------
1997 1998 1998 1999
(Unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 71,043 $ 446,103 $ 168,822 $(147,704)
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation 19,789 54,478 19,777 39,388
Stock-based compensation expense -- 11,230 -- 169,630
Changes in operating assets and liabilities:
Accounts receivable (84,299) (218,744) 29,206 154,977
Prepaid expenses and other current assets -- (10,456) (11,900) (3,384)
Accounts payable 35,347 5,130 (25,569) (9,047)
Accrued liabilities 4,950 6,075 30,377 17,062
--------- --------- --------- ---------
Net cash provided by operating activities 46,830 293,816 210,713 220,922
--------- --------- --------- ---------
CASH FLOWS USED IN INVESTING ACTIVITIES -
Purchases of property and equipment (25,225) (120,586) (48,799) (31,905)
--------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital lease obligations -- (18,906) (12,827) (6,359)
Payments to notes payable to stockholders (5,000) -- -- --
Subchapter S distributions -- -- -- (67,800)
--------- --------- --------- ---------
Net cash used in financing activities (5,000) (18,906) (12,827) (74,159)
--------- --------- --------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 16,605 154,324 149,087 114,858
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 16,347 32,952 32,952 187,277
--------- --------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 32,952 $ 187,276 $ 182,039 $ 302,135
========= ========= ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid for interest $ -- $ 2,251 $ 640 $ 4,141
========= ========= ========= =========
Cash paid for taxes $ 456 $ 456 $ 456 $ --
========= ========= ========= =========
NONCASH FINANCING AND INVESTING ACTIVITIES -
Purchase of equipment under capital lease $ -- $ 51,169 $ 51,169 $ --
========= ========= ========= =========
</TABLE>
See notes to financial statements.
- 5 -
<PAGE>
INTERSTEP, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization - InterStep, Inc. (the "Company"), a Massachusetts
corporation, is a closely held, electronic mail ("e-mail") management
company founded in 1995. The Company provides publishers with e-mail
content management, list management, and distribution services on an
outsourced basis. The Company has a suite of web-based management tools
and a three-tier, back-end distribution architecture.
Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
Cash Equivalents - Cash equivalents consist of money market funds and
certificates of deposit with original maturities of three months or less
at the time of acquisition.
Property and Equipment - Property and equipment are stated at cost.
Property and equipment under capital leases are stated at the present
value of minimum lease payments. Depreciation on property and equipment is
calculated using the straight-line method over the estimated useful lives
of the assets. Equipment held under capital leases is amortized using the
straight-line method over the shorter of the lease term or the estimated
useful life of the asset.
Revenue Recognition - Revenues derived from the delivery of e-mail content
are recognized in the period the e-mail contents are delivered, provided
collection of the resulting receivable is probable. Revenues from list
management and distribution services are recognized when services have
been performed.
Advertising Expenses - Advertising expenses are charged to operations as
incurred. Advertising expenses were not significant in 1997 or 1998.
Research and Development Expenses - Research and development expenses are
charged to operations as incurred.
Income Taxes - The Company elected to be taxed under the provisions of
Subchapter S of the Internal Revenue Code ("Subchapter S") which provides
that the stockholders are taxed on their proportionate share of the
taxable income. As a result of the Company's Subchapter S election, the
accompanying statements of operations do not include an income tax
provision for federal income taxes.
Concentration of Credit Risk - Financial instruments that potentially
subject the Company to concentration of credit risk consist of trade
receivables. The Company's credit risk is mitigated by the Company's
credit evaluation process and the reasonably short collection terms. The
Company does not require collateral or other security to support accounts
receivable. One customer represented 50% and 77% of total revenue for the
years ended December 31, 1997 and 1998, respectively. Another customer
represented 44% of total revenues for the year ended December 31, 1997.
The amounts outstanding for these customers are $120,000 and $244,000 at
December 31, 1997 and 1998, respectively.
- 6 -
<PAGE>
Financial Instruments - The Company's financial instruments include cash
and cash equivalents, accounts receivable, accounts payable and note
payable to stockholders. At December 31, 1997 and 1998, the fair values of
these instruments approximated their financial statement carrying amount.
Stock-Based Compensation - The Company accounts for its employee stock
option plan in accordance with the provisions of Accounting Principles
Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees."
Accordingly, no accounting recognition is given to stock options granted
to employees (including directors) at fair market value until they are
exercised. Upon exercise, the net proceeds are credited to stockholders'
equity. In addition, accounting recognition is given to stock options
granted to employees (including directors) at less than fair market value
(see Note 7). The Company accounts for stock grants issued to nonemployees
in accordance with the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation," and
Emerging Issues Task Force Issue No. 96-18 under the fair-value-based
method.
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of -
The Company evaluates its long-lived assets for impairment whenever events
or changes in circumstances indicate that the carrying amount of such
assets or intangibles may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an
asset to future undiscounted net cash flows expected to be generated by
the asset. If such assets are considered to be impaired, the impairment to
be recognized is measured by the amount by which the carrying amount of
the assets exceeds the fair value of the assets. Assets to be disposed of
are reported at the lower of the carrying amount or fair value, less costs
to sell.
Recently Issued Accounting Standards - In June 1997, the Financial
Accounting Standards Board ("FASB") issued SFAS No. 130, "Reporting
Comprehensive Income," which requires an enterprise to report, by major
components and as a single total, the change in its net assets during the
period from nonowner sources; and SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information," which establishes
annual and interim reporting standards for an enterprise's business
segments and related disclosures about its products, services, geographic
areas and major customers. The Company had no comprehensive income items
to report for either of the two years in the period ended December 31,
1998. The Company currently operates one reportable segment under SFAS No.
131. Adoption of these statements currently does not impact the Company's
financial position, results of operations, cash flows, or financial
statement disclosures.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which defines derivatives, requires
that all derivatives be carried at fair value, and provides for hedge
accounting when certain conditions are met. SFAS No. 133 is effective for
the Company in fiscal 2001. Although the Company has not fully assessed
the implications of SFAS No. 133, the Company does not believe adoption of
this statement will have a material impact on the Company's financial
position or results of operations.
In March 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of
Position ("SOP") 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use." SOP 98-1 provides guidance for an
enterprise on accounting for the costs of computer software developed or
obtained for internal use. SOP 98-1 is effective for the Company in 1999.
The Company anticipates that accounting for transactions under SOP 98-1
will not have a material impact on the Company's financial position or
results of operations.
Pro Forma Information (Unaudited) - An unaudited pro forma adjustment to
include an incremental income tax provision, at an effective tax rate of
40%, has been made to the historical results of operations to make the pro
forma presentation comparable to what would have been reported had the
Company operated as a C Corporation for federal and state tax purposes.
- 7 -
<PAGE>
Interim Financial Information (Unaudited) - The interim financial
information as of June 30, 1999 and for the six months ended June 30, 1998
and 1999, is unaudited and has been prepared on the same basis as the
audited financial statements. In the opinion of management, such unaudited
information includes all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of the interim information.
Operating results for the six months ended June 30, 1999, are not
necessarily indicative of the results that may be expected for the year
ending December 31, 1999.
2. PROPERTY AND EQUIPMENT
Property and equipment as of December 31 consisted of the following:
1997 1998
Computer equipment and purchased software $ 74,786 $ 157,978
Computer equipment under capital lease 44,416
Furniture, fixtures and office equipment 2,834 46,981
--------- ---------
Total 77,620 249,375
Less accumulated depreciation (34,817) (89,295)
--------- ---------
Net $ 42,803 $ 160,080
========= =========
The accumulated depreciation associated with computer equipment under
capital lease was $0 and $10,487 at December 31, 1997 and 1998,
respectively.
3. NOTES PAYABLE TO STOCKHOLDERS
The Company has notes payable to two stockholders, payable on demand
bearing an annual interest rate of 6.74%. The outstanding amounts as of
December 31, 1997 and 1998 are $57,881 and $61,782, respectively. Interest
expense incurred amounted to $3,800 and $3,900 for the years ended
December 31, 1997 and 1998, respectively.
4. DEBT
In 1997, the Company entered into a revolving line-of-credit agreement
with a bank under which the Company may borrow up to $12,000 at an
interest rate of prime plus 5%. The borrowings under the line of credit
are unsecured. There are no amounts outstanding on the line of credit as
of December 31, 1997 and 1998.
5. INCOME TAXES
As of December 31, 1998, the Company has available state research and
development tax credit carryforwards of $15,100 which expire in 2003.
State rules place limitations on use of research and development tax
credits after a change in control. Due to these provisions, utilization of
the research and development tax credit carryforwards may be limited.
The Company, under the provisions of subchapter S, is subject to a state
income tax of $456, and accordingly, such amounts have been recorded as
income taxes in the accompanying financial statements.
- 8 -
<PAGE>
6. STOCKHOLDERS' EQUITY
Common Stock - On August 20, 1998, the Company's Board of Directors
approved a 950-for-1 stock split and authorized an increase of common
stock from 1,000 shares without par value to 1,250,000 shares with par
value of $0.01 per share. All references to number of shares in the
financial statements have been adjusted to reflect the stock split on a
retroactive basis.
In February 1999, the Company granted 9,500 common shares of the Company
to a nonemployee consultant. Accordingly, the Company recorded $104,226 as
the value of such stock granted and a corresponding stock-based
compensation expense in the six-month period ended June 30, 1999.
Stock Option Plan - The Company's 1998 Stock Option Plan (the "Plan")
provides for the grant of up to 50,000 incentive or nonstatutory options
to employees, officers, directors, consultants and advisors of the Company
at the fair market value of the common stock on the date of grant as
determined by the Board of Directors. Options granted under the Plan
generally vest ratably over a period of three and a half years and expire
10 years from the date of the grant.
Deferred Stock Compensation - At December 31, 1998, the Company had
$80,848 in deferred stock compensation related to options granted to
employees. This amount will be amortized to stock-based compensation
expense through 2002.
Stock-Based Compensation - During the six months ended June 30, 1999, the
Company issued 10,000 common stock options at $1.15 per share, which was
less than the deemed fair value of $11.00 per share. Accordingly, the
Company recorded $98,210 as the value of such options. Stock-based
compensation of $65,404 was amortized to expense in the six-month period
ended June 30, 1999. The Company had $113,654 in deferred stock
compensation, which will be amortized to expense through 2003.
- 9 -
<PAGE>
6. STOCKHOLDERS' EQUITY (CONTINUED)
During 1998, the Company issued 9,000 common stock options at less than
the fair value of its common stock. The fair value of the common stock
granted in 1998 was $0.74 per share, which was less than the deemed fair
value of $11.00 per share. Accordingly, the Company recorded $92,078 as
the value of such options in 1998. Stock-based compensation of $11,230 was
amortized to expense in 1998, and at December 31, 1998, the Company had
$80,848 in deferred stock compensation related to such options, which will
be amortized to expense through 2002.
A summary of the Company's stock option activity follows:
Weighted-
Average
Outstanding Exercise
Options Price
Balance, December 31, 1997 -- $ --
Granted 9,000 0.74
------ --------
Balance, December 31, 1998 9,000 $ 0.74
====== ========
Available for future grant at
December 31, 1998 41,000
======
The following table summarizes information about currently outstanding and
vested stock options at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Vested
---------------------------------------------- -----------------------
Weighted- Weighted-
Outstanding at Weighted-Average Average Vested at Average
Range of December 31, Remaining Exercise December 31, Exercise
Exercise 1998 Contractual Life Price 1998 Price
Price
<S> <C> <C> <C> <C> <C>
$ 0.74 9,000 9.67 $ 0.74 500 $ 0.74
</TABLE>
Additional Stock Plan Information - As discussed in Note 1, the Company
accounts for its stock-based awards using the intrinsic-value method in
accordance with APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and its related interpretations.
SFAS No. 123, "Accounting for Stock-Based Compensation," requires the
disclosure of pro forma net income had the Company adopted the fair value
method since the Company's inception. Under SFAS No. 123, the fair value
of stock-based awards to employees is calculated through the use of
option- pricing models, even though such models were developed to estimate
the fair value of freely tradable, fully transferable options without
vesting restrictions, which significantly differ from the Company's stock
option awards.
- 10 -
<PAGE>
6. STOCKHOLDERS' EQUITY (CONTINUED)
Additional Stock Plan Information (Continued) - The Company's calculations
for employee grants were made using the minimum value, option-pricing
model with the following weighted-average assumptions for the year ended
December 31, 1998:
Dividend yield None
Risk-free interest rate 4.60%
Expected term 3.5 years
The weighted-average minimum value per option as of the date of grant for
options granted during 1998 was $1.34.
If the computed minimum values of the Company's stock-based awards to
employees had been amortized to expense over the vesting period of the
awards as specified under SFAS No. 123, net income on a pro forma basis
(as compared to such items as reported) would have been as follows at
December 31, 1998:
Loss attributable to common stockholders:
As reported $446,103
Pro forma 445,310
7. COMMITMENTS AND CONTINGENCIES
Leases - Future minimum net lease payments under noncancellable operating
leases (with initial or remaining lease terms in excess of one year) and
future minimum capital lease payments as of December 31, 1998 are as
follows:
<TABLE>
<CAPTION>
Capital Operating
Year Ending December 31 Leases Leases
<S> <C> <C>
1999 $ 15,381 $ 41,783
2000 15,381 45,042
2001 5,127 19,167
Thereafter -- --
-------- --------
Total 35,889 $105,992
========
Less amount representing interest (3,625)
--------
Present value of net minimum capital lease payments 32,264
Less current installments of obligations under capital lease (13,006)
--------
Obligations under capital leases, excluding current installments $ 19,258
========
</TABLE>
- 11 -
<PAGE>
Total rent expense under operating leases for the years ended December 31,
1997 and 1998 was $8,690 and $22,808, respectively.
Litigation - From time to time, the Company is involved in routine
litigation that arises in the ordinary course of its business. There are
no pending legal proceedings which management of the Company believes
could materially affect the Company's financial position or results of
operations.
8. SUBSEQUENT EVENTS
On August 30, 1999, Flycast Communications Corporation ("Flycast")
completed the acquisition of the Company through a merger with Fremont
Acquisition Corporation, a Massachusetts corporation and wholly owned
subsidiary of Flycast. As a result of this acquisition, the Company became
a wholly owned subsidiary of Flycast. In the transaction, which will be
accounted for as a pooling-of-interests, Flycast issued 480,337 shares of
common stock to the Company's stockholders. Of the 480,337 shares of
common stock, 47,558 shares are held by an escrow agent to serve as
security for the indemnity provided by some of the stockholders of the
Company.
On September 30, 1999, Flycast announced that a definitive agreement was
entered into for Flycast to be acquired by CMGI, Inc. ("CMGI") in a
stock-for-stock merger. Under the terms of the agreement, CMGI will issue
.4738 CMGI shares for every share of Flycast held on the closing date of
the transaction. Closing of the merger is subject to customary conditions
including formal approval by Flycast stockholders. In connection with the
merger, Flycast also entered into a stock-option agreement, dated as of
September 29, 1999, whereby Flycast granted CMGI an option to purchase up
to 19.9% of the outstanding shares of Flycast common stock, which option
may be exercised in the event that the merger agreement is terminated
under certain circumstances.
* * * * * *
- 12 -
