<PAGE>
EXHIBIT 99.3
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
The accompanying unaudited pro forma combined financial statements give effect
to the acquisitions of Pacific Netcom, Inc. ("Pacific Netcom"), Sandpiper
Networks, Inc. ("Sandpiper") and SoftAware, Inc. ("SoftAware") as if they had
occurred on October 1, 1998 for the unaudited pro forma combined statements of
operations. The unaudited pro forma balance sheet gives effect to the
acquisition of SoftAware as if it had occurred on June 30, 2000. The acquisition
of Sandpiper was consummated on December 28, 1999; therefore, Digital Island's
historical combined balance sheet at June 30, 2000 includes the allocated
purchase price for this transaction. The acquisition of Pacific Netcom by
SoftAware was consummated on January 13, 2000; therefore, SoftAware's historical
combined balance sheet at June 30, 2000 includes the allocated purchase price
for this transaction.
The unaudited pro forma combined financial statements are presented for
illustrative purposes only and are not necessarily indicative of the operating
results that would have been achieved had the transactions been in effect as of
the beginning of the periods presented and should not be construed as being
representative of future operating results.
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DIGITAL ISLAND, INC. AND SUBSIDIARIES
PRO FORMA COMBINED BALANCE SHEET
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
June 30, 2000
Historical
----------------------------
Digital Island
and Combined Pro
Subsidiaries SoftAware Adjustments Forma
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 304,881 $4,564 $(20,000) A $ 289,445
Investments 328,298 - - 328,298
Accounts receivable, net 18,886 1,311 - 20,197
Restricted cash 7,063 - - 7,063
Inventory - 227 - 227
Prepaid expenses and other 18,850 182 - 19,032
------------------------------------------------------------
Total Current Assets 677,978 6,284 (20,000) 664,262
------------------------------------------------------------
Investments 73,734 - - 73,734
Property and equipment, net 112,150 5,500 - 117,650
Goodwill, net 823,816 4,403 343,178 D 1,166,994
(4,403) B
Intangible assets, net 115,227 - 59,800 D 175,027
Unamortized convertible note issuance costs 10,226 - - 10,226
Other assets, net 2,890 411 - 3,301
------------------------------------------------------------
Total Assets $1,816,021 $16,598 $378,575 $2,211,194
============================================================
Liabilities and Stockholders' Equity
Current Liabilities:
Capital lease obligations $ 13,344 $ 309 $ - $ 13,653
Accounts payable 17,963 2,295 5,197 C 25,455
Accrued liabilities 11,531 550 - 12,081
Cash overdraft 9,447 - - 9,447
Interest payable 6,900 - - 6,900
Deferred revenue 1,097 - - 1,097
Other liabilities - - - -
------------------------------------------------------------
Total Current liabilities 60,282 3,154 5,197 68,633
------------------------------------------------------------
Bank borrowings, less current portion - 4,500 - 4,500
Convertible notes 345,000 - - 345,000
Capital lease obligations, less current portion 5,618 30 - 5,648
Deferred revenue 334 - - 334
Other liabilities 358 4 - 362
------------------------------------------------------------
Total Liabilities 411,592 7,688 5,197 424,477
------------------------------------------------------------
Stockholders' equity
Preferred stock - 7,900 (7,900) B -
Common stock 69 7,012 9 A 78
(7,012) B
Additional paid-in capital 1,694,037 - 395,236 A 2,089,273
Deferred compensation (2,122) - (11,939) D (14,061)
Stockholder notes receivable (419) (1,018) - (1,437)
Common stock warrants 2,785 - - 2,785
Accumulated deficit (289,921) (4,984) 4,984 B (289,921)
------------------------------------------------------------
Total stockholders' equity 1,404,429 8,910 373,378 1,786,717
------------------------------------------------------------
Total liabilities and stockholders' equity $1,816,021 $16,598 $378,575 $2,211,194
============================================================
See the accompanying notes to the unaudited pro forma combined financial statements.
</TABLE>
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DIGITAL ISLAND, INC. AND SUBSIDIARIES
PRO FORMA COMBINED STATEMENTS OF
OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------
Historical Historical
---------------------------- ------------------------
Period from Period from
October 1, October 1,
Nine Months 1999 to Nine Months 1999 to
Ended June December 28, Ended June January 12,
30, 2000 1999 30, 2000 2000
---------------------------- ------------------------
Digital Island
and Combined Pro Pacific
Subsidiaries SandPiper Adjustments Forma SoftAware Netcom
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenue $ 34,990 $ 854 $ (262) G $ 35,582 $ 9,950 $ 1,307
Cost and expenses:
Cost of revenue 71,240 2,731 (262) G 73,709 6,308 1,334
Sales and marketing 36,985 49,557 - 86,542 1,146 91
Product development 13,227 783 - 14,010 342 -
General and administrative 30,052 1,561 - 31,613 3,657 186
Amortization of intangible assets 106,556 - 48,693 E 155,249 833 17
Stock compensation expense 1,911 240 - 2,151 246 -
----------------------------------------- --------------------------------------
Total costs and expenses 259,971 54,872 48,431 363,274 12,532 1,628
----------------------------------------- --------------------------------------
Loss from operations (224,981) (54,018) (48,693) (327,692) (2,582) (321)
----------------------------------------- --------------------------------------
Interest income/(expense), net 8,139 25 - 8,164 61 (23)
Other income/(expense) - - - - (91) 1
----------------------------------------- --------------------------------------
Loss before income taxes (216,842) (53,993) (48,693) (319,528) (2,612) (343)
----------------------------------------- --------------------------------------
Provision for income taxes 17 - 17 (13) 3
----------------------------------------- --------------------------------------
Net loss $ (216,859) $ (53,993) $ (48,693) $ (319,545) $ (2,599) $ (346)
========================================= ======================================
Pro forma net loss per share:
Net loss per share - basic and diluted $ (3.94) $ (5.05)
Weighted average shares - basic and diluted 55,032,310 8,185,363 F 63,217,673
<CAPTION>
Combined
Adjustments Pro Forma
--------------------------------------
<S> <C> <C>
Revenue $ - $ 46,839
Cost and expenses:
Cost of revenue - 81,351
Sales and marketing - 87,779
Product development - 14,352
General and administrative - 35,456
Amortization of intangible assets 59,597 E 215,696
Stock compensation expense 2,507 E 4,904
------------- -----------
Total costs and expenses 62,104 439,538
------------- -----------
Loss from operations (62,104) (392,699)
------------- -----------
Interest income/(expense), net - 8,202
Other income/(expense) - (90)
------------- -----------
Loss before income taxes (62,104) (384,587)
------------- -----------
Provision for income taxes - 6
------------- -----------
Net loss $ (62,104) $ (384,593)
============= ===========
Pro forma net loss per share:
Net loss per share - basic and diluted $ (5.98)
Weighted average shares - basic and diluted 9,301,892 F 64,334,202
See the accompanying notes to the unaudited pro forma combined financial statements.
</TABLE>
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<PAGE>
DIGITAL ISLAND, INC. AND SUBSIDIARIES
PRO FORMA COMBINED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
Historical Historical
---------------------------- ------------------------
Twelve Months Ended Twelve Months Ended
September 30, 1999 December 31, 1999
---------------------------- ------------------------
Digital Island
and Combined Pro Pacific
Subsidiaries Sandpiper Adjustments Forma SoftAware Netcom
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenue $ 12,431 $ 219 $ - $ 12,650 $ 6,656 $ 4,338
Cost and expenses:
Cost of revenue 29,496 4,341 - 33,837 3,179 3,528
Sales and marketing 16,010 5,358 - 21,368 943 446
Product development 6,357 2,357 - 8,714 - -
General and administrative 9,848 1,731 - 11,579 2,947 507
Amortization of intangible assets - - 194,770 E 194,770 52 16
Stock compensation expense 3,207 581 - 3,788 321 -
------------------------------------------ --------------------------------------
Total costs and expenses 64,918 14,368 194,770 274,056 7,442 4,497
------------------------------------------ --------------------------------------
Loss from operations (52,487) (14,149) (194,770) (261,406) (786) (159)
------------------------------------------ --------------------------------------
Interest income/(expense), net 1,551 179 - 1,730 3 (23)
Other income - - - - 94 28
------------------------------------------ --------------------------------------
Loss before income taxes (50,936) (13,970) (194,770) (259,676) (689) (154)
------------------------------------------ --------------------------------------
Provision (benefit) for income taxes 2 3 - 5 (12) 1
------------------------------------------ --------------------------------------
Net loss $ (50,938) $ (13,973) $ (194,770) $ (259,681) $ (677) $ (155)
========================================== ======================================
Pro forma net loss per share:
Net loss per share - basic and diluted $ (4.58) $ (7.28)
Weighted average shares - basic and diluted 11,127,462 24,556,088 F 35,683,550
<CAPTION>
Combined
Adjustments Pro Forma
--------------------------------------
<S> <C> <C>
Revenue $ - 23,644
Cost and expenses:
Cost of revenue - 40,544
Sales and marketing - 22,757
Product development - 8,714
General and administrative - 15,033
Amortization of intangible assets 80,527 E 275,365
Stock compensation expense 7,283 E 11,392
--------------------------------------
Total costs and expenses 87,810 373,805
--------------------------------------
Loss from operations (87,810) (350,161)
--------------------------------------
Interest income/(expense), net - 1,710
Other income - 122
--------------------------------------
Loss before income taxes (87,810) (348,329)
--------------------------------------
Provision (benefit) for income taxes - (6)
--------------------------------------
Net loss $ (87,810) (348,323)
======================================
Pro forma net loss per share:
Net loss per share - basic and diluted $ (18.30)
Weighted average shares - basic and diluted 7,906,608 F 19,034,070
See the accompanying notes to the unaudited pro forma combined financial statements.
</TABLE>
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DIGITAL ISLAND, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
On September 15, 2000, Digital Island, Inc. (the "Company") acquired a 100%
ownership interest of SoftAware, Inc. ("SoftAware") through the issuance of
approximately 9.3 million shares of the Company's common stock, $20 million of
cash and 73,108 common stock options for a total purchase price of approximately
$418.7 million including acquisition costs of $5.2 million. This acquisition
was accounted for using the purchase method of accounting. The value of the
common stock issued in connection with the acquisition of SoftAware is $41.98
per share, the average value of the Digital Island common stock surrounding
the date the terms of the acquisition were agreed to. The fair value of the
common stock options was estimated using the Black-Scholes model with the
following weighted average assumptions: deemed fair value of the underlying
common stock of $41.98, risk-free interest rate of 5.8%, expected life of 4.5
years, expected dividend rate of 0% and volatility rate of 205%. The purchase
price was allocated to the tangible and intangible assets acquired and
liabilities assumed on the basis of their respective fair values on the
acquisition date. The excess of the purchase price over the fair value of the
net tangible and identifiable intangible assets acquired was recorded as
goodwill. Of the purchase price, $3.8 million was allocated to the net assets
of SoftAware, $403.0 million and $11.9 million was allocated to intangible
assets and deferred compensation, respectively. The acquired intangible
assets, including goodwill, will be amortized over their estimated useful life
of 5 years. Deferred compensation will be amortized over the remaining vesting
terms of the related unvested common shares and unvested options using the
amortization method under FIN 28. SoftAware provides commercial connectivity,
including equipment, to the Internet for content providers and data center
services, including co-location, monitoring, and administration.
On December 28, 1999 the Company acquired Sandpiper Networks, Inc. ("Sandpiper")
through the merger of a wholly owned subsidiary of the Company with Sandpiper.
In the merger, each outstanding share of Sandpiper capital stock was exchanged
for 1.0727 shares of the Company's common stock and all outstanding stock
options and warrants were assumed. The Company issued 24.6 million shares of
common stock and 3.1 million stock options and warrants. The total purchase
price of approximately $967.6 million was allocated primarily to intangible
assets and goodwill, which will be amortized over 5 years.
On January 13, 2000, SoftAware acquired all the outstanding shares of Pacific
Netcom, Inc. ("Pacific Netcom") for aggregate consideration of approximately
$4.6 million.
5
<PAGE>
The total purchase price was allocated primarily to intangible assets and
goodwill, which was to be amortized over 3 years.
The following pro forma adjustments have been made to the historical financial
statements of the Company and SoftAware based upon assumptions made by
management for the purpose of preparing the unaudited pro forma combined
financial statements:
A. Record common stock issued and cash paid for the acquisition of SoftAware.
B. Eliminate the shareholders' equity accounts and goodwill of SoftAware.
C. Record estimated transaction costs.
D. Record the excess of acquisition costs over the fair value of net assets
acquired at June 30, 2000. Approximately $414.9 million were allocated
to deferred compensation and intangible assets, including customer
relationships, assembled workforce, software and technology,
trademark/tradename and goodwill.
E. Reflect amortization of deferred compensation, goodwill and other purchased
intangibles.
F. Adjust weighted average shares outstanding used in computing basic and
diluted loss per share to reflect issuance of shares upon acquisition of
Sandpiper and SoftAware.
G. Reflect elimination of inter-company transactions between Digital Island
and Sandpiper.
The pro forma combined basic net loss per share is based on the combined
weighted average number of common shares of the Company's common stock for each
period, calculated using an exchange ratio that results in the issuance of 9.4
million shares of the Company's common stock for 100% ownership of SoftAware.
The adjustment to historical weighted average shares outstanding results from
inclusion of actual shares issued or estimated shares to be issued in
conjunction with the acquisition as if such shares were outstanding from October
1, 1998. In accordance with the agreement, approximately 15% of the stock will
be held in a time-lapsing escrow account and have been excluded from the pro
forma basic and diluted net loss per share for the year ended September 30,
1999.
6
