<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): December 17, 1999
-----------------
CMGI, INC.
(Exact name of registrant as specified in its charter)
Delaware 0-22846 04-2921333
(State or other (Commission (IRS Employer
jurisdiction of incorporation) File Number) Identification No.)
100 Brickstone Square, Andover, MA 01810
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (978) 684-3600
--------------
Not Applicable
(Former name or former address, if changed since last report)
<PAGE>
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Audited financial information of acquired business. See Exhibit 99.1.
--------------------------------------------------
Audited consolidated balance sheets of Flycast Communications Corporation and
subsidiary as of December 31, 1997 and 1998, and the related consolidated
statements of operations, common stockholders' equity (deficit) and cash flows
for each of the three years in the period ended December 31, 1998.
(b) Pro forma condensed combined financial information of Registrant. See
----------------------------------------------------------------
Exhibit 99.2.
(c) Exhibits:
--------
99.1 Audited financial statements of Flycast Communications Corporation
and subsidiary as of December 31, 1997 and 1998 and for the three
years in the period ended December 31, 1998.
Unaudited financial statements of Flycast Communications Corporation
and subsidiary as of September 30, 1999 and for the three and nine
months ended September 30, 1998 and 1999.
99.2 Unaudited pro forma condensed combined financial information of
Registrant as of and for the three months ended October 31, 1999 and
for the twelve months ended July 31, 1999.
2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Date: December 17, 1999 CMGI, INC.
By: /s/ Andrew J. Hajducky III
---------------------------------------
Andrew J. Hajducky III
Executive Vice President, Chief Financial
Officer and Treasurer
<PAGE>
EXHIBIT INDEX
99.1 Audited financial statements of Flycast Communications Corporation
and subsidiary as of December 31, 1997 and 1998 and for the three
years in the period ended December 31, 1998.
Unaudited financial statements of Flycast Communications Corporation
and subsidiary as of September 30, 1999 and for the three and nine
months ended September 30, 1998 and 1999.
99.2 Unaudited pro forma condensed combined financial information of
Registrant as of and for the three months ended October 31, 1999 and
for the twelve months ended July 31, 1999.
<PAGE>
EXHIBIT 99.1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Flycast Communications Corporation:
We have audited the accompanying consolidated balance sheets of Flycast
Communications Corporation and subsidiary (the "Company") as of December 31,
1997 and 1998, and the related consolidated statements of operations, common
stockholders' equity (deficit) and cash flows for each of the three years in
the period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits. The consolidated
financial statements give retroactive effect to the merger of InterStep, Inc.
with and into Flycast Communications Corporation on August 30, 1999, which has
been accounted for as a pooling-of-interests as described in Note 9 to the
consolidated financial statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Flycast Communications
Corporation and subsidiary at December 31, 1997 and 1998, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1998 in conformity with generally accepted accounting
principles.
/s/ DELOITTE & TOUCHE LLP
San Jose, California
October 18, 1999
1
<PAGE>
FLYCAST COMMUNICATIONS CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
1997 1998
------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 3,593 $ 5,197
Investments............................................... 183
Accounts receivable, net of allowance for doubtful
accounts of $12 and $178, respectively................... 531 3,802
Prepaid expenses and other assets......................... 40 267
------- --------
Total current assets..................................... 4,164 9,449
PROPERTY AND EQUIPMENT, NET................................. 703 1,945
OTHER ASSETS................................................ 18 108
------- --------
TOTAL ASSETS................................................ $ 4,885 $ 11,502
======= ========
LIABILITIES, MANDATORILY REDEEMABLE PREFERRED STOCK AND
COMMON STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable.......................................... $ 361 $ 2,561
Accrued liabilities....................................... 82 375
Accrued compensation and related expenses................. 63 460
Notes payable to stockholders............................. 58 62
Short-term capital lease obligations...................... 31 490
Short-term debt........................................... -- 983
------- --------
Total current liabilities................................ 595 4,931
LONG-TERM CAPITAL LEASE OBLIGATIONS......................... 40 1,041
LONG-TERM DEBT.............................................. -- 3,682
------- --------
Total liabilities........................................ 635 9,654
------- --------
MANDATORILY REDEEMABLE PREFERRED STOCK:
Mandatorily redeemable convertible preferred stock,
$0.0001 par value, 9,904,000 shares authorized:
Series A, 920,000 shares designated, 911,295 shares issued
and outstanding in 1997 and 1998 (aggregate liquidation
preference $911)......................................... 951 1,027
Series B, 5,500,000 shares designated, 5,324,532 shares
issued and outstanding in 1997 and 1998 (aggregate
liquidation preference $7,082)........................... 7,244 7,824
Series C, 3,484,000 shares designated, 497,785 shares
issued and outstanding in 1998 (aggregate liquidation
preference $4,500)....................................... -- 5,004
------- --------
Total mandatorily redeemable preferred stock............. 8,195 13,855
------- --------
COMMON STOCKHOLDERS' EQUITY (DEFICIT):
Common stock, $0.0001 par value, 20,000,000 shares
authorized, 2,827,615 and 3,132,219 shares issued and
outstanding in 1997 and 1998, respectively............... 247 922
Common stock options...................................... 2,929
Deferred stock compensation............................... (1,771)
Notes receivable from stockholders........................ (227) (606)
Accumulated deficit....................................... (3,965) (13,481)
------- --------
Total common stockholders' equity (deficit).............. (3,945) (12,007)
------- --------
TOTAL LIABILITIES, MANDATORILY REDEEMABLE PREFERRED STOCK
AND COMMON STOCKHOLDERS' EQUITY (DEFICIT).................. $ 4,885 $ 11,502
======= ========
</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
FLYCAST COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
REVENUE.......................................... $ 123 $ 934 $ 9,282
COST OF REVENUE.................................. 5 600 6,118
------- -------- --------
GROSS PROFIT..................................... 118 334 3,164
------- -------- --------
OPERATING EXPENSES:
Sales and marketing............................ 111 1,393 5,228
Research and development....................... 218 1,473 3,010
General and administrative..................... 183 807 2,216
Stock-based compensation....................... 1,158
------- -------- --------
Total operating expenses..................... 512 3,673 11,612
------- -------- --------
OPERATING LOSS................................... (394) (3,339) (8,448)
INTEREST INCOME.................................. 1 95 98
INTEREST EXPENSE................................. (2) (102) (510)
------- -------- --------
NET LOSS......................................... $ (395) $ (3,346) $ (8,860)
======= ======== ========
ACCRETION OF MANDATORILY
REDEEMABLE PREFERRED STOCK....................... (206) (656)
------- -------- --------
LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS......... $ (395) $ (3,552) $ (9,516)
======= ======== ========
BASIC AND DILUTED LOSS PER SHARE................. $ (0.83) $ (6.03) $ (7.26)
======= ======== ========
SHARES USED IN BASIC AND DILUTED LOSS PER SHARE.. 476 589 1,311
======= ======== ========
PRO FORMA BASIC AND DILUTED LOSS PER SHARE (Note
1).............................................. $ (1.25)
========
SHARES USED IN PRO FORMA BASIC AND DILUTED LOSS
PER SHARE (Note 1).............................. 7,589
========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
FLYCAST COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY (DEFICIT)
(In thousands)
<TABLE>
<CAPTION>
Common Stock
-------------- Common Deferred Stock Notes Accumulated
Shares Amount Stock Options Compensation Receivable Deficit Total
------ ------ ------------- -------------- ---------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1,
1996................... 475 $ 10 $ (18) $ (8)
ISSUANCE OF COMMON STOCK
FOR CASH AND NOTES
RECEIVABLE............. 1 611 $ (16) 595
NET LOSS................ (395) (395)
----- ---- ----- -------- --------
BALANCE, DECEMBER 31,
1996................... 476 621 (16) (413) 192
CONVERSION OF COMMON
STOCK TO SERIES A
PREFERRED STOCK........ (1) (611) 16 (595)
ISSUANCE OF COMMON STOCK
FOR CASH AND NOTES
RECEIVABLE............. 2,284 228 (227) 1
EXERCISE OF COMMON STOCK
OPTIONS................ 68 7 7
ISSUANCE OF COMMON
WARRANTS IN CONNECTION
WITH ISSUANCE OF DEBT.. 2 2
ACCRETION OF MANDATORILY
REDEEMABLE PREFERRED
STOCK.................. (206) (206)
NET LOSS................ (3,346) (3,346)
----- ---- ----- -------- --------
BALANCE, DECEMBER 31,
1997................... 2,827 247 (227) (3,965) (3,945)
EXERCISE OF COMMON STOCK
OPTIONS................ 686 492 (446) 46
REPURCHASE OF COMMON
STOCK.................. (425) (42) 42
PAYMENT ON NOTES
RECEIVABLE............. 25 25
ISSUANCE OF COMMON STOCK
FOR SERVICES........... 44 47 47
COMPENSATORY STOCK
ARRANGEMENTS........... $2,929 $(2,929)
AMORTIZATION OF DEFERRED
STOCK COMPENSATION..... 1,158 1,158
ISSUANCE OF COMMON STOCK
OPTIONS AND WARRANTS
FOR SERVICES........... 178 178
ACCRETION OF MANDATORILY
REDEEMABLE PREFERRED
STOCK.................. (656) (656)
NET LOSS................ (8,860) (8,860)
----- ---- ------ ------- ----- -------- --------
BALANCE, DECEMBER 31,
1998................... 3,132 $922 $2,929 $(1,771) $(606) $(13,481) $(12,007)
===== ==== ====== ======= ===== ======== ========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
FLYCAST COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------
1996 1997 1998
---------------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.......................................... $ (395) $ (3,346) $ (8,860)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation.................................... 30 204 585
Provision for bad debts......................... 12 236
Loss on sale of property and equipment.......... 5
Stock and warrants issued for services.......... 225
Noncash interest expense........................ 71 248
Stock-based compensation expense................ 1,158
Changes in operating assets and liabilities:
Accounts receivable........................... (50) (493) (3,507)
Prepaid expenses and other assets............. (4) (54) (317)
Accounts payable.............................. 40 321 2,200
Accrued liabilities........................... 30 121 694
------ -------- --------
Net cash used in operating activities....... (349) (3,164) (7,333)
------ -------- --------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchases of property and equipment............. (252) (569) (132)
Proceeds from sale of property and equipment.... 4
Purchases of short term investments............. (183)
------ -------- --------
Net cash used in investing activities....... (252) (569) (311)
------ -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long term debt.................... 5,100
Payments on long term debt...................... (179)
Payments on capital leases...................... (28) (244)
Proceeds from notes payable to shareholders..... 19
Payment on notes payable to shareholders........ (5)
Proceeds from payment of notes receivable from
stockholders................................... 16 25
Proceeds from issuance of common stock.......... 595 8 46
Proceeds from issuance of preferred stock....... 7,308 4,500
------ -------- --------
Net cash provided by financing activities... 614 7,299 9,248
------ -------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS......... 13 3,566 1,604
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.... 14 27 3,593
------ -------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD.......... $ 27 $ 3,593 $ 5,197
====== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest.......................... $ 27 $ 258
======== ========
Noncash financing and investing activities:
Purchase of equipment under capital lease..... $ 100 $ 1,704
======== ========
Issuance of common stock for notes
receivable................................... $ 16 $ 228 $ 446
====== ======== ========
Repurchase of common stock for extinguishment
of debt...................................... $ 42
========
Conversion of common stock to preferred
stock........................................ $ 611
========
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
FLYCAST COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization--Flycast Communications Corporation ("Flycast") commenced
operations on April 14, 1996 (inception). Flycast is a leading provider of Web-
based advertising solutions designed to maximize the return on investment for
direct response advertisers and e-commerce companies. Flycast is headquartered
in San Francisco.
Basis of Presentation--On August 30, 1999, Flycast completed a merger with
InterStep, Inc. ("InterStep") a Massachusetts corporation which commenced
operations in 1995. The transaction has been accounted for as a pooling-of-
interests and, accordingly, the consolidated financial statements of Flycast
Communications Corporation (the "Company") for all periods presented have been
restated to include the accounts of InterStep (see Note 9). No adjustments were
required to conform accounting policies of the entities. There were no
significant intercompany transactions requiring elimination for any periods
presented.
Use of Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. The Company
performs ongoing credit evaluations of its customers' respective financial
conditions, and, generally, requires no collateral from its customers. The
Company maintains an allowance for uncollectible accounts receivable based on
the expected collectibility of accounts receivable.
Cash equivalents consist of money market funds and certificates of deposit
with original maturities of three months or less at the time of acquisition.
Investments consist of certificates of deposit with an original maturity
date of greater than three months at the time of acquisition. Such investments
are considered available for sale and have carrying values which approximate
fair value.
Property and Equipment--Property and equipment are stated at cost. Equipment
held under capital leases is stated at the present value of minimum lease
payments. Depreciation on property and equipment is calculated on the straight-
line method over the estimated useful lives of the assets. Equipment held under
capital leases is amortized on the straight-line method over the shorter of the
lease term or the estimated useful life of the asset.
Revenue Recognition--Revenues derived from the delivery of advertising
impressions through third-party Web sites and delivery of e-mail content are
recognized in the period the advertising impressions or e-mail contents are
delivered provided collection of the resulting receivable is probable. Revenues
from list management and distribution services are recognized when services
have been performed. Amounts payable to third party Web sites for
advertisements displayed on such sites are recorded as cost of revenue in the
period the advertising impressions or e-mails are delivered.
Advertising expenses are charged to operations as incurred. Advertising
expenses were not significant in 1996 or 1997 and were $634,000 in 1998.
Research and development expenses are charged to operations as incurred.
Income Taxes--Deferred tax liabilities are recognized for future taxable
amounts, and deferred tax assets are recognized for future deductions, net of a
valuation allowance to reduce net deferred tax assets to amounts that are more
likely than not to be realized.
6
<PAGE>
FLYCAST COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Concentration of Credit Risk--Financial instruments that potentially subject
the Company to concentration of credit risk consist of trade receivables. The
Company's credit risk is mitigated by the Company's credit evaluation process
and the reasonably short collection terms. The Company does not require
collateral or other security to support accounts receivable and maintains
reserves for potential credit losses.
Financial Instruments--The Company's financial instruments include cash and
cash equivalents, short-term investments, notes receivable from stockholders
and long-term debt. At December 31, 1997 and 1998, the fair values of these
instruments approximated their financial statement carrying amounts.
Stock-Based Compensation--The Company accounts for its employee stock option
plan in accordance with the provisions of Accounting Principles Board (APB)
Opinion No. 25, "Accounting for Stock Issued to Employees." Accordingly, no
accounting recognition is given to stock options granted to employees
(including directors) at fair market value until they are exercised. Upon
exercise, the net proceeds are credited to stockholders' equity (deficit).
Compensation expense is recognized for stock options granted to employees
(including directors) at less than fair market value.
The Company accounts for stock options issued to non-employees in accordance
with the provisions of Statement of Financial Accounting Standards (SFAS) No.
123, "Accounting for Stock-Based Compensation" and Emerging Issues Task Force
Issue No. 96-18 under the fair value based method.
Impairment of Long-Lived Assets and Long-Lived Assets To Be Disposed Of--The
Company evaluates its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of such assets or
intangibles may not be recoverable. Recoverability of assets to be held and
used is measured by a comparison of the carrying amount of an asset to future
undiscounted net cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less costs to sell.
Loss per Common Share--Basic loss per common share excludes dilution and is
computed by dividing loss attributable to common stockholders by the weighted
average number of common shares outstanding for the period (excluding shares
subject to repurchase). Diluted loss per common share reflects the potential
dilution that could occur if securities or other contracts to issue common
stock were exercised or converted into common stock. Common share equivalents
are excluded from the computation in loss periods as their effect would be
antidilutive.
Pro Forma Net Loss per Common Share--Pro forma basic and diluted loss per
common share is computed by dividing loss attributable to common stockholders
by the weighted average number of common shares outstanding for the period
(excluding shares subject to repurchase) and the weighted average number of
common shares resulting from the assumed conversion of outstanding shares of
mandatorily redeemable preferred stock.
Recently Issued Accounting Standards--In June 1997, the Financial Accounting
Standards Board (FASB) issued SFAS No. 130, "Reporting Comprehensive Income,"
which requires an enterprise to report, by major components and as a single
total, the change in its net assets during the period from nonowner sources;
and SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information," which establishes annual and interim reporting standards for an
enterprise's business segments and related disclosures about its products,
services, geographic areas and major customers. The Company had no
comprehensive income items to report for the three years in the period ended
December 31, 1998. The Company currently operates one reportable segment under
SFAS No. 131. Adoption of these statements in 1998 did not impact the Company's
financial position, results of operations or cash flows.
7
<PAGE>
FLYCAST COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which defines derivatives, requires that
all derivatives be carried at fair value, and provides for hedge accounting
when certain conditions are met. SFAS No. 133 is effective for the Company in
fiscal 2001. Although the Company has not fully assessed the implications of
SFAS No. 133, the Company does not believe that adoption of this statement will
have a material impact on the Company's financial position or results of
operations.
2. PROPERTY AND EQUIPMENT
Property and equipment as of December 31, 1997 and 1998 consisted of the
following (in thousands):
<TABLE>
<CAPTION>
1997 1998
----- ------
<S> <C> <C>
Computer equipment and purchased software..................... $ 810 $ 904
Computer equipment under capital lease........................ 100 1,796
Furniture, fixtures and office equipment...................... 29 60
----- ------
Total..................................................... 939 2,760
Less accumulated depreciation................................. (236) (815)
----- ------
Net........................................................... $ 703 $1,945
===== ======
</TABLE>
The accumulated depreciation associated with computer equipment under
capital lease was $24,000 and $312,000 at December 31, 1997 and 1998,
respectively.
3. NOTES PAYABLE TO STOCKHOLDERS
The Company has notes payable to two stockholders, payable on demand, with
interest of 6.74%. The outstanding amount as of December 31, 1997 and 1998 is
$58,000 and $62,000, respectively.
4. DEBT
In 1998, the Company borrowed $600,000 from a lending institution at an 8%
interest rate. Principal and interest payments are due in monthly installments
through July 2001. As of December 31, 1998, the outstanding obligation was
$445,000.
In 1998, the Company obtained a $175,000 letter of credit as a security
deposit on office space leased. The letter of credit is collateralized by all
assets of the Company.
In 1998, the Company entered into a financing agreement with a preferred
stockholder and lender for $2,500,000, due in April 2002 with interest at 11%
per annum, and for an additional $5,000,000, due in August 2001 with interest
at 14%. The Company granted this lender Series C preferred stock warrants to
purchase 55,409 shares at $4.51 per share, and 72,324 shares of preferred stock
at $4.42 per share. The estimated fair value allocated to the warrants of
$304,000 is being accreted over the life of the financing agreements. As of
December 31, 1998, the recorded obligation totaled $4,220,000 and $3,000,000 is
available for future borrowing.
Debt outstanding excluding capital lease obligations (Note 8) as of December
31, 1998 will be due in annual principal payments of $983,000, $1,876,000,
$1,646,000 and $160,000 in 1999, 2000, 2001 and 2002, respectively.
8
<PAGE>
FLYCAST COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. INCOME TAXES
The Company's deferred income tax assets are comprised of the following (in
thousands):
<TABLE>
<CAPTION>
1997 1998
------ ------
<S> <C> <C>
Deferred tax assets:
Net operating loss
carryforwards.......... $1,368 $4,239
Reserves and accruals
not currently
deductible............. 28 807
Research and development
tax credit............. 40 135
Other................... 23 28
------ ------
Total gross deferred tax
assets before valuation
allowance.............. 1,459 5,209
Valuation allowance..... (1,452) (4,945)
------ ------
7 264
Deferred tax
liabilities:
Accrual to cash
adjustments............ (264)
Other................... (7)
------ ------
Total gross deferred
liabilities............ (7) (264)
------ ------
Net deferred tax
assets................. $ 0 $ 0
====== ======
</TABLE>
The Company established a 100% valuation allowance at December 31, 1996, 1997
and 1998 due to the uncertainty of realizing future tax benefits from its net
operating loss carryforwards and other deferred tax assets.
At December 31, 1998, the Company had net operating loss ("NOL")
carryforwards of approximately $11,000,000 for federal and state income tax
purposes. These carryforwards begin to expire in 2004 for state and 2011 for
federal purposes. The Company also has available federal and state research and
development tax credit carryforwards of $77,000 and $58,000, respectively,
which had no expiration date as of December 31, 1998.
Internal Revenue Code Section 382 and similar California rules place a
limitation on the amount of taxable income which can be offset by NOL
carryforwards after a change in control (generally greater than 50% change in
ownership). Due to these provisions, utilization of the NOL and tax credit
carryforwards may be limited.
6. STOCKHOLDERS' EQUITY (DEFICIT)
Common Stock Reserved For Future Issuance
At December 31, 1998, the Company has reserved the following shares of
common stock for issuance in connection with:
<TABLE>
<S> <C>
Conversion of Series A preferred stock............................. 911,295
Conversion of Series B preferred stock............................. 5,324,532
Conversion of Series C preferred stock............................. 497,785
Warrants issued and outstanding.................................... 386,237
Options issued and outstanding..................................... 1,938,705
Options available under stock option plans......................... 132,230
---------
Total.............................................................. 9,190,784
=========
</TABLE>
9
<PAGE>
FLYCAST COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Mandatorily Redeemable Preferred Stock
In July 1997, the Company issued 611,295 shares of Series A redeemable
convertible stock in exchange for all 1,000 shares of outstanding common
stock. Additionally, in July 1997, 300,000 shares of Series A preferred stock
were issued upon conversion of $300,000 of convertible notes. In July, August
and December 1997, the Company issued 5,324,532 shares of Series B preferred
stock for $1.33 per share. In December 1998, the Company issued 497,785 shares
of Series C preferred stock for $9.04 per share.
Significant terms of the Series A, B and C redeemable convertible preferred
stock are as follows (see Note 9):
. At the option of the holder, each share of preferred stock is
convertible at any time into one share of common stock, subject to
adjustment for certain dilutive issuances. As of December 31, 1998, no
such adjustments had occurred. Shares automatically convert into common
stock upon the earlier of (a) completion of a public offering with
aggregate proceeds greater than $15,000,000 at not less than $8.00 per
share or (b) upon the consent of more than 50% of the holders of the
preferred stock, voting together as a single class.
. Series A, B and C convertible preferred stock are entitled to annual
noncumulative cash dividends of $0.08, $0.106 and $0.723 per share,
respectively, when and if declared by the Board of Directors.
. In the event of any liquidation of the Company (which includes the
acquisition of the Company by another entity), the holders of Series B
and Series C preferred stock have a liquidation preference over common
stock and Series A preferred stock of $1.33 per share and $9.04 per
share, respectively, plus all declared but unpaid dividends. After such
payment, the holders of Series A preferred stock have a liquidation
preference of $1.00 per share plus any declared but unpaid dividends.
Upon payment of all preferred stock liquidation preferences, any
remaining proceeds will be allocated to the common stockholders.
. Any time after May 31, 2002, upon the vote of at least two-thirds of the
then outstanding redeemable convertible preferred stock, the Company
will be required to redeem all of the redeemable convertible preferred
stock at the liquidation preference plus an amount equal to $0.08,
$0.106 and $0.723 per share per year compounded annually for Series A, B
and C, respectively, less any cash dividends paid. As a result, the
Company has recorded an increase to the carrying values by the accretion
of the mandatorily redeemable preferred stock of $206,000 in 1997 and
$656,000 in 1998.
. Holders of preferred stock have the same voting rights as the holders of
common stock.
Preferred Stock Warrants
In 1997, in connection with certain loan arrangements, the Company issued
five year warrants to purchase 33,834 shares of Series B preferred stock at
$1.33 per share and 7,500 shares of Series A preferred stock at $1.00 per
share to a bank. The warrants expire in 2002. The fair value of these warrants
of $33,000 was recognized as interest expense in 1997.
Also in 1997, in connection with a bridge loan arrangement, the Company
issued a five year warrant to purchase 43,854 shares of Series B preferred
stock at $1.33 per share. The warrant expires in 2002 or upon closing of an
underwritten public offering. The fair value of these warrants of $36,000 was
recognized as interest expense in 1997.
As discussed in Note 4, in 1998, the Company granted a lender Series C
preferred stock warrants to purchase 55,409 shares at $4.51 per share, and
72,324 shares at $4.42 per share. The warrants expire upon the earlier of five
years from the grant date or two years from closing of an underwritten public
offering. The fair value of the warrants of $304,000 is being accreted to
interest expense over the life of the financing agreements.
10
<PAGE>
FLYCAST COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In 1998, in connection with certain bridge loan arrangements, the Company
issued warrants to purchase 132,840 shares of Series C preferred stock at $9.04
per share to various lenders. The warrants expire in 2003 or upon closing of an
underwritten public offering. The fair value of these warrants of $200,000 was
recognized as interest expense in 1998.
Notes Receivable from Stockholders
In July 1997, the Company issued an aggregate of 2,275,011 shares of common
stock to officers and members of the Board of Directors. In connection with
such issuance, the Company's board members paid for the stock by issuing notes
payable (secured by the shares of the Company's common stock purchased) to the
Company. The secured note payable bears interest at 6.65% per annum with the
entire principal balance of the note, together with all accrued and unpaid
interest, due and payable on the earlier of (a) nine months after the closing
of an initial public offering of the Company's common stock or (b) July 2002 or
(c) termination of employment. The shares vest over a four year period. Any
unvested shares purchased are subject to repurchase rights by the Company upon
occurrence of certain events or conditions, such as employment termination, at
the original purchase price. Of such shares, there were 1,990,635 and 997,500
shares subject to repurchase at December 31, 1997 and 1998, respectively.
Additionally, in September 1998, two officers of the Company exercised
options to purchase 357,000 shares with an exercise price of $1.25 by issuing
notes payable (secured by the shares of the Company's common stock purchased).
The secured note payable bear interest at 5.54% per annum with the entire
principal balances of the notes, together with all accrued and unpaid interest,
due and payable on the earlier of (a) nine months after the closing of an
underwritten public offering, (b) September 2003 or (c) termination of
employment.
Stock Option Plans
The Company's stock option plans (the "Plans") provide for the grant of up
to 2,850,000 incentive or nonstatutory options to employees, directors and
consultants of the Company at the fair market value of the common stock on the
date of grant as determined by the Board of Directors. Options granted under
the Plans generally vest ratably over periods of up to four years and expire
ten years from the date of grant. The Plans also provide for early exercise of
options prior to full vesting. Any unvested shares purchased are subject to
repurchase rights by the Company upon occurrence of certain events or
conditions, such as employment termination, at the original purchase price.
There were 528,289 shares subject to repurchase at December 31, 1998.
Options and Warrants Granted to Nonemployees
In 1998, the Company granted options and warrants for common stock to
nonemployees for services performed and to be performed through 2002. In
connection with these awards, the Company recognized $178,000 in stock-based
compensation expense related to such options which vested during 1998. At
December 31, 1998, unvested options granted to nonemployees totaled 24,479
shares.
Stock-Based Compensation
During 1998, the Company issued common stock options at less than the fair
value of its common stock. The fair value of the common stock, weighted based
on options granted in 1998, was $2.75 per share. Accordingly, the Company
recorded $2,929,000 as the value of such options in 1998. Stock-based
compensation of $1,158,000 was amortized to expense in 1998 and at December 31,
1998, the Company had $1,771,000 in deferred stock compensation related to such
options, which will be amortized to expense through 2002.
11
<PAGE>
FLYCAST COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
During 1997, the Company issued common stock options at exercise prices
equal to the fair value of its common stock. Accordingly, no stock-based
compensation was recorded for that period.
Stock Option Activity
A summary of the Company's stock option activity follows (in thousands):
<TABLE>
<CAPTION>
Weighted
Average
Outstanding Exercise
Options Price
----------- --------
<S> <C> <C>
Balance, January 1, 1997
Granted.................................................. 497,125 $0.11
Exercised................................................ (68,020) 0.10
Canceled or expired...................................... (27,605) 0.10
---------
Balance, December 31, 1997 (68,503 shares vested at a
weighted average exercise price of $0.11)............... 401,500 0.11
Granted.................................................. 2,551,756 1.61
Exercised................................................ (686,076) 0.73
Canceled or expired...................................... (328,475) 0.24
---------
Balance, December 31, 1998............................... 1,938,705 $1.85
=========
Available for grant at December 31, 1998................. 132,230
=========
</TABLE>
The following table summarizes information about currently outstanding and
vested stock options at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Vested
----------------------------------- ---------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number of Contractual Exercise Number of Exercise
Price Shares Life Price Shares Price
-------------- --------- ----------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
$0.10 to $0.13 416,799 8.76 $0.12 333,348 $0.12
1.25 866,500 9.46 1.25 176,135 1.25
1.40 270,400 9.67 1.40 24,871 1.40
1.48 4,506 9.67 1.48 250 1.48
1.75 156,050 9.75 1.75 9,753 1.75
8.00 224,450 9.92 8.00 4,676 8.00
--------- ----- ------- -----
1,938,705 $1.85 549,033 $0.64
========= ===== ======= =====
</TABLE>
Additional Stock Plan Information
As discussed in Note 1, the Company accounts for its stock-based awards to
employees using the intrinsic value method in accordance with APB Opinion No.
25, "Accounting for Stock Issued to Employees," and its related
interpretations.
SFAS No. 123, "Accounting for Stock-Based Compensation," requires the
disclosure of pro forma net income (loss) and earnings (loss) per share had the
Company adopted the fair value method since the Company's inception. Under SFAS
No. 123, the fair value of stock-based awards to employees is calculated
12
<PAGE>
FLYCAST COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
through the use of option pricing models, even though such models were
developed to estimate the fair value of freely tradable, fully transferable
options without vesting restrictions, which significantly differ from the
Company's stock option awards.
The Company's calculations for employee grants were made using the minimum
value option pricing model with the following weighted average assumptions:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------
1997 1998
----------- -----------
<S> <C> <C>
Dividend yield..................................... None None
Risk free interest rate............................ 6.1% 5.2%
Expected term, in years............................ 2.5 2.5
</TABLE>
The weighted average minimum value per option as of the date of grant for
options granted during 1997 and 1998 was $0.02 and $1.31, respectively.
If the computed minimum values of the Company's stock-based awards to
employees had been amortized to expense over the vesting period of the awards
as specified under SFAS No. 123, loss attributable to common stockholders and
basic and diluted loss per share on a pro forma basis (as compared to such
items as reported) would have been (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------
1997 1998
----------- -----------
<S> <C> <C>
Loss attributable to common stockholders:
As reported..................................... $ (3,552) $ (9,516)
Pro forma....................................... $ (3,555) $ (9,640)
Basic and diluted net loss per share:
As reported..................................... $ (6.03) $ (7.26)
Pro forma....................................... $ (6.03) $ (7.35)
</TABLE>
7. NET LOSS PER SHARE
The following is a reconciliation of the denominators used in computing
basic and diluted net loss per share.
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------
1996 1997 1998
------- ---------- ----------
<S> <C> <C> <C>
Shares (denominator):
Weighted average common shares
outstanding............................. 476,584 1,644,053 2,834,981
Weighted average common shares
outstanding subject to repurchase....... 0 (1,054,562) (1,524,202)
------- ---------- ----------
Shares used in computation, basic and
diluted................................... 476,584 589,491 1,310,779
======= ========== ==========
</TABLE>
For the three years ended December 31, 1996, 1997 and 1998, the Company had
securities outstanding which could potentially dilute basic earnings per share
in the future, but were excluded in the computation of diluted net loss per
share in the periods presented, as their effect would have been antidilutive.
Such outstanding securities consist of the following at December 31, 1998:
6,733,612 shares of convertible preferred stock, warrants to purchase 345,761
shares of preferred stock, and options and warrants to purchase 1,979,181
shares of common stock. There were 1,990,635 and 1,525,789 shares subject to
repurchase by the Company at December 31, 1997 and 1998, respectively.
13
<PAGE>
FLYCAST COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8. COMMITMENTS AND CONTINGENCIES
Leases
Future minimum net lease payments under noncancellable operating leases
(with initial or remaining lease terms in excess of one year) and future
minimum capital lease payments as of December 31, 1998 are as follows (in
thousands):
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
------- ---------
<S> <C> <C>
Year ending December 31:
1999.................................................... $ 598 $ 366
2000.................................................... 561 369
2001.................................................... 464 343
2002.................................................... 34 322
2003.................................................... 319
Thereafter.............................................. 346
------ ------
Total................................................. 1,657 $2,065
======
Less amount representing interest....................... (126)
------
Present value of net minimum capital lease payments..... 1,531
Less current installments of obligations under capital
leases................................................. (490)
------
Obligations under capital leases, excluding current
installments........................................... $1,041
======
</TABLE>
Total rent expense under operating leases for the years ended 1996, 1997 and
1998 was $22,000, $127,000 and $400,000, respectively.
Legal Matters
In connection with the termination of employment of an officer, the Company
foreclosed on 264,560 shares of the Company's common stock securing a
promissory note from that officer. If that officer should elect to legally
contest the number of shares issued to him, and if additional shares are
ultimately issued, the Company could incur a charge equal to the fair market
value of such shares. The ultimate outcome of this matter cannot be determined
at this time.
Additionally, the Company is involved in various other claims and legal
actions. Management does not expect that the outcome of these other claims and
actions will have a material effect on the Company's financial position or
results of operations.
9. SUBSEQUENT EVENTS
In January 1999, the Company sold 1,496,347 shares of Series C preferred
stock at $9.04 per share for proceeds of $13,527,000.
On January 4, 1999, the Board of Directors adopted, subject to stockholder
approval, the 1999 Stock Option Plan (the "1999 Stock Plan"). The 1999 Stock
Plan will serve as the successor equity incentive program to the Company's
existing 1997 Stock Option Plan. A total of 2,000,000 shares of common stock
were initially reserved for issuance under the 1999 Stock Plan. On March 30,
1999, the Board of Directors adopted an amendment to the 1999 Stock Plan that
increased the shares of common stock reserved for issuance to 3,500,000. The
number of shares reserved will increase for each of the next five years by the
lesser of 1,000,000 shares or 3% of the number of shares of common stock
outstanding at the beginning of the year.
14
<PAGE>
FLYCAST COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On January 28, 1999, the Board of Directors adopted, subject to stockholder
approval, the 1999 Directors' Stock Option Plan (the "Directors' Plan"). Under
the Directors' Plan, each person who becomes a nonemployee director after the
effective date of the Directors' Plan may be granted nonstatutory stock
options. A total of 200,000 shares of common stock have initially been reserved
for issuance under the Directors' Plan.
On January 28, 1999, the Board of Directors approved, subject to stockholder
approval, the reincorporation of the Company in the State of Delaware and the
associated exchange of one share of common stock or preferred stock of the
Company for every share of common stock or preferred stock, as the case may be,
of the Company's California predecessor. Such reincorporation and stock
exchange will become effective prior to the effective date of the initial
public offering contemplated by the Company.
Additionally, on January 28, 1999, the Board of Directors adopted, subject
to stockholder approval, the 1999 Employee Stock Purchase Plan (the "Purchase
Plan"). Under the Purchase Plan, eligible employees are allowed to have salary
withholdings of up to 10% of their base compensation to purchase shares of
common stock at a price equal to 85% of the lower of the market value of the
stock at the beginning or end of defined purchase periods. The initial purchase
period commences upon the effective date for the initial public offering of the
Company's common stock. The Company has initially reserved 350,000 shares of
common stock for issuance under this plan, and the number of shares reserved
will increase for each of the next five years by the lesser of 75,000 shares or
0.5% of the shares of common stock outstanding at the beginning of the year.
On May 4, 1999, Flycast completed an initial public offering of 3,000,000
shares of the Flycast's common stock. In addition, on June 4, 1999, the Company
sold an additional 200,000 shares under the underwriters' overallotment option.
Total net proceeds were $74.4 million. Upon the closing of the initial public
offering, Flycast's mandatorily redeemable preferred stock converted into 6.9
million shares of common stock.
On August 30, 1999, Flycast completed a merger with InterStep, Inc., a
Massachusetts corporation which commenced operations in 1995. InterStep
provides publishers with e-mail content management, list management and
distribution services on an outsourced basis. In the transaction, Flycast
issued 480,337 shares of common stock to InterStep's stockholders, of which
47,558 shares are held by an escrow agent to serve as security for the
indemnity provided by stockholders of InterStep. The Company also assumed all
outstanding InterStep common stock options, which were converted to options to
purchase approximately 10,012 shares of the Company's common stock. No
adjustments were required to conform accounting policies of the entities. There
were no significant intercompany transactions requiring elimination for any
periods presented.
The above transaction has been accounted for as a pooling-of-interests and,
accordingly, the supplemental consolidated financial statements of the Company
for all periods presented have been restated to include the accounts of
InterStep.
15
<PAGE>
FLYCAST COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Revenue and net income (loss) of the separate companies for the periods
preceding the acquisition were as follows (in thousands):
<TABLE>
<CAPTION>
Net Income
Revenue (Loss)
------- ----------
<S> <C> <C>
Fiscal year ended December 31, 1998
Flycast.................................................... $8,029 $(9,306)
InterStep.................................................. 1,253 446
------ -------
Combined................................................... $9,282 $(8,860)
====== =======
Fiscal year ended December 31, 1997
Flycast.................................................... $ 630 $(3,417)
InterStep.................................................. 304 71
------ -------
Combined................................................... $ 934 $(3,346)
====== =======
Fiscal year ended December 31, 1996
Flycast.................................................... $ -- $ (445)
InterStep.................................................. 123 50
------ -------
Combined................................................... $ 123 $ (395)
====== =======
</TABLE>
On September 30, 1999, the Company announced that a definitive agreement was
entered into to be acquired by CMGI, Inc. ("CMGI") in a stock-for-stock merger.
Under the terms of the agreement, CMGI will issue 0.4738 CMGI shares for every
Flycast share held on the closing date of the transaction. Closing of the
merger is subject to customary conditions, including formal approval by the
Company's shareholders. In connection with the merger, the Company also entered
into a Stock Option Agreement dated as of September 29, 1999, whereby the
Company granted CMGI an option to purchase up to 19.9% of the outstanding
shares of the Company common stock, which option may be exercised in the event
that the Merger Agreement is terminated under certain circumstances. Related to
the acquisition, the Company incurred $1,350,000 in expenses in the quarter
ended September 30, 1999.
16
<PAGE>
FLYCAST COMMUNICATIONS CORPORATION
Interim Consolidated Financial Statements
<TABLE>
<CAPTION>
Page
----
<S> <C>
Consolidated Balance Sheets as of December 31, 1998 and September 30,
1999 (unaudited)........................................................ 18
Consolidated Statements of Operations for the three and nine months ended
September 30, 1998 and 1999 (unaudited)................................. 19
Consolidated Statements of Cash Flows for the nine months ended September
30, 1998 and 1999 (unaudited)........................................... 20
Notes to Consolidated Financial Statements (unaudited)................... 21
</TABLE>
17
<PAGE>
FLYCAST COMMUNICATIONS CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
(unaudited)
<TABLE>
<CAPTION>
Dec. Sept.
31, 30,
1998 1999
------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................. $ 5,197 $14,221
Short-term investments..................................... 183 57,195
Accounts receivable, net................................... 3,802 11,336
Prepaid expenses........................................... 267 2,002
------- -------
Total current assets..................................... 9,449 84,754
Property and equipment, net.................................. 1,945 9,606
Other assets................................................. 108 315
------- -------
TOTAL ASSETS................................................. $11,502 $94,675
======= =======
LIABILITIES, MANDATORILY REDEEMABLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable........................................... $ 2,561 $10,270
Accrued liabilities........................................ 375 3,141
Accrued compensation and benefits.......................... 460 2,392
Short-term capital lease obligations....................... 490 841
Short-term debt............................................ 1,045 1,817
------- -------
Total current liabilities................................ 4,931 18,461
Long-term capital lease obligations.......................... 1,041 1,189
Long-term debt............................................... 3,682 2,224
------- -------
Total liabilities........................................ 9,654 21,874
------- -------
Mandatorily redeemable preferred stock, $0.0001 par value,
9,904,000 shares authorized:
Series A, 920,000 designated, 918,295 shares issued and
outstanding at December 31, 1998; none at September 30,
1999...................................................... 1,027
Series B, 5,500,000 designated, 5,324,532 shares issued and
outstanding at December 31, 1998; none at September 30,
1999...................................................... 7,824
Series C, 3,484,000 designated, 497,785 shares issued and
outstanding at December 31, 1998; none at September 30,
1999...................................................... 5,004
------- -------
13,855 --
------- -------
Stockholders' equity (deficit):
Common stock, $.001 par value: 20,000,000 shares
authorized; issued 2,690,787 shares--December 31, 1998;
15,165,021 shares--September 30, 1999..................... 922 103,747
Common stock options....................................... 2,929 3,931
Deferred stock compensation................................ (1,771) (1,556)
Notes receivable from stockholders......................... (606) (404)
Accumulated deficit........................................ (13,481) (32,917)
------- -------
Total stockholders' equity (deficit)..................... (12,007) 72,801
------- -------
TOTAL LIABILITIES, MANDATORILY REDEEMABLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY (DEFICIT).............................. $11,502 $94,675
======= =======
</TABLE>
See notes to consolidated financial statements
18
<PAGE>
FLYCAST COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
September 30, September 30,
---------------- -----------------
1998 1999 1998 1999
------- ------- ------- --------
<S> <C> <C> <C> <C>
Revenues................................. $ 2,544 $12,531 $ 4,765 $ 24,066
Cost of revenues......................... 1,630 8,592 3,066 16,811
------- ------- ------- --------
Gross profit........................... 914 3,939 1,699 7,255
Operating expenses:
Sales and marketing.................... 1,627 5,981 3,330 14,136
Research and development............... 655 2,576 1,574 5,623
General and administrative............. 490 2,481 1,389 4,922
Stock-based compensation............... 407 365 737 1,323
------- ------- ------- --------
Total operating expenses............. 3,179 11,403 7,030 26,004
Operating loss........................... (2,265) (7,464) (5,331) (18,749)
Interest income (expense), net........... (63) (309) (71) 56
------- ------- ------- --------
Net loss................................. $(2,328) $(7,773) $(5,402) $(18,693)
======= ======= ======= ========
Accretion of mandatorily redeemable
preferred stock......................... (165) -- (491) (667)
======= ======= ======= ========
Loss attributable to common
stockholders............................ $(2,493) $(7,773) $(5,893) $(19,360)
======= ======= ======= ========
Basic and diluted loss per common share.. $ (1.75) $ (0.57) $ (4.77) $ (2.18)
======= ======= ======= ========
Shares used in computing basic and
diluted loss per common share........... 1,426 13,645 1,235 8,895
======= ======= ======= ========
Proforma basic and diluted loss per
common share............................ $ (0.33) $ (0.57) $ (0.79) $ (1.61)
======= ======= ======= ========
Shares used in computing proforma basic
and diluted loss per common share....... 7,662 13,645 7,471 12,027
======= ======= ======= ========
</TABLE>
See notes to consolidated financial statements
19
<PAGE>
FLYCAST COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine Months
Ended September
30,
-----------------
1998 1999
------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $(5,402) $(18,693)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation and amortization............................... 388 1,590
Provision for doubtful accounts............................. 107 735
Loss on sale of property and equipment...................... 5
Stock and warrants issued for services...................... 180 139
Non-cash interest expense................................... 43
Stock-based compensation expense............................ 736 1,323
Changes in operating assets and liabilities:
Accounts receivable..................................... (1,936) (8,269)
Prepaids and other assets............................... (372) (1,942)
Accounts payable........................................ 1,212 7,710
Accrued liabilities..................................... 181 4,684
------- --------
Net cash used by operations........................... (4,858) (12,723)
------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment........................ (93) (8,197)
Proceeds from sales of property and equipment............. 3
Purchase of short term investments, net................... (180) (57,025)
------- --------
Net cash used by financing activities................. (270) (65,222)
------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt.............................. 2,100
Payments on long-term debt................................ (115) (673)
Payments on capital leases................................ (163) (492)
Proceeds from payment of notes receivable from
stockholders............................................. 58
Payments on note payable to shareholders.................. (49)
Shareholder distributions................................. (79)
Proceeds from issuance of common stock.................... 25 73,668
Proceeds from issuance of preferred stock................. -- 14,536
------- --------
Net cash provided by investing activities............. 1,847 86,969
------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ (3,281) 9,024
CASH AND CASH EQUIVALENTS--BEGINNING OF PERIOD.............. 3,593 5,197
------- --------
CASH AND CASH EQUIVALENTS--END OF PERIOD.................... $ 312 $ 14,221
======= ========
Supplemental Disclosures of Cash Flow Information:
Cash paid for interest.................................... $ 101 $ 575
======= ========
Non-cash financing and investing activities:
Purchase of equipment under capital leases.............. $ 1,612 $ 1,041
======= ========
Issuance of common stock for notes receivable........... $ 446 $ 31
======= ========
Repurchase of common stock for extinguishment of debt... $ 35 $ 175
======= ========
Conversion of preferred stock to common stock........... $ -- $ 28,856
======= ========
</TABLE>
See notes to consolidated financial statements
20
<PAGE>
FLYCAST COMMUNICATIONS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Basis of Presentation
The interim consolidated financial statements are unaudited and have been
prepared on the same basis as the audited financial statements. In the opinion
of management, such unaudited financial statement includes all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of the Company's financial position as of September 30, 1999 and
the results of operations for the three and nine months ended September 30,
1998 and 1999 and cash flows for the nine months ended September 30, 1998 and
1999.
The unaudited financial statements should be read in conjunction with
Flycast's audited financial statements and the notes thereto as included in
Flycast's Registration Statement on Form S-1 filed with the Securities and
Exchange Commission on May 4, 1999, and its periodic filings with the
Securities and Exchange Commission thereafter. The results of operations for
the three and nine months ended September 30, 1999 are not necessarily
indicative of the results to be expected for any subsequent quarter or the
entire year ending December 31, 1999.
On August 30, 1999, Flycast acquired InterStep by issuing 480,337 shares of
common stock for all of the outstanding shares of InterStep, Inc. in
transaction that was accounted for as a pooling-of-interests. As a result,
InterStep became a wholly owned subsidiary of Flycast. For purposes of
financial statement presentation, historical financial information for
InterStep has been consolidated into the statements presented herein.
Certain reclassifications have been made to prior period financial
statements to conform to the current period presentation.
2. Initial Public Offering
On May 4, 1999, Flycast completed an initial public offering of 3,000,000
shares of the Flycast's common stock. In addition, on June 4, 1999, the Company
sold an additional 200,000 shares under the underwriters' overallotment option.
Total net proceeds were $74.4 million. Upon the closing of the initial public
offering, Flycast's mandatorily redeemable preferred stock converted into 6.9
million shares of common stock.
3. Acquisitions
On August 30, 1999, we acquired InterStep by issuing 480,337 shares of
common stock for all of the outstanding shares of InterStep, Inc. Of the
480,337 shares of common stock, 47,558 shares are held by an escrow agent to
serve as security for the indemnity provided by some of the shareholders of
InterStep. The information presented herein reflects the combination of Flycast
and InterStep accounted for as a pooling-of-interests.
On September 30, 1999, we announced that we had signed a definitive
agreement to be acquired by CMGI, Inc. in a stock-for-stock merger. Under the
terms of the agreement, CMGI will issue 0.4738 CMGI shares for every Flycast
share held on the closing date of the transaction. Closing of the merger is
subject to customary conditions, including formal approval by our shareholders.
It is anticipated that the transaction will close in January 2000. A
significant percentage of our shareholders have agreed to vote in favor of the
merger. In connection with the merger, we also entered into a Stock Option
Agreement dated as of September 29, 1999, whereby we granted CMGI an option to
purchase up to 19.9% of the outstanding shares of our common stock, which
option may be exercised in the event that the Merger Agreement is terminated
under certain circumstances. We incurred approximately $1.5 million in
expenses, which are reflected as general and administrative operating expenses
herein for the quarter ended September 30, 1999. We expect to incur additional
financial advisory accounting and legal fees estimated to be between $6.0
million and $8.0 million contingent upon completion of the acquisition. This
range is a preliminary estimate only and is, therefore, subject to change.
21
<PAGE>
FLYCAST COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(unaudited)
4. Basic and Diluted Loss per Share
Basic net loss per share is computed by dividing the loss attributable to
common shareholders by the weighted average number of common shares outstanding
for the period (excluding shares subject to repurchase). Diluted loss per
common share reflects the potential dilution that could occur if securities or
other contracts to issue common stock were exercised or converted into common
stock. Common share equivalents are excluded from the computation in loss
periods, as their effect would be antidilutive.
The following is a reconciliation of the denominators used in calculating
basic and diluted net loss per share (in thousands):
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
September 30, September 30,
-------------- --------------
1998 1999 1998 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Shares (denominator)
Weighted average common shares outstanding.... 2,677 14,980 2,744 10,310
Weighted average common shares outstanding
subject to repurchase........................ (1,251) (1,335) (1,509) (1,415)
------ ------ ------ ------
Shares used in computation, basic and
diluted...................................... 1,426 13,645 1,235 8,895
====== ====== ====== ======
</TABLE>
5. Pro Forma Loss per Common Share
Pro forma basic and diluted loss per common share is computed by dividing
loss attributable to common shareholders by the weighted average number of
common shares outstanding for the period (excluding shares subject to
repurchase) and the weighted average number of common shares resulting from the
assumed conversion of outstanding mandatorily redeemable preferred stock.
6. Combining Financial Information
The acquisition of InterStep has been accounted for as a pooling-of-
interests and, accordingly, our historical consolidated financial statements
have been restated to include the accounts and results of operations of
InterStep. The results of operations previously reported by the separate
businesses and the combined amounts presented in the accompanying consolidated
financial statements are presented below.
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, 1998 September 30, 1998
------------------ ------------------
(unaudited) (unaudited)
<S> <C> <C>
Revenues:
Flycast................................... $ 2,126 $ 3,890
InterStep................................. 418 875
------- -------
Combined.................................. $ 2,544 $ 4,765
======= =======
Net income (loss):
Flycast................................... $(2,321) $(5,775)
InterStep................................. (7) 373
------- -------
Combined.................................. $(2,328) $(5,402)
======= =======
</TABLE>
We have restated our results of operations for the three and nine month
periods ended September 30, 1998 and 1999 by combining InterStep's financial
statements with our financial statements. We have restated the balance sheet as
of December 31, 1998 to include our balance sheet and InterStep's balance sheet
as of December 31, 1998. The equity accounts of the separate entities were
combined. There were no significant transactions between our Company and
InterStep prior to the combination.
22
<PAGE>
EXHIBIT 99.2
Pro forma financial information:
- -------------------------------
On August 18, 1999, CMGI acquired an 81.495% equity stake in the former
AltaVista division of Digital Equipment Corporation, referred to as the
AltaVista Business, from Compaq Computer Corporation and its wholly-owned
subsidiary, Digital Equipment Corporation. Consideration for the acquisition was
valued at approximately $2.4 billion, including $4 million of direct costs of
the acquisition. The AltaVista Business includes the assets and liabilities
constituting the AltaVista Internet search service, referred to as AltaVista
Search , which was a division of Digital, and also includes former
Compaq/Digital wholly-owned subsidiaries Zip2 Corporation and Shopping.com. In
consideration for the acquisition, CMGI issued 18,994,975 shares of its common
stock valued at approximately $1.8 billion, 18,090.45 shares of its Series D
Preferred Stock (which were converted into 1,809,045 shares of CMGI common stock
in October 1999) valued at approximately $173 million and promissory notes with
an aggregate principal amount of $220 million. Additionally, AltaVista Business
and CMGI stock options issued in the transaction, valued at a total of
approximately $175 million, have been included in CMGI's purchase consideration.
On September 29, 1999, CMGI entered into an agreement to acquire Flycast
Communications Corporation for consideration preliminarily valued at $920
million, consisting of: CMGI common stock valued at approximately $709 million,
options to purchase CMGI common stock valued at approximately $190 million and
estimated direct acquisition costs of $21 million. Since the acquisition has
not yet been completed, the actual consideration for the acquisition of Flycast
can not yet be determined. For the purpose of the pro forma financial
information included herein, the number of shares of CMGI common stock assumed
issued in the acquisition of Flycast is approximately 7.2 million. This amount
is based on the number of shares of Flycast common stock outstanding as of
September 29, 1999, the date of the CMGI-Flycast merger agreement. Similarly,
the estimated value of the options to purchase CMGI common stock to be issued in
the acquisition of Flycast is based on the outstanding options to purchase
Flycast common stock as of September 29, 1999. The actual number of CMGI common
shares and stock options to be issued will be based on the actual outstanding
Flycast common shares and stock options as of the completion of the merger. The
estimated acquisition related costs consist primarily of investment banker,
legal and accounting fees to be incurred directly related to the acquisition of
Flycast.
The following pro forma unaudited combined condensed financial statements give
effect to CMGI's acquisitions of the AltaVista Business and Flycast, both of
which will be accounted for under the purchase method of accounting. The
unaudited pro forma condensed combined statements of operations for the three
months ended October 31, 1999 and the year ended July 31, 1999 give effect to
the acquisitions of the AltaVista Business and Flycast by CMGI as if each had
occurred on August 1, 1998. The pro forma statement of operations for the three
months ended October 31, 1999 is based on historical results of operations of
CMGI for the three months ended October 31, 1999 (which include the results of
the AltaVista Business from August 19, 1999 through October 31, 1999), the
historical results of operations of Flycast for the three months ended September
30, 1999 and the historical results of operations for the AltaVista Business for
the period from August 1, 1999 through August 18, 1999. The pro forma statement
of operations for the twelve months ended July 31, 1999 is based on historical
results of operations of CMGI for the twelve months ended July 31, 1999, the
historical results of operations of Flycast for the twelve months ended June 30,
1999 and the historical results of operations of the components of the AltaVista
Business as follows: the carve-out historical results of AltaVista Search and
the historical results of Zip2 Corporation for the twelve months ended June 30,
1999 and the historical results of Shopping.com for the twelve months ended July
31, 1999. The unaudited pro forma condensed combined balance sheet as of October
31, 1999 gives effect to the acquisition of Flycast as if this transaction had
occurred on that date. The pro forma balance sheet is based on the historical
balance sheet of CMGI as of October 31, 1999 and the historical balance sheet of
Flycast as of September 30, 1999. The following pro forma financial information,
consisting of the pro forma statements of operations and the pro forma balance
sheet and the accompanying notes, should be read in conjunction with and are
qualified by the historical financial statements and notes of CMGI, the
AltaVista Business and Flycast which are incorporated by reference in this pro
forma financial information.
The pro forma financial information is presented for illustrative purposes
only and is not necessarily indicative of the future financial position or
future results of operations of the consolidated company after the acquisitions
of the AltaVista Business and Flycast, or of the financial position or results
of operations of the consolidated company that would have actually occurred had
the acquisitions of the AltaVista Business and Flycast been effected as of the
dates described above.
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
October 31, 1999
(In thousands)
<TABLE>
<CAPTION>
Pro Forma Pro Forma
Assets CMGI Flycast Adjustments (A) As Adjusted
- ------ ------------ ----------- --------------- -----------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 705,001 $ 14,221 $ -- $ 719,222
Available-for-sale securities 1,776,641 57,195 -- 1,833,836
Other current assets 145,132 13,338 -- 158,470
----------- ----------- -------------- -------------
Total current assets 2,626,774 84,754 -- 2,711,528
Goodwill and other intangible assets,
net of accumulated amortization 2,512,031 -- 847,199 3,359,230
Other non-current assets 292,877 9,921 -- 302,798
----------- ----------- -------------- -------------
Total assets $ 5,431,682 $ 94,675 $ 847,199 $ 6,373,556
=========== =========== ============== =============
Liabilities and Stockholders' Equity
- ------------------------------------
Deferred income taxes $ 587,029 $ -- $ -- $ 587,029
Other current liabilities 358,107 18,461 21,000 397,568
----------- ----------- -------------- -------------
Total current liabilities 945,136 18,461 21,000 984,597
Non-current liabilities 280,040 3,413 -- 283,453
Minority interest 353,100 -- -- 353,100
Convertible, redeemable preferred stock 413,511 -- -- 413,511
Stockholders' equity 3,439,895 72,801 826,199 4,338,895
----------- ----------- -------------- -------------
Total liabilities and stockholders' equity $ 5,431,682 $ 94,675 $ 847,199 $ 6,373,556
=========== =========== ============== =============
</TABLE>
2
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
Three Months Ended October 31, 1999
(In thousands, except per share data)
<TABLE>
<CAPTION>
AltaVista Business
(August 1, 1999
through Pro Forma
CMGI August 18, 1999) Adjustments Subtotal
---- ---------------- ----------- --------
<S> <C> <C> <C> <C>
Net revenues $ 123,731 $ 7,198 $ -- $ 130,929
Operating expenses:
Cost of revenues 108,173 4,104 -- 112,277
Research and development 20,188 1,891 -- 22,079
Selling 72,501 7,361 -- 79,862
General and administrative 27,357 2,400 -- 29,757
Amortization of intangible
assets and 170,039 30,117 26,337 (B) 210,943
stock-based compensation (15,550)(D)
----------- ----------- ---------- ----------
Total operating expenses 398,258 45,873 10,787 454,918
----------- ----------- ---------- ----------
Operating loss (274,527) (38,675) (10,787) (323,989)
Other income (expense):
Interest income (expense), net 171 (35) (1,139)(E) (1,003)
Equity in losses of affiliates (1,796) -- -- (1,796)
Minority interest 23,288 -- 4,298 (F) 27,586
Non-operating gains, net 94,717 -- -- 94,717
----------- ----------- ---------- ----------
116,380 (35) 3,159 119,504
----------- ----------- ---------- ----------
Loss from continuing operations
before income taxes (158,147) (38,710) (7,628) (204,485)
Income tax benefit (40,735) -- (14,952)(G) (55,687)
----------- ----------- ---------- ----------
Loss from continuing operations (117,412) (38,710) 7,324 (148,798)
Preferred stock accretion and
amortization of discount (4,935) -- -- (4,935)
----------- ----------- ---------- ----------
Loss from continuing operations
available to common
stockholders $ (122,347) $ (38,710) $ 7,324 $ (153,733)
=========== =========== ========== ==========
Basic loss from continuing
operations per share $ (1.08) $ (1.30) (I)
=========== ==========
Diluted loss from continuing
operations per share $ (1.08) $ (1.30) (I)
=========== ==========
Shares used in computing loss from
continuing operations per share:
Basic 113,186 118,426 (I)
=========== ==========
Diluted 113,186 118,426 (I)
=========== ==========
<CAPTION> Pro Forma Pro Forma
Flycast Adjustments As Adjusted
---------- -------------- ----------------
<S> <C> <C> <C>
Net revenues $ 12,531 $ -- $ 143,460
Operating expenses:
Cost of revenues 8,592 -- 120,869
Research and development 2,576 -- 24,655
Selling 5,981 -- 85,843
General and administrative 2,481 -- 32,238
Amortization of intangible
assets and 365 70,600 (C) 281,543
stock-based compensation (365) (D)
---------- ---------- -----------
Total operating expenses 19,995 70,235 545,148
---------- ---------- -----------
Operating loss (7,464) (70,235) (401,688)
Other income (expense):
Interest income (expense), net (309) -- (1,312)
Equity in losses of affiliates -- -- (1,796)
Minority interest -- -- 27,586
Non-operating gains, net -- -- 94,717
---------- ---------- -----------
(309) -- 119,195
---------- ---------- -----------
Loss from continuing operations
before income taxes (7,773) (70,235) (282,493)
Income tax benefit -- (2,593) (G) (58,280)
---------- ---------- -----------
Loss from continuing operations (7,773) (67,642) (224,213)
Preferred stock accretion and
amortization of discount -- -- (4,935)
---------- ---------- -----------
Loss from continuing operations
available to common
stockholders $ (7,773) $ (67,642) $ (229,148)
========== ========== ===========
Basic loss from continuing
operations per share $ (1.82) (J)
===========
Diluted loss from continuing
operations per share $ (1.82) (J)
===========
Shares used in computing loss from
continuing operations per share:
Basic 125,656 (J)
===========
Diluted 125,656 (J)
===========
</TABLE>
3
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
Twelve Months Ended July 31, 1999
(In thousands, except per share data)
<TABLE>
<CAPTION>
AltaVista Pro Forma
CMGI Business Adjustments Subtotal
---- -------- ----------- --------
<S> <C> <C> <C> <C>
Net revenues $ 175,666 $ 97,838 $ -- $ 273,504
Operating expenses:
Cost of revenues 168,830 64,155 -- 232,985
Research and development 22,253 27,105 -- 49,358
In-process research and development 6,061 -- -- 6,061
Selling 45,505 79,210 -- 124,715
General and administrative 43,566 31,823 -- 75,389
Amortization of intangible assets and 16,110 171,925 682,337 (B) 861,466
stock-based compensation (8,906)(D)
----------- ---------- ---------- ----------
Total operating expenses 302,325 374,218 673,431 1,349,974
----------- ---------- ---------- ----------
Operating loss (126,659) (276,380) (673,431) (1,076,470)
Other income (expense):
Interest income (expense), net 269 (7,555) (23,100)(E) (30,386)
Equity in losses of affiliates (15,737) -- -- (15,737)
Minority interest 2,331 -- 76,698 (F) 79,029
Non-operating gains, net 889,041 -- -- 889,041
----------- ---------- ---------- ----------
875,904 (7,555) 53,598 921,947
----------- ---------- ---------- ----------
Income (loss) from continuing
operations before income taxes 749,245 (283,935) (619,833) (154,523)
Income tax expense (benefit) 325,402 -- (290,118)(G) 35,284
----------- ---------- ---------- ----------
Income (loss) from continuing
operations 423,843 (283,935) (329,715) (189,807)
Preferred stock accretion (1,662) -- -- (1,662)
----------- ---------- ---------- ----------
Income (loss) from continuing
operations available to common
stockholders $ 422,181 $ (283,935) $ (329,715) $ (191,469)
=========== ========== ========== ==========
Basic earnings (loss) from
continuing operations per share $ 4.53 $ (1.68) (I)
=========== ==========
Diluted earnings (loss) from
continuing operations per share $ 4.10 $ (1.68) (I)
=========== ==========
Shares used in computing earnings (loss)
from continuing operations per share:
Basic 93,266 113,718 (I)
=========== ==========
Diluted 103,416 113,718 (I)
=========== ==========
<CAPTION>
Pro Forma Pro Forma
Flycast Adjustments As Adjusted
------- ----------- -----------
<S> <C> <C> <C>
Net revenues $ 18,596 $ -- $ 292,100
Operating expenses:
Cost of revenues 12,901 -- 245,886
Research and development 4,760 -- 54,118
In-process research and development -- -- 6,061
Selling 12,309 -- 137,024
General and administrative 3,540 -- 78,929
Amortization of intangible assets and 1,786 282,400 (C) 1,143,866
stock-based compensation (1,786)(D)
---------- ---------- ------------
Total operating expenses 35,296 280,614 1,665,884
---------- ---------- ------------
Operating loss (16,700) (280,614) (1,373,784)
Other income (expense):
Interest income (expense), net (39) -- (30,425)
Equity in losses of affiliates -- -- (15,737)
Minority interest -- -- 79,029
Non-operating gains, net -- -- 889,041
---------- ---------- ------------
(39) -- 921,908
---------- ---------- ------------
Income (loss) from continuing
operations before income taxes (16,739) (280,614) (451,876)
Income tax expense (benefit) 2 (5,234)(G) 30,052
---------- ---------- ------------
Income (loss) from continuing
operations (16,741) (275,380) (481,928)
Preferred stock accretion (998) 998 (H) (1,662)
---------- ---------- ------------
Income (loss) from continuing
operations available to common
stockholders $ (17,739) $ (274,382) $ (483,590)
========== ========== ============
Basic earnings (loss) from
continuing operations per share $ (4.00) (J)
============
Diluted earnings (loss) from
continuing operations per share $ (4.00) (J)
============
Shares used in computing earnings (loss)
from continuing operations per share:
Basic 120,948 (J)
============
Diluted 120,948 (J)
============
</TABLE>
4
<PAGE>
Notes to the Unaudited Pro Forma Condensed Combined Financial Information
(1) Pro Forma Adjustments and Assumptions
(A) CMGI completed its acquisition of an 81.495% equity stake in the
AltaVista Business for consideration valued at approximately $2.4
billion on August 18, 1999. Accordingly, the assets and liabilities of
the AltaVista Business are included in CMGI's consolidated balance
sheet as of October 31, 1999 and no pro forma adjustments are
necessary to the pro forma balance sheet related to the acquisition of
the AltaVista Business. The following represents the allocation of the
purchase price for CMGI's acquisition of the AltaVista Business over
81.495% of the fair values of the acquired assets and assumed
liabilities of the AltaVista Business as of August 18, 1999:
<TABLE>
<S> <C>
(in thousands)
Working capital deficit, including cash acquired $ (39,604)
Other non-current assets 62,979
Non-current liabilities (2,733)
Goodwill and other intangible assets 2,368,129
-----------
Purchase price $ 2,388,771
===========
</TABLE>
The purchase price allocation for the acquisition of the AltaVista
Business is preliminary and is subject to adjustment upon finalization
of the purchase accounting.
The pro forma financial information also reflects the acquisition of
Flycast for consideration preliminarily valued at $920 million (see
description of the components of the estimated consideration above).
Since the acquisition has not yet been completed, the actual
consideration for the acquisition of Flycast can not yet be
determined. For the purpose of the pro forma financial information,
the number of shares of CMGI common stock assumed issued in the
acquisition of Flycast is approximately 7.2 million. This amount is
based on the number of shares of Flycast common stock outstanding as
of September 29, 1999, the date of the CMGI-Flycast merger agreement.
Similarly, the estimated value of the options to purchase CMGI common
stock to be issued in the acquisition of Flycast is based on the
outstanding options to purchase Flycast common stock as of September
29, 1999. The actual number of CMGI common shares and stock options to
be issued will be based on the actual outstanding Flycast common
shares and stock options as of the completion of the merger. The
estimated acquisition related costs consist primarily of investment
banker, legal and accounting fees to be incurred directly related to
the acquisition of Flycast.
The following represents the allocation of the estimated purchase
price for CMGI's pending acquisition of Flycast over the historical
net book values of the acquired assets and assumed liabilities of
Flycast as of the date of the pro forma balance sheet, and is for
illustrative purposes only. The actual purchase price allocation will
be based on fair values of the acquired assets and assumed liabilities
as of the actual acquisition date. Assuming the transaction occurred
on October 31, 1999, the allocation for the acquisition of Flycast
would have been as follows:
<TABLE>
<S> <C>
(in thousands)
Working capital, including cash acquired $66,293
Other non-current assets 9,921
Non-current liabilities (3,413)
Goodwill and other intangible assets 847,199
--------
Purchase price $920,000
========
</TABLE>
The pro forma adjustment reconciles the historical balance sheet of
Flycast to the allocated purchase price above and includes the accrual
of approximately $21.0 million of estimated acquisition costs to be
paid by CMGI related to the acquisition of Flycast.
5
<PAGE>
Notes to the Unaudited Pro Forma Condensed Combined Financial Information
(Continued)
(B) The pro forma adjustments include an incremental $38.2 million and
$789.4 million in amortization of goodwill and other intangible assets
(per the allocation in "(A)" above) that would have been recorded
during the three months ended October 31, 1999 and the twelve months
ended July 31, 1999 related to the acquisition of the AltaVista
Business. The amounts identified as goodwill and other intangible
assets in CMGI's acquisition of the AltaVista Business are being
amortized on a straight-line basis over a three-year period. The
adjustment amounts also include a net reduction of $11.9 million and
$107.0 million in amortization of goodwill and other intangible assets
for the three months ended October 31, 1999 and the twelve months ended
July 31, 1999, respectively. These amounts relate to the reduction in
historical amortization expense to reflect only the 18.505% carry-over
basis in the historical goodwill and other intangible assets of the
AltaVista Business and includes the amortization that would have been
recorded in the historical financial statements of the AltaVista
Business if Compaq/Digital's acquisitions of Shopping.com and Zip2
Corporation had occurred on August 1, 1998. The historical financial
statements of the AltaVista Business represented in the pro forma
statement of operations include amortization of goodwill and other
intangible assets relating to Compaq's acquisition of Digital in June
1998 and Compaq/Digital's acquisitions of Shopping.com and Zip2
Corporation in January 1999 and April 1999, respectively.
(C) The pro forma adjustments represent amortization of goodwill and other
intangible assets (per the allocation in "(A)" above) that would have
been recorded during the periods covered by the pro forma statements of
operations related to the acquisition of Flycast.
The pro forma adjustments are based on the assumption that the entire
amounts identified as goodwill and other intangible assets in CMGI's
acquisition of Flycast will be amortized on a straight-line basis over
a three-year period. The valuation of the actual intangible assets will
not be completed until after the acquisition of Flycast is complete.
When completed, certain amounts identified as intangible assets may be
amortized over periods other than the three-year period represented in
the pro forma statement of operations. Additionally, a portion of the
purchase price may be identified as in-process research and
development. This amount, if any, will be charged to operating results
in CMGI's fiscal year 2000 financial statements when the acquisition
accounting and valuation amounts are finalized. The pro forma
statements of operations do not give effect to any potential in-process
research and development charge related to the acquisition of Flycast.
(D) The pro forma adjustments relate to stock-based compensation charges
recorded in the historical financial statements of the AltaVista
Business and Flycast. The value of the stock options to which these
charges related are included in the calculation of the purchase
consideration. Accordingly, on a pro forma basis, these expenses have
been eliminated.
(E) The pro forma adjustments reflect the incremental interest expense that
would have been recorded by CMGI related to the $220 million of
aggregate principal amounts of notes payable issued in the acquisition
of the AltaVista Business as if the notes payable had been issued on
August 1, 1998. The notes bear interest at an annual rate of 10.5%.
(F) The pro forma adjustment reflects the 18.505% minority interest in the
results of operations of the AltaVista Business assuming that CMGI's
acquisition of 81.495% of the AltaVista Business occurred on August 1,
1998.
6
<PAGE>
Notes to the Unaudited Pro Forma Condensed Combined Financial Information
(Continued)
(G) The pro forma adjustments reflect the income tax benefit that would
have been recorded by CMGI in its consolidated statements of operations
related to the AltaVista Business' and Flycast's historical losses for
the comparable periods presented and the income tax effect, if any, of
the other pre-tax pro forma adjustments. The pro forma adjustments
assume that CMGI would recognize a federal tax benefit for the
amortization of goodwill and other intangible assets related to the
acquisition of the AltaVista Business, but would not recognize a
federal tax benefit for the amortization of goodwill and other
intangible assets related to the acquisition of Flycast. The pro forma
adjustments also assume that CMGI would record a valuation allowance
for all state tax benefits associated with the AltaVista Business and
Flycast. Actual effective tax rates may differ from pro forma rates
reflected in this pro forma financial information.
(H) The pro forma adjustment reflects the elimination of preferred stock
accretion recorded in Flycast's historical financial statements.
Assuming the acquisition of Flycast occurred on August 1, 1998, the
preferred stock, to which this accretion relates, would not have been
outstanding during the period covered by the pro forma statement of
operations.
(I) Since the pro forma statements of operations each result in a loss from
continuing operations, the pro forma basic and diluted loss from
continuing operations per common share are computed by dividing the
loss from continuing operations available to common stockholders by the
weighted average number of common shares outstanding. The calculations
of the pro forma weighted average number of common shares outstanding
assume that the 18,994,975 shares of CMGI's common stock issued in the
acquisition of the AltaVista Business were outstanding for the entire
periods. The calculations of the pro forma weighted average number of
common shares outstanding also assume that the 18,090.45 shares of
CMGI's Series D preferred stock were converted into 1,809,045 shares of
CMGI common stock on October 11, 1998 (the 71st day after the assumed
acquisition date of August 1, 1998) and that such common shares were
outstanding for the entire period thereafter. The Series D preferred
shares were converted into common stock on October 28, 1999 (the 71st
day after the actual acquisition date of August 18, 1999).
(J) Since the pro forma statements of operations each result in a loss from
continuing operations, the pro forma basic and diluted loss from
continuing operations per common share are computed by dividing the
loss from continuing operations available to common stockholders by the
weighted average number of common shares outstanding. The calculations
of the weighted average number of common shares outstanding assume that
the 18,994,975 shares of CMGI's common stock issued in the acquisition
of the AltaVista Business and the 7.2 million shares of CMGI's common
stock estimated to be issued in the acquisition of Flycast were
outstanding for the entire period. The calculations of the weighted
average number of common shares outstanding also assume that the
18,090.45 shares of CMGI's Series D preferred stock were converted into
1,809,045 shares of CMGI common stock on October 11, 1998 (the 71st day
after the assumed acquisition date of August 1, 1998) and that such
common shares were outstanding for the entire period thereafter. The
Series D preferred shares were converted into common stock on October
28, 1999 (the 71st day after the actual acquisition date of August 18,
1999).
7
