Report of Independent Auditors
Board of Directors
i360 inc.
We have audited the accompanying consolidated balance sheet of i360 inc. as of
December 31, 1999, and the related consolidated statements of operations,
changes in stockholders' equity, and cash flows for the period from July 14,
1999 (inception) through December 31, 1999. 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 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of i360 inc. as of
December 31, 1999 and the results of its operations and its cash flows for the
period from July 14, 1999 (inception) through December 31, 1999 in conformity
with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that i360 inc.
will continue as a going concern. As more fully described in Note 1, the Company
has incurred an operating loss and has a working capital deficiency. These
conditions raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans with respect to obtaining financial resources
they believe are necessary to move toward profitable operations are also
described in Note 1. The financial statements do not include any adjustments to
reflect the possible future effects on the recoverability and classification of
assets or the amounts and classification of liabilities that may result from the
outcome of this uncertainty.
/s/ ERNST & YOUNG LLP
Tucson, Arizona
February 16, 2000
F-1
<PAGE>
i360 inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31, June 30
1999 2000
(Unaudited)
Assets
Current assets:
<S> <C> <C>
Cash $ 103,471 $ 182,144
Accounts receivable, net of allowance of $119,533 in 2000,
and $98,769 in 1999
69,478 93,574
Stock subscriptions receivable 25,000 --
Prepaid expenses and other 122,272 371,271
Total current assets 320,221 646,989
Property and equipment:
Computer hardware 206,091 311,848
Office equipment 165,635 166,407
Furniture and fixtures -- 8,425
Software 5,517 14,419
377,243 501,099
Accumulated depreciation 18,170 84,516
359,073 416,583
Goodwill, net of amortization of $313,660 in 2000, and
$125,464 in 1999 1,756,499 1,568,303
Deposits 300,000 290,000
Other assets 84,375 56,247
$ 2,820,168 $ 2,978,122
================================
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 656,360 $ 963,897
Accrued stock repurchase obligation 760,600 250,000
Accrued expenses 162,122 408,284
Deferred revenue 4,050 81,382
Total current liabilities 1,583,132 1,703,563
Accrued building lease expense 144,000 199,600
Commitments and contingencies
Stockholders' equity:
Series A Convertible Preferred stock, no par value,
authorized 5,000,000 shares, no shares
issued and outstanding -- --
Common stock, $0.0001 par value, authorized
75,000,000 shares, issued and outstanding
25,280,000 in 2000 and 19,864,904 shares in 1999 1,987 2,528
Paid in capital 4,579,929 12,135,388
Accumulated deficit (3,488,880) (11,062,957)
Total stockholders' equity 1,093,036 1,074,959
$ 2,820,168 $ 2,978,122
================================
</TABLE>
See accompanying notes.
F-2
<PAGE>
i360 inc.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Period from July 14, 1999
(inception) through
December 31, 1999
Six months ended
June 30, 2000
------------------------- --------------------
(Unaudited)
<S> <C> <C>
Revenues:
Set-top box sales $ 119,148 $ 70,705
Subscription services 7,175 507,999
Other 29,759 92,249
------------ ------------
Total revenue 156,082 670,953
Costs and expenses:
Cost of revenue 229,884 1,255,288
Sales and marketing 572,288 683,672
General and administrative 2,017,132 2,164,228
Product development 699,636 467,375
Amortization of goodwill 125,464 188,196
------------ ------------
Total costs and expenses 3,644,404 4,758,759
------------ ------------
Operating loss (3,488,322) (4,087,806)
Other income (expense), net (558) 13,729
------------ ------------
Loss before income taxes (3,488,880) (4,074,077)
Provision for income taxes -- --
------------ ------------
Net loss before beneficial conversion (3,488,880) (4,074,077)
Deemed dividend for preferred stock -- (3,500,000)
------------ ------------
Net loss attributable to common shareholders $ (3,488,880) $ (7,574,077)
============ ============
Basic and diluted net loss per share $ (0.16) $ (0.42)
============ ============
Basic and diluted weighted average common shares 21,211,905 17,959,732
============ ============
</TABLE>
See accompanying notes.
F-3
<PAGE>
i360 inc.
Consolidated Statements of Changes in Stockholders' Equity
Period from July 14, 1999 (inception) through June 30, 2000
<TABLE>
<CAPTION>
Series A Convertible
Preferred Stock Common Stock
--------------------------- ------------------------------
Shares Dollars Shares Dollars
--------------------------- ------------- ---------------
<S> <C> <C> <C> <C>
Issuance of stock to founders -- $ -- 26,560,000 $ 2,656
Sales of stock for cash -- 3,344,159 335
Issuance of stock - ITS acquisition -- 5,000,000 500
Return of shares: --
ITS acquisition -- (2,539,255) (254)
Other shareholders -- (9,200,000) (920)
Repurchase and cancellation of stock -- (3,300,000) (330)
Net loss for the period -- -- --
---------------------------- ------------ ------------
Balance at December 31, 1999 -- -- 19,864,904 1,987
Sales of common stock for cash (unaudited) -- -- 285,714 28
Sale of convertible preferred stock for cash
(unaudited) 300 3,500,000 -- --
Deemed dividend on convertible preferred stock
(unaudited) -- -- -- --
Return of shares from shareholders (unaudited) -- -- (3,966,618) (397)
Shares issued under fair value provision
(unaudited) -- -- 96,000 10
Conversion of preferred stock to common stock
(unaudited) (300) (3,500,000) 9,000,000 900
Accrued liability extinguished with stock option
issuance (unaudited) -- -- -- --
Net loss for period (unaudited) -- -- -- --
---------------------------- -----------------------------
Balance at June 30, 2000 (unaudited) -- $ -- 25,280,000 $ 2,528
============================ =============================
</TABLE>
<TABLE>
<CAPTION>
Paid In Accumulated
Capital Deficit Total
-----------------------------------------------
<S> <C> <C> <C>
Issuance of stock to founders $ 84,550 $ -- $ 87,206
Sales of stock for cash 3,614,470 -- 3,614,805
Issuance of stock - ITS acquisition 3,332,850 -- 3,333,350
Return of shares:
ITS acquisition (1,692,591) -- (1,692,845)
Other shareholders 920 -- --
Repurchase and cancellation of stock (760,270) -- (760,600)
Net loss for the period -- (3,488,880) (3,488,880)
------------ ------------ ------------
Balance at December 31, 1999 4,579,929 (3,488,880) 1,093,036
Sales of common stock for cash (unaudited) 499,972 -- 500,000
Sale of convertible preferred stock for cash
(unaudited) -- -- 3,500,000
Deemed dividend on convertible preferred stock
(unaudited) 3,500,000 (3,500,000) --
Return of shares from shareholders (unaudited) 397 -- --
Shares issued under fair value provision
(unaudited) (10) -- --
Conversion of preferred stock to common stock
(unaudited) 3,499,100 -- --
Accrued liability extinguished with stock option
issuance (unaudited) 56,000 -- 56,000
Net loss for period (unaudited) -- (4,074,077) (4,074,077)
------------ ------------ ------------
Balance at June 30, 2000 (unaudited) $ 12,135,388 $(11,062,957) $ 1,074,959
============ ============ ============
</TABLE>
See accompanying notes.
F-4
<PAGE>
i360 inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Period from July 14, 1999
(inception) through
December 31, 1999 Six months ended
June 30,
2000
------------------------------------------------
(Unaudited)
<S> <C> <C>
Operating activities
Net loss $(3,488,880) $(4,074,077)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 149,841 254,879
Loss on sale of assets 77,925 2,389
Changes in operating assets and liabilities:
Accounts receivable (38,944) (24,096)
Prepaid expenses and other (112,728) (220,871)
Accounts payable 388,682 307,537
Accrued expenses 312,576 357,762
Deposits (300,000) 10,000
Deferred revenue 4,050 77,332
---------------------------------------
Net cash used in operating activities (3,007,478) (3,309,145)
Investing activities
Purchases of property and equipment (439,189) (126,582)
Proceeds from sale of property and equipment 89,321 --
---------------------------------------
Net cash used in investing activities (349,868) (126,582)
Financing activities
Proceeds from issuance of stock 3,614,805 4,000,000
Repayment of ITS shareholder loans (153,988) --
Payments of stock repurchase obligation -- (510,600)
Stock subscription payment -- 25,000
---------------------------------------
Net cash provided by financing activities 3,460,817 3,514,400
---------------------------------------
Increase in cash 103,471 78,673
Cash, beginning of period -- 103,471
---------------------------------------
Cash, end of period $ 103,471 $ 182,144
=======================================
Noncash activities
Common stock issued for assets $ 87,206 $ --
=======================================
Accrued expense paid with stock options $ -- $ 56,000
=======================================
</TABLE>
See accompanying notes.
F-5
<PAGE>
i360 inc.
Notes to Consolidated Financial Statements
Period from July 14, 1999 (inception) through December 31, 1999
(The information for the six months ended June 30, 2000 is unaudited.)
1. Accounting Policies
Organization
i360 inc. (the Company) is an internet solutions company. The Company was
founded on July 14, 1999.
Interim Financial Information
The consolidated financial statements for the six months ended June 30, 2000 are
unaudited but include all adjustments (consisting only of normal recurring
adjustments) that the Company considers necessary for a fair presentation of
financial position and results of operations. Operating results for the six
months ended June 30, 2000 are not necessarily indicative of the results that
may be expected for any future period.
Basis of Presentation
The accompanying consolidated financial statements have been prepared assuming
the Company is a going concern. The Company has incurred a net loss of
approximately $3.5 million through December 31, 1999 and has a working capital
deficiency. Management's plan with respect to this matter is to raise sufficient
additional financial resources to enable the Company to increase the volume of
its customers to a level that will generate net income and positive operating
cash flows. In this regard, management has negotiated an agreement to be
acquired by Infocast Corporation (Infocast) (see Note 8). Management believes
that if the transaction is completed Infocast will have the financial resources
necessary to enable it to meet its financial obligations. Should the transaction
not occur, the Company intends to seek alternative investments to generate
operating capital. However, the Company is not currently in discussions with
potential financial resources other than Infocast. The financial statements do
not include any adjustments that might be necessary should the Company be unable
to continue as a going concern.
Concentration of Credit Risk
Sales to two customers accounted for a total of 33% of the Company's revenue in
the period from July 14, 1999 (inception) through December 31, 1999, and 81% for
the six months ended June 30, 2000. One of these customers is owned by a
shareholder in the Company.
F-6
<PAGE>
i360 inc.
Notes to Consolidated Financial Statements (continued)
(The information for the six months ended June 30, 2000 is unaudited.)
1. Accounting Policies (continued)
Fair Value of Financial Instruments
The Company's accounts receivable and accounts payable represent financial
instruments as defined by Statement of Financial Accounting Standards (SFAS) No.
107, Disclosures About Fair Value of Financial Instruments. The carrying value
of these financial instruments is a reasonable approximation of fair value, due
to their current maturities.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiary, Innovative Technology Solutions, Inc. (ITS). All
significant intercompany accounts and transactions are eliminated.
Stock Subscription Receivable
The Company records stock subscriptions receivable as current assets to the
extent they are paid in a short time frame after year-end.
Property and Equipment
Property and equipment are stated at cost, except for items acquired from ITS
which were recorded at their fair value on the acquisition date. Depreciation is
computed by the straight-line method over the estimated useful lives ranging
from three to five years.
Goodwill
Goodwill incurred in connection with the ITS acquisition is amortized on a
straight-line basis over the estimated useful life of 5 years.
Revenue Recognition
Revenue from the sale of set-top boxes is recognized when the items are shipped.
Subscription services are recognized when the service is provided.
F-7
<PAGE>
i360 inc.
Notes to Consolidated Financial Statements (continued)
(The information for the six months ended June 30, 2000 is unaudited.)
1. Accounting Policies (continued)
Income Taxes
Income taxes are determined utilizing the liability method. This method gives
consideration to the future tax consequences associated with temporary
differences between the carrying amounts of assets and liabilities for financial
statement purposes and the amounts used for income tax purposes.
Loss Per Share Computation
Loss per share is computed in accordance with SFAS No. 128, "Earnings per
Share." Basic loss per share is computed using the weighted average number of
common shares. Diluted loss per share is computed using the weighted average
number of common share equivalents outstanding during the period. Dilutive
common share equivalents consist of stock options and warrants using the
treasury method and dilutive convertible securities using the if-converted
method, if the effect would be dilutive. Given the net loss of the Company,
there are no dilutive shares.
New Accounting Pronouncements
In December 1999, the Securities Exchange Commission issued Staff Accounting
Bulletin (SAB) 101, Revenue Recognition in Financial Statements. The effective
date of SAB 101 for the Company is no later than the fourth fiscal quarter of
the year ending December 31, 2000. The Company is currently evaluating the
effect of this SAB on its financial statements.
In March 2000, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 44, Accounting for Certain Transactions involving Stock
Compensation, an interpretation of APB Opinion No. 25 (Interpretation No. 44).
Interpretation No. 44 became effective July 1, 2000. The interpretation
clarifies the application of APB Opinion No. 25 for certain issues,
specifically, (1) the definition of an employee, (b) the criteria for
determining whether a plan qualifies as a noncompensatory plan, (c) the
accounting consequence of various modifications to the terms of a previous
compensation award in a business combination. The adoption of Interpretation No.
44 is not expected to have a significant impact on the Company's financial
position or results of operations.
F-8
<PAGE>
i360 inc.
Notes to Consolidated Financial Statements (continued)
(The information for the six months ended June 30, 2000 is unaudited.)
2. Income Taxes
Significant components of Company's deferred tax assets at December 31, 1999 are
as follows:
Net operating losses $ 1,235,000
Other 165,000
Valuation allowance (1,400,000)
-------------------
$ -
===================
At December 31, 1999, the Company has net operating loss carryforwards for
federal and state income tax purposes of approximately $2.9 million. These
federal and state carryforwards will begin to expire in 2020 and 2005,
respectively, if not previously utilized. No income taxes were paid in the
period ended December 31, 1999.
3. Commitments and Contingencies
Litigation: The Company is involved from time to time in various litigation
matters. Management believes that the resolution of such matters will not have a
material adverse impact on the Company's financial position, results of
operations or cash flows.
Operating Leases: The Company leases various equipment and office space under
operating leases. Aggregate future commitments under noncancelable operating
leases are as follows at December 31, 1999:
2000 $ 657,130
2001 698,456
2002 728,699
2003 780,000
2004 780,000
--------------------
$3,644,285
====================
Rent expense was $204,659 in the period ended December 31, 1999 and was $410,143
for the six month period ended June 30, 2000. The Company is obligated to
reimburse the landlord $200,000 for leasehold improvements in twenty equal
monthly installments of $10,000 beginning October 1, 2000. The existing lease
remains in effect; however, during 2000, the Company has begun the process of
renegotiating the lease. During 1999, the landlord or affiliates thereof
received 45,000 common shares in exchange for a commitment to make $84,375 in
leasehold improvements in the future. At December 31, 1999, such amount is
included in long-term other assets until such expenditures are made.
F-9
<PAGE>
i360 inc.
Notes to Consolidated Financial Statements (continued)
(The information for the six months ended June 30, 2000 is unaudited.)
3. Commitments and Contingencies (continued)
Other contractual obligations: ITS is obligated to pay certain per-user
activation (one-time) and technical support (monthly) fees to Liberate
Technologies (Liberate) as new internet service customers are obtained. The
rights to certain Liberate-owned technology have been licensed by ITS from
Liberate under an agreement which expires in July 7, 2001. At December 31, 1999,
the Company had prepaid license fees of $71,250, net of amortization of $23,750.
Under the arrangement, the original prepayment is reduced by $95 per new
subscriber. The Company records amortization at the greater of straight line or
the per subscriber amounts.
4. Acquisition of ITS
The Company acquired ITS on September 1, 1999. Total consideration of $1,881,963
paid by the Company consisted of (i) 2,460,745 shares of common stock and (ii)
the assumption of a deficiency in net assets of $241,458, and was allocated to
goodwill. Included in the deficiency in net assets assumed by the Company was
$153,988 in loans payable to certain ITS shareholders, which were paid off by
the Company in 1999. The original purchase called for the issuance of 5,000,000
shares of the Company's common stock. Subsequent to the acquisition the parties
amended the share issuance agreement and the sellers returned 2,539,255 shares
for no consideration. The acquisition has been accounted for as a purchase. The
results of ITS are included in the accompanying consolidated financial
statements from the date of acquisition.
5. Stock Issuances
One of the Company's founding shareholders and former chief executive officer
entered into an agreement with the Company to end his employment status with the
Company. Under the terms of the arrangement the former executive agreed to
return 9,200,000 of his 11,000,000 shares of common stock issued at the
formation of the Company for no consideration.
During 1999, the Company agreed to repurchase and cancel 3,300,000 shares of
common stock from its former chief executive officer and another former employee
for a total of $760,600 payable in the year 2000.
On February 15, 2000, the Company sold 285,714 shares of common stock to two
current shareholders for $500,000 in cash.
On March 8 and March 10, 2000, the Company sold 300 shares of Series A
convertible preferred shares to new investors for $3,500,000. The 300 shares are
convertible into the greater of 9,000,000 shares of common stock or 22.5% of the
outstanding common stock
F-10
<PAGE>
i360 inc.
Notes to Consolidated Financial Statements (continued)
(The information for the six months ended June 30, 2000 is unaudited.)
5. Stock Issuances (continued)
on a fully diluted basis at the discretion of the shareholders at any time. No
stated dividends accrue on the convertible preferred shares and the holders are
entitled to voting rights based upon the number of common shares into which the
preferred shares convert. Given the beneficial conversion feature the Company
recorded the $3,500,000 of proceeds as zero for preferred stock and recorded a
$3,500,000 deemed preferred stock dividend given that the fair value of the
common shares into which the preferred stock converts was in excess of the
preferred stock proceeds by an amount in excess of the proceeds as is required
by EITF 98-5. Such amount is also reflected as a deemed preferred stock dividend
in the statement of operations. During May of 2000, the shareholders converted
the 300 preferred shares into 9,000,000 shares of common stock.
During the six months ended June 30, 2000, the Company received a return of
3,966,618 common shares from founding shareholders. The Company also issued
96,000 common shares to certain investors who initially purchased shares at
$2.50 per share and had the right to receive additional shares for no additional
consideration given that in February 2000 common shares were sold for cash at
$1.75 per share.
6. Stock Options
The Company had no employee stock option plan in place at December 31, 1999,
although commitments to issue stock options to certain employees in the future
had been made as of that date. On January 21, 2000, the Company adopted the i360
Stock Incentive Plan (the Plan) under which a total of 14,720,000 shares of
common stock were issued. Both incentive and non-qualified stock options may be
granted under the Plan and such options generally vest as follows: 25% after one
month, 25% after 8 months, 25% after 12 months and 25% after 24 months. All
outstanding options shall become fully exercisable upon a change in control.
The Company has elected to follow APB 25 in accounting for its employee stock
options. Under APB 25, as long as the exercise price of the Company's employee
stock options equals or exceeds the fair value of the underlying stock on the
date of the grant, no compensation expense is recognized. All of the Company's
employee stock option grants have been made at fair value for accounting
purposes. At the time of the January 21, 2000 grants the Company was without
financial resources and on the verge of discontinuing operations. Accordingly,
management believes the $0.10 grant price was not less than fair value.
Pro-forma information regarding net loss and net loss per share is required by
Statement 123, which also requires that the information be determined as if the
Company has
F-11
<PAGE>
i360 inc.
Notes to Consolidated Financial Statements (continued)
(The information for the six months ended June 30, 2000 is unaudited.)
6. Stock Options (continued)
accounted for all its employee stock options grants under the fair value method
of that Statement. The fair value for these options was estimated at the date of
grant using a minimum value pricing model with the following weighted-average
assumptions:
Expected life of the award 5 years
Dividend yield 0 percent
Risk-free interest rate 5 percent
The impact of such pro-forma amounts was not material to the Company.
Option activity under the stock option plan is as follows:
<TABLE>
<CAPTION>
Weighted
Average
Exercise Exercise
Shares Price Price
----------------------------------------------------
<S> <C> <C> <C>
Outstanding at December 31, 1999 - $ - $ -
Granted 14,720,000 0.10 0.10
Exercised - -
Expired or canceled - - -
----------------------------------------------------
Outstanding at March 31, 2000 14,720,000 0.10 0.10
Granted 41,250 1.06 1.06
Granted 2,993,669 1.33 1.33
Exercised - -
Expired or canceled (52,500) 0.10 0.10
----------------------------------------------------
Outstanding at June 30, 2000 17,702,419 $0.10 - 1.33 $0.31
====================================================
</TABLE>
The weighted average fair value of options granted in 2000 was $0.06. The
weighted average remaining contractual life at June 30, 2000 was approximately
ten years.
During the six months ended June 30, 2000, the Company issued 66,667 options to
purchase shares of common stock at $1.33 per share. The issuance was accounted
for as an extinguishment of a $56,000 accrued expense related to the recipient
and has been reflected as an increase to paid-in-capital.
F-12
<PAGE>
i360 inc.
Notes to Consolidated Financial Statements (continued)
(The information for the six months ended June 30, 2000 is unaudited.)
7. Year 2000
The Company has experienced no issues to date with respect to the Year 2000 date
change.
8. Subsequent Events
Subsequent to December 31, 1999, certain shareholders of the Company who, as a
group, maintain a controlling interest in the Company have entered into an
agreement with Infocast to vote in favor of a sale of the shares of the Company
to Infocast in exchange for Infocast common shares. The merger was completed on
August 15, 2000.
In August 2000, a claim was filed against i360 alleging a breach of contract by
i360 in connection with the distribution of i360's service offering. The claim
was for an indeterminate amount of damages. On August 17, 2000, counsel for i360
met with counsel for the plaintiffs regarding this matter. The Company believes
the claim is frivolous and without merit and intends to defend it vigorously.
Subsequent to June 30, 2000, the Company issued additional options to purchase
shares of common stock. Of the options issued, 778,333 were at $1.33 per share,
and 250,000 were at $1.06 per share. In addition, 252,500 options with an
exercise price of $0.10 were cancelled.
F-13
<PAGE>
InfoCast Corporation [formerly Virtual Performance Systems Inc.]
[a development stage company]
PRO-FORMA CONSOLIDATED FINANCIAL INFORMATION
[Expressed in United States dollars unless otherwise stated]
Prepared without audit or review
June 30, 2000
1. BASIS OF PRESENTATION
The unaudited pro-forma consolidated financial information of InfoCast
Corporation [formerly Virtual Performance Systems Inc.] [a development stage
company] [the "Company"] set forth below gives effect to the acquisitions of
Homebase Work Solutions Ltd. ["Homebase"] and i360 Inc. ["i360"] as if the
Company had acquired i360 on June 30, 2000 for the purpose of the pro-forma
consolidated balance sheet and as if the Company had acquired Homebase and i360
as of April 1, 1999 for purposes of the pro-forma consolidated statement of
operations for the year ended March 31, 2000 and the three-month period ended
June 30, 2000. Homebase was acquired by the Company on May 13, 1999, and i360
was acquired by the Company on August 15, 2000.
The pro-forma consolidated financial statements are not necessarily indicative
of the results that actually would have occurred had the Company acquired
Homebase and i360 on the dates indicated or which would be obtained in the
future.
The unaudited pro-forma consolidated information should be read in conjunction
with the audited and unaudited consolidated financial statements of the Company
appearing in the most recently filed 10-K and 10-Q, the audited financial
statements of Homebase appearing in the previously filed Form 10 and the audited
and unaudited financial statements of i360 appearing elsewhere in this current
report on Form 8-K.
The unaudited pro-forma consolidated balance sheet as of June 30, 2000 has been
prepared from the unaudited consolidated balance sheet of the Company as of June
30, 2000 and the unaudited balance sheet of i360 as of June 30, 2000.
The unaudited pro-forma statement of operations for the year ended March 31,
2000 has been prepared from the audited consolidated statement of operations of
the Company for the year ended March 31, 2000, the unaudited pre-acquisition
statement of operations of Homebase for the 43-day period ended May 13, 1999
after translation of the statement of operations from Canadian dollars to United
States dollars, and the audited and unaudited statements of operations of i360
for the 171-day period ended December 31, 1999 and the three months ended March
31, 2000, respectively. The unaudited statement of operations of Homebase has
been prepared in accordance with Canadian GAAP ["Canadian GAAP"].
The unaudited pro-forma statement of operations for the three-month period ended
June 30, 2000 has been prepared from the unaudited consolidated statement of
operations of the Company for the three-month period ended June 30, 2000 and the
unaudited statements of operations of i360 for the three-month period ended
June 30, 2000.
The pro-forma adjustments do not reflect any operating efficiencies or potential
synergies that may be achievable with respect to the combined companies.
The pro-forma adjustments reflecting the acquisition of i360 using the purchase
method of accounting are tentative and are based on available financial
information and certain estimates and assumptions. The actual adjustments to the
Company's consolidated financial statements will depend on a number of factors,
including additional financial information available in respect of the August
15, 2000 consummation date, changes in i360's operating results between June 30,
2000 and August 15, 2000 and the changes in values between the date of
preparation of the unaudited pro-forma consolidated information and the date of
the preparation of the final purchase
<PAGE>
InfoCast Corporation [formerly Virtual Performance Systems Inc.]
[a development stage company]
PRO-FORMA CONSOLIDATED FINANCIAL STATEMENTS
[Expressed in United States dollars unless otherwise stated]
Prepared without audit or review
June 30, 2000
equation. Therefore, it is likely that the actual adjustments will differ from
the pro-forma adjustments. Management of the Company believes that such
assumptions provide a reasonable basis for presenting all of the significant
effects of the transactions contemplated and that the pro-forma adjustments give
appropriate effect to those assumptions and are properly applied in the pro-
forma combined financial statements.
PRO-FORMA CONSOLIDATED BALANCE SHEET
[Expressed in United States dollars]
Prepared without audit or review
As of June 30, 2000
<TABLE>
<CAPTION>
InfoCast i360 Inc. Pro-forma Pro-forma
Corporation [June 30, 2000] Note adjustments consolidated
$ $ $ $
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current
Cash and cash equivalents 3,054,734 182,144 -- 3,236,878
Short-term equity investment 1,625,000 -- -- 1,625,000
Accounts receivable 273,194 93,574 -- 366,768
Due from i360 Inc. 145,137 -- [c] (145,137) --
Prepaid expenses and other 323,251 371,271 -- 694,522
------------------------------------------------------------------------------------------------------------------------------------
5,421,316 646,989 (145,137) 5,923,168
Joint venture investment 84,699 -- -- 84,699
Deferred acquisition costs 965,635 -- [c] [965,635] --
Deferred convertible debt issuance costs 1,339,668 -- -- 1,339,668
Capital assets, net 3,227,171 416,583 -- 3,643,754
Distribution and licensing rights 2,925,000 -- -- 2,925,000
Intellectual property 13,972,003 -- [c] 60,000,000 73,972,003
Goodwill, net 4,520,065 1,568,303 [c] 19,842,373 25,930,741
Deposits -- 290,000 -- 290,000
Other assets -- 56,247 -- 56,247
------------------------------------------------------------------------------------------------------------------------------------
32,455,557 2,978,122 78,731,601 114,165,280
====================================================================================================================================
</TABLE>
2
<PAGE>
InfoCast Corporation [formerly Virtual Performance Systems Inc.]
[a development stage company]
PRO-FORMA CONSOLIDATED FINANCIAL STATEMENTS
[Expressed in United States dollars unless otherwise stated]
Prepared without audit or review
June 30, 2000
PRO-FORMA CONSOLIDATED BALANCE SHEET - continued
[Expressed in United States dollars]
Prepared without audit or review
As of June 30, 2000
<TABLE>
<CAPTION>
InfoCast i360 Inc. Pro-forma Pro-forma
Corporation [June 30, 2000] Note adjustments consolidated
$ $ $ $
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
Current liabilities
Accounts payable and accrued liabilities 1,177,354 1,676,644 -- 2,853,998
Due to InfoCast Corporation -- 145,137 [c] (145,137) --
Current portion of obligations under capital
leases 486,501 -- -- 486,501
Deferred revenue -- 81,382 -- 81,382
-----------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 1,663,855 1,903,163 (145,137) 3,421,881
-----------------------------------------------------------------------------------------------------------------------------------
Convertible debenture 6,960,000 -- -- 6,960,000
Obligation under capital lease 678,564 -- -- 678,564
Deferred income taxes 5,309,395 -- [c] 24,000,000 29,309,395
-----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 14,611,814 1,903,163 23,864,863 40,369,840
-----------------------------------------------------------------------------------------------------------------------------------
Shareholders' equity
Common stock 23,071 2,528 [c] 7,584
[c] (2,528) 30,655
Additional paid-in-capital 59,248,522 12,135,388 [c] 43,808,725
[d] 279,086 115,471,721
Deferred compensation (735,836) -- [d] (279,086) (1,014,922)
Warrants 2,253,875 -- -- 2,253,875
Accumulated other comprehensive loss (2,588,281) -- -- (2,588,281)
Accumulated development stage deficit (40,357,608) (11,062,957) [c] 11,062,957 (40,357,608)
------------------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 17,843,743 1,074,959 54,876,738 73,795,440
------------------------------------------------------------------------------------------------------------------------------------
32,455,557 2,978,122 78,731,601 114,165,280
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
3
<PAGE>
InfoCast Corporation [formerly Virtual Performance Systems Inc.]
[a development stage company]
PRO-FORMA CONSOLIDATED FINANCIAL STATEMENTS
[Expressed in United States dollars unless otherwise stated]
Prepared without audit or review
June 30, 2000
PRO-FORMA CONSOLIDATED STATEMENT OF OPERATIONS
[Expressed in United States dollars]
Prepared without audit or review
Year ended March 31, 2000
<TABLE>
<CAPTION>
Homebase
Work i360 Inc.
Solutions Ltd. (262-day
(43-day period
period ended ended
InfoCast May 13, March 31, Pro-forma Pro-forma
Corporation 1999) 2000) Note adjustment consolidated
$ $ $ $ $
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
REVENUE 305,754 -- 493,432 -- 799,186
EXPENSES
General, administrative and
selling 7,391,128 68,130 4,857,567 -- 12,316,825
Stock option compensation 13,351,908 -- -- [f] 232,494 13,584,402
Research and development 5,186,265 -- 995,787 -- 6,182,052
Interest and loan fees 1,913,482 -- -- -- 1,913,482
First preferred series A
interest accretion -- 7,518 -- [a] (7,518) --
First preferred series A
share dividend expense -- 8,813 -- [a] (8,813) --
Amortization and depreciation 4,810,581 16,872 219,562 [b] 546,351
[e] 16,282,135 21,875,501
------------------------------------------------------------------------------------------------------------------------------------
32,653,364 101,333 6,072,916 17,044,649 55,872,262
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
4
<PAGE>
InfoCast Corporation [formerly Virtual Performance Systems Inc.]
[a development stage company]
PRO-FORMA CONSOLIDATED FINANCIAL STATEMENTS
[Expressed in United States dollars unless otherwise stated]
Prepared without audit or review
June 30, 2000
PRO-FORMA CONSOLIDATED STATEMENT OF OPERATIONS - continued
[Expressed in United States dollars]
Prepared without audit or review
Year ended March 31, 2000
<TABLE>
<CAPTION>
Homebase
Work i360 Inc.
Solutions Ltd. (262-day
(43-day period
period ended ended
InfoCast May 13, March 31, Pro-forma Pro-forma
Corporation 1999) 2000) Note adjustment consolidated
$ $ $ $ $
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Loss from operations before
the following (32,347,610) (101,333) (5,579,484) (17,044,649) (55,073,076)
Interest income 132,057 473 247 132,777
Equity in loss
of joint venture (164,736) -- -- -- (164,736)
-----------------------------------------------------------------------------------------------------------------------------------
Loss before income taxes (32,380,289) (100,860) (5,579,237) (17,044,649) (55,105,035)
Deferred income taxes (1,229,105) -- -- [b] (159,945)
-- -- -- [e] (4,800,000) (6,189,050)
-----------------------------------------------------------------------------------------------------------------------------------
Loss before deemed dividend
for preferred stock (31,151,184) (100,860) (5,579,237) (12,084,704) (48,915,985)
Deemed dividend
for preferred stock -- -- 3,500,000 [g] [3,500,000] --
--------------------------------------------------------------------------------------------------------------------------------
Net loss for the
period attributable
to common stockholders (31,151,184) (100,860) (9,079,237) (8,584,704) (48,915,985)
===================================================================================================================================
Weighted average
number of shares
outstanding 22,655,810 399,454 7,584,000 -- 30,639,264
===================================================================================================================================
Basic and diluted
loss per share (1.37) (0.25) (1.20) (1.60)
===================================================================================================================================
</TABLE>
5
<PAGE>
InfoCast Corporation [formerly Virtual Performance Systems Inc.]
[a development stage company]
PRO-FORMA CONSOLIDATED FINANCIAL STATEMENTS
[Expressed in United States dollars unless otherwise stated]
Prepared without audit or review
June 30, 2000
PRO-FORMA CONSOLIDATED STATEMENT OF OPERATIONS
[Expressed in United States dollars]
Prepared without audit or review
Three-month period ended June 30, 2000
<TABLE>
<CAPTION>
i360 Inc.
(three-month
period ended
InfoCast June 30, Pro-forma Pro-forma
Corporation 2000) Note adjustment consolidated
$ $ $ $
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
REVENUE 137,137 333,063 -- 470,740
EXPENSES
General, administrative and
selling 2,161,796 2,085,483 -- 4,227,279
Stock option compensation 743,354 -- [f] 58,124 801,478
Research and development 119,132 171,224 -- 290,356
Interest and loan fees 1,599,609 -- -- 1,599,609
Amortization and depreciation 1,517,544 94,098 [e] 4,070,534 5,682,176
------------------------------------------------------------------------------------------------------------------------
6,141,435 2,330,805 4,128,657 12,600,897
-----------------------------------------------------------------------------------------------------------------------
</TABLE>
6
<PAGE>
InfoCast Corporation [formerly Virtual Performance Systems Inc.]
[a development stage company]
PRO-FORMA CONSOLIDATED FINANCIAL STATEMENTS
[Expressed in United States dollars unless otherwise stated]
Prepared without audit or review
June 30, 2000
PRO-FORMA CONSOLIDATED STATEMENT OF OPERATIONS - continued
[Expressed in United States dollars]
Prepared without audit or review
Three-month period ended June 30, 2000
<TABLE>
<CAPTION>
i360 Inc.
(three month
period ended
InfoCast June 30, Pro-forma Pro-forma
Corporation 2000) Note adjustment consolidated
$ $ $ $
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Loss from operations before
the following (6,004,298) (1,997,202) (4,128,657) (12,130,157)
Interest income 54,328 13,482 -- 67,810
---------------------------------------------------------------------------------------------------------------------------
Loss before income taxes (5,949,970) (1,983,720) (4,128,657) (12,062,347)
Deferred income taxes (347,500) -- [e] (1,200,000) (1,547,500)
------------------------------------------------------------------------------------------------------------
Net loss for the
period (5,602,470) (1,983,720) (2,928,657) (10,514,847)
============================================================================================================================
Weighted average
number of shares
outstanding 24,571,333 7,584,000 -- 32,155,333
============================================================================================================================
Basic and diluted
loss per share (0.23) (0.26) (0.33)
============================================================================================================================
</TABLE>
7
<PAGE>
InfoCast Corporation [formerly Virtual Performance Systems Inc.]
[a development stage company]
PRO-FORMA CONSOLIDATED FINANCIAL STATEMENTS
[Expressed in United States dollars unless otherwise stated]
Prepared without audit or review
June 30, 2000
2. PRO-FORMA ADJUSTMENTS
The unaudited pro-forma consolidated financial statements give effect to the
following pro-forma adjustments:
[a] Homebase's first preferred Series A shares were purchased by the Company
on May 13, 1999. Accordingly, Homebase's first preferred Series A interest
accretion of $7,518 and first preferred Series A share dividend expense of
$8,813 each recorded in Homebase's statement of operations for the 43-day
period ended May 13, 1999 prepared in accordance with Canadian GAAP have
been eliminated because these items would be charged directly to
shareholders' equity under accounting principles generally accepted in the
United States.
[b] The amortization of the $17,015,000 of completed technology, $853,000 of
trademarks, $253,000 of workforce-in-place and $5,846,293 of goodwill
created by the purchase of Homebase by the Company over the
pre-acquisition 43-day period ended May 13, 1999 on a straight-line basis
utilizing amortization periods of five years in respect of the completed
technology, trademarks and goodwill and three years in respect of the
workforce-in-place. In addition, the amortization of the $6,886,000
deferred income tax liability [created by the purchase of Homebase by the
Company in respect of the difference between the tax and accounting basis
of the completed technology, trademarks and work-force-in-place] over the
periods of the underlying assets.
[c] The acquisition of i360 by the Company. On August 15, 2000, i360 merged
with and into the Company pursuant to the definitive Agreement and Plan of
Merger (the "Merger Agreement") dated as of May 3, 2000, as amended,
providing for the acquisition by the Company of all of the outstanding
shares of common stock of i360. The Merger Agreement provides for a
statutory merger of i360 into the Company. As of August 15, 2000, the
holders of i360's issued and outstanding common stock will be entitled to
receive 0.30 shares of the Company's common stock per share of i360 common
stock which will result in an aggregate of 7,584,000 shares of the
Company's common stock being issued. In addition, all outstanding warrants
and stock options to purchase shares of i360 common stock converted into
stock options and merger warrants to purchase shares of the Company's
common stock at a 1:0.3 exchange ratio. As a result, an aggregate of
4,416,000 merger warrants of the Company (4,324,500 with an exercise price
of $0.33 per share, 87,375 with an exercise price of $3.18 per share and
4,125 with an exercise price of $4.00 per share) and 1,127,476 stock
options of the Company with an exercise price of $4.00 per share were
deemed issued as of August 15, 2000. The transaction was approved by the
Boards of Directors and stockholders of InfoCast and i360.
The pro-forma acquisition has been accounted for by the purchase method
whereby the pro-forma purchase price is equal to the sum of [i] the fair
value of the 7,584,000 common shares of the Company on the date the
revised terms of the acquisition were announced; [ii] the fair value of
the 4,324,500 merger warrants of the Company with an exercise price of
$0.33 per share; [iii] the fair value of the 87,375 merger warrants of the
Company with an exercise price of $3.18 per share; [iv] the fair value of
4,125 merger warrants of the Company with an exercise price of $4.00 per
share; [v] the fair value of the 1,127,476 stock options of the Company,
[vi] the deferred acquisition costs of $965,635 recorded by the Company as
of June 30, 2000 in respect of the acquisition of i360; less [vii] the
portion of the intrinsic value of the unvested merger warrants of the
Company with an exercise of $0.33 per share related to the vesting periods
remaining after the August 15, 2000 acquisition date for those merger
warrants
8
<PAGE>
InfoCast Corporation [formerly Virtual Performance Systems Inc.]
[a development stage company]
PRO-FORMA CONSOLIDATED FINANCIAL STATEMENTS
[Expressed in United States dollars unless otherwise stated]
Prepared without audit or review
June 30, 2000
granted to individuals that are required to continue providing service to
the Company after the acquisition in consideration for the merger
warrants. There was no intrinsic value for the merger warrants of the
Company with an exercise of $3.18 per share or for the stock options as of
August 15, 2000. The fair value of common shares of the Company is assumed
to be equal to the average of the closing share price of the Company's
common shares from May 2, 2000 to May 5, 2000. The fair value of the
merger warrants with an exercise price of $0.33 per share is $4.33 per
merger warrant, the fair value of the merger warrants with an exercise
price of $3.18 per share is $2.74 per merger warrant and the fair value of
the stock options is $2.46 per stock option using a Black Scholes
valuation model based on a May 3, 2000 assumed grant date, a volatility
factor of 0.873, a risk-free interest rate of 5.95% and an expected life
of 2 years. As a result, the total pro-forma purchase price is $56,917,332
and has been allocated as follows:
$
--------------------------------------------------------------------------
Cash 182,144
Accounts receivable 93,574
Prepaid expenses and other 371,271
Capital assets 416,583
Deposits and other assets 346,247
Completed technology 60,000,000
Goodwill 21,410,676
Accounts payable and accrued liabilities (1,676,644)
Deferred revenue (81,382)
Due to the Company (145,137)
Deferred tax liability (24,000,000)
--------------------------------------------------------------------------
56,917,332
--------------------------------------------------------------------------
9
<PAGE>
InfoCast Corporation [formerly Virtual Performance Systems Inc.]
[a development stage company]
PRO-FORMA CONSOLIDATED FINANCIAL STATEMENTS
[Expressed in United States dollars unless otherwise stated]
Prepared without audit or review
June 30, 2000
[d] The creation of deferred compensation of $279,086 as of the August 15,
2000 acquisition date related to the portion of the intrinsic value of the
346,050 unvested merger warrants with an exercise price of $0.33 per share
that were granted to individuals that are required to continue providing
service to the Company after the acquisition in consideration for the
merger warrants, related to the remaining vesting periods of the merger
warrants. The unvested merger warrants exercisable at $0.33 per share will
vest as follows: 33% on September 21, 2000, 33% on January 21, 2001 and
33% on January 21, 2002.
[e] The amortization of the $60,000,000 of completed technology and
$21,410,676 of goodwill created by the purchase of i360 by the Company, as
described in [c] above, over the year ended March 31, 2000 and the three
month period ended June 30, 2000 on a straight-line basis utilizing an
amortization period of five years. In addition, the amortization of the
$24,000,000 deferred income tax liability [created by the pro forma
purchase of i360 by the Company in respect of the difference between the
tax and accounting basis of the completed technology] over the period of
the underlying asset.
[f] The amortization of the deferred compensation created in [d] above over
the year ended March 31, 2000 and the three-month period ended June 30,
2000.
[g] Deemed preferred stock dividend recorded by i360. On March 8 and 10, 2000,
i360 sold 300 shares of Series A convertible preferred shares for
$3,500,000. The 300 shares were convertible into the greater of 9,000,000
shares of common stock or 22.5% of the outstanding common stock of i360 on
a fully diluted basis at the discretion of the shareholders at any time.
No stated dividends accrue on the convertible preferred shares and the
holders were entitled to voting rights based on the number of common
shares into which the preferred shares converted. As a result of the
beneficial conversion feature and given that the fair value of the common
shares into which the preferred stock converts was in excess of the
preferred stock proceeds by an amount in excess of the proceeds as is
required by EITF 98-5, i360 recorded a $3,500,000 deemed preferred stock
dividend. Immediately prior to the merger with the Company, the preferred
stock automatically converted into common shares of i360. As the pro-forma
consolidated statement of operations for the year ended March 31, 2000
assumes that the Company acquired all of the common shares of i360 at the
beginning of the year, the deemed preferred stock dividend has been
eliminated.
10
