<PAGE>
Exhibit 99.1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of Post Communications, Inc.:
We have audited the accompanying balance sheet of Post Communications, Inc. as
of December 31, 1999, and the related statements of operations, mandatorily
redeemable convertible preferred stock and common shareholders' deficit, and
cash flows for the year 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 audit.
We conducted our audit 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 balance sheet. 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 audit provides a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Post Communications, Inc. as of December 31,
1999, and the results of its operations and its cash flows for the year then
ended in conformity with generally accepted accounting principles.
As discussed in Note 1 to the financial statements, the Company changed its
method of accounting for email marketing program set-up fee revenues and related
costs as of January 1, 1999.
April 10, 2000
<PAGE>
POST COMMUNICATIONS, INC.
<TABLE>
<CAPTION>
BALANCE SHEET
DECEMBER 31, 1999
--------------------------------------------------------------------------------------------------------------------------------
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 5,479,000
Accounts receivable 581,000
Prepaid expenses and other current assets 315,000
Deferred project costs 415,000
------------
Total current assets 6,790,000
PROPERTY AND EQUIPMENT, NET 1,918,000
OTHER ASSETS 221,000
------------
TOTAL ASSETS $ 8,929,000
============
LIABILITIES, MANDATORILY REDEEMABLE CONVERTIBLE
PREFERRED STOCK AND COMMON SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Bank borrowings $ 580,000
Accounts payable and accrued expenses 1,113,000
Advanced funding of preferred stock 4,500,000
Deferred project revenue 495,000
Capital lease obligations 507,000
Notes payable - related party 783,000
------------
Total current liabilities 7,978,000
CAPITAL LEASES 953,000
NOTES PAYABLE 717,000
------------
Total liabilities 9,648,000
------------
COMMITMENTS AND CONTINGENCIES (Note 5)
MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK:
Mandatorily redeemable convertible preferred stock: $0.0001 par value;
30,000,000 shares authorized; 7,395,307 issued and outstanding 9,750,000
------------
COMMON SHAREHOLDERS' DEFICIT:
Common stock: $0.0001 par value; 60,000,000 shares authorized; 4,499,399
shares issued and outstanding -
Paid-in capital 8,151,000
Deferred stock compensation expense (5,460,000)
Receivables from sales of stock (227,000)
Accumulated deficit (12,933,000)
------------
Total common shareholders' deficit (10,469,000)
------------
TOTAL LIABILITIES, MANDATORILY REDEEMABLE CONVERTIBLE
PREFERRED STOCK AND COMMON SHAREHOLDERS' DEFICIT $ 8,929,000
============
</TABLE>
See notes to financial statements.
<PAGE>
POST COMMUNICATIONS, INC.
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999
----------------------------------------------------------------------------------------------------------
<S> <C>
REVENUES $ 2,899,000
-----------
COSTS AND EXPENSES:
Cost of revenues 2,471,000
Technology development 1,220,000
Sales and marketing 1,335,000
General and administrative 3,554,000
Amortization of deferred stock compensation 1,057,000
-----------
Total operating expenses 9,637,000
-----------
LOSS FROM OPERATIONS (6,738,000)
INTEREST EXPENSE, NET (1,247,000)
-----------
LOSS BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING METHOD (7,985,000)
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING METHOD 230,000
-----------
NET LOSS $(7,755,000)
===========
</TABLE>
See notes to financial statements.
<PAGE>
POST COMMUNICATIONS, INC.
STATEMENT OF MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK AND COMMON
SHAREHOLDERS' DEFICIT
YEAR ENDED DECEMBER 31, 1999
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Common Shareholders' Deficit
------------------------------------------------------
Mandatorily Redeemable Deferred
Convertible Additional Stock
Preferred Stock Common Stock Paid-In Compensation
------------------------- ----------------------
Shares Amount Shares Amount Capital Expense
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1998 2,681,289 $3,539,000 2,723,846 $ - $ 239,000
Sale of Series B preferred stock, at $1.32
per share, net of expenses of $12,000 3,755,435 4,946,000
Issuance of Series B preferred stock, at
$1.32 per share, upon conversion of notes
payable 958,583 1,265,000
Exercise of common stock options 2,043,981 - 264,000
Stock warrants issued with convertible
notes payable 953,000
Stock warrants issued in connection with
borrowing arrangements 207,000
Deferred compensation related to
stock option grants 6,517,000 $(6,517,000)
Payments on notes receivable from sales
of stock
Amortization of deferred stock compensation 1,057,000
Forfeiture of common stock (268,428) - (29,000)
Net loss
--------- ---------- --------- ---- ---------- -----------
Balances at December 31, 1999 7,395,307 $9,750,000 4,499,399 $ - $8,151,000 $(5,460,000)
========= ========== ========= ==== ========== ============
<CAPTION>
POST COMMUNICATIONS, INC.
STATEMENT OF MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK AND COMMON SHAREHOLDERS' DEFICIT
YEAR ENDED DECEMBER 31, 1999
--------------------------------------------------------------------------------------------------------------------
Common Shareholders' Deficit
------------------------------------------------------------------------
Receivables
from
Sales of Accumulated
Stock Deficit Total
<S> <C> <C> <C>
Balances at December 31, 1998 $ (68,000) $ (5,178,000) $ (5,007,000)
Sale of Series B preferred stock, at $1.32
per
share, net of expenses of $12,000
Issuance of Series B preferred stock, at
$1.32
per share, upon conversion of notes payable
Exercise of common stock options (185,000) 79,000
Stock warrants issued with convertible
notes payable 953,000
Stock warrants issued in connection with
borrowing arrangements 207,000
Deferred compensation related to
stock option grants -
Payments on notes receivable from sales
of stock 27,000 27,000
Amortization of deferred stock compensation 1,057,000
Forfeiture of common stock (1,000) (30,000)
Net loss (7,755,000) (7,755,000)
--------- ------------ ------------
Balances at December 31, 1999 $(227,000) $(12,933,000) $(10,469,000)
========= ============ ============
</TABLE>
See notes to financial statements.
-4-
<PAGE>
POST COMMUNICATIONS, INC.
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1999
-------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(7,755,000)
Adjustments to reconcile net cash used in operating activities:
Depreciation and amortization 373,000
Amortization of deferred stock compensation 1,057,000
Amortization of debt issuance costs 987,000
Changes in operating assets and liabilities:
Accounts receivable (473,000)
Prepaid expenses and other current assets (263,000)
Deferred project costs (415,000)
Accounts payable and accrued expenses 808,000
Deferred revenue 429,000
-----------
Net cash used in operating activities (5,252,000)
-----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (542,000)
Long-term deposits 8,000
-----------
Net cash used in investing activities (534,000)
-----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Sales of common stock 79,000
Bridge financing 1,265,000
Sales of preferred stock 4,946,000
Advanced receipt for preferred stock issuances 4,500,000
Payments on notes receivable from sales of stock 27,000
Payments to repurchase common stock (30,000)
Principal payments on capital lease obligations (193,000)
Payments on bank loan payable, net (56,000)
-----------
Net cash provided by financing activities 10,538,000
-----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 4,752,000
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 727,000
-----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 5,479,000
===========
SUPPLEMENTAL INFORMATION:
Cash paid during the year for:
Interest $ 326,000
Income taxes 28,000
NONCASH INVESTING AND FINANCING ACTIVITIES:
Property and equipment acquired under capital leases 41,000
Conversion of debt to preferred stock 1,265,000
Exercise of common stock options for notes receivable 185,000
Issuance of warrants in connection with borrowing arrangements 173,000
See notes to financial statements.
<PAGE>
POST COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1999
--------------------------------------------------------------------------------
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company - Post Communications, Inc. (the "Company") delivers a range of
email marketing services to help client companies build customer
relationships, from periodic email campaigns to ongoing customer
acquisition and loyalty programs. The Company designs, implements, and
operates email programs for clients via the Internet. The Company was
incorporated in Delaware in June 1996.
Cumulative Effect of Change in Accounting Method - In 1999 the Company
changed its method of accounting for recognition of email marketing program
set-up fee revenue and related costs from a percentage of completion
methodology to recognition over the minimum life of the client contract,
beginning on the launch date of the email program. The new method of
revenue recognition was adopted to match the set-up fee revenue and related
costs with the continuing obligations to the client. The amount recorded in
1999 represents the cumulative effect of adopting the change in accounting
policy at the beginning of the year.
Cash Equivalents - The Company considers all highly liquid investments
purchased with an original maturity of three months or less to be cash
equivalents. At December 31, 1999, $5,293,000 of money market funds, the
fair value of which approximates cost, are included in cash and cash
equivalents.
Deferred Project Costs - See "Revenue Recognition" in Note 1.
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets, generally 3 to 5 years.
Capitalized Leases - Equipment subject to noncancelable leases, which meet
the criteria of capital leases, is capitalized at the present value of the
minimum lease payments due over the term of the lease and amortized over
the estimated useful life of the equipment or the lease term, whichever is
shorter.
Income Taxes - The Company accounts for income taxes using an asset and
liability approach. Deferred income tax assets and liabilities result from
temporary differences between the tax basis of assets and liabilities and
their reported amounts in the financial statements that will result in
taxable or deductible amounts in future years. Valuation allowances are
provided when necessary to reduce deferred tax assets to the amount
expected to be realized.
Revenue Recognition - The Company recognizes revenue related to email
marketing program services as the services are provided. Revenue, and
related costs, associated with the initial set-up of client email marketing
programs are recognized over the minimum life of the client contract,
beginning on the launch date of the email program. Deferred project
revenues and costs represent amounts associated with the initial set-up of
client email programs which have not been recognized at the balance sheet
date.
Stock-Based Compensation - The Company accounts for stock-based awards to
employees using the intrinsic value method in accordance with Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees.
The Company accounts for equity instruments 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 ("EITF") Issue No. 96-18, Accounting for Equity
Instruments That Are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services, which requires that the fair
value of such instruments be recognized as an expense over the period in
which the related services are received.
<PAGE>
Comprehensive Income - For the periods presented, the Company's
comprehensive loss, as defined by SFAS No. 130, Reporting Comprehensive
Income, is equal to its net loss.
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.
Concentration of Credit Risk - Financial instruments that potentially
subject the Company to significant concentrations of credit risk consist
primarily of cash and cash equivalents and accounts receivable. Risks
associated with cash and cash equivalents are mitigated by placing such
amounts with high credit quality financial institutions.
Credit risk with respect to trade receivables is spread over diverse
customers that make up the Company's customer base. At December 31, 1999,
four customers accounted for 13%, 13%, 13% and 11% of total revenue. At
December 31, 1999, one customer accounted for 13% of total accounts
receivable.
Recently Issued Accounting Standards - In June 1998 and June 1999, the
Financial Accounting Standards Board issued Statement of Financial
Accounting Standards SFAS No. 133 ("SFAS 133"), Accounting for Derivative
Instruments and Hedging Activities, and Statement of Financial Accounting
Standards No. 137 ("SFAS 137"), Deferral of the Effective Date of SFAS 133,
respectively. SFAS 133 and SFAS 137 require the recognition of all
derivatives as either assets or liabilities in the statement of financial
position, and to measure those instruments at its fair value, and are
effective for all fiscal years beginning after June 15, 2000. As of
December 31, 1999, the Company did not own any derivative instruments or
engage in hedging activities that would require the application of SFAS
133.
2. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1999 consists of:
Computer software $ 353,000
Computer equipment 1,301,000
Furniture and fixtures 808,000
------------
Total 2,462,000
Accumulated depreciation (544,000)
------------
Total property and equipment - net $ 1,918,000
============
At December 31, 1999, the Company had assets under capital lease with a
cost basis of $1,664,000, and a net book value of $1,288,000.
3. BORROWINGS
Bank Borrowings - In 1999, the Company rolled its existing line of credit
with a bank into a working capital loan under which the Company's borrowing
base, which may not exceed $500,000, is determined on a monthly basis by
the Company's average accounts receivable balance. In connection this
transaction, the Company issued warrants to purchase 17,500 shares of
Series B mandatorily redeemable convertible preferred stock at $1.32 per
share (see Note 5). At December 31, 1999, the Company had borrowings under
the working capital loan in the amount of $500,000, with interest payable
monthly at the bank's prime rate plus 2.00% (10.50% at December 31, 1999)
and principal due June 2000. The Company also had an equipment loan with a
bank in the amount of $80,000, with interest at 9.00% and principal and
interest due in
<PAGE>
monthly installments through May 2001. The assets of the Company have been
pledged as collateral for the line of credit and equipment loan, and the
Company is required to maintain certain covenants.
Notes Payable - Related Party consist of amounts payable to a lender who is
also a common shareholder in the Company. The proceeds of the note are
restricted to working capital expenditures. Under the Loan and Security
agreement, the loan is required to be repaid over 24 months commencing on
January 1, 2000, and the Company is required to maintain certain covenants.
Interest is payable on the note at 14.46%, and the assets of the Company
are pledged as collateral.
4. COMMITMENTS
At December 31, 1999, the Company had a $500,000 equipment financing line
with a leasing agency, which had a drawdown period from December 31, 1997
to December 19, 1998. The equipment financing line is secured by the assets
of the Company. The financing line has a 48 month payment schedule and
bears interest at a rate of 8.75% per annum. At December 31, 1999, the
Company had drawn down $499,000 under the equipment financing line and the
total outstanding balance was $349,000.
In 1999, the Company entered into an equipment lease agreement with a
lender, who is also a common shareholder in the Company, for a $2,000,000
equipment financing line. In connection with the equipment financing line,
the Company issued warrants to purchase 65,000 shares of Series B
mandatorily redeemable convertible preferred stock at $1.32 per share (see
Note 5). The lease line has a draw down period from October 1, 1999 to July
31, 2000 and is secured by the assets of the Company. Monthly principal and
interest payments are payable over 36 months. The lease line bears interest
at rates of 7.65% to 8.34%. At December 31, 1999, the Company had drawn
down $1,165,000 under the equipment financing line and the balance
outstanding was $1,112,000.
The Company leases office space and equipment under noncancelable operating
and capital leases with various expiration dates through December 2002.
Rent expense on operating leases for the year ended December 31, 1999 was
$474,000. Future minimum lease payments under noncancelable operating and
capital leases as of December 31, 1999 are as follows:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
<S> <C> <C>
Year ended December 31:
2000 $ 596,000 $ 499,000
2001 596,000 293,000
2002 and thereafter 403,000 -
------------- ---------------
Total minimum lease payments 1,595,000 $ 792,000
==============
Less amount representing interest 135,000
-------------
Present value of capital lease obligations 1,460,000
Less current portion 507,000
-------------
Long-term portion of capital lease obligations $ 953,000
=============
</TABLE>
<PAGE>
5. MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK
At December 31, 1999, the amounts, terms and liquidation values of the
Company's mandatorily redeemable convertible preferred stock ("convertible
preferred") are as follows:
<TABLE>
<CAPTION>
Proceeds Net Aggregate
Shares of Issuance Liquidation
Authorized Outstanding Costs Preference
<S> <C> <C> <C> <C>
A 3,000,000 2,681,289 $3,539,000 $3,539,000
B 5,450,000 4,714,018 6,211,000 6,223,000
C 4,250,000 - - -
Undesignated 17,300,000 - - -
---------- --------- ---------- ----------
Total 30,000,000 7,395,307 $9,750,000 $9,762,000
========== ========= ========== ==========
</TABLE>
The holders of convertible preferred have various rights and preferences as
follows:
Voting - Each share of convertible preferred has voting rights equal to an
equivalent number of shares of common stock into which it is convertible
and votes together as one class with the common stock.
As long as at least a majority of shares of convertible preferred remain
outstanding, the Company must obtain approval from a majority of the
holders of convertible preferred in order to alter the articles of
incorporation as related to convertible preferred, change the authorized
number of shares of convertible preferred, repurchase any; shares of
Preferred or common stock other than shares subject to the right of
repurchase by the company, change the authorized number of Directors,
authorize a dividend on the common Stock, effect a merger, consolidation or
sale of assets where the existing shareholders retain less than 50% of the
voting stock of the surviving entity or authorize any other equity
securities or issue or obligate itself to issue any capital stock or any
equity security other than the issuance of stock under the Company's stock
plans.
Dividends - Holders of convertible preferred are entitled to receive
noncumulative dividends at the per annum rate of $0.11 per share,
respectively, when and if declared by the Board of Directors. The holders
of convertible preferred will also be entitled to participate in dividends
on common stock, when and if declared by the Board of Directors, based on
the number of shares of common stock held on an as-if converted basis. No
dividends on convertible preferred stock or common stock have been declared
by the Board from inception through December 31, 1999.
Liquidation - In the event of any liquidation, dissolution or winding up of
the Company including the acquisition of the Company by means of any
transactions or series of transactions that result in the transfer of 50%
or more of the outstanding voting power of the company or the sale of
substantially all of the assets of the company, unless the holders of at
least a majority of the convertible preferred then outstanding shall
determine otherwise, the holders of convertible preferred are entitled to
receive an amount of $1.32 per share plus any declared but unpaid dividends
prior to and in preference to any distribution to the holders of common
stock. Upon completion of such distribution, any remaining assets of the
Company shall be distributed among the holders of convertible preferred and
common stock pro rata based upon the number of shares of common stock held
by each (assuming full conversion of all convertible preferred) until the
convertible preferred holders have received an aggregate of $3.30 per
share; thereafter, the holders of the common stock shall receive all
remaining assets pro rata based upon the number of shares held by each.
Conversion - Each share of convertible preferred is convertible, at the
option of the holder, according to a conversion ratio, subject to
adjustment for dilution. Initially, the conversion feature is set at one
share of convertible preferred to one share of common stock. Each share of
convertible preferred automatically converts into the number of shares of
common stock into which such shares are convertible at the then effective
conversion ratio upon: (1) the closing of a public offering of common stock
at a per share price of
<PAGE>
at least $6.60 per share with gross proceeds of at
least $15,000,000 in the aggregate or (2) the consent of the holders of the
majority of convertible preferred.
At December 31, 1999, the Company reserved 8,450,000 shares of common stock
for the conversion of convertible preferred.
Redemption - Upon written notice of at least a majority of the holders of
convertible preferred, at any time subsequent to September 30, 2004, the
Company must redeem a specified percentage of Convertible preferred stock
at a price equal to $1.32 per share, plus all declared but unpaid dividends
on such shares. The redemption amount shall be payable in cash in four
annual installments beginning on the redemption date .
Warrants to Purchase Mandatorily Redeemable Convertible Preferred Stock -In
1999, the Company issued convertible promissory notes, due December 31,
1999, with an aggregate principal value of $1,251,000 and an interest rate
of 7.75%, with detachable warrants to purchase 606,846 shares of Series B
mandatorily redeemable convertible preferred stock at $1.32 per share. The
warrants expire in March 2002 and were outstanding at December 31, 1999.
The principal value of these notes, plus accrued interest, in the amount of
$1,265,000 converted into 958,583 shares of Series B mandatorily redeemable
convertible preferred stock during 1999. The estimated fair value of the
warrants of $953,000 was recorded as a debt discount and amortized to
interest expense over the term of the promissory notes.
In 1999, the Company issued warrants to purchase 82,500 shares of Series B
mandatorily redeemable convertible preferred stock at $1.32 per share in
connection with obtaining a working capital loan with a bank (see Note 3)
and a $2,000,000 equipment financing line with a lender who is also a
common shareholder in the Company (see Note 4). The warrants expire at
various dates through 2006 and were outstanding at December 31, 1999. The
estimated fair value of the warrants of $207,000 was recorded as debt
issuance costs and is being amortized to interest expense over the term of
the borrowing arrangements, resulting in interest expense of $34,000 during
1999.
6. SHAREHOLDERS' EQUITY
Common Stock - The Company's Articles of Incorporation, as amended,
authorize the Company to issue 60,000,000 shares of $0.0001 par value
common stock. Under the terms of the Stock Purchase Plan and certain stock
purchase agreements with the founder and certain executives, the Company
has the right to repurchase shares of common stock at the original issuance
price in certain circumstances. The purchase rights lapse generally over a
four year period. At December 31, 1999, there were 2,138,911 shares subject
to repurchase.
Stock Option Plan - The Company has a stock option plan (1997 Stock Option
Plan), which provides for the granting of stock options to employees and
consultants of the Company. Options granted under the Plan may be either
incentive stock options or nonqualified stock options. Incentive stock
options ("ISO") may be granted only to Company employees (including
officers and directors who are also employees). Nonqualified stock options
("NSO") may be granted to Company employees and consultants. Options
generally vest in installments over four years from the date of grant and
expire ten years from the grant date. The Company has reserved 4,208,305
shares of common stock for issuance under the 1997 Stock Option Plan.
Options are exercisable immediately subject to repurchase options held by
the Company which lapse over a maximum period of 4 years at such times and
under such conditions as determined by the Board of Directors.
<PAGE>
A summary of activity under the option plan is set forth below:
<TABLE>
<CAPTION> Available Options Weighted Average
for Grant Outstanding Exercise Price
<S> <C> <C> <C>
Outstanding, December 31, 1998 153,620 489,132 $ 0.13
Shares authorized 2,636,805
Options granted (weighted average
fair value of $0.03 per share) (2,196,500) 2,196,500 0.15
Options exercised 2,047,732 0.13
Options canceled 162,484 (162,484) 0.14
---------- --------- ----------
Outstanding, December 31, 1999 756,409 475,416 $ 0.21
========= ========= ==========
</TABLE>
<TABLE>
<CAPTION>
Options Vested
Options Outstanding at and Exercisable at
December 31, 1999 December 31, 1999
----------------------------------------- ----------------------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Number Average
Exercise Number Contractual Exercise Vested and Exercise
Price Outstanding Life Price Outstanding Price
<S> <C> <C> <C> <C> <C>
$ 0.13 377,616 9.20 $0.13 114,764 $0.13
0.50 97,800 9.96 0.50 2,038 0.50
------- ---- ----- ------- -----
475,416 9.36 $0.21 116,802 $0.13
======= ==== ===== ======= =====
</TABLE>
Deferred Stock Expense - Employee Compensation - In connection with certain
stock option grants during the year ended December 31, 1999, the Company
recorded deferred stock compensation of $6,149,000 for the difference between
the exercise price of the stock options and estimated fair value of the stock
at that time. Deferred compensation related to stock option grants is being
amortized over the vesting periods of the related options. Amortization of
such expense during 1999 totaled $944,000.
Options Granted to Nonemployees - In 1999, the Company granted 105,000 shares
of common stock options to consultants in conjunction with services performed.
The Company recorded deferred compensation of $368,000 for the fair value of
the options on the date of grant, of which $113,000 is included in operating
expenses at December 31, 1999.
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 Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees, and its related interpretations.
Statement of Financial Accounting Standards No. 123, Accounting for Stock-
Based Compensation, requires the disclosure of pro forma net loss had the
Company adopted the fair value method. The fair value of stock-based awards
to employees have been calculated using the minimum value method with the
following weighted average assumptions: expected life, 48 months; risk-free
interest 5.0%; and no dividends during the expected term. The Company's
calculations are based on a single option valuation approach, and forfeitures
are recognized as they occur. If the computed fair values of the Company's
awards had been amortized to expense over their related vesting periods, the
effect on the Company's reported net loss would not have been significant.
<PAGE>
7. INCOME TAXES
No provisions for federal or state income taxes have been recorded as the
Company has incurred federal and state operating losses on a cumulative
basis in the year ended December 31, 1999 of approximately $11,991,000.
At December 31, 1999 deferred tax assets of approximately $4,919,000
consisted primarily of federal and state net operating loss carryforwards,
which expire in varying amounts beginning in 2019 for federal and 2004 for
state purposes. Management believes that a full valuation allowance is
appropriate given the uncertainty regarding utilization. Under the Tax
reform Act of 1986, the amounts of and benefits from net operating loss
carryforwards may be impaired or limited in certain circumstances. Events
which cause limitations in the amount of net operating losses that the
Company may utilize in any one year include, but are not limited to a
cumulative ownership change of more than 50%, as defined, over a three year
period.
8. SUBSEQUENT EVENTS
In January 2000, the Company issued 3,787,500 shares of $0.0001 par value
Series C mandatorily redeemable convertible preferred stock and received
proceeds net of issuance costs totaling $15,150,000.
In February and March 2000, the Company utilized an additional $573,000
against the $2,000,000 equipment financing line (see Note 4), at an
interest rate of 8.34%.
On April 7, 2000, the Company was acquired by Netcentives Inc. in a stock
transaction whereby the Company exchanged approximately 17.6 million shares
of its common stock, representing all outstanding shares on that date, for
approximately 6.3 million shares of Netcentives Inc. common stock. Prior to
close of the acquisition, all outstanding warrants to purchase mandatorily
redeemable convertible preferred stock were exercised and all outstanding
shares of mandatorily redeemable convertible preferred stock were converted
into the Company's common stock.
