<PAGE>
EXHIBIT 99.1
ADWARE SYSTEMS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of PricewaterhouseCoopers LLP, Independent Accountants................................ 1
Consolidated Balance Sheets as of June 30, 2000 and December 31, 1999........................ 2
Consolidated Statements of Operations for the six-month period ended June 30, 2000
and 1999 (unaudited) and the year ended December 31, 1999.................................. 3
Consolidated Statement of Changes in Stockholder's Equity for the six-month period
ended June 30, 2000 and the year ended December 31, 1999................................... 4
Consolidated Statements of Cash Flows for the six-month period ended June 30, 2000
and 1999 (unaudited) and the year ended December 31, 1999.................................. 5
Notes to Consolidated Financial Statements................................................... 6
</TABLE>
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders of
AdWare Systems, Inc.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of changes in stockholder's
equity and of cash flows present fairly, in all material respects, the
consolidated financial position of AdWare Systems, Inc. and its subsidiary (the
Company) as of June 30, 2000 and December 31, 1999 and the results of their
operations and their cash flows for the six-month period ended June 30, 2000 and
the year ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States. 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
audit of these statements in accordance with auditing standards generally
accepted in the United States which 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, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Louisville, Kentucky
September 20, 2000
1
<PAGE>
ADWARE SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
------------ -----------
<S> <C> <C>
ASSETS
Cash and cash equivalents................................................... $ 643 $ 798
Trade accounts receivable - McCann and other IPG subsidiaries............... 954 397
Trade accounts receivable - third party..................................... 95 38
Other current assets........................................................ 78 83
----------- ----------
Total current assets.................................................. 1,770 1,316
Property and equipment, at cost:
Furniture and equipment................................................... 1,345 1,218
Computer equipment........................................................ 4,716 5,266
Capitalized software...................................................... 8,844 7,813
Leasehold improvements.................................................... 539 530
----------- ----------
15,444 14,827
Accumulated depreciation and amortization................................. (9,744) (8,877)
----------- ----------
Property and equipment, net............................................ 5,700 5,950
Other assets................................................................ 9 13
----------- ----------
Total assets.......................................................... $ 7,479 $ 7,279
=========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable and accrued expenses.................................. $ 629 $ 576
Payable - McCann and other IPG subsidiaries........................... 3,416 1,324
Current portion of capital lease obligations........................... 234 361
----------- ----------
Total current liabilities............................................. 4,279 2,261
Capital lease obligations................................................... 548 407
Other non-current liabilities............................................... 363 347
----------- ----------
Total liabilities..................................................... 5,190 3,015
Commitments and contingencies (Note 3)
Stockholders'/Divisional Equity
Common stock, no par value; 2,000 shares authorized; 100 shares
issued and outstanding................................................ 186 186
Net contributions from McCann and IPG/Division Equity.................. 2,119 4,094
Treasury stock, at cost; 100 shares.................................... (16) (16)
----------- ----------
Total stockholder's/divisional equity................................. 2,289 4,264
----------- ----------
Total liabilities and stockholder's/divisional equity................. $ 7,479 $ 7,279
=========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
2
<PAGE>
ADWARE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended
Six-month period ended June 30, December 31,
-------------------------------
2000 1999 1999
------------- ------------ -----------
(unaudited)
<S> <C> <C> <C>
Revenues:
McCann and other IPG subsidiaries................................. $ 4,542 $ 3,947 $ 7,829
Third party....................................................... 234 212 644
---------- ----------- ----------
Total revenues.................................................. 4,776 4,159 8,473
Cost of revenues.................................................... 2,140 2,090 4,134
---------- ----------- ----------
Gross profit.................................................... 2,636 2,069 4,339
Operating expenses:
Sales and marketing............................................. 1,045 976 2,134
Research and development........................................ 1,550 1,901 1,787
General and administrative...................................... 1,978 617 1,361
---------- ----------- ----------
Total operating expenses..................................... 4,573 3,494 5,282
---------- ----------- ----------
Loss from operations......................................... (1,937) (1,425) (943)
Interest income.................................................... 15 16 29
Interest charged by IPG............................................ 266 186 385
Interest expense................................................... 28 11 33
Loss on disposal of property and equipment......................... 5 111 216
---------- ----------- ----------
Loss before income tax benefit...................................... (2,221) (1,717) (1,548)
Income tax benefit................................................. (807) (670) (604)
---------- ----------- ----------
Net loss............................................................ (1,414) (1,047) (944)
========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
ADWARE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
(in thousands, except share data)
<TABLE>
<CAPTION>
Net Contributions
Common Stock from McCann Total
------------------- and IPG/ Treasury Stockholder's
Shares Amount Divisional Equity Stock Equity
-------- -------- ----------------- --------- -------------
<S> <C> <C> <C> <C> <C>
Balances, January 1, 1999.................. 100 $ 186 $ 3,542 $ (16) $ 3,712
Dividends declared....................... (300) (300)
Net contributions from
McCann and IPG.......................... 1,796 1,796
Net loss................................. (944) (944)
------ ------- -------- ------ --------
Balances, December 31, 1999................ 100 $ 186 $ 4,094 (16) 4,264
------ ------- -------- ------ --------
Net contributions to
McCann and IPG.......................... (561) (561)
Net loss................................. (1,414) (1,414)
------ ------- -------- ------ --------
Balances, June 30, 2000.................... 100 $ 186 $ 2,119 $ (16) $ 2,289
====== ======= ======== ====== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
ADWARE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Year ended
Six-month period ended June 30, December 31,
-------------------------------
2000 1999 1999
---------- ----------- ------------
(unaudited)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss........................................................... $ (1,414) $ (1,047) $ (944)
Adjustments to reconcile net loss to net cash (used in) provided by
operating activities:
Depreciation and amortization.................................... 1,340 1,045 2,039
Loss on disposal of property and equipment....................... 5 111 216
Changes in operating assets and liabilities:
Trade accounts receivable - McCann and other
IPG subsidiaries............................................. (557) (922) (131)
Trade accounts receivable - third party........................ (57) (83) 30
Other assets................................................... 9 (20) (34)
Accounts payable and accrued expenses.......................... 53 118 (372)
Other liabilities.............................................. 16 (86) (101)
---------- ----------- ------------
Net cash (used in) provided by operating activities.......... (605) (884) 703
---------- ----------- ------------
Cash flows from investing activities:
Purchase of property and equipment............................... (941) (752) (3,376)
---------- ----------- ------------
Net cash used in investing activities........................ (941) (752) (3,376)
---------- ----------- ------------
Cash flows from financing activities:
Dividends paid................................................... -- (756) (1,097)
Change in payable to McCann and other IPG subsidiaries........... 2,092 1,172 1,324
Net contributions (to) from McCann and IPG....................... (561) 78 1,796
Payments on capital lease obligations............................ (140) (114) (187)
---------- ----------- ------------
Net cash provided by financing activities.................... 1,391 380 1,836
---------- ----------- ------------
Net change in cash and cash equivalents...................... (155) (1,256) (837)
Cash and cash equivalents at beginning of period.................... 798 1,635 1,635
---------- ----------- ------------
Cash and cash equivalents at end of period.......................... $ 643 $ 379 $ 798
========== =========== ============
Supplemental cash flow information:
Income tax refunds $ 826 $ 630 $ 604
Interest payments $ 294 $ 197 $ 33
Summary of non-cash investing and financing activities:
Equipment acquired under capital lease $ 154 -- $ 526
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
ADWARE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Reporting Entity and Summary of Significant Accounting Policies
The Company
AdWare Systems, Inc. (the Company), a wholly-owned subsidiary of
McCann-Erickson USA, Inc. (McCann), a wholly-owned subsidiary of The Interpublic
Group of Companies, Inc. (IPG), is an applications services provider delivering
information management systems and services to companies in the marketing
communications industry.
On July 21, 2000, the Company was acquired by Mediaplex, Inc. (Mediaplex)
for total consideration approximating $27.3 million in cash and stock pursuant
to the Share Acquisition Agreement (the Acquisition Agreement). In connection
with the Acquisition Agreement, Mediaplex and the Company executed the AdWare
Software License and Service Agreement (the Service Agreement) whereby the
Company granted to McCann and other IPG subsidiaries a nonexclusive, non-
sublicenseable, non-transferable license to use the Company's software for a
five-year period commencing on July 15, 2000 and ending on July 15, 2005.
Pursuant to the Service Agreement, McCann and other IPG subsidiaries agree to
pay the Company a fixed monthly fee, to be adjusted semi-annually provided that
the fixed monthly fee from McCann and other IPG subsidiaries will not be less
than approximately $757,000 per month.
Certain allocations and estimates have been made by management in the
accompanying consolidated financial statements to present the financial
position, results of operations and cash flows of the Company as an independent
entity. Costs allocated to the Company by McCann and IPG include employee
benefits, insurance, payroll processing, tax services, legal and other general
and administrative expenses. Fees for these services charged to operations for
the six-month periods ended June 30, 2000 and 1999 (unaudited) and for the year
ended December 31, 1999 approximated $170,000, $132,000 and $296,000,
respectively. These fees are included in general and administrative expenses in
the statements of operations. The allocation of these expenditures was based
principally on specific identification and the ratio of the number of Company
employees to total McCann and IPG employees. In addition, IPG charged the
Company interest on intercompany debt during the six-month periods ended June
30, 2000 and 1999 (unaudited) and the year ended December 31, 1999,
approximating $266,000, $186,000 and $385,000, respectively. The interest is
charged at a variable rate and averaged 6% at June 30, 2000 and December 31,
1999. These interest amounts are included in interest charged by IPG in the
statements of operations. Management believes that the allocation methods and
assumptions are reasonable.
Changes in stockholder's equity represent IPG's transfer of its net
investment in the Company, after giving effect to the net operations of the
Company plus net cash transfers to IPG and McCann and other transfers from IPG
and McCann.
The accompanying financial information may not reflect the consolidated
financial position, operating results, changes in stockholder's equity and cash
flows of the Company in the future or what they would have been had the Company
been a separate, stand-alone entity during the periods presented.
The Company has sustained losses from operations and negative operating
cash flows in recent years and has been highly dependent upon funding from IPG.
The Company expects these conditions to continue for the foreseeable future.
The implementation of the Company's business plan is dependent upon
obtaining continued funding from external sources, including Mediaplex. There
can be no assurance that such additional funding will be available on terms
attractive to the Company, or at all. Should additional funding not be
available, management believes that the Company's current growth plans would be
curtailed and sufficient funds would be available from operations, and from
Mediaplex which acquired the Company on July 21, 2000.
Principles of Consolidation
The consolidated financial statements of the Company include the accounts
of the Company and its wholly-owned subsidiary, AdWare Systems Canada, Inc. All
significant intercompany accounts and transactions have been eliminated.
Cash and Cash Equivalents
Cash and cash equivalents include cash and highly liquid investments with a
maturity of three months or less at the date of purchase or no stated maturity
date. Carrying value approximates fair value due to the short-term maturity of
the investments. The Company's cash and cash equivalents have been deposited
with a single financial institution. At most times such cash is in excess of the
FDIC insurance level.
6
<PAGE>
ADWARE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1. Reporting Entity and Summary of Significant Accounting Policies, continued
Property and Equipment
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 (equipment, computer equipment and software, 3 years
and lease hold improvements, 10 years), commencing when assets are placed in
service, ranging from three to ten years, or the life of the leases, if shorter,
for leased assets. Costs of additions and improvements are capitalized and
repairs and maintenance are charged to expense as incurred. Retirements, sales
and disposals of assets are recorded by removing the cost and accumulated
depreciation from the accounts with any resulting gain or loss being recognized
in results of operations.
The Company capitalizes costs associated with the design and implementation
of internal use computer software and software utilized to provide application
management services to customers, including internally and externally developed
software, in accordance with American Institute of Certified Public Accountants
(AICPA) Statement of Position (SOP) 98-1 "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use".
The Company reviews for the impairment of property and equipment whenever
events or changes in circumstances indicate that the carrying amount of the
asset may not be recoverable. An impairment loss would be recognized when
estimated undiscounted future cash flows expected to result for the use of the
asset and its eventual disposition are less than its carrying amount. If such
assets are considered to be impaired, the impairment to be recognized is
measured based on the amount by which the carrying amount of the assets exceeds
the fair value of the assets.
Income Taxes
The Company's operating results historically have been included in IPG's
consolidated federal and state income tax returns. The provision for income
taxes in the accompanying consolidated financial statements has been determined
on a separate-return basis. The Company accounts for income taxes under the
provisions of Statement of Financial Accounting Standards (SFAS) No. 109,
"Accounting for Income Taxes" (SFAS 109). SFAS 109 requires an asset and
liability based approach in accounting for income taxes. Deferred income tax
assets and liabilities are recorded to reflect the tax consequences on future
years of temporary differences of revenue and expense items for financial
statement and income tax reporting purposes. Valuation allowances are provided
against deferred tax assets not likely to be realized.
Stock-Based Employee Compensation
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation" (SFAS 123) and uses Accounting
Principles Board (APB) Opinion No. 25, "Accounting for Stock-Issued to
Employees" (APB 25) and related interpretations in accounting for employee stock
options. Under APB 25, compensation cost is recognized based on the amount by
which the fair market value of the common stock exceeds the exercise price of
the options on the date of grant.
The Company accounts for stock issued to non-employees in accordance with
the provisions of SFAS 123 and Emerging Issues Task Force 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." The Company
uses the Black-Scholes option pricing model to value options granted to
non-employees. The related expense is recorded over the period in which the
related services are received. As of June 30, 2000, the Company had no stock
issued to non-employees.
The Company amortizes deferred stock-based compensation recorded in
connection with certain stock option grants over the vesting periods of the
related options.
7
<PAGE>
ADWARE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1. Reporting Entity and Summary of Significant Accounting Policies, continued
Revenue Recognition
The Company generates revenue from application management services,
professional services and other revenues. Application management services
revenue consists of monthly recurring fees for hosting services and is
recognized as the services are performed. The Company's application management
services provide customers rights to access applications, hardware for the
application access, customer service, and rights to upgrades and updates. The
Company's customers generally do not have the right to take possession of the
software at any time during the hosting agreement. Contracts for application
management services that exceed designated minimum monthly or quarterly volume
usage are recognized as revenues by the Company in the month or quarter in which
minimum volume is exceeded.
Research and Development Expenses
Research and development expenses and enhancements to existing products are
charged to operations as incurred.
Advertising Expenses
The Company expenses the cost of advertising and promoting its services as
incurred. These costs are included in sales and marketing expenses in the
accompanying consolidated statements of operations. Advertising expense was
approximately $71,000, $79,000 and $165,000 for the six-month period ended June
30, 2000 and 1999 (unaudited) and the year ended December 31, 1999,
respectively.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of cash, cash equivalents and
accounts receivable. The Company generates a significant portion of its business
through services provided to McCann and other IPG subsidiaries. The loss of
business from McCann and other IPG subsidiaries would have a significant adverse
impact on the Company's financial position, results of operations and cash
flows.
Risks and Uncertainties
The Company is subject to all of the risks inherent in an early stage
company in the Internet advertising industry. These risks include, but are not
limited to, a limited operating history, limited management resources,
dependence upon consumer acceptance of the Internet, Internet-related security
risks and the changing nature of the electronic commerce industry. The Company's
operating results may be materially affected by the foregoing factors.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
certain 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 results of operations during the
reporting period. Actual results could differ from those estimates.
8
<PAGE>
ADWARE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1. Reporting Entity and Summary of Significant Accounting Policies, continued
Recently Issued Accounting Pronouncements
In March 2000, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation (FIN) No. 44, "Accounting for Certain Transactions Involving
Stock Compensation - an interpretation of APB 25" (FIN 44). FIN 44 clarifies the
application of APB 25 regarding the definition of employee for purposes of
applying APB 25, the criteria for determining whether a plan qualifies as a
noncompensatory plan, the accounting consequence of various modifications to the
terms of a previously fixed stock option or award, and the accounting for an
exchange of stock compensation awards in a business combination. This
interpretation was effective July 1, 2000. The Company is currently in
compliance with FIN 44 and thus it will not have a material impact on its
financial position, results of operations or cash flows.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statement," (SAB 101). SAB 101 expresses the views of the SEC staff in applying
accounting principles generally accepted in the United States to certain revenue
recognition issues. The Company is currently in compliance with SAB 101 and thus
it will not have a material impact on its financial position, results of
operations or cash flows.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," (SFAS 133) which defines derivatives,
requires that all derivatives be carried at fair value, and provides for hedge
accounting when certain conditions are met. SFAS 133, as amended by SFAS 138, is
effective for the Company in calendar 2001. Although the Company has not fully
assessed the implications of SFAS 133, the Company does not believe the adoption
of this statement will have a material effect on the Company's financial
position, results of operations or cash flows.
Interim Financial Information
The interim financial information for the six-month period ended June 30,
1999 has been prepared in accordance with the Company's customary accounting
practices and has not been audited. In the opinion of management, the
information presented reflects all adjustments necessary for a fair presentation
of interim results. All such adjustments are of a normal and recurring nature.
Operating results for the six-months ended June 30, 1999 are not necessarily
indicative of results that may be expected for any future periods.
Comprehensive Earnings
The Company has no material components of other comprehensive earnings and,
accordingly, comprehensive earnings are the same as net loss in the accompanying
statements of operations for all periods presented.
2. Lease Commitments
The Company leases certain office facilities and equipment under non-
cancelable operating lease agreements that expire at various dates through
February 2005. Rent expense for the six-month periods ended June 30, 2000 and
1999 (unaudited) and the year ended December 31, 1999 approximated $519,000,
$431,000 and $1,031,000, respectively. There was no sublease rental income
during the six-month period ended June 30, 2000. Sublease rental income
approximated $34,000 and $67,000 for the period ended June 30, 1999 (unaudited)
and for the year ended December 31, 1999, respectively.
The Company leases certain equipment under capital lease agreements with
various providers with terms ranging from two to five years. Assets acquired
under capital leases totaled $1,362,000 and $1,204,000 at June 30, 2000, and
December 31, 1999, respectively. Accumulated depreciation of those assets was
$610,000 and $465,000 at June 30, 2000 and December 31, 1999, respectively.
9
<PAGE>
ADWARE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. Lease Commitments, continued
Future minimum lease payments under non-cancelable operating and capital
leases having terms in excess of one year at June 30, 2000 are as follows (in
thousands):
<TABLE>
<CAPTION>
Operating Capital
Leases Leases
----------- -----------
<S> <C> <C>
Twelve-month period ended June 30:
---------------------------------
2001................................................ $ 249 $ 231
2002................................................ 146 415
2003................................................ 27 158
2004................................................ 2 59
2005................................................ -- 9
----------- -----------
Total minimum lease payments............. $ 424 872
===========
Less amount representing interest................... (90)
-----------
Present value of minimum capital lease obligations.. 782
Less current portion................................ (234)
-----------
$ 548
===========
</TABLE>
3. Commitments and Contingencies
The Company is not a party to any material legal proceedings. In the
opinion of management, the amount of ultimate liability with respect to any
known actions will not materially affect the financial position, results of
operations or cash flows of the Company.
4. Income Taxes
The Company incurred net operating losses for the six-month period ended
June 30, 2000 and the year ended December 31, 1999 which, under the separate
return method, are carried back to prior taxable years. The Company has
sufficient taxable income in those prior years to absorb the losses. Therefore,
a current tax benefit has been recorded in the Company's financials. The
Company's income tax benefit for the six-month period ended June 30, 2000 and
the year ended December 31, 1999 consists of the following (in thousands):
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
Current benefit:
Federal............................................. $ (760) $ (551)
State and local..................................... (67) (53)
----------- -----------
(827) (604)
----------- -----------
Deferred provision:
Federal............................................. 9 42
State and local..................................... 1 4
----------- -----------
10 46
----------- -----------
(817) (558)
Provision (benefit) for valuation allowance........... 10 (46)
----------- -----------
$ (807) $ (604)
=========== ===========
</TABLE>
10
<PAGE>
ADWARE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. Income Taxes, continued
A reconciliation of the Company's income tax benefit for the six-month
period ended June 30, 2000 and the year ended December 31, 1999 to the income
tax benefit determined by applying the U.S. federal statutory rate to the loss
before income tax benefit follows (in thousands):
<TABLE>
<CAPTION>
2000 1999
---------- ----------
<S> <C> <C>
Tax benefit at U.S. federal statutory rate........... $ (756) $ (527)
State and local income tax benefit................... (67) (45)
Provision (benefit) for valuation allowance.......... 10 (46)
Non-deductible expenses.............................. 6 14
---------- ----------
4 (807) $ (604)
========== ==========
</TABLE>
The tax effects of temporary differences giving rise to significant
deferred tax assets at June 30, 2000 and December 31, 1999 are as follows (in
thousands):
<TABLE>
<CAPTION>
2000 1999
---------- ----------
<S> <C> <C>
Depreciation......................................... $ 212 $ 216
Accrued liabilities.................................. 110 117
---------- ----------
322 333
Valuation allowance.................................. (322) (333)
---------- ----------
Net deferred tax assets.............................. $ -- $ --
========== ==========
</TABLE>
Due to uncertainty with the Company's ability to recognize the benefits of
net deferred tax assets, a valuation allowance has been established to offset
the amount of net deferred tax assets.
5. Retirement Plan
The Company's employees participate in the defined contribution plan (the
Savings Plan) of IPG. The Savings Plan allows participants to choose among
several investment alternatives. The Company matches a portion of participants'
contributions based upon the number of years of service. The Company contributed
$83,000, $70,000 and $144,000 during the six-month period ended June 30, 2000
and 1999 (unaudited) and the year ended December 31, 1999, respectively. Upon
completion of the acquisition of the Company by Mediaplex, the employees of the
Company will no longer participate in the Savings Plan.
6. Incentive Plan
An officer of the Company participates in the 1997 Performance Incentive
Plan (the PIP) of IPG which includes both stock and cash based incentive awards.
The maximum number of shares of IPG's common stock which may be granted in any
year under the PIP is equal to 1.85% of the total number of shares of IPG's
common stock outstanding on the first day of the year adjusted for additional
shares as defined in the PIP document (excluding management incentive
compensation performance awards). The PIP also limits the number of shares
available with respect to awards made to any one participant as well as limiting
the number of shares available under certain awards. Awards made prior to the
PIP remain subject to the respective terms and conditions of the predecessor
plans.
Options are generally granted at the fair market value of IPG's common
stock on the date of grant and are excerciseable as determined by the
Compensation Committee of the Board of Directors of IPG. The officer's options
become excerciseable between two and five years after the date of grant and
expire ten years from the grant date.
11
<PAGE>
ADWARE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. Incentive Plan, continued
The fair value of stock options granted in 1999 was$16.08 per option. There
were no stock option grants during the six-month period ended June 30, 2000. Had
compensation expense been recognized pursuant to SFAS 123, the Company's net
loss for the six-month periods ended June 30, 2000 and 1999 (unaudited) would
have been $1,416,000 and $1,048,000, respectively, and net loss for the year
ended December 31, 1999 would have been $952,000.
The fair value of options granted in 1999 is estimated on the date of grant
using the Black-Scholes pricing model with the following assumptions:
Expected life of options.................... 6 years
Risk-free interest rate..................... 5.72%
Expected dividend yield..................... 0.81%
Expected volatility......................... 19.73%
The effects of applying SFAS 123 in the pro forma disclosures are not
likely to be representative of the effects on pro forma results of operations
for future years because variables such as option grants, exercises and stock
price volatility in the disclosures may not be indicative of future activity.
The following table summarizes activity related to the officer's options:
<TABLE>
<CAPTION>
Shares Under Exercise Price Weighted Average
Option Per Share Exercise Price
------------ --------------- ----------------
<S> <C> <C> <C>
Balance, January 1, 1999............ 5,000 $17.60 - $34.59 $24.40
Grants............................ 5,000 $52.47
-------------
Balance, December 31, 1999.......... 10,000 $17.60 - $52.47 $38.43
Forfeitures....................... 2,000 $34.59
-------------
Balance, June 30, 2000.............. 8,000 $17.60 - $52.47 $39.39
=============
</TABLE>
At June 30, 2000, 3,000 options were exercisable by the officer. The
weighted-average remaining contractual life of the officer's options was 8.5
years at June 30, 2000. Immediately following the acquisition of the Company by
Mediaplex, the officer of the Company excercised 6,600 shares. The remaining
shares were forfeited.
7. Subsequent Event
On July 21, 2000, the Company was acquired by Mediaplex, Inc. (Mediaplex)
for total consideration approximating $27.3 million in cash and stock pursuant
to the Share Acquisition Agreement (the Acquisition Agreement). In connection
with the Acquisition Agreement, Mediaplex and the Company executed the AdWare
Software License and Service Agreement (the Service Agreement) whereby the
Company granted to McCann and other IPG subsidiaries a nonexclusive, non-
sublicenseable, non-transferable license to use the Company's software for a
five-year period commencing on July 15, 2000 and ending on July 15, 2005.
Pursuant to the Service Agreement, McCann and other IPG subsidiaries agree to
pay the Company a fixed monthly fee, to be adjusted semi-annually provided that
the fixed monthly fee from McCann and other IPG subsidiaries will not be less
than approximately $757,000 per month.
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