<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): June 29, 1999
CMGI, INC.
(Exact name of registrant as specified in its charter)
Delaware 0-22846 04-2921333
(State or other jurisdiction (Commission File (IRS Employer
of incorporation) Number) Identification No.)
100 BRICKSTONE SQUARE, ANDOVER, MA 01810
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code:
(978) 684-3600
<PAGE>
Item 5. Other Events
As reported by CMGI, Inc. in its current report on Form 8-K filed on
July 14, 1999, CMGI has entered into a Purchase and Contribution Agreement dated
as of June 29, 1999 (the "Agreement") by and among itself, Compaq Computer
Corporation ("Compaq"), Digital Equipment Corporation, a wholly-owned subsidiary
of Compaq ("Digital"), AltaVista Company, a wholly-owned subsidiary of Digital
("Altavista"), and Zoom Newco Inc., a wholly-owned subsidiary of CMGI ("Newco")
which provides, among other things, Compaq and Digital will contribute to Newco
certain assets and liabilities constituting the Altavista division of Digital
(the "Altavista Business"). Set forth in exhibits to this report is certain
historical financial information of the Altavista Business, and of Zip2
corporation and Shopping.com, which will become wholly-owned subsidiaries of
Newco following the consummation of the transactions contemplated by the
Agreement.
Item 7. Financial Statement, pro forma Financial Information and Exhibits.
--- -----
(c) Exhibits.
23.1 Consent of PricewaterhouseCoopers LLP, independent accountants,
filed herewith.
23.2 Consent of Singer Lewak Greenbaum & Goldstein LLP, independent
auditors, filed herewith.
99.1 Audited financial statements of AltaVista as of and for the years
ended December 31, 1996, 1997 and 1998 and unaudited financial
statements of the AltaVista Business as of March 31, 1999 and for
the three months ended March 31, 1999 and 1998.
99.2 Audited financial statements of Zip2 Corporation as of and
for the years ended December 31, 1996, 1997 and 1998 and
unaudited financial statements of Zip2 Corporation as of March
31, 1999 for the three months ended March 31, 1999 and 1998.
99.3 Audited financial statements of Shopping.com as of and for
the years ended January 31, 1999, 1998 and 1997.
-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: August 12, 1999 CMGI, Inc.
By: /s/ Andrew J. Hajducky III
-------------------------------------
Andrew J. Hajducky III
Executive Vice President, Chief Financial
Officer and Treasurer
-3-
<PAGE>
EXHIBIT INDEX
Exhibit
No. DESCRIPTION
-------- -----------
23.1 Consent of PricewaterhouseCoopers LLP, independent accountants,
filed herewith.
23.2 Consent of Singer Lewak Greenbaum & Goldstein LLP, independent
auditors, filed herewith.
99.1 Audited financial statements of AltaVista as of and for the years
ended December 31, 1996, 1997 and 1998 and unaudited financial
statements of the AltaVista Business as of March 31, 1999 and for
the three months ended March 31, 1999 and 1998. Filed herewith.
99.2 Audited financial statements of Zip2 Corporation as of and for the
years ended December 31, 1996, 1997 and 1998 and unaudited
financial statements of Zip2 Corporation as of March 31, 1999 and
for the three months ended March 31, 1999 and 1998. Filed herewith.
99.3 Audited financial statements of Shopping.com as of and for the
years ended January 31, 1999, 1998 and 1997. Filed herewith.
-2-
<PAGE>
Exhibit 23.1
Consent of Independent Accountants
----------------------------------
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-3 (No. 333-71863) and Form S-8 (Nos. 333-06745 and
033-86742) of CMGI, Inc. of our reports dated as follows:
. June 29, 1999 relating to the financial statements of AltaVista,
. April 2, 1999 relating to the financial statements of Zip2 Corporation, and
. June 9, 1999, except as to Note 12, which is as of July 3, 1999 relating to
the financial statements of Shopping.com
which appear in the CMGI, Inc. Current Report on Form 8-K dated August 12, 1999.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
San Jose, California
August 9, 1999
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the incorporation by reference of our report, dated June
17, 1997, except for Note 6, for which the date is June 9, 1999, relating to the
financial statements of Shopping.com included in this Form 8-K dated August 12,
1999 in the previously filed Registration Statements of CMGI, Inc. on Form S-3
(No. 333-71863) and Forms S-8 (Nos. 333-06745 and 033-86742).
/s/ SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
August 11, 1999
<PAGE>
EXHIBIT 99.1
AltaVista
Financial Statements
December 31, 1998
<PAGE>
ALTAVISTA
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Accountants.................................. F-1
Report of Independent Accountants.................................. F-2
Balance Sheets..................................................... F-3
Statements of Operations........................................... F-4
Statements of Changes in Owner's Net Investment.................... F-5
Statements of Cash Flows........................................... F-6
Notes to Financial Statements...................................... F-7
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of Compaq Computer Corporation
In our opinion, the accompanying balance sheet and the related statements of
operations, of changes in owner's net investment and of cash flows present
fairly, in all material respects, the financial position of AltaVista (the
"Business") at December 31, 1998, and the results of its operations and its cash
flows for the period from June 12, 1998 through December 31, 1998 in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of the Business's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financials statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
June 29, 1999
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of Compaq Computer Corporation
In our opinion, the accompanying balance sheet and the related statements of
operations, of changes in owner's net investment and of cash flows present
fairly, in all material respects, the financial position of AltaVista (the
"Business") at December 31, 1997, and the results of its operations and its cash
flows for the period from January 1, 1998 through June 11, 1998, and the years
ended December 31, 1997 and 1996 in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Business's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financials statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
June 29, 1999
F-2
<PAGE>
ALTAVISTA
BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
Predecessor Business
--------------- ---------------
December 31,
---------------------------------
1997 1998
--------------- ---------------
<S> <C> <C>
ASSETS
Current assets:
Accounts receivable, less allowance of $1,427 and $2,832 $ 6,290 $ 12,819
Prepaid expenses 481 350
---------------- ---------------
Total current assets 6,771 13,169
Property and equipment, less accumulated depreciation 10,418 24,173
Goodwill and other intangible assets, net 31 226,488
Investments - 500
--------------- ---------------
Total assets $ 17,220 $ 264,330
--------------- ---------------
LIABILITIES AND OWNER'S NET INVESTMENT
Current liabilities:
Long-term debt, current portion $ - $ 658
Accounts payable 702 691
Salaries, wages and related items 455 455
Accrued partner fees 281 7,656
Deferred revenue 500 150
Other current liabilities 667 774
--------------- ---------------
Total current liabilities 2,605 10,384
--------------- ---------------
Commitments and contingencies
Long-term debt - 1,656
--------------- ---------------
Net contribution from owner 28,738 321,856
Accumulated deficit (14,123) (69,566)
--------------- ---------------
Owner's net investment 14,615 252,290
--------------- ---------------
Total liabilities and owner's net investment $ 17,220 $ 264,330
--------------- ---------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
ALTAVISTA
STATEMENTS OF OPERATIONS
(in thousands)
<TABLE>
<CAPTION>
Predecessor Business
--------------------------------------------------- ----------------
Period from Period from
Year ended January 1, June 12,
December 31, 1998 through 1998 through
--------------------------------- June 11, December 31,
1996 1997 1998 1998
--------------- --------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Revenues $ 900 $ 13,813 $ 13,622 $ 23,517
Cost of revenues 1,963 5,008 3,445 6,964
--------------- --------------- ---------------- ----------------
Gross profit (loss) (1,063) 8,805 10,177 16,553
--------------- --------------- ---------------- ----------------
Operating expenses:
Sales and marketing 941 5,615 5,426 23,900
Product development 3,475 6,000 5,413 7,210
General and administrative 1,784 2,785 1,744 3,806
Amortization of intangible assets 19 25 8 50,982
--------------- --------------- ---------------- ----------------
Loss from operations (7,282) (5,620) (2,414) (69,345)
Interest expense 32 114 79 221
--------------- --------------- ---------------- ----------------
Loss before income taxes (7,314) (5,734) (2,493) (69,566)
Income taxes - - - -
--------------- --------------- ---------------- ----------------
Net loss $ (7,314) $ (5,734) $ (2,493) $ (69,566)
--------------- --------------- ---------------- ----------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
ALTAVISTA
STATEMENTS OF CHANGES IN OWNER'S NET INVESTMENT
(in thousands)
<TABLE>
<CAPTION>
Net Total
Contribution Accumulated Owner's Net
from Owner Deficit Investment
---------------- --------------- ---------------
<S> <C> <C> <C>
Balance, January 1, 1996 $ 1,454 $ (1,075) $ 379
Net loss - (7,314) (7,314)
Net contribution from owner 12,055 - 12,055
---------------- --------------- ---------------
Balance, December 31, 1996 13,509 (8,389) 5,120
Net loss - (5,734) (5,734)
Net contribution from owner 15,229 - 15,229
---------------- --------------- ---------------
Balance, December 31, 1997 28,738 (14,123) 14,615
Net loss - (2,493) (2,493)
Net contribution from owner 11,536 - 11,536
---------------- --------------- ---------------
Balance, June 11, 1998 40,274 (16,616) 23,658
---------------- --------------- ---------------
- -------------------------------------------------------------------------------------------------------------------
Net loss - (69,566) (69,566)
Net contribution from owner 321,856 - 321,856
---------------- --------------- ---------------
Balance, December 31, 1998 $ 321,856 $ (69,566) $ 252,290
---------------- --------------- ---------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
ALTAVISTA
STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Predecessor Business
--------------------------------------------------- ---------------
Period from Period from
Year ended January 1, June 12,
December 31, 1998 through 1998 through
---------------------------------- June 11, December 31,
1996 1997 1998 1998
---------------- ---------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (7,314) $ (5,734) $ (2,493) $ (69,566)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 854 2,685 2,079 54,147
Provision for bad debts - 1,427 1,220 2,516
Changes in operating assets and liabilities:
Accounts receivable (573) (7,144) (3,248) (7,017)
Prepaid expenses (181) (300) (3,577) 3,708
Accounts payable 37 665 47 (58)
Salaries, wages and related items 161 290 371 (371)
Deferred revenue 100 400 (187) (163)
Other current liabilities 118 830 (329) 7,681
---------------- ---------------- ---------------- ---------------
Net cash used in operating activities (6,798) (6,881) (6,117) (9,123)
---------------- ---------------- ---------------- ---------------
Cash flows from investing activities:
Purchase of intangible assets (75) - - (477)
Purchases of property and equipment (5,182) (8,348) (5,419) (2,906)
Investments - - - (500)
---------------- ---------------- ---------------- ---------------
Net cash used in investing activities (5,257) (8,348) (5,419) (3,883)
---------------- ---------------- ---------------- ---------------
Cash flows from financing activities:
Repayment of long-term debt - - - (436)
Net change in contribution from owner 12,055 15,229 11,536 13,442
---------------- ---------------- ---------------- ---------------
Net cash provided by financing activities 12,055 15,229 11,536 13,006
---------------- ---------------- ---------------- ---------------
Net increase in cash $ - $ - $ - $ -
---------------- ---------------- ---------------- ---------------
Noncash investing activities:
Contribution of net assets from owner $ - $ - $ - $ 308,414
Purchase of URL $ - $ - $ - $ 2,930
Noncash financing activities:
Note payable from purchase of URL $ - $ - $ - $ 2,750
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
ALTAVISTA
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES:
DESCRIPTION OF BUSINESS
AltaVista (the "Business") provides Internet search and navigation
technology, enabling the delivery of information through broad-based search
capabilities. The Business's objective is to deliver the most personally
relevant Internet results faster than anyone else on the Internet. With the
leverage from numerous partnerships, the business is extending its services to
delivering highly personalized e-Commerce offerings and local content through an
integrated network of new media and e-Commerce partners.
BASIS OF PRESENTATION
These financial statements present the assets, liabilities, changes in
owner's net investment, results of operations and cash flows applicable to the
operations of the Business. The financial statements of the Business are
derived from the historic books and records of Digital Equipment Corporation
("Digital") through June 11, 1998. As a result of the acquisition of Digital by
Compaq Computer Corporation ("Compaq") on June 11, 1998, the financial
statements of the Business after the acquisition date are derived from the
historic books and records of Compaq and reflect the "pushdown" of Compaq's
bases in the assets and liabilities.
The statement of operations includes all revenues and costs directly
attributable to the Business, including charges for shared facilities, functions
and services used by the Business and provided by Digital or Compaq. Certain
costs and expenses have been allocated based on management's estimates of the
cost of services provided to the Business by Digital or Compaq. Such costs
include corporate research and engineering expenses, corporate selling and
marketing expenses and corporate general and administrative expenses (see Note
6). Such allocations and charges are based on either a direct cost pass-through
or a percentage of total costs for the services provided based on factors such
as headcount or the specific level of activity directly related to such costs
(i.e., direct spending). Management believes that these allocations are based
on assumptions that are reasonable under the circumstances. However, these
allocations and estimates are not necessarily indicative of the costs and
expenses which would have resulted if the Business had been operated as a
separate entity.
The Business has incurred recurring losses from operations through December
31, 1998. Compaq has committed to provide the funds required for the conduct of
the Business's operations at least through December 31, 1999 or to the date, if
earlier, on which it ceases to be the controlling shareholder. The historical
operating results may not be indicative of future results.
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 these estimates. Significant estimates include
the allowance for accounts receivable and the lives of intangible assets.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Business to a
concentration of credit risk consist of accounts receivable. The Business's
accounts receivable are derived primarily from advertising revenue earned from
customers located in the U.S. The Business maintains reserves for potential
credit loss. Historically such losses have not been significant and have been
within management's expectations.
F-7
<PAGE>
ALTAVISTA
NOTES TO FINANCIAL STATEMENTS
(Continued)
During all the periods presented, the Business derived substantially all of
its revenues from the Procurement and Trafficking Agreement (the "Agreement")
with DoubleClick, Inc. ("DoubleClick"). Under the Agreement, DoubleClick is the
exclusive third-party provider of advertising services on specified pages within
the Business's web site. The agreement was amended on January 7, 1998 to extend
the term of the Agreement through December 1999, and to provide that either
party may terminate the Agreement, after July 1998, upon 90 days prior written
notice. The Agreement is expected to continue to account for a significant
portion of the Business's revenues. The termination of the Agreement, or any
development materially affecting the business or financial condition of
DoubleClick would have a material adverse effect on the Business's results of
operations and financial position. Accounts receivable from DoubleClick
comprised 77% and 77.8% of gross accounts receivable as of December 31 1997 and
1998, respectively.
BUSINESS RISKS
The Business is subject to risks and uncertainties common to growing
technology-based companies, including rapid technological change, growth and
commercial acceptance of the Internet, dependence on third-party technology, new
service introductions and other activities of competitors, dependence on key
personnel, international expansion, and limited operating history.
CASH
Cash received from operations by the Business is swept by Compaq or Digital
and recorded as reductions of net contribution from owner; disbursements made by
Compaq or Digital on behalf of the Business are recorded as increases to net
contribution from owner.
PROPERTY AND EQUIPMENT
Property and equipment were recorded at fair market value at the date of the
acquisition by Compaq. Minor replacements, maintenance and repairs are charged
to current operations. Depreciation is computed by applying the straight-line
method over the estimated useful lives of the related assets as follows:
<TABLE>
<CAPTION>
Estimated
Useful Lives
In Years
----------------
<S> <C>
Machinery and equipment 5-10
Furniture and fixtures 3-10
Buildings and improvements 10-33
</TABLE>
Leasehold improvements are amortized over the shorter of the useful life of
the improvement or the life of the related lease.
F-8
<PAGE>
ALTAVISTA
NOTES TO FINANCIAL STATEMENTS
(Continued)
REVENUE RECOGNITION
The Business's revenues are derived primarily from short term advertising
contracts negotiated by DoubleClick in accordance with the terms of the
Agreement. The Business records as revenues its contractual percentage of the
total revenues generated from the delivery of advertisements. Such revenues are
recognized in the periods in which the advertisement is delivered, provided that
no significant obligations remain and collection of the resulting receivable is
probable. To the extent DoubleClick does not collect billings from the
advertisers, or grants additional discounts, the Business is at risk for its
contractual percentage of such bad debts and additional discounts. Provisions
for bad debts and additional discounts are provided at the time of revenue
recognition based upon historical experience and current economic conditions.
Net revenues derived from the Agreement represented 22%, 58%, 68%, and 74% of
the Business's total net revenues for the years ended December 31, 1996 and 1997
and for the period January 1, 1998 through June 11, 1998, and for the period
June 12, 1998 to December 31, 1998, respectively.
The Business has recently entered into agreements with partners whereby the
Business receives a percentage of revenues generated by the partners through
e-Commerce transactions. Such revenues are recognized by the Business upon
notification from the partners of revenues earned by the Business and, to date,
have not been significant.
Also included in revenue is the exchange by the Business of advertising space
on the Business' web site for reciprocal advertising space or traffic in other
web sites or receipt of services. Revenue from these transactions is recognized
during the period in which the advertisements are placed and are recorded at the
lower of estimated fair value of the service received or the estimated fair
value of the advertisement given. Revenues from these transactions represented
7% and 5% of total net revenues for the period January 1, 1998 through June
11, 1998 and for the year ended December 31, 1997, respectively. Revenues for
barter transactions were immaterial for the period from June 12, 1998 through
December 31, 1998 and for the year ended December 31, 1996.
DEFERRED REVENUE
Deferred revenue primarily comprises cash collections in advance of revenue
associated with certain contracts and is recognized at the time the Business's
obligations under the contracts are fulfilled.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of the Company's financial instruments, which include
accounts receivable, accounts payable, accrued expenses and notes payable
approximate their fair values at December 31, 1997 and 1998.
INTANGIBLE ASSETS
Intangible assets primarily consist of trademarks and goodwill resulting from
the "pushdown" of the fair market value of the intangible assets attributable to
the Business as recorded on Compaq's books resulting from the acquisition of
Digital. Intangible assets also relate to the Business's purchase of Universal
Resource Locators ("URL"). Intangible assets are being amortized on a straight-
line basis over their estimated useful lives of three years.
IMPAIRMENT OF LONG-LIVED ASSETS
The Business reviews for the impairment of long-lived assets and certain
identifiable intangibles whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. An impairment loss
would be recognized when estimated undiscounted future cash flows expected to
result from the use of the asset and its eventual disposition is less than its
carrying amount. The Business has not identified any such impairment losses.
F-9
<PAGE>
ALTAVISTA
NOTES TO FINANCIAL STATEMENTS
(Continued)
INVESTMENTS
Compaq obtained equity interests in one privately held company which is
intended to be contributed to the Business. The investment resulted in the
Business owning less than 20% of the investee. Accordingly, the investment is
accounted for under the cost method. The investment was purchased near December
31, 1998, therefore, its carrying value approximates fair value. For non-quoted
investments, the Business's policy is to regularly review the assumptions
underlying the operating performance and cash flow forecasts in assessing the
carrying values.
PRODUCT DEVELOPMENT
Product development costs are expensed as incurred. Software development
costs subsequent to the establishment of technological feasibility are
capitalized and amortized to cost of software. Based upon the Business's
product development process, technological feasibility is established upon
completion of a working model. Costs incurred by the Business between
completion of the working model and the point at which the product is ready for
general release have been insignificant.
ADVERTISING EXPENSE
The Business expenses advertising costs the first time the advertisement is
published or broadcasted. Included in sales and marketing is approximately $0,
$2,339,000, $2,465,500 and $2,880,000 for the years ended December 31, 1996 and
1997 and for the period January 1, 1998 through June 11, 1998, and for the
period June 12, 1998 to December 31, 1998, respectively.
INTEREST EXPENSE
Interest expense represented $32,000, $114,000, $79,000 and $221,000 for the
years ended December 31, 1996 and 1997 and for the period January 1, 1998
through June 11, 1998, and for the period June 12, 1998 to December 31, 1998,
respectively. There was no direct interest expense incurred by the Business
until the purchase of the URL in July 1998 (Note 3). Prior to that date,
interest expense corresponded to an allocation of Digital's or Compaq's
worldwide interest expense based upon the Business' proportionate share of total
assets. Management believes that this method provides a reasonable basis for
allocation within the Business' historical statement of operations.
INCOME TAXES
The Business was not a separate taxable entity for federal, state or local
income tax purposes and its operations are included in the consolidated Digital
or Compaq tax returns. The Business accounts for income taxes under the
separate return method in accordance with SFAS No. 109, "Accounting for Income
Taxes." Under the separate return method, deferred tax assets generated from
operating losses required a full valuation allowance because given the history
of operating losses, realizability of such tax benefit is not probable.
STOCK-BASED COMPENSATION PLANS
As permitted under SFAS No. 123, "Accounting for Stock-Based Compensation,"
the Business accounts for its stock-based compensation plans using the intrinsic
value method prescribed by Accounting Principals Board Opinion No. 25,
Accounting for Stock Issued to Employees (APB 25). Under APB 25, no stock
compensation expense has been recorded for any of the periods presented in the
accompanying financial statements.
EARNINGS PER SHARE
The Business is not a separate legal entity and has no historical capital
structure. Therefore, historical earnings per share have not been presented in
the financial statements.
F-10
<PAGE>
ALTAVISTA
NOTES TO FINANCIAL STATEMENTS
(Continued)
COMPREHENSIVE INCOME
The Business has adopted the provisions of SFAS No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes standards for reporting
comprehensive income and its components in financial statements. Comprehensive
income, as defined, includes all changes in equity (net assets) during a period
from non-owner sources. To date, the Business has not had any transactions that
are required to be reported in comprehensive income.
SEGMENT INFORMATION
Effective January 1, 1998, the Business adopted the provisions of SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS 131"). The Business identifies its operating segments based on business
activities, management responsibility and geographical location. The Business
has organized its operations in a single operating segment providing delivery of
relevant and personalized e-Commerce offerings and local content. Further, the
Business derives the vast majority of its revenue from its operations in the
United States.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." The
new standard establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. SFAS No. 133 is effective for all fiscal
quarters of fiscal years beginning after June 15, 2000. The Business does not
expect SFAS No. 133 to have a material effect on its financial position or
results of operations.
In February 1998, the Accounting Standards Executive Committee ("AcSEC")
issued Statement of Position ("SoP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." SoP 98-1 establishes the
accounting for costs of software products developed or purchased for internal
use, including when such costs should be capitalized. The Business does not
expect SoP 98-1, which is effective for the Business beginning January 1, 1999,
to have a material effect on its financial position or results of operations.
In April 1998, the AcSEC issued SoP 98-5, "Reporting on the Costs of Start-Up
Activities." Start-up activities are defined broadly as those one-time
activities related to opening a new facility, introducing a new product or
service, commencing some new operation or organizing a new entity. Under SoP
98-5, the cost of start-up activities should be expensed as incurred. SoP 98-5
is effective for the Business beginning January 1, 1999 and the Business does
not expect its adoption to have a material effect on its financial position or
results of operations.
F-11
<PAGE>
NOTE 2 - -PROPERTY AND EQUIPMENT:
Property and equipment are summarized below (in thousands):
ALTAVISTA
NOTES TO FINANCIAL STATEMENTS
(Continued)
<TABLE>
<CAPTION>
Predecessor Business
---------------- ----------------
December 31,
----------------------------------
1997 1998
---------------- ----------------
<S> <C> <C>
Land $ - $ 3,491
Buildings - 8,451
Leasehold improvements 1,111 1,296
Machinery and equipment 11,002 11,480
Construction in-process 2,168 2,773
---------------- ----------------
14,281 27,491
Less: Accumulated depreciation 3,863 3,318
---------------- ----------------
Property and equipment, net $ 10,418 $ 24,173
---------------- ----------------
</TABLE>
Depreciation expense totaled $834,000, $2,660,000, $2,070,000, and $3,318,000
for the years ended December 31, 1996 and 1997 and for the period January 1,
1998 through June 11, 1998, and for the period June 12, 1998 to December 31,
1998, respectively.
NOTE 3 - INTANGIBLE ASSETS:
Intangible assets are summarized below (in thousands):
<TABLE>
<CAPTION>
Predecessor Business
---------------- ----------------
December 31,
----------------------------------
1997 1998
---------------- ----------------
<S> <C> <C>
Goodwill $ - $ 255,600
Trademarks 75 18,500
Purchased URL sites - 3,422
---------------- ----------------
75 277,522
Less: accumulated amortization 44 51,034
---------------- ----------------
$ 31 $ 226,488
---------------- ----------------
</TABLE>
COMPAQ ACQUISITION
On June 11, 1998, Compaq consummated its acquisition of Digital. The
purchase price was allocated to the assets acquired and liabilities assumed
based on Compaq's estimates of fair value. The fair value assigned to
intangible assets acquired was based on a valuation prepared by an independent
third-party appraisal company.
PURCHASED URL
In March 1996, the Business entered into an agreement pursuant to which the
other party assigned to the Business all of its right, title and interest in and
to the AltaVista URL and the Business agreed to grant the other party a
nonexclusive license to use the AltaVista URL as part of their corporate name.
In July 1998, the other party agreed to sell, transfer and assign to the
Business all of its rights in and to the AltaVista URL granted under the
original agreement for an aggregate consideration of approximately $3.3 million.
The consideration paid consists of cash and a note payable of $2,750,000
(Note 5).
F-12
<PAGE>
ALTAVISTA
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 4 - INVESTMENT:
In December 1998, Compaq purchased 500,000 shares of Series B preferred stock
of Centraal Corporation ("Centraal"). The total consideration paid of
approximately $500,000 has been included in long-term investments from the date
of acquisition and represents an ownership of less than 10%. This investment is
accounted for under the cost method of accounting.
NOTE 5 - LONG-TERM DEBT:
Long-term debt consists of a note payable related to the purchased URL which
bears interest at an annual rate of 7%. The note plus accrued interest is
payable in twelve quarterly installments commencing October 1, 1998.
Principal payments due under the note are as follows:
<TABLE>
<CAPTION>
<S> <C>
1999 $ 658
2000 932
2001 724
---------
Total $ 2,314
=========
</TABLE>
NOTE 6 - RELATED PARTY TRANSACTIONS:
The Business uses Digital or Compaq manufactured equipment for its operations
which represents 60% of the total assets at December 31, 1997 and are not
significant with respect to total assets at December 31, 1998. Digital
manufactured equipment is recorded at fair market value at the date of
acquisition.
ALLOCATED COSTS
The amounts allocated to the Business and included in the accompanying
statement of operations are as follows (in thousands):
<TABLE>
<CAPTION>
Predecessor Business
------------------------------------------------------- ----------------
Period from Period from
Year Ended January 1, 1998 June 12, 1998
December 31, through through
---------------------------------- June 11, December 31,
1996 1997 1998 1998
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Research and engineering expenses $ 764 $ 558 $ 318 $ 388
Selling and marketing expenses 600 600 - -
General and administrative expenses 1,001 1,082 631 973
Interest expense 32 114 79 145
</TABLE>
Beginning January 1, 1998, selling and marketing expenses were not allocated
from Compaq because these expenses were incurred directly by the Business.
NOTE 7 - INCOME TAXES:
Given the recent history of operating losses, deferred tax assets generated
from operating losses required a full valuation allowance because realizability
of such tax benefit is not probable. Accordingly, the accompanying statement of
operations includes no benefit for income taxes.
F-13
<PAGE>
ALTAVISTA
NOTES TO FINANCIAL STATEMENTS
(Continued)
Deferred tax assets and liabilities at December 31, 1998 and 1997 are
comprised of the following (in thousands):
<TABLE>
<CAPTION>
Predecessor Business
---------------- ----------------
December 31,
----------------------------------
1997 1998
---------------- ----------------
<S> <C> <C>
Receivable allowances $ 655 $ 1,249
Capitalized research and development costs 1,752 1,534
Loss carryforwards 3,615 10,288
Property, plant and equipment - 2,868
Other 14 201
---------------- ----------------
Gross deferred tax assets 6,036 16,140
---------------- ----------------
Intangible assets - (6,036)
Property, plant and equipment (387) -
---------------- ----------------
Gross deferred tax liabilities (387) (6,036)
---------------- ----------------
Deferred tax asset valuation allowance (5,649) (10,104)
---------------- ----------------
$ - $ -
---------------- ----------------
</TABLE>
Net operating loss carryforwards will remain with Compaq after the assets and
liabilities of the Business are transferred to the Company.
NOTE 8 - MARKETING AGREEMENTS:
PREMIER PROVIDER AGREEMENT WITH NETSCAPE
In June 1998, the Business entered into a Premier Provider agreement (the
"Service Agreement") with Netscape Corporation ("Netscape"), whereby Netscape
guaranteed a minimum number of exposures (as defined) for the Business's search
and directory service on the Netscape's Page, as defined. The Service Agreement
is for one year and the Business's minimum financial commitment under the
Service Agreement is $14,150,000, of which $3,650,000 was paid upon execution of
the Service Agreement and $3,500,000 was paid on July 15 and December 15, 1998.
The remaining payment to satisfy the minimum financial commitment is payable on
March 31, 1999. All exposures delivered above the minimum number of impressions
will be payable at specified contractual rates. Amounts included in sales and
marketing expense in the accompanying financial statements related to the
Service Agreement are approximately $1,550,000 for the period from the date of
the Service Agreement through June 11, 1998 and $10,000,000 for the period from
June 12, 1998 through December 31, 1998.
The Business's primary obligation under the Service Agreement is to display
certain Netscape buttons and/or information prominently on the Business's home
page and pages linked thereto. Other obligations include the implementation of
certain technologies to maintain compatibility with the Netscape's browser and
the placement of certain hypertext links for keywords searched on the Business's
Web site. Effective January 11, 1999, the Business terminated the Service
Agreement without penalty.
F-14
<PAGE>
ALTAVISTA
NOTES TO FINANCIAL STATEMENTS
(Continued)
PREMIER SEARCH SERVICES AGREEMENT WITH MICROSOFT
In September 1998, the Business and Microsoft (the "Portal") entered into a
one year Premier Search Services Agreement (the "Search Services Agreement")
whereby the Portal guaranteed a minimum number of impressions on the Portal's
various internet search versions and Web site (referred to as the "Guaranteed
Impressions"). For the Guaranteed Impressions, the Business shall pay $18
million, in four equal payments of $4.5 million as follows: the first payment
was paid upon execution, the second, third and fourth payments are due 90 days,
180 days and 270 days, respectively after September 16, 1998. All impressions
delivered above the Guaranteed Impressions will be payable at specified
contractual rates, not to exceed a total amount paid of $23 million. Included
in sales and marketing expense in the accompanying financial statements related
to the Search Services Agreement for the period from June 12, 1998 to December
31, 1998 is approximately $6.2 million.
NOTE 9 - PENSIONS:
Upon consummation of the acquisition of Digital by Compaq, Compaq assumed
certain of Digital's defined benefit and defined contribution plans of which
employees of the Business were participants. The Business' employees who were
eligible to participate in the Digital plans at the time of the acquisition
continue to be eligible to participate in these plans. The benefits generally
are based on years of service and compensation during the employee's career.
Pension cost is based on estimated benefit formulas.
Additionally, Compaq assumed the defined benefit postretirement plans that
provide medical and dental benefits for Business' retirees and their eligible
dependents in the United States.
The statements of operations include allocated costs as fringe benefits
included in general and administrative expense based upon an average cost per
employee for the retirement plan and are not significant for any periods
presented.
NOTE 10 - STOCK OPTION PLANS:
The following disclosure related to stock-based compensation includes
information applicable to the Business derived from the historic books and
records of Digital through June 11, 1998 and Compaq thereafter.
Included in the acquisition of Digital by Compaq on June 11, 1998, all
outstanding Digital options were cancelled and Compaq issued, in exchange, a
fully vested and exercisable option to purchase shares of Compaq stock. The
Compaq options are subject to all other terms and conditions as applicable
immediately prior to the acquisition.
F-15
<PAGE>
ALTAVISTA
NOTES TO FINANCIAL STATEMENTS
(Continued)
The following table summarizes activities under the stock option plans
related to employees of the Business:
<TABLE>
<CAPTION>
Weighted
Price Average Price
Shares Per Share Per Share
--------------- ---------------- ----------------
<S> <C> <C> <C>
Digital Options
Options outstanding, December 31, 1995: 25,894 $ 37.30
Options granted 38,890 $ 0.00 - 54.13 38.18
Options lapsed or canceled (1,000) 56.00 56.00
Options exercised (5,130) 0.00 - 22.88 5.53
--------------- ----------------
Options outstanding, December 31, 1996: 58,654 40.32
Options granted 24,000 46.69 - 51.69 47.31
Options lapsed or canceled
Options exercised (4,931) 19.69 - 37.75 24.07
--------------- ----------------
Options outstanding, December 31, 1997: 77,723 43.49
Options granted
Options lapsed or canceled - -
Options exercised (1,790) 19.69 - 37.75 21.65
--------------- ----------------
Options outstanding, June 11, 1998 75,933 44.00
--------------- ----------------
Compaq Options
Options granted in the acquisition of Digital 150,997 9.90 - 39.23 22.03
Options granted 109,500 35.88 35.88
Options lapsed or canceled (2,386) 36.71 36.71
Options exercised (94,001) 9.90 - 23.48 20.69
--------------- ----------------
Options outstanding, December 31, 1998 164,110 $ 31.82
--------------- ----------------
</TABLE>
F-16
<PAGE>
ALTAVISTA
NOTES TO FINANCIAL STATEMENTS
(Continued)
The following table summarizes significant ranges of outstanding and
exercisable options at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------------- ----------------------------------
Weighted
Average Weighted Weighted
Range of Contractual Average Average
Exercise Remaining Exercise Exercise
Prices Options Life (Years) Price Options Price
- ----------------- --------------- --------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
10.01 - 15.00 3,802 2.42 $ 11.50 3,802 $ 11.50
15.01 - 20.00 15,909 7.67 18.98 15,909 18.98
20.01 - 25.00 5,668 7.33 22.66 5,668 22.66
25.01 - 30.00 27,044 7.42 27.06 27,044 27.06
over 30.00 111,687 9.51 35.95 9,487 36.65
--------------- --------------- ---------------- ---------------- ----------------
164,110 8.74 $ 31.81 61,910 $ 19.48
--------------- --------------- ---------------- ---------------- ----------------
</TABLE>
The weighted average fair value per share of stock based compensation issued
during the years ended December 31, 1996 and 1997 and during the period from
June 12, 1998 through December 31, 1998 was $15.53, $17.23, and $13.53,
respectively. There were no options issued during the period from January 1,
1998 to June 11, 1998. The fair value for these options was estimated using the
Black-Scholes model with the following weighted average assumptions.
<TABLE>
<CAPTION>
Assumptions Table:
Predecessor Business
---------------------------------------------------- ----------------
Year Ended Period from
December 31, Period from June 12, 1998
---------------------------------- January 1, 1998 Through
1996 1997 Through December 31,
---------------- ---------------- June 11, 1998 1998
Digital Digital Digital Compaq
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Expected option life (in years) 4 4 2 2
Risk-free interest rate 6.2% 6.3% 5.5% 4.6%
Volatility 35.0% 35.0% 35.0% 33.5%
Dividend yield 0.0% 0.0% 0.0% 0.2%
</TABLE>
The table that follows summarizes the pro forma effect of net loss if the
fair values of stock based compensation had been recognized in the period
presented as compensation expense on a straight-line basis over the vesting
period of the grant. The following pro forma effect on net loss for the periods
presented is not representative of the pro forma effect on net loss in future
years because it does not take into consideration pro forma compensation expense
related to grants made prior to 1995.
F-17
<PAGE>
ALTAVISTA
NOTES TO FINANCIAL STATEMENTS
(Continued)
(In thousands)
<TABLE>
<CAPTION>
Predecessor Business
---------------------------------------------------- ---------------
Period from Period from
Year Ended January 1, 1998 June 12, 1998
December 31, through through
---------------------------------- June 11, December 31,
1996 1997 1998 1998
---------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Net loss:
As reported $ (7,314) $ (5,734) $ (2,493) $ (69,566)
Pro forma (7,375) (5,904) (2,603) (69,665)
</TABLE>
NOTE 11 - SUBSEQUENT EVENTS:
ACQUISITIONS
Compaq acquired Shopping.com effective February 15, 1999. The aggregate
purchase price of $256.9 million consisted primarily of $218.9 million in cash,
the issuance of employee stock options with a fair value of $32 million and
other acquisition costs.
Compaq also acquired Zip2 on April 1, 1999. The aggregate purchase price of
$339.1 million consisted of $307.2 million in cash, the issuance of
approximately 999,000 employee stock options with a fair value of $25.9 million
and other acquisition costs.
Both acquisitions were intended to be included in the Business. On June 29,
1999, Compaq entered into a Purchase and Contribution Agreement (the "Purchase
Agreement") with CMGI whereby Compaq agreed to effectively sell controlling
interests in the Business including Zip2 and Shopping.com.
PROCUREMENT AND TRAFFICKING AGREEMENT WITH DOUBLECLICK
Effective January 1, 1999, the Agreement has been amended so that the
Business could form its internal sales force to sell advertisements directly to
advertisers. DoubleClick no longer has the exclusivity to sell advertisements
on the Business's web site. DoubleClick only retains the exclusivity for
delivering through its proprietary computer system the advertisements negotiated
either by DoubleClick or by the Business. Under the new agreement, the Business
is bearing substantially the entire economic risk of the transaction. This
agreement is for a term of three years from the effective date and can be
cancelled by either party with a 90 days notice period.
PREMIER SEARCH SERVICES AGREEMENT WITH MICROSOFT
The Search Services Agreement was amended in February 1999. Under the
amended Search Services Agreement, Microsoft guaranteed a minimum number of
impressions for a total consideration of $16.5 million. No additional payment
is due if the number of impressions delivered exceeds the minimum number of
impressions. A payment of $4.5 million has been made as of December 31, 1998.
A second payment of $12 million is due after the effective date of the Search
Services Agreement.
STOCK OPTION PLAN
On May 28, 1999, the Company adopted the AltaVista Company 1999 Stock Option
Plan (the "Plan"). The Plan will be administered by a committee of the Board
designated by the Board of Directors to administer the Plan and composed of
individuals who are, to the extent necessary, "non-employee directors".
F-18
<PAGE>
ALTAVISTA
NOTES TO FINANCIAL STATEMENTS
(Continued)
Subject to the terms of the Plan and applicable law, the committee will have
the full authority to (a) designate participants; (b) determine the type, size,
terms and conditions of awards made to participants; and (c) establish rules
and regulations under and make any other determination necessary or desirable
for the administration of the Plan. The number of shares with respect to which
awards may be granted under the Plan is 20,000,000. As of June 29, 1999, there
were 9,769,554 options outstanding under the Plan. Such options were issued at
below fair market value. The corresponding compensation expense of
approximately $169 million will be amortized over the vesting period from the
date of grant.
F-19
<PAGE>
AltaVista Business
Combined Financial Statements
March 31, 1999 and 1998
F-20
<PAGE>
AltaVista Business
INDEX TO Combined FINANCIAL STATEMENTS
Page
----
Combined Balance Sheet ............................................ F-2
Combined Statement of Operations .................................. F-3
Combined Statement of Changes in Owner's Net Investment ........... F-4
Combined Statement of Cash Flows .................................. F-5
Notes to Combined Financial Statements ............................ F-6
F-21
<PAGE>
AltaVista Business
Combined Balance Sheets
(in thousands)
<TABLE>
<CAPTION>
December 31, March 31,
1998 1999
---------------- ---------------
<S> <C> <C>
(unaudited)
Assets
Current assets:
Cash and cash equivalents $ - $ 2,586
Accounts receivable, net 12,819 13,070
Prepaid expenses 350 2,782
---------------- ---------------
Total current assets 13,169 18,438
Property, plant and equipment, less accumulated depreciation 24,173 30,077
Goodwill and other intangible assets, net 226,488 468,205
Investments 500 13,980
Receivable from Compaq - 9,805
Other noncurrent asset - 560
---------------- ---------------
Total assets $ 264,330 $ 541,065
---------------- ---------------
Liabilities and Owner's Net Investment
Current liabilities:
Long-term debt, current portion $ 658 $ 1,170
Accounts payable 691 8,629
Salaries, wages and related items 455 527
Accrued partner fees 7,656 1,092
Deferred revenue 150 -
Other current liabilities 774 15,078
Capital lease obligation, current portion - 248
---------------- ---------------
Total current liabilities 10,384 26,744
---------------- ---------------
Commitments and contingencies
Long-term debt 1,656 1,429
Capital lease obligation - 94
---------------- ---------------
Net contribution from owner 321,856 633,054
Accumulated deficit (69,566) (120,256)
---------------- ---------------
Owner's net investment 252,290 512,798
---------------- ---------------
Total liabilities and owner's net investment $ 264,330 $ 541,065
---------------- ---------------
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-22
<PAGE>
AltaVista Business
Combined Statements of Operations
(in thousands)
<TABLE>
<CAPTION>
Predecessor Business
----------- --------
Three Months Three Months
Ended Ended
March 31, March 31,
1998 1999
--------------- ----------------
(unaudited) (unaudited)
<S> <C> <C>
Advertising and service revenue $ 6,514 $ 16,705
Product revenue - 2,431
--------------- ----------------
Total revenue 6,514 19,136
--------------- ----------------
Cost of advertising and service revenue 1,514 5,200
Cost of product revenue - 2,917
--------------- ----------------
Total cost of revenue 1,514 8,117
--------------- ----------------
Gross profit (loss) 5,000 11,019
--------------- ----------------
Operating expenses:
Sales and marketing 2,289 19,672
Product development 2,928 4,627
General and administrative 961 2,645
Amortization of intangible assets - 34,667
--------------- ----------------
Loss from operations (1,178) (50,592)
Interest expense 40 98
--------------- ----------------
Loss before income taxes (1,218) (50,690)
Income taxes - -
--------------- ----------------
Net loss $ (1,218) $ (50,690)
--------------- ----------------
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-23
<PAGE>
AltaVista Business
Combined Statement of Changes in Owner's Net Investment
(in thousands)
<TABLE>
<CAPTION>
Net Total
Contribution Accumulated Owner's Net
from Owner Deficit Investment
---------------- --------------- ---------------
<S> <C> <C> <C>
Balance, December 31, 1998 $ 321,856 $ (69,566) $ 252,290
Net loss (unaudited) - (50,690) (50,690)
Net contribution from owner (unaudited) 311,198 - 311,198
---------------- --------------- ---------------
Balance, March 31, 1999 (unaudited) $ 633,054 $ (120,256) $ 512,798
---------------- --------------- ---------------
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-24
<PAGE>
AltaVista Business
Combined Statements of Cash Flows
<TABLE>
<CAPTION>
Predecessor Business
----------- --------
Three Months Three Months
Ended Ended
March 31, March 31,
1998 1999
--------------- ----------------
(unaudited) (unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (1,218) $ (50,690)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 973 36,266
Provision for bad debts and concessions 457 1,181
Changes in operating assets and liabilities:
Accounts receivable (1,823) (699)
Prepaid expenses (266) (2,050)
Receivable from Compaq - (9,805)
Accounts payable (498) 772
Salaries, wages and related items 321 72
Deferred revenue - (150)
Other current liabilities (200) (5,468)
--------------- ----------------
Net cash used in operating activities (2,254) (30,571)
--------------- ----------------
Cash flows from investing activities:
Purchase of investments - (13,480)
Purchases of property and equipment (2,734) (5,585)
Cash used in business combination, net of cash received - (224,193)
--------------- ----------------
Net cash used in investing activities (2,734) (243,258)
--------------- ----------------
Cash flows from financing activities:
Repayment of long-term debt - (2,715)
Change in contribution from owner 4,988 279,130
--------------- ----------------
Net cash provided by financing activities 4,988 276,415
--------------- ----------------
Net increase in cash - 2,586
Cash at beginning of period - -
Cash and cash equivalents at end of period $ - $ 2,586
--------------- ----------------
Non-cash investing activities:
Owner's stock options issued for acquisition $ - $ 32,068
--------------- ----------------
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-25
<PAGE>
AltaVista Business
Notes to Combined Financial Statements
Note 1 - Basis of Presentation and Summary of Significant Accounting Policies:
Basis of presentation
On June 29, 1999, Compaq Computer Corporation ("Compaq") announced it
entered into an agreement to sell to CMGI, Inc. ("CMGI") AltaVista and its
related properties, including Shopping.com and Zip2 (the "AltaVista Business").
The AltaVista Business provides search and navigation technology and
personalized e-Commerce offerings and local content trough an integrated network
of new media and e-Commerce partners.
The AltaVista Business operations were conducted by AltaVista, a division
of Digital Equipment Corporation ("Digital") through June 11, 1998 and of Compaq
thereafter, throughout the period covered by the Combined Financial Statements
and by Shopping.com, a wholly owned subsidiary of Compaq, from the date of its
acquisition. The combined financial statements of the AltaVista Business are
derived from the historic books and records of Shopping.com, from the historic
books and records of Digital through June 11, 1998, and from the historical
books and records of Compaq thereafter as a result of the acquisition of Digital
by Compaq.
The AltaVista Business has incurred recurring losses from operations
through March 31, 1999. Compaq has committed to provide the funds required for
the conduct of the Business's operations at least through December 31, 1999 or
to the date, if earlier, on which it ceases to be the controlling shareholder.
The historical operating results may not be indicative of future results.
Principles of consolidation
Effective February 15, 1999, Compaq completed a cash tender offer for
Shopping.com, an online retailer that offers users an array of consumer products
to buy. This acquisition is intended to be included in the AltaVista Business.
Accordingly, Shopping.com is included in these combined financial statements
from the date of acquisition. All significant intercompany balances and
transactions have been eliminated in consolidation.
Cash
Cash received from operations by the AltaVista Business is swept by Compaq
or Digital and recorded as reductions of net contribution from owner;
disbursements made by Compaq or Digital on behalf of the AltaVista Business are
recorded as increases to net contribution from owner.
Effective as of the date of the acquisition of Shopping.com, these combined
financial statements include the cash and cash equivalent balances carried by
Shopping.com. The AltaVista Business considers all highly-liquid investments of
Shopping.com with an original maturity of three months or less to be cash
equivalents.
Revenue recognition
The AltaVista Business's revenues are derived primarily from short-term
advertising contracts negotiated by DoubleClick in accordance with the terms of
the Procurement and Trafficking Agreement (the "Agreement"). The AltaVista
Business recorded as revenues its contractual percentage of the total revenues
generated from the delivery of advertisements. Effective January 1, 1999, the
AltaVista Business renegotiated the Agreement whereby the AltaVista Business is
bearing the economic risk of the advertising transactions. Accordingly, the
AltaVista Business now records the full sales amount as revenue upon delivery of
advertisements. The amount payable to DoubleClick is reported as selling and
marketing expenses.
Pursuant to the acquisition of Shopping.com, these combined financial
statements include revenues resulting from the sales of consumer products. The
AltaVista Business recognizes revenue for such transactions at the time the
vendor ships the product to the customer. The AltaVista Business provides an
allowance for sales returns based on historical experience. To date, the
Business' sales returns have not been material.
F-26
<PAGE>
AltaVista Business
Notes to Combined Financial Statements
(Continued)
Intangible assets
Intangible assets consist of trademarks and goodwill resulting from the
"pushdown" of the fair market value of the intangible assets attributable to the
AltaVista Business as recorded on Compaq's books as part of the acquisition of
Digital and from the acquisition of Shopping.com. Intangible assets are being
amortized on a straight-line basis over their estimated useful lives of three
years.
Impairment of long-lived assets
The AltaVista Business reviews for the impairment of long-lived assets and
certain identifiable intangibles whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. An
impairment loss would be recognized when estimated undiscounted future cash
flows expected to result from the use of the asset and its eventual disposition
is less than its carrying amount. The Alta Vista Business has not identified
any such impairment losses.
Investments
Starting in 1998, Compaq obtained equity interests in several privately
held companies which are intended to be included in the AltaVista Business.
These investments resulted in the AltaVista Business owning less than 20% of the
respective investees and, accordingly, are accounted for under the cost method.
These investments were purchased recently, therefore, their carrying values
approximate fair values. For these non-quoted investments, the AltaVista
Business's policy is to regularly review the assumptions underlying the
operating performance and cash flow forecasts in assessing the carrying values.
The AltaVista Business identifies and records impairment losses on long lived
assets when events and circumstances indicate that such assets might be
impaired. To date, no such impairment has been recorded.
Interim results
The interim combined financial statements as of March 31, 1999 and for the
three months ended March 31, 1998 and 1999, have been prepared on the same basis
as the financial statements as of December 31, 1998 and for the period from
January 1, 1998 to June 11, 1998 and from June 12, 1998 to December 31, 1998,
respectively, and, in the opinion of management, reflect all adjustments, which
include only normal recurring adjustments, necessary to present fairly the
AltaVista Business' financial position, results of operations and cash flows as
of March 31, 1999 and for the three months ended March 31, 1998 and 1999. The
results for the three months ended March 31, 1999 are not necessarily indicative
of the results to be expected for the year ending December 31, 1999.
Recent accounting pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." The new
standard establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. SFAS No. 133 is effective for all fiscal
quarters of fiscal years beginning after June 15, 2000. The AltaVista Business
does not expect SFAS No. 133 to have a material effect on its financial position
or results of operations.
Note 2 - Acquisitions:
Compaq acquisition
On June 11, 1998, Compaq consummated its acquisition of Digital. The
purchase price was allocated to the assets acquired and liabilities assumed
related to the Business based on Compaq's estimates of fair value. The fair
value assigned to intangible assets acquired was based on a valuation prepared
by an independent third party appraisal company and included intangibles
aggregating $274.1 million (goodwill of $255.6 million and trademark of $18.5
million).
F-27
<PAGE>
AltaVista Business
Notes to Combined Financial Statements
(Continued)
Shopping.com acquisition
Effective February 15, 1999, Compaq completed its acquisition of
Shopping.com which is intended to be contributed to the AltaVista Business. The
aggregate purchase price of $256.9 million consisted of $218.9 million in cash,
the issuance of employee stock options with a fair value of $32 million and
other acquisition costs. The transaction was accounted for under the purchase
method of accounting. The results of operations of the acquired entity and the
estimated fair market values of the acquired assets and liabilities have been
included in the AltaVista Business's combined financial statements from the date
of acquisition. The aggregate purchase price including liabilities assumed has
been allocated to the assets acquired, consisting primarily of goodwill of
approximately $271 million that is being amortized over a three year period. The
purchase price allocation was based on the results of an independent third party
appraisal.
At the time of the acquisition by Compaq, Shopping.com was a defendant in
various litigation matters for which Compaq agreed to assume any ultimate
liability for such matters. Any unrecorded costs incurred in connection with
resolving these matters will, if incurred within one year of the acquisition, be
added to the purchase accounting allocation or if incurred thereafter, charged
to expense. An equal amount will be recorded as a capital contribution from
Compaq.
The following unaudited pro forma consolidated amounts give effect to the
acquisition of the AltaVista Business and the subsequent acquisition of
Shopping.com as if they occurred on January 1, 1998:
<TABLE>
<CAPTION>
Three Months
Year Ended Ended
December 31, March 31,
1998 1999
---------------- ----------------
<S> <C> <C>
Net revenues $ 45,261 $ 22,338
---------------- ----------------
Net loss $ 279,941 $ 68,820
---------------- ----------------
</TABLE>
CMGI acquisition
On June 29, 1999, Compaq entered into a Purchase and Contribution Agreement
(the "Purchase Agreement") whereby Compaq agreed to effectively sell controlling
interests in the AltaVista Business, including Shopping.com.
Note 3 - Intangible Assets:
<TABLE>
<CAPTION>
March 31,
----------
1999
----------
<S> <C>
Goodwill $ 526,284
Trademarks 20,000
Purchased URL sites 3,422
Other 4,200
-----------
553,906
Less: accumulated amortization 85,701
-----------
$ 468,205
-----------
</TABLE>
F-28
<PAGE>
AltaVista Business
Notes to Combined Financial Statements
(Continued)
Note 4 - Investments:
In December 1998, Compaq purchased on behalf of the Business 500,000 shares
of Series B preferred stock of Centraal Corporation ("Centraal"). The total
consideration paid of approximately $500,000 resulted in the AltaVista Business
owning less than 20% of the investee.
In January 1999, Compaq purchased on behalf of the Business 2,023,635
shares of Series D preferred stock of Virage, Inc. ("Virage"). The total
consideration paid of approximately $3,480,000 resulted in the AltaVista
Business owning less than 20% of the investee.
In March 1999, Compaq purchased on behalf of the Business 2,000,000 shares
of Series B preferred stock of Free PC.com for approximately $10,000,000.
Pursuant to the Purchase Agreement, these three investments are intended to
be included in the AltaVista Business.
Note 5 - Subsequent Events:
Compaq acquired Zip2 on April 1, 1999. The aggregate purchase price of
$339.1 million consisted of $307.2 million in cash, the issuance of employee
stock options with a fair value of $25.9 million and other acquisition costs.
Pursuant to the Purchase Agreement, Zip2 is intended to be included in the
AltaVista Business.
F-29
<PAGE>
EXHIBIT 99.2
Zip2 Corporation
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998
<PAGE>
ZIP2 CORP.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Accountants............... 2
Consolidated Balance Sheet...................... 3
Consolidated Statement of Operations............ 4
Consolidated Statement of Shareholders' Equity.. 5
Consolidated Statement of Cash Flows............ 6
Notes to Consolidated Financial Statements...... 7
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Zip2 Corp.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of shareholders' equity and of cash flows
present fairly, in all material respects, the financial position of Zip2 Corp.
and its 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.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
San Jose, California
April 2, 1999
2
<PAGE>
ZIP2 CORP.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
December 31,
----------------------------- March 31,
1997 1998 1999
-------------- -------------- -------------
(unaudited)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 22,367,000 $ 16,028,000 $ 12,435,000
Accounts receivable, net of allowance of $130,000 and $180,000 704,000 956,000 994,000
Receivable from Compaq - - 1,585,000
Prepaid expenses and other current assets 878,000 466,000 511,000
------------- ------------- ------------
Total current assets 23,949,000 17,450,000 15,525,000
Property and equipment, net 2,954,000 3,638,000 3,497,000
Goodwill, net 577,000 180,000 153,000
Other assets 460,000 535,000 812,000
------------- ------------- ------------
$ 27,940,00 $ 21,803,000 $ 19,987,000
============= ============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 390,000 $ 980,000 $ 348,000
Accrued liabilities 875,000 2,260,000 2,575,000
Deferred revenue 2,878,000 6,511,000 7,744,000
Notes payable, current 250,000 1,645,000 187,000
Payable to Compaq - - 7,883,000
Capital lease obligations, current 393,000 1,078,000 1,159,000
------------- ------------- ------------
Total current liabilities 4,786,000 12,474,000 19,896,000
Notes payable, long-term 263,000 5,058,000 -
Capital lease obligations, long-term 1,219,000 2,600,000 2,716,000
------------- ------------- ------------
6,268,000 20,132,000 22,612,000
------------- ------------- ------------
Commitments (Note 7)
Shareholders' Equity:
Convertible Preferred Stock, $0.001 par value;
issuable in series; aggregate liquidation amount $40,539,000;
12,000,000 shares authorized; 9,412,112 shares issued and
outstanding at December 31, 1997 and 1998 9,000 9,000 9,000
Common Stock: $0.001 par value; 20,000,000
shares authorized; 4,956,552 and 4,967,947 shares
issued and outstanding at December 31, 1997 and 1998 5,000 5,000 7,000
Additional paid-in capital 40,088,000 54,621,000 61,008,000
Notes receivable from shareholders (184,000) (323,000) (2,065,000)
Unearned compensation - (12,620,000) (14,492,000)
Accumulated deficit (18,246,000) (40,021,000) (47,092,000)
------------- ------------- ------------
Total shareholders' equity 21,672,000 1,671,000 (2,625,000)
------------- ------------- ------------
$ 27,940,000 $ 21,803,000 $ 19,987,000
============= ============= ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
ZIP2 CORP.
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31, Three Months Ended March 31,
----------------------------------------------- ----------------------------
1996 1997 1998 1998 1999
----------- ------------ ------------ ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Net revenues:
Service $ - $ 2,033,000 $ 4,058,000 $ 1,020,000 $ 1,953,000
Advertising - 61,000 910,000 42,000 329,000
----------- ------------ ------------ ----------- -----------
Total net revenues - 2,094,000 4,968,000 1,062,000 2,282,000
----------- ------------ ------------ ----------- -----------
Costs and expenses:
Cost of service revenues - 3,084,000 9,468,000 1,895,000 3,255,000
Sales and marketing 1,430,000 7,661,000 9,184,000 2,647,000 1,722,000
Product development 1,703,000 3,475,000 4,426,000 1,065,000 1,282,000
General and administrative 847,000 2,567,000 4,105,000 707,000 1,092,000
----------- ------------ ------------ ----------- -----------
Total costs and expenses 3,980,000 16,787,000 27,183,000 6,314,000 7,351,000
----------- ------------ ------------ ----------- -----------
Loss from operations (3,980,000) (14,693,000) (22,215,000) (5,252,000) (5,069,000)
Interest Income 63,000 478,000 684,000 180,000 -
Interest and other expense (10,000) (63,000) (244,000) - (2,002,000)
----------- ------------ ------------ ----------- -----------
Net loss $(3,927,000) $(14,278,000) $(21,775,000) $(5,072,000) $(7,071,000)
----------- ------------ ------------ ----------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
ZIP2 CORP.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Convertible Preferred Stock Common Stock Additional
------------------------------------------------------------- Paid-in
Shares Amount Shares Amount Capital
------------- ------------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1995 - $ - 2,189,600 $ 2,000 $ 16,000
Sale of Common Stock for cash and
conversion of notes payable - - 284,350 - 29,000
Sale of Series A Preferred Stock for cash and
conversion of notes payable, net 3,734,732 4,000 - - 3,571,000
Sale of Series B Preferred Stock for cash and
conversion of notes payable, net 2,420,600 2,000 - - 12,049,000
Exercise of stock options for cash
and notes receivable - - 1,706,086 2,000 170,000
Net loss - - - - -
------------- ------------- ------------- ------------- ------------
Balances at December 31, 1996 6,155,332 6,000 4,180,036 4,000 15,835,000
Sale of Series B Preferred Stock for cash, net 50,000 - - - 236,000
Pantheon acquisition, net - - 501,167 1,000 230,000
Sale of Series C Preferred Stock for cash and
conversion of notes payable, net 3,206,780 3,000 - - 23,697,000
Exercise of stock options for cash
and notes receivable - - 275,349 - 90,000
Net loss - - - - -
------------- ------------- ------------- ------------- ------------
Balances at December 31, 1997 9,412,112 9,000 4,956,552 5,000 40,088,000
Exercise of stock options for cash
and notes receivable - - 1,182,122 1,000 806,000
Issuance of warrants in conjunction with
subordinated debt - - - - 560,000
Repurchases of unvested common stock - - (1,170,727) (1,000) (527,000)
Unearned compensation - - - - 13,694,000
Amortization of unearned compensation - - - - -
Net loss - - - - -
------------- ------------- ------------- ------------- ------------
Balances at December 31, 1998 9,412,112 9,000 4,967,947 5,000 54,621,000
Exercise of stock options for cash
and notes receivable - - 1,993,976 2,000 1,954,000
Unearned compensation - - - - 2,874,000
Amortization of unearned compensation - - - - -
Exercise of warrants in conjunction with
subordinated debt 142,921 - - - 1,310,000
Exercise of warrants - - 101,532 - 271,000
Repurchases of unvested common stock - - (80,436) - (22,000)
Payment for notes receivable - - - - -
Net loss - - - - -
------------- ------------- ------------- ------------- ------------
Balances at March 31, 1999 (unaudited) 9,555,033 $ 9,000 6,983,019 $ 7,000 $61,008,000
============= ============= ============= ============= ============
<CAPTION>
Notes Total
Receivable from Unearned Accumulated Shareholders'
Shareholders Compensation Deficit Equity
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Balances at December 31, 1995 $ - $ - $ (41,000) $ (23,000)
Sale of Common Stock for cash and
conversion of notes payable - - - 29,000
Sale of Series A Preferred Stock for cash and
conversion of notes payable, net - - - 3,575,000
Sale of Series B Preferred Stock for cash and
conversion of notes payable, net - - - 12,051,000
Exercise of stock options for cash
and notes receivable (137,000) - - 35,000
Net loss - - (3,927,000) (3,927,000)
--------------- --------------- --------------- ---------------
Balances at December 31, 1996 (137,000) - (3,968,000) 11,740,000
Sale of Series B Preferred Stock for cash, net - - - 236,000
Pantheon acquisition, net - - - 231,000
Sale of Series C Preferred Stock for cash and
conversion of notes payable, net - - - 23,700,000
Exercise of stock options for cash
and notes receivable (47,000) - - 43,000
Net loss - - (14,278,000) (14,278,000)
--------------- --------------- --------------- ---------------
Balances at December 31, 1997 (184,000) - (18,246,000) 21,672,000
Exercise of stock options for cash
and notes receivable (270,000) - - 537,000
Issuance of warrants in conjunction with
subordinated debt - - - 560,000
Repurchases of unvested common stock 131,000 - - (397,000)
Unearned compensation - (13,694,000) - -
Amortization of unearned compensation - 1,074,000 - 1,074,000
Net loss - - (21,775,000) (21,775,000)
--------------- --------------- --------------- ---------------
Balances at December 31, 1998 (323,000) (12,620,000) (40,021,000) 1,671,000
Exercise of stock options for cash
and notes receivable (1,851,000) - - 105,000
Unearned compensation - (2,874,000) - -
Amortization of unearned compensation - 1,002,000 - 1,002,000
Exercise of warrants in conjunction with
subordinated debt - - - 1,310,000
Exercise of warrants - - - 271,000
Repurchases of unvested common stock 6,000 - - (16,000)
Payment for notes receivable 103,000 - - 103,000
Net loss - - (7,071,000) (7,071,000)
--------------- --------------- --------------- ---------------
Balances at March 31, 1999 (unaudited) $(2,065,000) $(14,492,000) $(47,092,000) $(2,625,000)
=============== =============== =============== ===============
</TABLE>
5
<PAGE>
ZIP2 CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31, Three Months Ended March 31,
-------------------------------------------- ----------------------------
1996 1997 1998 1998 1999
-------------- -------------- ------------- ------------- -------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (3,927,000) $ (14,278,000) $ (21,775,000) $(5,072,000) $(7,071,000)
Adjustments to reconcile net loss to net cash
used in operating activities:
Provision for doubtful accounts - 130,000 50,000 - -
Depreciation and amortization 36,000 630,000 2,471,000 320,000 550,000
Amortization of unearned compensation - - 1,074,000 268,000 1,002,000
Changes in assets and liabilities,
net of effect of Pantheon acquisition:
Accounts receivable - (659,000) (302,000) (646,000) (38,000)
Receivable from Compaq - - - - (1,585,000)
Prepaid expenses and other current assets (470,000) (366,000) 412,000 (137,000) (45,000)
Other assets (199,000) (258,000) (75,000) 229,000 (277,000)
Accounts payable 491,000 (307,000) 590,000 (73,000) (632,000)
Accrued liabilities 457,000 163,000 1,385,000 112,000 315,000
Payable to Compaq - - - - 1,427,000
Deferred revenue 521,000 2,131,000 3,633,000 681,000 1,233,000
-------------- -------------- ------------- ------------- -------------
Net cash used in operating activities (3,091,000) (12,814,000) (12,537,000) (4,318,000) (5,121,000)
-------------- -------------- ------------- ------------- -------------
Cash flows used in investing activities for
acquisition of property and equipment (742,000) (1,138,000) (26,000) (15,000) -
-------------- -------------- ------------- ------------- -------------
Cash flows from financing activities:
Proceeds from issuance of Preferred Stock, net 15,626,000 23,936,000 - - 1,870,000
Proceeds from issuance of Common Stock, net 35,000 28,000 140,000 18,000 494,000
Proceeds from notes payable 609,000 141,000 7,000,000 - -
Repayment of notes payable (11,000) (226,000) (250,000) (245,000) (589,000)
Repayment of capital lease obligations - (30,000) (666,000) 742,000 (247,000)
Proceeds from shareholder notes receivable - 15,000 - - -
-------------- -------------- ------------- ------------- -------------
Net cash provided by financing activities 16,259,000 23,864,000 6,224,000 515,000 1,528,000
-------------- -------------- ------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents 12,426,000 9,912,000 (6,339,000) (3,818,000) (3,593,000)
Cash and cash equivalents at beginning of year 29,000 12,455,000 22,367,000 22,367,000 16,028,000
-------------- -------------- ------------- ------------- -------------
Cash and cash equivalents at end of year $ 12,455,000 $ 22,367,000 $ 16,028,000 $18,549,000 $12,435,000
============== ============== ============= ============= =============
Supplemental disclosure of cash flow information:
Cash paid for interest $ 8,000 $ 63,000 $ 243,000
============== ============== =============
Supplemental schedule of noncash investing and
financing activities:
Capital leases for equipment $ - $ 1,642,000 $ 2,732,000
============== ============== =============
Common Stock for Pantheon acquisition $ - $ 231,000 $ -
============== ============== =============
Common Stock for notes receivable, net $ 137,000 $ 47,000 $ 139,000
============== ============== =============
Notes payable converted to Preferred and
Common Stock $ 29,000 $ - $ -
============== ============== =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
ZIP2 CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
THE COMPANY
Zip2 Corp., ("Zip2" or the "Company"), was incorporated in California on
November 6, 1995. Through a comprehensive suite of Web development solutions
and service offerings, the Company supports the delivery of localized editorial
content, consumer information and advertising products by newspapers and other
local media companies.
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiary, Zip2 Bay Area, Inc. ("Zip2 Bay
Area"). Zip2 Bay Area was sold in August 1998. All intercompany accounts and
transactions have been eliminated in consolidation.
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
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original maturity
from date of purchase of three months or less to be cash equivalents. At
December 31, 1997 and 1998, cash equivalents were composed primarily of
investments in U.S. Treasury Bills, commercial paper and money market accounts
stated at cost, which approximates fair value.
PROPERTY AND EQUIPMENT
Property and equipment, including leasehold improvements, are stated at cost
net of accumulated depreciation and amortization. Depreciation is computed
using the straight-line method over the estimated useful lives of the assets,
generally three years. Leasehold improvements and assets acquired under capital
lease obligations are amortized over the shorter of the estimated useful lives
of the assets or the remaining lease term.
GOODWILL
Goodwill arising from the acquisition of Pantheon III, Inc. is being
amortized using the straight-line method over three years from the acquisition
date. At each balance sheet date, the Company measures whether any impairment
exists with respect to the carrying amount of goodwill based upon the
undiscounted value of expected future cash flows from the acquired business.
REVENUE RECOGNITION
The Company derives, or expects to derive, revenues from the delivery of Web
development solutions, Web software applications hosting, technical and sales-
related consulting services and from a share of advertising revenues generated
by newspaper and other local media customers.
7
<PAGE>
ZIP2 CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Revenues from the delivery of Web development solutions combined with
consulting, Web hosting and other continuing service obligations are recognized
ratably as service revenues over the contract terms which range from one to six
years. Revenues from technical and sales-related consulting services are
recognized as services are provided. Provisions for contract adjustments and
losses are recorded in the period such items are identified. Deferred revenues
represent the amount of cash received or invoices rendered prior to revenue
recognition. Revenues from contractual rights to share in advertising revenues
generated by newspaper and other local media customers are recognized as
advertising revenues as the fees are earned and become receivable from the
customer. Amounts payable due to newspaper and other local media customers from
contractual rights to share in advertising revenues generated by the Company are
recognized as costs of revenues in the period the related revenues are earned.
PRODUCT DEVELOPMENT COSTS
The Company accounts for product development costs in accordance with SFAS
No. 86, "Accounting for the Costs of Computer Software to Be Sold, Leased, or
Otherwise Marketed." After technological feasibility is established using the
"working model" approach, product development costs are capitalized. The
capitalized costs are then amortized on a straight-line basis over the estimated
product life or on the ratio of current revenues to total projected product
revenue, whichever is greater. Since inception, the amount of costs qualifying
for capitalization has been immaterial and as a result, all product development
costs have been expensed as incurred.
STOCK-BASED COMPENSATION
The Company accounts for stock-based employee compensation arrangements in
accordance with provisions of APB No. 25, "Accounting for Stock Issued to
Employees," ("APB No. 25") and complies with the disclosure provisions of SFAS
No. 123, "Accounting for Stock Based Compensation," ("SFAS No. 123"). Under APB
No. 25, compensation cost is recognized based on the difference, if any, on the
date of grant between the fair value of the Company's stock and the amount an
employee must pay to acquire the stock.
ADVERTISING COSTS
Advertising costs are expensed as incurred in accordance with SOP 93-7,
"Reporting on Advertising." Advertising costs for the years ended December 31,
1996, 1997 and 1998, totaled $288,000, $519,000 and $969,000, respectively.
INCOME TAXES
Income taxes are accounted for using an asset and liability approach in
accordance with SFAS No. 109, "Accounting for Income Taxes." The asset and
liability approach requires the recognition of taxes payable or refundable for
the current year and deferred tax liabilities and assets for the future tax
consequences of events that have been recognized in the Company's financial
statements or tax returns. The measurement of current and deferred tax
liabilities and assets are based on provisions of the enacted tax law; the
effects of future changes in tax laws or rates are not anticipated. The
measurement of deferred tax assets is reduced, if necessary, by the amount of
any tax benefits that, based on available evidence, are not expected to be
realized.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consists primarily of cash and cash equivalents
and accounts receivable. The Company limits its exposure to credit loss by
depositing its cash and cash equivalents with financial institutions that
management believes are of high credit quality. The Company believes that the
risk associated with accounts receivable is mitigated, to some extent, by the
fact that the Company's customer base is geographically dispersed and is
composed primarily of large newspaper and other local media companies that
management believes are financially secure.
8
<PAGE>
ZIP2 CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
During the year ended December 31, 1997, approximately 51% of the Company's
net revenues were derived from one customer that holds shares of the Company's
Series B and Series C Preferred Stock. At December 31, 1997, approximately 29%
and 15% of accounts receivable, net, were due from two customers that hold
shares of the Company's Series B and Series C Preferred Stock.
During the year ended December 31, 1998, two customers that hold shares of
the Company's Preferred Stock accounted for 11% and 10% of net revenue,
respectively. At December 31, 1998, one customer that holds shares of the
Company's series B and Series C Preferred Stock accounted for 29% of accounts
receivable, net.
COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted the provisions of SFAS No.
130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for
reporting comprehensive income and its components in financial statements.
Comprehensive income, as defined, includes all changes in equity (net assets)
during a period from non-owner sources. To date, the Company has not had any
significant transactions that are required to be reported in comprehensive
income.
SEGMENT INFORMATION
Effective January 1, 1998, the Company adopted the provisions of SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information." The
Company operates in a single business segment that provides Web development
solutions. The adoption of SFAS No. 131 did not have a material impact on the
Company's financial statement disclosure.
INTERIM RESULTS (UNAUDITED)
The interim consolidated financial information as of March 31, 1999 and for
the three months ended March 31, 1998 and 1999, have been presented on the same
basis as the consolidated financial statements as of and for the year ended
December 31, 1998, and, in the opinion of management, reflect all adjustments,
which include only normal recurring adjustments, necessary to present fairly the
Company's financial position, results of operations, cash flows and
shareholders' equity as of March 31, 1999 and for the three months ended March
31, 1998 and 1999. The results for the three months ended March 31, 1999 are
not necessarily indicative of the results to be expected for the year ending
December 31, 1999.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1999, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, "Accounting for the Cost of Computer Software
Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 provides
guidance over accounting for computer software developed or obtained for
internal use including the requirement to capitalize specified costs and
amortization of such costs. The Company will adopt the provisions of SOP 98-1
in its fiscal year ending December 31, 1999, and does not expect adoption to
have a material impact on its financial position or results of operations.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivatives and
Hedging Activities" ("SFAS No. 133"). SFAS No. 133 establishes accounting and
reporting standards of derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. The
Company will adopt SFAS No. 133 in its fiscal year ending December 31, 1999 and
does not expect adoption to have a material impact on its financial position and
results of operations.
9
<PAGE>
ZIP2 CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities"
("SOP 98-5"). Start-up activities are defined broadly as those one-time
activities related to opening a new facility, introducing a new product or
service, commencing some new operation or organizing a new entity. Under SOP
98-5, the cost of start-up activities should be expensed as incurred. SOP 98-5
is effective for the Company beginning January 1, 1999 and the Company does not
expect its adoption to have a material effect on its financial position or
results of operations.
NOTE 2 - BALANCE SHEET COMPONENTS:
<TABLE>
<CAPTION>
December 31,
----------------------------
1997 1998
------------- -------------
<S> <C> <C>
Property and equipment, net:
Computer equipment and software $3,240,000 $5,859,000
Furniture and fixtures 65,000 68,000
Leasehold improvements 222,000 358,000
------------- -------------
3,527,000 6,285,000
Less: Accumulated depreciation and amortization (573,000) (2,647,000)
------------- -------------
$2,954,000 $3,638,000
============= =============
</TABLE>
At December 31, 1997 and 1998, property and equipment includes $1,642,000 and
$4,374,000 of computer equipment, furniture and fixtures and leasehold
improvements acquired under capital lease obligations, respectively.
Accumulated amortization of assets under capital lease obligations totaled
$164,000 and $1,371,000 at December 31, 1997 and 1998, respectively.
<TABLE>
<CAPTION>
December 31,
-----------------------------
1997 1998
-------------- -------------
<S> <C> <C>
Accrued liabilities:
Payroll and related expenses $ 608,000 $ 542,000
Accrued advertising - 855,000
Other 267,000 863,000
-------------- -------------
$ 875,000 $2,260,000
============== =============
</TABLE>
NOTE 3 - ACQUISITION:
PANTHEON III, INC. ACQUISITION
In July 1997, the Company acquired all of the outstanding stock of Pantheon
III, Inc. ("Pantheon"), a Washington corporation involved in the development,
marketing and support of data conversion software applications for the newspaper
industry. The consideration for the acquisition totaled $907,000 and was
composed of 501,167 shares of the Company's Common Stock, the assumption of
outstanding Pantheon warrants and options in exchange for 59,166 and 45,145
warrants and options, respectively, to purchase the Company's Common Stock,
assumption of Pantheon liabilities totaling $535,000 and direct acquisition
costs totaling $130,000. The acquisition was accounted for using the purchase
method of accounting and accordingly, the purchase price was allocated to the
assets acquired and liabilities assumed on the basis of their fair values on the
acquisition date, with the excess of $675,000 being allocated to goodwill.
During the years ended December 31, 1997 and 1998, goodwill amortization totaled
$98,000 and $396,000, respectively, including an impairment charge of $181,000
in 1998.
10
<PAGE>
ZIP2 CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 4 - RELATED PARTY TRANSACTIONS:
The Company conducts a substantial portion of its business with newspapers
and other local media companies that have also made strategic investments in the
Company's Preferred Stock. The terms of such arrangements have historically
been negotiated in parallel with negotiations for the purchase of Preferred
Stock and may not necessarily reflect terms that would have resulted from
negotiations with unrelated third parties.
During the years ended December 31, 1996, 1997 and 1998, service revenues
derived from customers that also hold shares of the Company's outstanding
Preferred Stock totaled $0, $1,224,000 and $1,861,000, respectively. During the
years ended December 31, 1996, 1997 and 1998, advertising revenues derived from
customers that also hold shares of the Company's outstanding Preferred Stock
amounted to $0, $34,000 and $232,000, respectively.
In August 1998, the Company discontinued the operations of Zip2 Bay Area and
sold certain Zip2 Bay Area assets for a nominal amount to a holder of
outstanding Preferred Stock. The loss on the sale was immaterial.
NOTE 5 - INCOME TAXES:
Deferred tax assets, related primarily to net operating loss carryforwards,
amounted to approximately $5,000,000 and $13,000,000 at December 31, 1997 and
1998, respectively. Valuation allowances have been provided in amounts equal to
the assets because management believes that, based on a number of factors, it is
more likely than not that the deferred tax assets will not be realized.
At December 31, 1998, the Company had approximately $30,000,000 of federal
net operating loss carryforwards available to offset future taxable income which
expire in varying amounts beginning in 2011. Under the Tax Reform Act of 1986,
the amounts of and benefits from net operating loss carryforwards may be
impaired or limited in certain circumstances. Events which cause limitations in
the amount of net operating losses that the Company may utilize in any one year
include, but are not limited to, a cumulative ownership change of more than 50%,
as defined, over a three year period.
NOTE 6 - BORROWINGS:
NOTES PAYABLE
During 1996 and 1997, the Company issued notes payable to a financing company
totaling $609,000 and $141,000, respectively. These notes payable are secured
by certain computer equipment of the Company. In connection with the issuance
of the notes payable during 1996, the Company granted the financing company
warrants to purchase 46,812 shares of the Company's Series A Preferred Stock
with an exercise price of $3.65 per share. The warrants expire on the later of
August 2006 or five years following an initial public offering and had a nominal
fair value on the date of the grant.
SUBORDINATED DEBT
In December 1998, the Company entered into a loan and security agreement with
two holders of the Company's warrants and an unrelated party and issued
subordinated notes totaling $7,000,000. Under the terms of the agreement, the
notes bear interest at 12.75% per year and are secured by the Company's assets.
In conjunction with the subordinated debt, warrants to purchase 136,897 shares
of the Company's Series C Preferred Stock with an exercise price of $7.67 per
share were issued to the note holders. The warrants expire on the later of
seven years after the date of grant or three years after the closing of the
Company's initial public offering. The warrants had an estimated fair value of
$560,000 on the date of grant, which will be amortized to interest expense over
the term of the related debt.
11
<PAGE>
ZIP2 CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
At December 31, 1997 and 1998, outstanding borrowings consist of the
following:
<TABLE>
<CAPTION>
December 31,
-----------------------------
1997 1998
-------------- -------------
<S> <C> <C>
8.6% note; principal and interest payable monthly;
due October 31, 1999 $ 275,000 $ 130,000
8.7% note; principal and interest payable monthly;
due December 1, 1999 124,000 65,000
9.3% note; principal and interest payable monthly;
due April 30, 2000 114,000 68,000
12.75% note; principal and interest payable beginning
July 1999; due December 2002 - 7,000,000
Less: Discount associated with warrants - (560,000)
-------------- -------------
513,000 6,703,000
Less: Current portion 250,000 1,645,000
-------------- -------------
$ 263,000 $5,058,000
============== =============
</TABLE>
Principal payments due under the notes payable are $1,645,000, $2,818,000 and
$2,800,000 for 1999, 2000 and 2001, respectively.
EQUIPMENT LEASE LINE
During 1997 and 1998, the Company obtained certain equipment lease lines from
a leasing company. At December 31, 1997 and 1998, obligations under these lease
arrangements consist of the following:
<TABLE>
<CAPTION>
December 31,
-----------------------------
1997 1998
-------------- -------------
<S> <C> <C>
$3,000,000 equipment lease line; equal monthly installments
through April 2002 $1,612,000 $2,430,000
$1,500,000 equipment lease line; equal monthly installments
through December 2002 - 1,248,000
$2,000,000 euqipment lease line; expires December 1999 - -
-------------- -------------
1,612,000 3,678,000
Less: Current portion 393,000 1,078,000
-------------- -------------
$1,219,000 $2,600,000
============== =============
</TABLE>
Under the terms of the 1997 lease lines, warrants to purchase 13,136 and
7,082 shares of the Company's Series B and Series C Preferred Stock with
exercise prices of $5.00 and $7.67 per share, respectively, were issued to the
leasing Company. The warrants expire on the later of August 2002 or five years
following an initial public offering and had a nominal fair value on the date of
grant. Under the terms of the 1998 lease lines, a warrant to purchase 18,253
shares of the Company's Series C Preferred Stock with an exercise price of $7.67
per share was issued to the leasing Company. The warrant expires on the shorter
of five years from the date of grant or two years following an initial public
offering and had a nominal fair value on the date of grant.
12
<PAGE>
ZIP2 CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 7 - COMMITMENTS:
ROYALTY OBLIGATIONS
The Company has obligations to pay minimum royalties to various companies for
mapping content. The minimum obligations under the royalty agreements total
$440,000 and $35,000 for the years ending December 31, 1999 and 2000,
respectively.
LEASES
The Company leases office space and equipment under noncancelable operating
and capital leases with various expiration dates through October 2001. Rent
expense for the years ended December 31, 1996, 1997 and 1998 totaled $77,000,
$415,000 and $910,000, respectively.
At December 31, 1998, future minimum lease payments under noncancelable
operating and capital leases are as follows:
<TABLE>
<CAPTION>
Year Ending Capital Operating
December 31, Leases Leases
-------------- -------------
<S> <C> <C>
1999 $ 1,338,000 $ 1,159,000
2000 1,340,000 1,131,000
2001 1,170,000 687,000
2002 359,000 137,000
-------------- -------------
Total minimum lease payments 4,207,000 $ 3,114,000
=============
Less: Amount representing interest (529,000)
--------------
Present value of capital lease obligations 3,678,000
Less: Current portion (1,078,000)
--------------
Long-term portion of capital lease obligations $ 2,600,000
==============
</TABLE>
CONTINGENCIES
From time to time, the Company is involved in certain litigation, claims and
assessments arising in the normal course of business. The Company believes that
any potential liability with respect to such routine litigation, claim or
assessment, individually or in the aggregate, is not likely to be material to
the Company's financial position, results of operations or cash flows.
NOTE 8 - CONVERTIBLE PREFERRED STOCK:
At December 31, 1998, Convertible Preferred Stock consists of the following:
<TABLE>
<CAPTION>
Proceeds
Shares Net of
----------------------------- Liquidation Issuance
Series Authorized Outstanding Amount Costs
- ------- -------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
A 4,000,000 3,734,732 $ 3,590,000 $ 3,575,000
B 4,000,000 2,470,600 12,353,000 12,287,000
C 4,000,000 3,206,780 24,596,000 23,700,000
-------------- -------------- ------------- --------------
12,000,000 9,412,112 $ 40,539,000 $ 39,562,000
============== ============== ============= ==============
</TABLE>
13
<PAGE>
ZIP2 CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The holders of Preferred Stock have various rights and preferences as
follows:
VOTING
Each share of Series A, Series B and Series C has voting rights equal to an
equivalent number of shares of Common Stock into which it is convertible and
votes together as one class with the Common Stock.
As long as any shares of Convertible Preferred Stock remain outstanding, the
Company must obtain approval from a majority of the holders of Convertible
Preferred Stock in order to alter the articles of incorporation as related to
Convertible Preferred Stock, change the authorized number of shares of
Convertible Preferred Stock, repurchase any shares of Common Stock other than
shares subject to the right of repurchase by the Company, change the authorized
number of Directors, authorize a dividend for any class or series other than
Convertible Preferred Stock, create a new class of stock or effect a merger,
consolidation or sale of assets where the existing shareholders retain less than
50% of the voting stock of the surviving entity.
DIVIDENDS
Holders of Series A, B and C Convertible Preferred Stock are entitled to
receive noncumulative dividends at the per annum rate of $0.09613, $0.5 and
$0.767 per share, respectively, when and if declared by the Board of Directors.
The holders of Series A, B and C Convertible Preferred Stock will also be
entitled to participate in dividends on Common Stock, when and if declared by
the Board of Directors, based on the number of shares of Common Stock held on an
as-if converted basis. No dividends on Convertible Preferred Stock or Common
Stock have been declared by the Board from inception through December 31, 1998.
LIQUIDATION
In the event of any liquidation, dissolution or winding up of the Company,
including a merger, acquisition or sale of assets where the beneficial owners of
the Company's Common Stock and Convertible Preferred Stock own less than 51% of
the resulting voting power of the surviving entity, the holders of Series A, B
and C Convertible Preferred Stock are entitled to receive an amount of $0.9613,
$5.00 and $7.67 per share, respectively, plus any declared but unpaid dividends
prior to and in preference to any distribution to the holders of Common Stock.
Should the Company's legally available assets be insufficient to satisfy the
liquidation preferences, the entire amount of assets will be distributed ratably
to the holders of Series A, B and C Convertible Preferred Stock.
After the payment has been made to the holders of the Preferred Stock in
full, the remaining legally available assets would be distributed ratably to the
holders of Series A Preferred Stock and the holders of Common Stock.
CONVERSION
Each share of Series A, B and C Convertible Preferred Stock is convertible,
at the option of the holder, according to a conversion ratio, subject to
adjustment for dilution. Each share of Series A, B and C Convertible Preferred
Stock automatically converts into the number of shares of Common Stock into
which such shares are convertible at the then effective conversion ratio upon:
1) the closing of a public offering of Common Stock at a per share price of at
least $10 per share with gross proceeds of at least $17,000,000 or 2) the
consent of not less than two-thirds of the then holders of the majority of
Convertible Preferred Stock, subject to the limitation that the holders of
Series A Preferred Stock shall not be entitled to more than three times the
Liquidation Preference.
At December 31, 1998, the Company had reserved 4,000,000, 4,000,000 and
4,000,000 shares of Common Stock for the conversion of Series A, B and C
Convertible Preferred Stock, respectively.
14
<PAGE>
ZIP2 CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 9 - COMMON STOCK:
The Company's Articles of Incorporation, as amended, authorize the Company to
issue 20,000,000 shares of $0.001 par value Common Stock. A portion of the
shares issued for notes receivable are subject to rights of repurchase by the
Company that lapse generally over a four year period from the earlier of the
purchase date or employee hire date, as applicable, until all restrictions
lapse. At December 31, 1998, there were 549,000 shares of Common Stock subject
to repurchase.
NOTE 10 - STOCK OPTION PLANS:
In April 1996, the Company adopted the 1996 Stock Option Plan (the "1996
Plan"). The 1996 Plan provides for the granting of stock options to employees,
consultants and directors of the Company. Options granted under the Plan may be
either incentive stock options or nonqualified stock options. Incentive stock
options ("ISO") may be granted only to Company employees (including officers and
directors who are also employees). Nonqualified stock options ("NSO") may be
granted to Company employees and consultants. The Company has reserved
3,093,336 shares of Common Stock for issuance under the 1996 Plan.
In September 1997, the Company adopted the 1997 Stock Option Plan (the "1997
Plan"). The 1997 Plan provides for the granting of stock options to employees,
consultants and directors of the Company. Options granted under the 1997 Plan
may be either incentive stock options or nonqualified stock options. Incentive
stock options ("ISO") may be granted only to Company employees (including
officers and directors who are also employees). Nonqualified stock options
("NSO") may be granted to Company employees and consultants. The Company has
reserved approximately 600,000 shares of Common Stock for issuance under the
1997 Plan.
Options under the 1996 and 1997 Plans may be granted for periods of up to ten
years and at prices no less than 85% of the estimated fair value of the shares
on the date of grant as determined by the Board of Directors, provided, however,
that (i) the exercise price of an ISO and NSO shall not be less than 100% and
85% of the estimated fair value of the shares on the date of grant,
respectively, and (ii) the exercise price of an ISO and NSO granted to a 10%
shareholder shall not be less than 110% of the estimated fair value of the
shares on the date of grant, respectively. Options are exercisable immediately
subject to repurchase options held by the Company which lapse over a maximum
period of ten years at such times and under such conditions as determined by the
Board of Directors. To date, options granted generally vest over four years.
The following table summarizes stock option activity under the Company's
stock option plans:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------------------------------
1996 1997 1998
----------------------------- ----------------------------- ----------------------------
Weighted Weighted Weighted
Average Average Average
Options Exercise Exercise Exercise
Outstanding Price Shares Price Shares Price
------------- -------------- ------------- -------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of period - $ - 87,500 $ 0.10 808,095 $ 0.46
Granted 1,834,686 0.10 1,209,299 0.25 3,175,204 1.07
Assumed in Pantheon acquisition - - 45,145 3.31 - -
Exercised (1,706,086) 0.10 (447,849) 0.16 (1,182,122) 0.70
Canceled (41,100) 0.10 (86,000) 0.25 (325,885) 1.50
------------- ------------- -------------
Outstanding at period end 87,500 0.10 808,095 0.46 2,475,292 0.99
============= ============= =============
Weighted average grant date fair
value of options granted during
the year $ 0.04 $ 0.83 $ 4.26
============== ============== =============
</TABLE>
15
<PAGE>
ZIP2 CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
At December 31, 1998, 1,064,031 options were available for grant under the
Plans.
<TABLE>
<CAPTION>
Options Exercisable at
Options Outstanding at December 31, 1998 December 31, 1998
--------------------------------------------- -----------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Outstanding Price
- --------------- -------------- ------------- -------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
$ 0.10 20,000 7.59 $ 0.10 20,000 $ 0.10
0.25 112,968 8.50 0.25 109,968 0.25
0.40-$1.00 2,310,737 9.81 1.00 2,303,968 1.00
1.83-$3.66 31,587 7.72 3.39 31,587 3.39
-------------- --------------
2,475,292 9.70 0.99 2,465,523 0.99
============== ==============
</TABLE>
At December 31, 1998, approximately 267,000 options were vested.
UNEARNED STOCK-BASED COMPENSATION
In connection with certain stock option grants during the year ended December
31, 1998, the Company recognized unearned compensation totaling $13,694,000,
which is being amortized over the four year vesting periods of the related
options. Amortization expense recognized during the year ended December 31,
1998 totaled approximately $1,074,000.
MINIMUM VALUE DISCLOSURES
Had compensation cost for the Company's stock-based compensation plan been
determined based on the minimum value method at the grant dates for the awards
as prescribed by SFAS No. 123, the Company's net loss would have reflected an
immaterial change.
The Company calculated the minimum value of each option grant on the date of
grant using the Black-Scholes pricing method with the following assumptions:
dividend yield at 0%; weighted average expected option term of five years; risk
free interest rates of 6.2%, 6.2% and 5.4% for 1996, 1997 and 1998,
respectively.
NOTES RECEIVABLE FROM SHAREHOLDERS
In connection with the issuance of Common Stock upon the exercise of stock
options, notes receivable were received from certain officers and employees.
These full-recourse notes, which accrue interest on unpaid balances at between
5.7% to 6.8% per annum and are secured by the related Common Stock, are due
between 1999 and 2008. The Company may accelerate the amounts due, in part or
in whole, upon certain events including termination of employment, payment
default or sales of the pledged securities.
NOTE 11 - EMPLOYEE BENEFIT PLANS:
The Company sponsors a 401(k) defined contribution plan covering all
employees. Contributions made by the Company are determined annually by the
Board of Directors. There were no employer contributions under this plan during
the years ended December 31, 1996, 1997 and 1998.
16
<PAGE>
ZIP2 CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 12 - SUBSEQUENT EVENTS:
STOCK OPTION GRANTS
In January and February 1999, the Company granted to employees 201,000
options to purchase the Company's Common Stock at an exercise price of $1.00 per
share. In connection with these stock option grants, the Company recognized
unearned compensation totaling approximately $2,874,000, which is being
amortized over the four year vesting periods of the related options.
MERGER WITH COMPAQ COMPUTER CORPORATION
On April 1, 1999, the Company consummated a merger agreement with Compaq
Computer Corporation ("Compaq"). Under the terms of the merger agreement, each
share of the Company's Convertible Preferred Stock and Common Stock was
converted into the right to receive an amount per share equal to $307,000,000,
divided by the number of issued and outstanding shares of Convertible Preferred
Stock and Common Stock immediately prior to the consummation of the merger.
Additionally, Compaq repaid the subordinated debt of the Company as part of the
terms of the acquisition.
17
<PAGE>
EXHIBIT 99.3
SHOPPING.COM
(A DEVELOPMENT STAGE COMPANY)
FINANCIAL STATEMENTS
FOR THE YEAR ENDED
JANUARY 31, 1997
<PAGE>
SHOPPING.COM
(A DEVELOPMENT STAGE COMPANY)
CONTENTS
JANUARY 31, 1997
________________________________________________________________________________
<TABLE>
<CAPTION>
Page
<S> <C>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 1
FINANCIAL STATEMENTS
Balance Sheet 2
Statement of Operations 3
Statement of Shareholders' Deficit 4
Statement of Cash Flows 5
Notes to Financial Statements 6 - 14
</TABLE>
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Shareholder of
Shopping.com
We have audited the accompanying balance sheet of Shopping.com (a development
stage company) as of January 31, 1997, and the related statements of operations,
shareholders' deficit, and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Shopping.com as of January 31,
1997, and the results of its operations and cash flows for the year then ended
in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As shown in the financial statements,
the Company incurred a net loss of $201,697 and had negative cash flows from
operations for the year ended January 31, 1997, and had a shareholders' deficit
at January 31, 1997. These factors, among others, as discussed in Note 1 to the
financial statements, raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
As discussed in Note 6 to the financial statements, management of the Company
discovered an error in the number of weighted-average shares outstanding,
resulting in an understatement of previously reported loss per share.
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
June 17, 1997, except for
Note 6, for which the
date is June 9, 1999
<PAGE>
SHOPPING.COM
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
JANUARY 31, 1997
________________________________________________________________________________
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS
Cash $ 63
Stock subscription receivable 23,000
---------
Total current assets 23,063
FURNITURE AND EQUIPMENT, net 12,165
OTHER ASSETS 3,956
---------
TOTAL ASSETS $ 39,184
=========
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES
Note payable - related party $ 50,000
Accounts payable 35,986
Other accrued liabilities 31,845
---------
Total current liabilities 117,831
---------
COMMITMENTS
SHAREHOLDERS' DEFICIT
Preferred stock, Series A convertible, no par value
1,500,000 shares authorized
no shares issued and outstanding -
Preferred stock, Series B convertible, no par value
4,000,000 shares authorized
no shares issued and outstanding -
Common stock, no par value
4,000,000 shares authorized
1,152,500 shares issued and outstanding 123,050
Deficit accumulated during development stage (201,697)
---------
Total shareholders' deficit (78,647)
---------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT $ 39,184
=========
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
SHOPPING.COM
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JANUARY 31, 1997
________________________________________________________________________________
OPERATING EXPENSES $ 201,697
---------
NET LOSS $(201,697)
=========
BASIC AND DILUTED LOSS PER SHARE $ (0.18)
=========
WEIGHTED-AVERAGE SHARES OUTSTANDING 1,152,500
=========
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
SHOPPING.COM
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF SHAREHOLDERS' DEFICIT
FOR THE YEAR ENDED JANUARY 31, 1997
________________________________________________________________________________
<TABLE>
<CAPTION>
Preferred Stock Preferred Stock Deficit
-------------------- -------------------- Accumulated
Series A Convertible Series B Convertible Common Stock During
-------------------- -------------------- --------------------- Development
Shares Amount Shares Amount Shares Amount Stage Total
-------- ---------- -------- --------- --------- --------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, February 1, 1996 - $ - - $ - - $ - $ - $ -
Issuance of common stock 1,152,500 23,050 23,050
Capital contributed by Cyber
Depot, Inc. to purchase assets
and develop proprietary software 100,000 100,000
Net loss (201,697) (201,697)
-------- ---------- -------- ---------- ---------- --------- ------------ ---------
Balance, January 31, 1997 - $ - - $ - 1,152,500 $ 123,050 $ (201,697) $ (78,647)
======== ========== ======== ========== ========== ========= ============ =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
SHOPPING.COM
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED JANUARY 31, 1999
________________________________________________________________________________
<TABLE>
<CAPTION>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(201,697)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation of furniture and equipment 1,276
(Increase) decrease in
Other assets (3,956)
Increase (decrease) in
Accounts payable 35,986
Other accrued liabilities 31,845
---------
Net cash used in operating activities (136,546)
---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of furniture and equipment (13,441)
---------
Net cash used in investing activities (13,441)
---------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of note payable - related party 50,000
Proceeds from the issuance of common stock 50
Capital contribution 100,000
---------
Net cash provided by financing activities 150,050
---------
Net increase in cash 63
CASH, BEGINNING OF YEAR -
---------
CASH, END OF YEAR $ 63
=========
</TABLE>
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
During the year ended January 31, 1997, the Company issued common stock in the
amount of $23,000 for a subscription receivable.
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
SHOPPING.COM
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
JANUARY 31, 1997
________________________________________________________________________________
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Line of Business
---------------------------------
Shopping.com (the "Company") was incorporated in California on November 22,
1996. Cyber Depot, Inc. ("Cyber") was incorporated in California in January
1996 and among other business ventures commenced the design and development
of proprietary software for the Internet shopping marketplace in February
1996. In March 1997, Cyber agreed to sell certain assets and liabilities
and proprietary software to Shopping.com for 250,000 shares of Series A
convertible preferred stock with warrants, and Shopping.com continued the
design and development of the proprietary software. The operations of
Cyber devoted to the design and development of the proprietary software are
considered to be the predecessor operations of the Company and have been
included with the operations of the Company since February 1996. The
propriety software acquired by the Company in this transaction has been
expensed as software research and development. The Company is engaged in
the design and development of proprietary software for marketing a broad
range of products and services to retail customers on the Internet. On
July 11, 1997, the Company commenced selling products over the Internet
through its website at http://www.shopping.com.
Basis of Presentation
---------------------
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles which contemplate continuation of
the Company as a going concern. However, the Company has experienced net
losses of $201,697 for the year ended January 31, 1997. In addition, the
Company has used, rather than provided, cash from its operations. In view
of the matters described above, recoverability of a major portion of the
recorded asset amounts shown in the accompanying balance sheet is dependent
upon continued operations of the Company, which in turn, is dependent upon
the Company's ability to continue to meet its financing requirements and to
succeed in its future operations. The financial statements do not include
any adjustments relating to the recoverability and classification of
recorded asset amounts, or amounts and classification of liabilities that
might be necessary should the Company be unable to continue in existence.
Management has raised capital during 1997 through private placement
offerings of equity and debt securities and completed an initial public
offering ("IPO") in the latter part of 1997, which will provide sufficient
funding to continue present operations and support future marketing and
development activities.
6
<PAGE>
SHOPPING.COM
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
JANUARY 31, 1997
________________________________________________________________________________
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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
the disclosures of contingent assets and liabilities at the date of the
financial statements, as well as the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
Revenue Recognition
-------------------
The Company recognizes revenue at the time the vendor ships the product to
the customer.
Net Loss Per Share
------------------
Net loss per share is based on the number of common shares issued in the
initial capitalization of the Company.
Stock Subscription Receivable
-----------------------------
At January 31, 1997, the Company had subscriptions to purchase its common
stock of $23,000. This amount was collected subsequent to the balance sheet
date; therefore, the amount is shown as an asset in the accompanying
balance sheet.
Cash Equivalents
----------------
For the purpose of the statement of cash flows, the Company considers all
highly-liquid investments purchased with original maturities of three
months or less to be cash equivalents.
Furniture and Equipment
-----------------------
Furniture and equipment are recorded at cost, less accumulated
depreciation. Depreciation is provided using the straight-line method over
estimated useful lives of three to 15 years as follows:
Computer hardware 5 years
Furniture and equipment 5 to 7 years
Maintenance and minor replacements are charged to expense as incurred.
Gains and losses on disposals are included in the results of operations.
Advertising
-----------
The Company expenses advertising costs as incurred. There were no
advertising costs for the year ended January 31, 1997.
7
<PAGE>
SHOPPING.COM
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
JANUARY 31, 1997
________________________________________________________________________________
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Income Taxes
------------
The Company utilizes Statement of Financial Accounting Standards ("SFAS")
No. 109, "Accounting for Income Taxes," which requires the recognition of
deferred tax assets and liabilities for the expected future tax
consequences of events that have been included in the financial statements
or tax returns. Under this method, deferred income taxes are recognized for
the tax consequences in future years of differences between the tax bases
of assets and liabilities and their financial reporting amounts at each
period end based on enacted tax laws and statutory tax rates applicable to
the periods in which the differences are expected to affect taxable income.
Valuation allowances are established, when necessary, to reduce deferred
tax assets to the amount expected to be realized. The provision for income
taxes represents the tax payable for the period and the change during the
period in deferred tax assets and liabilities.
Fair Value of Financial Instruments
-----------------------------------
The Company measures its financial assets and liabilities in accordance
with generally accepted accounting principles. For certain of the Company's
financial instruments, including cash, accounts payable, and other accrued
liabilities, the carrying amounts approximate fair value due to their short
maturities. The amounts shown for note payable also approximate fair value
because current interest rates offered to the Company for debt of similar
maturities are substantially the same.
Stock Options
-------------
The Financial Accounting Standards Board ("FASB") issued SFAS No. 123,
"Accounting for Stock-Based Compensation," effective for fiscal years
beginning after December 15, 1995. SFAS No. 123 establishes and encourages
the use of the fair value based method of accounting for stock-based
compensation arrangements under which compensation cost is determined using
the fair value of stock-based compensation determined as of the date of
grant and is recognized over the periods in which the related services are
rendered. The statement also permits companies to elect to continue using
the current implicit value accounting method specified in Accounting
Principles Bulletin ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees," to account for stock-based compensation. The Company will use
the implicit value based method and will be required to disclose the pro
forma effect of using the fair value based method to account for its stock-
based compensation.
8
<PAGE>
SHOPPING.COM
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
JANUARY 31, 1997
________________________________________________________________________________
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Risks and Uncertainties
-----------------------
The Company's future revenues and any future profits are substantially
dependent upon the widespread acceptance and use of the Internet and other
online services as an effective medium of commerce by consumers. Rapid
growth in the use of an interest in the Web, the Internet, and other online
services is a recent phenomenon, and there can be no assurance that
acceptance and use will continue to develop or that a sufficiently broad
base of consumers will adopt, and continue to use, the Internet and other
online services as a medium of commerce.
To remain competitive, the Company must continue to enhance and improve the
responsiveness, functionality, and features of the Shopping.com online
store. The Internet and the online commerce industry are characterized by
rapid technological change, changes in user and customer requirements and
preferences, frequent new product and service introductions embodying new
technologies, and the emergence of new industry standards and practices
that could render the Company's existing website and proprietary technology
and systems obsolete. The Company's success will depend, in part, on its
ability to license leading technologies useful in its business, enhance its
existing services, develop new services and technology that address the
increasingly sophisticated and varied needs of its prospective customers,
and respond to technological advances and emerging industry standards and
practices on a cost-effective and timely basis.
A significant barrier to online commerce and communications is the secure
transmission of confidential information over public networks. The Company
relies on encryption and authentication technology licensed from third
parties to provide the security and authentication necessary to effect
secure transmission of confidential information, such as customer credit
card numbers. There can be no assurance that advances in computer
capabilities, new discoveries in the field of cryptography, or other events
or developments will not result in a compromise or breach of the algorithms
used by the Company to protect customer transaction data.
The online commerce market, particularly over the Internet, is new, rapidly
evolving, and intensely competitive, which competition the Company expects
to intensify in the future. Barriers to entry are minimal, and current and
new competitors can launch new websites at a relatively low cost. The
Company currently or potentially competes with a variety of other
companies.
The Company carries no inventory, has no warehouse employees or facilities,
and relies on rapid fulfillment from its vendors. To satisfy customer
orders, the Company has no long-term contracts or arrangements with any of
its manufacturers or distributors that guarantee the availability of
merchandise, the continuation of particular payment terms, the extension of
credit limits, or the shopping schedules.
9
<PAGE>
SHOPPING.COM
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
JANUARY 31, 1997
________________________________________________________________________________
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Risks and Uncertainties (Continued)
-----------------------
The Company regards its Shopping.com brand name and related software as
proprietary and relies primarily on a combination of copyright, trademark,
trade secret and confidential information laws, and employee and third
party non-disclosure agreements and other methods to protect its
proprietary rights. There can be no assurance that these protections will
be adequate to protect against technologies that are substantially
equivalent or superior to the Company's technologies. The Company does not
currently hold any patents or have any patent applications pending for
itself or its products and has not obtained federal registration for any of
its trademarks.
Earnings per Share
------------------
The FASB issued SFAS No. 128, "Earnings Per Share," which is effective for
financial statements issued for periods ending after December 31, 1997.
SFAS No. 128 requires public companies to present basic loss per share and,
if applicable, diluted loss per share instead of primary and fully-diluted
loss per share.
NOTE 2 - FURNITURE AND EQUIPMENT
<TABLE>
<CAPTION>
<S> <C>
Furniture and equipment at January 31, 1997
consisted of the following:
Computer hardware $12,761
Furniture and equipment 680
-------
13,441
Less accumulated depreciation 1,276
-------
TOTAL $12,165
=======
</TABLE>
NOTE 3 - COMMITMENTS
Litigation
----------
The Company is involved in certain litigation in the normal course of
business. The Company does not believe that the resolution of any suit will
result in any material adverse effect on the Company's financial position,
results of operations, or cash flows.
10
<PAGE>
SHOPPING.COM
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
JANUARY 31, 1997
________________________________________________________________________________
NOTE 3 - COMMITMENTS (Continued)
Leases
------
The Company leases a facility for its corporate offices under a non-
cancelable operating lease agreement that expires in 2002. Future minimum
lease payments under this non-cancelable operating lease are as follows:
<TABLE>
<CAPTION>
Year Ending
January 31,
-----------
<S> <C>
1998 $ 75,489
1999 117,282
2000 125,798
2001 131,594
2002 137,390
Thereafter 40,565
--------
TOTAL $628,118
========
</TABLE>
Rent expense was $13,451 for the year ended January 31, 1997.
NOTE 4 - NOTE PAYABLE - RELATED PARTY
The Company has a note payable to a related party which is personally
guaranteed by an officer of the Company. In addition, the note is
personally guaranteed by a vice president of the Company and secured by a
second deed of trust on a residence owned by the vice president. The note
accrues interest at the highest rate permitted by California law
(approximately 11% at January 31, 1997) and is due 90 days from January 13,
1997.
Subsequent to year-end, $51,000 was repaid which includes accrued interest
of $1,000.
11
<PAGE>
SHOPPING.COM
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
JANUARY 31, 1997
________________________________________________________________________________
NOTE 5 - INCOME TAXES
For the year ended January 31, 1997, the Company did not provide a
provision for income taxes due to the net loss incurred. At January 31,
1997, the Company has approximately $98,000 and $49,000 in net operating
loss carryforwards for federal and state income tax purposes, respectively,
that expire in 2012 and 2002, respectively. The components of the Company's
deferred tax assets and liabilities for income taxes consist of a deferred
tax asset relating to the net operating loss carryforwards of approximately
$36,000. The other components of the Company's deferred tax assets and
liabilities are immaterial. The Company has established a valuation
allowance of approximately $36,000 to fully offset its deferred tax asset
as the Company does not believe the recoverability of this deferred tax
asset is more likely than not.
NOTE 6 - RESTATEMENT
Loss per share and common shares outstanding have been restated to correct
an error discovered by management in the computation of common shares
outstanding.
NOTE 7 - SUBSEQUENT EVENTS (UNAUDITED)
Series A Convertible Preferred Stock
------------------------------------
In March 1997, the Company issued 500,000 shares of Series A convertible
preferred stock ("Series A Preferred") in connection with the acquisition
of certain assets and liabilities and proprietary software developed by
Cyber (see Note 1). The historical cost of the assets and liabilities and
proprietary software acquired was approximately $100,000, which is the
amount used to value the 500,000 shares of Series A Preferred. In April
1997, the Company sold 500,000 shares of Series A Preferred for a price of
$0.40 per share. The holders of the Series A Preferred are entitled to
receive a non-cumulative dividend of $0.04 per share per annum, payable in
cash at the option of the Company.
Each share of Series A Preferred is convertible into shares of common stock
at the option of the holder. In addition, Series A Preferred will be
automatically converted into shares of common stock based upon the
effective conversion price immediately upon the closing of an IPO of not
less than $6,000,000.
The Series A Preferred has a liquidation preference of $0.40 per share,
plus all declared and unpaid dividends prior to the payment of any amount
to the holders of common stock.
12
<PAGE>
SHOPPING.COM
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
JANUARY 31, 1997
________________________________________________________________________________
NOTE 7 - SUBSEQUENT EVENTS (UNAUDITED) (CONTINUED)
Series A Convertible Preferred Stock (Continued)
------------------------------------
Each holder of Series A Preferred was issued one warrant for every two
shares of Series A Preferred to purchase a share of the Company's common
stock for $3.00 per share, resulting in 375,000 warrants being issued.
Based on the financial condition of the Company at the time the warrants
were issued, management estimates that the fair value of the Company's
common stock was less than the exercise price of the warrants.
Series B Convertible Preferred Stock
------------------------------------
During May to September 1997, the Company sold 536,500 shares of Series B
convertible preferred stock ("Series B Preferred") for a price of $3.00 per
share. The holders of the Series B Preferred are entitled to receive a non-
cumulative dividend of $0.30 per share per annum, payable in cash at the
option of the Company.
Each share of Series B Preferred is convertible into shares of common stock
at the option of the holder. In addition, Series B Preferred will be
automatically converted into shares of common stock based upon the
effective conversion price immediately upon the closing of an IPO of not
less than $6,000,000.
The Series B Preferred has a liquidation preference of $3.00 per share,
plus all declared and unpaid dividends prior to the payment of any amount
to the holders of common stock.
Each holder of Series B Preferred was issued one warrant for every two
shares of Series B Preferred to purchase a share of the Company's common
stock for $3.00 per share, resulting in 268,250 warrants being issued.
Based on the financial condition of the Company at the time the warrants
were issued, management estimates that the fair value of the Company's
common stock approximates the exercise price of the warrants.
Upon the effective date of the Company's IPO, the 536,500 outstanding
shares of Series B Preferred were converted into 536,500 shares of the
Company's common stock.
Stock Options
-------------
The Company's board of directors adopted the 1997 Stock Option Plan (the
"Plan") and reserved 250,000 shares of common stock for grants of stock
options under the Plan. Generally, options granted under the Plan expire
the earlier of 10 years from the date of grant (five years in the case of
an incentive stock option granted to a holder of 10% or more of the
Company's outstanding capital stock) or three months after the optionee's
termination of employment or service. The Company had not granted any stock
options as of January 31, 1997, therefore, the disclosures required by SFAS
No. 123 are not applicable.
13
<PAGE>
SHOPPING.COM
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
JANUARY 31, 1997
________________________________________________________________________________
NOTE 7 - SUBSEQUENT EVENTS (UNAUDITED) (CONTINUED)
Notes Payable
-------------
In June and July 1997, the Company issued $950,000 of subordinated notes.
The notes bear interest at 10% per annum and are unsecured. The notes are
due at the earlier of nine months from the date of issuance or closing of
the IPO.
In connection with the note agreement, each note holder is entitled to
receive 333 warrants for each $1,000 loaned to purchase the Company's
common stock for $6.00 per share. There is a twelve-month "lock-up" on the
warrants and the common stock underlying these warrants.
En Pointe Technologies, Inc.
----------------------------
On September 15, 1997 the Company entered into an agreement with En Pointe
Technologies, Inc. ("En Pointe") whereby:
. En Pointe made an investment in the Company by purchasing $600,000 of
subordinated notes. In connection therewith, the Company issued 199,800
warrants to purchase the Company's common stock at $4.50 per share. As a
result of these warrants being issued with an exercise price less than
the fair market value of similar warrants, the Company will recognize
additional financing cost;
. En Pointe granted the Company a license to En Pointe's proprietary EPIC
Software for five years in exchange for 125,000 shares of the Company's
common stock valued at $6.00 per share. The Company has agreed to pay an
annual maintenance and upgrade fee of $100,000. The initial annual fee is
to be paid concurrent with the funding of the $600,000 subordinated
notes;
. En Pointe has also agreed to provide (i) consulting services to the
Company by customizing its EPIC Software and (ii) information system
services for a quarterly fee estimated to be $60,000 and $50,000,
respectively. The initial quarterly fees of $60,000 and $50,000 are to be
paid concurrent with the funding of the $600,000 subordinated notes;
. In the event that the Company does not complete its IPO within one year,
the Company is obligated to pay En Pointe $1,000,000 for the licensing of
the EPIC Software.
Stock Split
-----------
At the completion of the Company's IPO in December 1997, the Company
effected a one-for-two reverse stock split of its common stock. All share
and per share data have been retroactively restated to reflect this stock
split.
14
<PAGE>
SHOPPING.COM
REPORT AND FINANCIAL STATEMENTS
JANUARY 31, 1998 AND 1999
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholder of Shopping.com
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of shareholders' equity (deficit) and of
cash flows present fairly, in all material respects, the financial position of
Shopping.com and its subsidiary at January 31, 1998 and 1999, and the results of
their operations and their cash flows for the years then ended, in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Costa Mesa, California
June 9, 1999, except as to Note 12,
which is as of July 2, 1999
<PAGE>
SHOPPING.COM
CONSOLIDATED BALANCE SHEET
________________________________________________________________________________
<TABLE>
<CAPTION>
January 31,
1998 1999
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 4,761,000 $ 90,000
Accounts receivable, net of allowance for doubtful
accounts of $10,000 and $61,000 169,000 648,000
Prepaid and other current assets 666,000 1,465,000
Deposits 1,373,000
------------ ------------
Total current assets 5,596,000 3,576,000
Property and equipment, net 2,846,000 1,972,000
Other assets 216,000 546,000
------------ ------------
Total assets $ 8,658,000 $ 6,094,000
============ ============
Liabilities and Shareholders' Equity (Deficit)
Current liabilities
Accounts payable $ 777,000 $ 5,580,000
Notes payable 3,000,000
Other accrued liabilities 583,000 12,252,000
Current portion of capital lease obligations 211,000 250,000
------------ ------------
Total current liabilities 1,571,000 21,082,000
Capital lease obligations, net of current portion 229,000 92,000
------------ ------------
Total liabilities 1,800,000 21,174,000
------------ ------------
Commitments and contingencies (Note 9)
Shareholders' Equity (Deficit)
Common stock, no par value
20,000,000 shares authorized; 4,002,000 and
10,212,406 shares issued and outstanding 14,817,000 42,102,000
Unearned compensation (557,000) (58,000)
Accumulated deficit (7,402,000) (57,124,000)
------------ ------------
Total shareholders' equity (deficit) 6,858,000 (15,080,000)
------------ ------------
Total liabilities and shareholders' equity (deficit) $ 8,658,000 $ 6,094,000
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
1
<PAGE>
SHOPPING.COM
CONSOLIDATED STATEMENT OF OPERATIONS
________________________________________________________________________________
<TABLE>
<CAPTION>
Year Ended January 31,
1998 1999
<S> <C> <C>
Net sales $ 851,000 $ 8,122,000
Cost of sales 856,000 10,122,000
------------ ------------
Gross loss (5,000) (2,000,000)
------------ ------------
Operating expenses:
General and administrative 2,324,000 19,193,000
Advertising and marketing 2,006,000 10,087,000
Product development 658,000 3,288,000
Stock-based compensation 675,000 6,696,000
Loss on disposal of assets 25,000 1,539,000
------------ ------------
Total operating expenses 5,688,000 40,803,000
------------ ------------
Loss from operations (5,693,000) (42,803,000)
------------ ------------
Other income (expense):
Interest expense (1,195,000) (5,819,000)
Interest income 15,000 71,000
------------ ------------
Total other income (expense) (1,180,000) (5,748,000)
------------ ------------
Loss before extraordinary item (6,873,000) (48,551,000)
Extraordinary loss (Note 6) (1,171,000)
------------ ------------
Net loss $ (6,873,000) $(49,722,000)
============ ============
Basic and diluted per share amounts:
Loss before extraordinary item $ (4.03) $ (10.10)
============ ============
Extraordinary Item $ -- $ (0.24)
============ ============
Net loss $ (4.03) $ (10.34)
============ ============
Weighted average shares outstanding 1,786,894 4,808,069
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
SHOPPING.COM
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
________________________________________________________________________________
<TABLE>
<CAPTION>
Preferred Stock
Series A Convertible Series B Convertible Common Stock
--------------------------------------------------------------------------------------
Shares Amount Shares Amount Shares Amount
<S> <C> <C> <C> <C> <C> <C>
Balance, January 31, 1997 - $ - - $ - 1,152,500 $ 123,000
Sale of common stock 100,000 2,000
Issuance of common stock for services 38,000 54,000
Contribution of domain name 90,000
Sale of Series A Preferred Stock 1,000,000 200,000
Issuance of Series A Preferred Stock,
for net assets 500,000 100,000 (100,000)
Sale of Series B Preferred Stock, net 1,073,000 749,000
Beneficial conversion feature 327,000
Issuance of common stock for software 125,000 1,000,000
Sale of common stock in IPO, net 1,300,000 9,374,000
Conversion of Series A and B Preferred
to Common Stock (1,500,000) (300,000) (1,073,000) (749,000) 1,286,500 1,049,000
Issuance of warrants, net 1,666,000
Unearned compensation 1,232,000
Amortization of unearned compensation
Net loss
------------- ----------- ------------- ------------ -------------- ----------------
Balance, January 31, 1998 - - - - 4,002,000 14,817,000
Exercise of stock options 5,175 5,000
Issuance of common stock for services 121,226 2,878,000
Conversion of debt to common stock 3,806,701 1,833,000
Issuance of warrants, net 13,290,000
Exercise of warrants 2,277,304 3,082,000
Stock-based compensation - employees 2,869,000
Stock-based compensation - nonemployees 3,328,000
Amortization of unearned compensation
Net loss
------------- ----------- ------------- ------------ -------------- ----------------
Balance, January 31, 1999 $ - $ - 10,212,406 $42,102,000
============= =========== ============= ============ ============== ================
</TABLE>
<TABLE>
<CAPTION>
Unearned Accumulated
Compensation Deficit Total
<S> <C> <C> <C>
Balance, January 31, 1997 $ - $ (202,000) $ (79,000)
Sale of common stock 2,000
Issuance of common stock for services 54,000
Contribution of domain name 90,000
Sale of Series A Preferred Stock 200,000
Issuance of Series A Preferred Stock,
for net assets
Sale of Series B Preferred Stock, net 749,000
Beneficial conversion feature (327,000)
Issuance of common stock for software 1,000,000
Sale of common stock in IPO, net 9,374,000
Conversion of Series A and B Preferred
to Common Stock
Issuance of warrants, net 1,666,000
Unearned compensation (1,232,000)
Amortization of unearned compensation 675,000 675,000
Net loss (6,873,000) (6,873,000)
------------ ------------ ------------
Balance, January 31, 1998 (557,000) (7,402,000) 6,858,000
Exercise of stock options 5,000
Issuance of common stock for services 2,878,000
Conversion of debt to common stock 1,833,000
Issuance of warrants, net 13,290,000
Exercise of warrants 3,082,000
Stock-based compensation - employees 2,869,000
Stock-based compensation - nonemployees 3,328,000
Amortization of unearned compensation 499,000 499,000
Net loss (49,722,000) (49,722,000)
----------- ------------ ------------
Balance, January 31, 1999 $ (58,000) $(57,124,000) $(15,080,000)
=========== ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
SHOPPING.COM
CONSOLIDATED STATEMENT OF CASH FLOWS
________________________________________________________________________________
<TABLE>
<CAPTION>
Year Ended January 31,
1998 1999
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (6,873,000) $ (49,722,000)
Adjustments to reconcile net loss to
net cash used in operating activities
Common stock issued for services 54,000 2,878,000
Warrants issued for services 2,914,000
Amortization of debt issuance costs 91,000 1,149,000
Amortization of debt discount 1,082,000 2,462,000
Amortization of beneficial conversion feature 1,999,000
Extraordinary loss on conversion of notes payable 1,171,000
Stock-based compensation - employees 675,000 3,368,000
Stock-based compensation - nonemployees 3,328,000
Accrued interest converted to Common Stock 142,000
Depreciation and amortization 163,000 600,000
Loss on disposal of assets 25,000 1,539,000
Allowance for doubtful accounts 10,000 61,000
Changes in assets and liabilities:
Accounts receivable (179,000) (636,000)
Prepaid expenses (771,000) (799,000)
Deposits (196,000)
Other assets (34,000) (354,000)
Accounts payable 546,000 4,803,000
Other accrued liabilities 265,000 12,018,000
Stock subscription 23,000
------------ ------------
Net cash used in operating activities (4,923,000) (13,275,000)
------------ ------------
Cash flows from investing activities:
Purchase of property and equipment (1,564,000) (1,006,000)
------------ ------------
------------ -----------
Net cash used in investing activities (1,564,000) (1,006,000)
------------ ------------
------------ -----------
Cash flows from financing activities:
Proceeds from the issuance of note payable - related party 305,000
Payments on note payable - related party (355,000)
Payment on capital lease obligations (9,000) (333,000)
Proceeds from the issuance of notes payable 1,750,000 4,825,000
Payments on notes payable (1,750,000) (850,000)
Proceeds from exercise of warrants 1,905,000
Payment of debt issuance costs (241,000) (942,000)
Proceeds from the issuance of Series A Preferred Stock, net 200,000
Proceeds from the issuance of Series B Preferred Stock, net 1,483,000
Proceeds from the issuance of 8% Debentures 5,000,000
Proceeds from the issuance of Common Stock, net 9,865,000 5,000
------------ ------------
Net cash provided by financing activities 11,248,000 9,610,000
------------ ------------
Net increase (decrease) in cash and
cash equivalents 4,761,000 (4,671,000)
Cash and cash equivalents, beginning of period - 4,761,000
------------ ------------
Cash and cash equivalents, end of period $ 4,761,000 $ 90,000
============ ============
</TABLE>
Supplemental disclosure of cash flow information - Note 3
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
SHOPPING.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
________________________________________________________________________________
NOTE 1 - THE COMPANY
Shopping.com (the "Company") was incorporated in California on November 22,
1996. Cyber Depot, Inc. ("CyberDepot") was incorporated in California in January
1996 and among other business ventures commenced the design and development of
proprietary software for the Internet shopping marketplace in February 1996. In
March 1997, CyberDepot exchanged substantially all of its assets and liabilities
and proprietary software for 500,000 shares of Series A Preferred Stock and
Common Stock warrants (Note 7). The Company and CyberDepot are considered to be
entities under common control; accordingly, CyberDepot's results have been
combined with the Company since February 1996.
The Company is an Internet-based electronic retailer marketing a broad range of
products to both consumers and trade customers. The Company employs proprietary
information systems along with industry software to provide its customers with
access to an automated marketplace of products, which consist of inventories of
multiple manufacturers and distributors, price comparisons, detailed product
descriptions, delivery status of products ordered and back order information.
The Company commenced selling products over the Internet in July 1997 and
completed its initial public offering ("IPO") in November 1997.
The Company's fiscal year ends on January 31; accordingly, all references to
1998 and 1999 are for the years ended January 31, 1998 and 1999, respectively.
The Company has incurred losses from operations through January 31, 1999.
Compaq Computer Corporation ("Compaq") has committed to provide the funds
required for the conduct of the Company's operations at least through January
31, 2000 or to the date, if earlier, on which it ceases to be the controlling
shareholder (Notes 11 and 12).
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its subsidiary. All significant intercompany transactions and balances have
been eliminated.
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 the disclosures of
contingent assets and liabilities at the date of the financial statements, as
well as the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates. The valuation of
warrants, equity and debt securities, allowances for doubtful accounts, product
returns, and litigation reserves require the use of significant estimates. The
Company believes the techniques and assumptions used in establishing these
estimates are appropriate.
FAIR VALUE OF FINANCIAL INSTRUMENTS
It is management's belief that the carrying amounts for the Company's financial
instruments are reasonable estimates of their related fair values due to the
short-maturity of these instruments.
5
<PAGE>
SHOPPING.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
________________________________________________________________________________
CASH AND CASH EQUIVALENTS
The Company considers all highly-liquid investments with an original maturity of
three months or less to be cash equivalents.
DEPOSITS
Deposits primarily consist of cash held by a third party that was collected on
behalf of the Company from the exercise of stock options and warrants. Of the
total $1,373,000 outstanding as of January 31, 1999, $1,177,000 represent the
deposits held by the third party.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to a concentration of
credit risk consist of cash and cash equivalents and accounts receivable. The
Company maintains its cash and cash equivalents in bank deposit accounts which,
at times, may exceed federally insured limits. The Company has not experienced
any losses in these accounts and believes that it is not exposed to any
significant credit risk.
Accounts receivable are typically unsecured and are derived from revenues earned
from customers primarily located in the United States. The Company generally
requires no collateral from its customers for non-credit card sales. To date,
the Company has not experienced any material losses.
During 1998 and 1999, the Company sold products to its lead underwriter in its
IPO that accounted for approximately 40% and 2% of total net sales,
respectively. During 1998 and 1999, the Company purchased products from four
and two vendors, respectively, that represented 10% or more of total purchases.
These vendors represented 85% and 49% of total purchases in 1998 and 1999,
respectively.
LONG-LIVED ASSETS
The Company assesses potential impairments to its long-lived assets when events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. An impairment loss would be recognized when the sum of the
expected future undiscounted net cash flows is less than the carrying amount of
the asset. The amount of the impairment loss is based on the difference between
the related asset's carrying value and the expected future discounted net cash
flows.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost less accumulated depreciation and
amortization using the straight-line method over the following estimated useful
lives:
Computer equipment 5 years
Purchased software 3 to 5 years
Furniture and equipment 5 to 7 years
Leasehold improvements 5 years
6
<PAGE>
SHOPPING.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
________________________________________________________________________________
Leasehold improvements and assets under capital leases are amortized over the
term of the lease or estimated useful lives, whichever is shorter. Maintenance
and minor replacements are charged to expense as incurred. Gains and losses on
disposals are included in the results of operations. During 1999, the Company
wrote-off the $1,201,000 carrying value of certain purchased software which
management determined had no future benefit.
ISSUANCE COSTS
Issuance costs are amounts paid or the estimated value of warrants issued to
placement agents or financial consultants to obtain debt or equity financing.
The Company allocates issuance costs for debt issued with warrants between debt
and equity based on the relative fair value of the individual elements at the
time of issuance. Debt issuance costs are recorded as deferred charges and are
amortized over the term of the related debt using the effective interest method.
Equity issuance costs are deducted from the proceeds of the related equity
securities.
STOCK-BASED COMPENSATION
The Company accounts for employee stock compensation arrangements in accordance
with provisions of Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB 25"), and complies with the disclosure
provisions of Statement of Financial Accounting Standards "Accounting for
Stock-Based Compensation" ("SFAS 123"). Under APB 25, compensation expense is
based on the difference, if any, on the date of grant between the fair value of
the Company's Common Stock and the exercise price. Unearned compensation is
amortized over the vesting period of the related options.
STOCK SPLIT
At the completion of the Company's IPO in November 1997, the Company effected a
one-for-two reverse stock split of its Common Stock. All share and per share
data have been retroactively restated to reflect this stock split.
REVENUE RECOGNITION
The Company recognizes revenue at the time the vendor ships the product to the
customer. The Company provides an allowance for sales returns based on
historical experience. To date, the Company's sales returns have been
insignificant.
ADVERTISING
The Company expenses advertising costs the first time the advertisement is
published or broadcasted. Included in advertising and marketing is $899,000 and
$6,234,000 in advertising expense for 1998 and 1999, respectively.
7
<PAGE>
SHOPPING.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
________________________________________________________________________________
PRODUCT DEVELOPMENT
Product development expenses consist principally of payroll, consulting fees,
and related expenses for development and maintenance of the Company's web site,
including depreciation of computer equipment and purchased software. All
product development costs have been expensed as incurred.
INCOME TAXES
Income taxes are computed using the asset and liability method. Under the asset
and liability method, deferred income tax assets and liabilities are determined
based on the differences between the financial reporting and tax bases of assets
and liabilities and are measured using the currently enacted tax rates and laws.
A valuation allowance is provided for the amount of deferred tax assets that,
based on available evidence, are not expected to be realized.
NET LOSS PER SHARE
The Company computes net loss per share in accordance with SFAS 128 "Earnings
per Share" and SEC Staff Accounting Bulletin No. 98 ("SAB 98"). Under the
provisions of SFAS 128 and SAB 98, basic and diluted net loss per share is
computed by dividing the net loss available to common shareholders for the
period by the weighted average number of Common Stock outstanding during the
period. The calculation of diluted net loss per share excludes potential common
shares if the effect is antidilutive.
COMPREHENSIVE INCOME
Effective February 1, 1998, the Company adopted the provisions of SFAS 130,
"Reporting Comprehensive Income." SFAS 130 establishes standards for reporting
comprehensive income and its components in financial statements. Comprehensive
income, as defined, includes all changes in equity (net assets) during a period
from non-owner sources. To date, the Company has not had any material
transactions that are required to be reported in comprehensive income.
SEGMENT INFORMATION
Effective February 1, 1998, the Company adopted the provisions of SFAS 131,
"Disclosures about Segments of an Enterprise and Related Information." The
Company operates in a single business segment that provides eCommerce to
individuals and businesses. The adoption of SFAS 131 did not have a material
impact to the Company's financial statement disclosure.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, Statement of Position 98-1 "Accounting for the Cost of Computer
Software Developed or Obtained for Internal Use" ("SOP 98-1") was issued. SOP
98-1 provides guidance over accounting for computer software developed or
obtained for internal use including the requirement to capitalize specified
costs and amortization of such costs. The Company will adopt the provisions of
SOP 98-1 for the fiscal year ending January 31, 2000, and does not expect
adoption to have a material impact on its financial position and results of
operations.
8
<PAGE>
SHOPPING.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
________________________________________________________________________________
In April 1998, SOP 98-5 "Reporting on the Costs of Start-Up Activities" was
issued. Start-up activities are defined broadly as those one-time activities
relating to opening a new facility, introducing a new product or service,
conducting business in a new territory, conducting business with a new class of
customer, commencing some new operation or organizing a new entity. Under SOP
98-5, the cost of start-up activities should be expensed as incurred. SOP 98-5
is effective for the Company's year ending January 31, 2000. The Company does
not expect adoption to have a material impact to its financial position and
results of operations.
NOTE 3 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
In February and September 1998, the Company executed two separate agreements
with the same party whereby it issued 47,059 and 66,667 shares of Common Stock,
respectively, in exchange for radio advertising valued at $2,675,000. The value
of the advertising was based on the fair value of the Common Stock issued.
During 1999, the Company entered into two separate agreements for investor and
public relation services in exchange for shares of Common Stock and stock
options (Note 9). In September 1997, the Company entered into an agreement
whereby it issued 125,000 shares of the Company's Common Stock in exchange for a
five year software license. The estimated fair value of the software license
was $1,000,000. The value of other services provided in exchange for Common
Stock was based on the fair value of the Common Stock issued.
The Company entered into the following non-cash investing and financing
activities:
<TABLE>
<CAPTION>
Year Ended January 31,
1998 1999
<S> <C> <C>
Supplemental Schedule of Non-Cash Investing and
and Financing Activities
Common Stock issued or to be issued for services $ 54,000 $ 4,497,000
Warrants and options issued or to be issued for services 3,100,000
Exercise of warrants 1,177,000
Common Stock issued for software license 1,000,000
Conversion of debt into Common Stock 1,833,000
Series A Preferred Stock and Common Stock warrants
issued in exchange for net assets 100,000
Contribution of domain name 90,000
Equipment acquired under capital leases 449,000 236,000
Supplemental Disclosures of Cash Flow Information
Cash paid for interest 56,000 86,000
Cash paid for taxes - -
</TABLE>
9
<PAGE>
SHOPPING.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
________________________________________________________________________________
NOTE 4 - COMPOSITION OF CERTAIN BALANCE SHEET COMPONENTS
Prepaid and other current assets consist of the following:
<TABLE>
<CAPTION>
January 31,
1998 1999
<S> <C> <C>
Advertising $ 458,000 $ 104,000
Insurance 112,000 20,000
Investor and public relations 1,295,000
Other 96,000 46,000
------------- ------------
$ 666,000 $ 1,465,000
============= ============
</TABLE>
Property and equipment consist of the following:
<TABLE>
<CAPTION>
January 31,
1998 1999
<S> <C> <C>
Computer equipment $ 1,229,000 $ 1,698,000
Purchased software 1,469,000 475,000
Furniture and equipment 237,000 309,000
Leasehold improvements 59,000 103,000
------------- ------------
2,994,000 2,585,000
Less accumulated depreciation and
amortization (148,000) (613,000)
------------- ------------
Total $ 2,846,000 $ 1,972,000
============= ============
</TABLE>
Included in property and equipment at January 31, 1998 and 1999 is equipment
acquired under capital leases of $449,000 and $685,000 with related accumulated
amortization of $11,000 and $134,000, respectively. During 1997, 1998, and
1999, the Company recorded $1,000, $147,000 and $577,000 in depreciation
expense, respectively.
Other assets consist of the following:
<TABLE>
<CAPTION>
January 31,
1998 1999
<S> <C> <C>
Deposits $ 105,000 $ 487,000
Other 111,000 59,000
------------- ------------
$ 216,000 $ 546,000
============ ============
</TABLE>
10
<PAGE>
SHOPPING.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
________________________________________________________________________________
Other accrued liabilities consist of the following:
<TABLE>
<CAPTION>
January 31,
1998 1999
<S> <C> <C>
Legal $ 331,000 $ 1,000,000
Litigation reserves 113,000 8,510,000
Investor and public relations 1,805,000
Termination and severance 307,000
Payroll and vacation 76,000 151,000
Gift certificates 150,000
Other 63,000 329,000
------------- ------------
$ 583,000 $ 12,252,000
============= ============
</TABLE>
NOTE 5 - NET LOSS PER SHARE
<TABLE>
<CAPTION>
The following table sets forth the computation of basic and diluted net loss per
share:
Year Ended January 31,
1998 1999
<S> <C> <C>
Loss before extraordinary item $ (6,873,000) $ (48,551,000)
Preferred stock dividends from beneficial
conversion feature (327,000)
------------- -------------
Loss before extraordinary item
available to common shareholders (7,200,000) (48,551,000)
Extraordinary loss (Note 6) (1,171,000)
------------- -------------
Net loss available to common shareholders $ (7,200,000) $ (49,722,000)
============= =============
Weighted average shares outstanding 1,786,894 4,808,069
============= =============
Basic and diluted per share amounts:
Loss before extraordinary item $ (4.03) $ (10.10)
============= =============
Extraordinary item $ - $ (0.24)
============= =============
Net loss $ (4.03) $ (10.34)
============= =============
</TABLE>
11
<PAGE>
SHOPPING.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
________________________________________________________________________________
The following table sets forth potential dilutive securities that are not
included in the diluted net loss per share calculation above because to do so
would be antidilutive in the periods indicated:
<TABLE>
<CAPTION>
Year Ended January 31,
1998 1999
<S> <C> <C>
Weighted average effect of potential dilutive securities:
Series A Preferred Stock 734,000
Series B Preferred Stock 324,000
Common Stock warrants 19,000 754,000
Common Stock options 61,000 447,000
--------- ---------
1,138,000 1,201,000
========= =========
</TABLE>
NOTE 6 - BORROWINGS
CONVERTIBLE DEBENTURES
In June, July and November 1998, the Company issued $1,250,000, $1,250,000 and
$2,500,000, respectively of 8% convertible debentures ("the 8% Debentures").
Interest is payable quarterly, two years from the issuance date ("the Maturity
Date") or upon conversion. The Company, at its option, may pay any accrued
interest in shares of Common Stock at the Conversion Price then in effect, as
defined. The Debentures are convertible into Common Stock at a conversion price
equal to the lower of (i) the lowest market price for any three days in the 30
days preceding conversion; or (ii) $16.00 per share (the "Base Rate"), which is
subject to a 10% reduction in the event of contract breach, as defined. The
holders of the 8% Debentures may convert up to 20% of the original principal
amount between 30 days and 90 days after issuance, up to an additional 25% (45%
cumulative) 120 days after issuance, up to an additional 35% (80% cumulative)
150 days after issuance, with the balance being convertible at anytime
thereafter. Any 8% Debentures not previously converted as of the Maturity Date
automatically convert into Common Stock at the applicable conversion rate, as
defined.
The holders of the 8% Debentures receive one warrant to purchase one share of
Common Stock for each two shares of Common Stock issued in connection with the
corresponding conversion of the 8% Debentures. The warrants attributable to each
conversion have an exercise price equal to the lesser of (i) 120% of the lowest
market price for any three trading days prior to conversion or (ii) 125% of the
Base Rate. The warrants expire in June 2003. The Company has the right to
redeem all or any portion of the Debentures, subject to a Redemption Premium, as
defined. The holders of the 8% Debentures may require the Company to redeem the
outstanding portion of the 8% Debentures in the event of a contract breach, as
defined. Additionally, in the event of contract default, the holders may
consider the 8% Debentures immediately due and payable.
In connection with the issuance of the 8% Debentures, the Company issued
warrants and made payments to placement agents, which were recorded as debt and
equity issuance costs. The debt issuance costs were originally being amortized
as additional interest expense ratably over the term of the 8% Debentures. In
November and December of 1998, the entire $5,000,000 principal amount, plus
accrued interest, of the 8% Debentures was converted into 3,323,781 shares of
Common Stock and 1,627,153 warrants were issued and then exercised into
1,627,153 shares of Common Stock.
12
<PAGE>
SHOPPING.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
________________________________________________________________________________
PROMISSORY NOTES
In December 1998, the Company issued a $2,500,000 secured promissory note with a
10% per annum interest rate payable in 30 days provided however, if within 30
days the Company closes a financing transaction, as defined, the holder had the
right to convert the note into the same class of security as the defined
financing transaction. In conjunction with the promissory note, the Company
issued 500,000 warrants to purchase common stock at a price of $7.00 per share,
subject to adjustment, which expire in December 2001. The promissory note was
secured by a Non-Recourse Guaranty and Pledge Agreement with a former officer
and current shareholder of the Company. In exchange for this guaranty, the
former officer received 130,000 warrants to purchase common stock at a price of
$7.00 per share, subject to adjustment, which expire in December 2003. The
secured promissory note is also secured by all assets of the Company. The
secured promissory note was paid in full in February 1999.
In September 1998, the Company issued a $500,000 promissory note to a related
party (a director of the Company is also a member of the Board of Directors of
the corporation to which the Company issued the promissory note) that was due at
the earlier of the Company receiving $500,000 in additional financing from
another source or October 1998. The Company also issued 30,000 warrants to
purchase shares of Common Stock at an exercise price of $2.25 per share. The
warrants expire in September 2003. During October 1998, the Company repaid
$200,000 and renegotiated a revised due date of the earlier of the Company
receiving $300,000 in additional financing from another source or December 1998.
In connection with the modification, the Company also issued 30,000 additional
warrants to purchase shares of the Company's Common Stock at an exercise price
of $1.65 that expire in November 2003. The remaining balance of $300,000 was
paid in January 1999.
In August 1998, the Company issued a $500,000 convertible promissory note that
is due six months from the date of issuance, with an interest rate of 8% per
annum, that have been converted into Common Stock at a rate of $10.00 per share.
In connection with the issuance of the convertible promissory note, the Company
issued 50,000 warrants to purchase shares of Common Stock at an exercise price
of $10.00 that expires in August 2001. The Company also issued warrants to
purchase 10,000 shares of Common Stock to the placement agent, the value of
which has been accounted for as debt and equity issuance costs. The warrants
issued to the placement agent contain the same terms and conditions as the
warrants issued with the convertible promissory note. In January 1999, the note
plus accrued interest, were converted into 156,196 shares of Common Stock.
In May through July 1998, the Company issued $1,325,000 of unsecured promissory
notes at an interest rate of 8% per annum with principal and accrued interest
due six months from the date of issuance. In conjunction with the issuance, the
promissory note holders received a total of 132,500 warrants to purchase shares
of Common Stock that are exercisable until May 2001 (10,000 warrants are
exercisable until June 2001) at an exercise price of $14.00 per share. In
November 1998, the Company provided the note holders with the option to convert
the promissory notes or extend the maturity date by 90 days in exchange for
warrants with an exercise price of $7.00 to purchase the Company's Common Stock.
Of the total promissory notes, $475,000 plus accrued interest, were converted
into shares of Common Stock and $350,000 was paid in January 1999. The Company
issued an additional 71,250 warrants to the note holders. The holder of the
remaining unpaid $500,000 principal balance has filed a complaint against the
Company contending that it is entitled to convert the note into Common Stock.
The balance has not yet been paid. As a result of the conversion of the notes
to Common Stock, the Company recognized a
13
<PAGE>
SHOPPING.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
________________________________________________________________________________
$1,171,000 extraordinary loss which represents the excess of the fair value of
the Common Stock and warrants over the carrying value of the note on the date of
conversion. In addition, the Company issued warrants to purchase 20,000 shares
of Common Stock at an exercise price of $14.00 per share to the placement agent,
the value of which has been accounted for as debt and equity issuance costs.
In September 1997, the Company issued a $600,000 note to a shareholder of the
Company with an interest rate of 10% per annum that was due the earlier of nine
months or the closing of an IPO. In conjunction with the note, the Company
issued 199,800, five year warrants with an exercise price of $4.50 per share.
The note was paid in full in 1998.
During June through July 1997, the Company issued $1,150,000 in subordinated
promissory notes each with an interest rate of 10% per annum that were due the
earlier of nine months from the date of issuance or the closing of an IPO. The
note holders were issued 333 warrants for every $1,000 of note principal at an
exercise price of $6.00 per share that were exercisable any time after the
earlier of 90 days after the effective date of the Company's IPO or one year
from the date of issuance. The notes were paid in full in 1998.
The Company allocates the proceeds received from debt or convertible debt with
detachable warrants using the relative fair value of the individual elements at
the time of issuance. The amount allocated to the warrants is accounted for as
debt discount and is amortized to interest expense over the expected term of the
debt using the effective interest method. The carrying amount of convertible
debt has been reduced by any related unamortized debt discount and issuance
costs on the date of conversion to Common Stock.
In accordance with the FASB's Emerging Issues Task Force ("EITF") Topic No. D-60
("Topic D-60"), the Company accounts for the beneficial conversion feature of
convertible debt securities based on the difference between the conversion price
and the fair value of the Common Stock into which the security is convertible,
multiplied by the number of shares into which the security is convertible. The
amount attributable to the beneficial conversion feature is recognized as
additional interest expense over the most beneficial conversion period using the
effective interest method. Any unamortized beneficial conversion feature is
recognized as interest expense when the related debt security is converted into
Common Stock. During 1999, the Company recognized $1,999,000 in expense for the
beneficial conversion feature of its convertible debt.
NOTE 7 - SHAREHOLDERS' EQUITY
CONVERTIBLE PREFERRED STOCK
The Company's Series A and Series B Convertible Preferred Stock (collectively
referred to as the "Preferred Stock") is convertible upon issuance into Common
Stock at the option of the holder or automatically converts into shares of
Common Stock based upon the Conversion Price, immediately upon the closing of an
IPO of not less than $6,000,000. The initial Conversion Price per share for the
Series A Preferred Stock and Series B Preferred Stock was $.20 and $1.50,
respectively, and was subsequently increased to $.40 and $3.00, respectively, as
a result of the reverse Common Stock split. The Conversion Price was subject to
further adjustment, as defined. The Series A Preferred Stock and Series B
Preferred Stock had a liquidation preference of $0.20 and $1.50 per share,
respectively, plus all declared and unpaid dividends. The Series A Preferred
Stock and Series B Preferred Stock were entitled
14
<PAGE>
SHOPPING.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
________________________________________________________________________________
to receive non-cumulative dividends of $.02 and $.15 per share, respectively.
The Preferred Stock holders were entitled to vote on an "as converted" basis.
Total shares authorized for issuance of the Series A and Series B Preferred
Stock was 1,500,000 and 4,000,000, respectively.
During April through August 1997, the Company issued 1,073,000 of its Series B
Convertible Preferred Stock at an issuance price of $1.50 per share with
issuance costs of approximately $125,000. Upon the consummation of the
Company's IPO, each two shares of the Preferred Stock were converted into one
share of Common Stock.
In accordance with Topic D-60, the Company accounted for the beneficial
conversion feature of its convertible Preferred Stock based on the difference
between the conversion price and the estimated fair value of the Common Stock
into which the security is convertible, multiplied by the number of shares into
which the security is convertible. The resultant allocation of the proceeds to
the beneficial conversion feature was accounted for as a dividend on the date
the Preferred Stock was issued.
In accordance with Topic D-60, the Company accounted for the beneficial
conversion feature of its convertible Preferred Stock based on the difference
between the conversion price and the estimated fair value of the Common Stock
into which the security is convertible, multiplied by the number of shares into
which the security is convertible. The resultant allocation of the proceeds to
the beneficial conversion feature was accounted for as a dividend on the date
the Preferred Stock was issued.
Each holder of the Series A and Series B Preferred Stock was issued one warrant
for every four shares of the Series A and Series B Preferred Stock to purchase
Common Stock at an exercise price of $.40 and $3.00 per share, respectively. The
Company allocated the proceeds received from the Preferred Stock using the
relative fair value of the individual elements at the time of issuance. The
estimated value of the warrants issued to the Series A Preferred Stock holders
was determined to be de minimis. The $407,000 allocated to the warrants
associated with the Series B Convertible Preferred Stock is included in Common
Stock.
COMMON STOCK
In November 1997, the Company completed its IPO by issuing 1,300,000 shares of
Common Stock for gross proceeds of $11,700,000. In addition to issuance costs of
$2,326,000, the Company issued 122,000, four year warrants with an exercise
price of $14.40 per share with an estimated value of $504,000.
COMMON STOCK WARRANTS
A summary of the Company's warrant activity is provided below.
<TABLE>
<CAPTION>
January 31,
1998 1999
------------------------------------- ----------------------------------------
Issued Exercised Outstanding Issued Exercised Outstanding
------ --------- ----------- ------ --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Beginning balance - - - 1,348,004 - 1,348,004
Series A Preferred Stock 375,000 375,000
Series B Preferred Stock 268,254 268,254 (97,402) (97,402)
8% Debentures - 1,627,153 (1,627,153)
Promisory Notes 582,750 582,750 813,750 (233,150) 580,600
Services 122,000 122,000 1,645,088 (669,152) 975,936
--------- ---------- --------- --------- ---------- ---------
Ending Balance 1,348,004 - 1,348,004 5,433,995 (2,626,857) 2,807,138
========= ========== ========= ========= ========== =========
</TABLE>
15
<PAGE>
SHOPPING.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
________________________________________________________________________________
<TABLE>
<CAPTION>
Warrants Outstanding Warrants Exercisable
------------------------------------------------------- --------------------------------------
Weighted Average
Number Remaining Weighted Number Weighted
Range of Outstanding at Contractual Life Average Exercisable at Average
Exercise Prices January 31, 1999 (Years) Exercise Price January 31, 1999 Exercise Price
--------------- ---------------- ---------------- -------------- ---------------- --------------
<S> <C> <C> <C> <C> <C>
$1.78 - $3.25 772,501 3.66 $2.72 772,501 $2.72
$4.50 - $7.00 1,284,200 3.39 $6.47 1,284,200 $6.47
$10.00 - $16.00 416,357 3.66 $14.05 416,357 $14.05
$21.92 - $24.00 334,080 4.14 $22.13 334,080 $22.13
---------------- ---------------- -------------- ---------------- --------------
2,807,138 2,807,138
================ ================
</TABLE>
The Company obtained a valuation for its warrants from an independent firm that
used the Black-Scholes option valuation model with the following
weighted-average assumptions:
<TABLE>
<CAPTION>
Year Ended January 31,
1998 1999
--------- ---------
<S> <C> <C>
Dividend Yield 0% 0%
Risk free interest rate 6% 5%
Expected volatility 61% 87%
Expected term - years 5.0 4.7
</TABLE>
The weighted average fair value of the warrants issued during 1998 and 1999 was
$2.94 and $7.63, respectively.
STOCK OPTION PLAN
In July 1997, the Company adopted the 1997 Stock Option Plan (the "1997 Plan")
that provides for the issuances of options to employees, directors and
consultants of the Company for up to a maximum of 750,000 shares of Common
Stock. Generally, options granted under the 1997 Plan expire the earlier of ten
years from the date of grant, (or five years in the case of an incentive stock
option granted to a holder of 10% or more of the Company's outstanding Common
Stock), or three months after the optionee's termination of employment. The
options vest over periods ranging from two to five years. Options are
exercisable for consideration in the form of cash or Common Stock previously
held by the optionee. The 1997 Plan may be suspended or terminated at the
discretion of the Board of Directors. As of January 31, 1999, 208,000 options
are available for future grant under the 1997 Plan.
In 1998 and 1999, the Company issued options to directors and employees with
exercise prices below the fair market value of the underlying Common Stock on
the date of grant resulting in $675,000 and $3,368,000 in compensation expense,
respectively. During 1999, the Company issued a total of 287,500 options to
non-employees resulting in additional compensation expense of $3,328,000 as
determined using the Black-Scholes option valuation model.
16
<PAGE>
SHOPPING.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
________________________________________________________________________________
A summary of the activity related to the Company's stock options issued under
the 1997 Plan, options issued to directors outside of the 1997 Plan, and options
issued to non-employees follows:
<TABLE>
<CAPTION>
Weighted Average
Number Exercise Price
of Shares Per Share
-------------- ----------------
<S> <C> <C>
Options outstanding, January 31, 1997 - -
Granted 230,000 $3.00
Cancelled (10,000) $3.00
--------------
Options outstanding, January 31, 1998 220,000 $3.00
Granted 2,534,500 $8.44
Exercised (5,175) $2.50
Cancelled (24,125) $2.74
--------------
Options outstanding, January 31, 1999 2,725,200 $9.60
==============
Options exercisable, January 31, 1999 2,530,325 $7.91
==============
</TABLE>
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------------- ---------------------------------
Weighted Average
Number Remaining Weighted Number Weighted
Range of Outstanding at Contractual Life Average Exercisable at Average
Exercise Prices January 31, 1999 (Years) Exercise Price January 31, 1999 Exercise Price
- ---------------- ---------------- ---------------- -------------- ---------------- --------------
<S> <C> <C> <C> <C> <C>
$1.78 - $3.00 1,612,700 5.04 $1.92 1,442,825 $ 1.94
$13.47 - $16.00 787,500 4.42 $15.36 787,500 $15.36
$18.49 - $21.00 325,000 4.46 $20.81 300,000 $21.00
--------- ---------
2,725,200 2,530,325
========= =========
</TABLE>
FAIR VALUE DISCLOSURE
The Company applies the measurement principles of APB No. 25 in accounting for
options issued to employees under its stock option plan and options issued to
Directors. If the Company had elected to recognize compensation expense based on
the fair value at the grant dates as prescribed by SFAS 123, the Company's net
loss would have been increased to the pro forma amounts indicated below.
17
<PAGE>
SHOPPING.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
________________________________________________________________________________
<TABLE>
<CAPTION>
Year Ended January 31,
1998 1999
<S> <C> <C>
Net loss available to common shareholders:
As reported $(7,200,000) $(49,722,000)
Pro forma $(7,659,000) $(56,135,000)
Basic and diluted loss per common share:
As reported $(4.03) $(10.34)
Pro forma $(4.29) $(11.68)
</TABLE>
The pro forma effects presented above are not likely to be representative of the
effects on reported net loss for future years. The fair value of options issued
to employees, non-employees and directors was estimated at the date of grant
using the Black-Scholes option-pricing model with the following weighted-average
assumptions:
<TABLE>
<CAPTION>
Year Ended January 31,
1998 1999
<S> <C> <C>
Dividend yield 0% 0%
Risk free interest rate 5% 5%
Expected volatility 60% 85%
Expected term - years 3.5 4.6
</TABLE>
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
<TABLE>
<CAPTION>
The weighted average fair values and exercise prices of options follows:
Year Ended January 31,
1998 1999
------------------------------------ -------------------------------------
Fair Value Exercise Price Fair Value Exercise Price
--------------- ------------------- --------------- -------------------
<S> <C> <C> <C> <C>
Issued at below market value $5.72 $3.00 $12.40 $16.00
Issued at market value $ 3.25 $ 5.52
All options $5.72 $3.00 $ 4.86 $ 7.71
</TABLE>
COMMON STOCK EQUITY LINE
In December 1998, the Company entered into a Common Stock Private Equity Line
Subscription Agreement (the "Common Stock Line") whereby the Company, at its
option, may put shares of Common Stock to the subscriber for a maximum of
$60,000,000 at a put price that is equal to the lesser of (i) 83% of the Common
Stock fair market value or (ii) the Common Stock fair market value less $.50 on
the put date. The Common Stock Line includes the payment of semi-annual
commitment fees of $100,000 in the event the subscriber does not receive a
defined amount of proceeds from its sale of the Company's
18
<PAGE>
SHOPPING.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
________________________________________________________________________________
Common Stock. In conjunction with the Common Stock Line, the Company issued
490,385 warrants to purchase the Company's Common Stock at an exercise price of
$8.38 per share, with semi-annual reset provisions, that are exercisable over a
7 year period. The estimated value of the warrants issued is approximately
$4,440,000 and represents the estimated value of the Company's right to put its
Common Stock to the subscriber. No Common Stock has been sold under the Common
Stock Equity Line.
NOTE 8 - INCOME TAXES
The Company did not record a provision for income taxes in 1998 and 1999 due to
net losses incurred. The Company's deferred tax assets and liabilities comprise
the following:
<TABLE>
<CAPTION>
January 31,
1998 1999
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards 2,583,000 $ 17,277,000
Stock-based compensation 7,000 1,379,000
Property and equipment 383,000
Litigation reserves 46,000 3,478,000
Accrued expenses 258,000 11,000
Other 4,000 52,000
----------- ------------
2,898,000 22,580,000
Valuation allowance (2,898,000) (22,580,000)
----------- ------------
$ - $ -
----------- ------------
</TABLE>
The Company has net operating loss carryforwards for both federal and state
purposes of $6,295,000 and $41,628,000 as of January 31, 1998 and 1999,
respectively. Federal and state net operating loss carryforwards begin expiring
in the years 2005 and 2011, respectively. Due to ownership changes, the net
operating loss carryforwards are subject to an annual limitation on the amount
that can be utilized. A full valuation allowance has been recorded based on
management's expectation that the Company's net deferred tax assets, more likely
than not, will not be realized based on estimated future taxable income.
The income tax benefit differs from the amount computed by applying the
statutory federal income tax rate to net loss as follows:
<TABLE>
<CAPTION>
Year Ended January 31,
1998 1999
<S> <C> <C>
Computed expected tax benefit (35%) (35%)
State income tax benefit, net of federal benefit ( 6%) (6%)
Non-deductible interest expense 2%
Change in valuation allowance 41% 39%
-------------- ---------------
0% 0%
-------------- ---------------
</TABLE>
19
<PAGE>
SHOPPING.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
________________________________________________________________________________
NOTE 9 - COMMITMENTS AND CONTINGENCIES
SEC INVESTIGATION
In March 1998, the Company became aware that the SEC had initiated a private
investigation to determine whether the Company, its lead underwriter in its IPO
and market maker, (the "Market Maker"), or any of its officers, directors,
employees, affiliates, or others had engaged in fraudulent activities in
connection with transactions in the Company's Common Stock in violation of
federal securities laws. This investigation resulted in the SEC temporarily
suspending trading of the Company's stock for 10 days in March 1998. Due to the
uncertainty regarding the outcome of the investigation, management is unable to
determine whether it will have a material adverse effect on the Company's
financial position, results of operations and cash flows. An accrual has not
been recorded in the financial statements for any loss that may result from the
outcome of the investigation.
LITIGATION
During the six months ended July 31, 1998, various similar class action lawsuits
were filed against the Company, certain officers of the Company, and the Market
Maker (the "Defendants") on behalf of all persons who purchased shares of the
Company's Common Stock between November 25, 1997 and March 26, 1998 alleging
violations of the various state and federal securities laws by the Defendants.
The complaints charge that the Defendants participated in a scheme and wrongful
course of business to manipulate the price of the Company's Common Stock, and
the Defendants seek compensatory damages in unspecified amounts. Compaq
anticipates entering into a mediation where the damages that may be awarded
would be within a range between $2,400,000 and $9,000,000. In addition,
management believes that the Company's directors' and officers' liability
insurance carrier may reimburse a portion of any amounts awarded.
In February 1999, a complaint was filed against the Company by a financial
advisor alleging that the Company owes $3,465,000 for breach of a warrant
agreement and an additional $2,886,000 as a transaction fee. The Company filed
an answer on April 9, 1999 denying the liability. Management is unable to
determine whether the outcome of this complaint will have a material adverse
effect on its financial position, results of operations and cash flows.
During 1999, the Company allegedly entered into a one-year consulting agreement
(for the period from December 1998 to November 1999) with a firm (the
"Consulting Firm") whereby the Consulting Firm was to provide investor and
public relation services in exchange for 153,000 shares of Common Stock. As of
January 31, 1999, the shares of Common Stock have not been issued. The Company
recorded a liability of $1,555,000 based upon the fair value of the Common Stock
on the commencement of the agreement and recorded approximately $260,000 in
expense related to this agreement in 1999. In March 1999, the Consulting Firm
filed a Demand for Arbitration claiming that the Company owes approximately
$3,000,000 of Common Stock pursuant to the contract. Management is unable to
determine whether the outcome of this complaint will have a material adverse
effect on its financial position, results of operations and cash flows. An
accrual has not been recorded in the financial statements for any loss that may
result from the outcome of this litigation.
20
<PAGE>
SHOPPING.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
________________________________________________________________________________
During 1999, the Company was negotiating a one-year consulting agreement (for
the period from February 1998 to January 1999) with a company (the "Consultant")
whereby the Consultant was to provide public relation services in exchange for
$5,000 upon execution of the agreement, monthly payments from $5,000 to $7,000,
7,000 shares of Common Stock, and 30,000 options with exercise prices of $22.50
and $25.00 (15,000 each) that are exercisable over a three-year period. In June
1998, the Company wrote to the Consultant giving the Consultant notice of
termination of services and offered 2,917 shares of Common Stock and a total of
6,250 stock options as a reimbursement for services previously provided. The
Company has recorded $250,000 as expense that represents the fair value of the
Common Stock and the estimated fair value of the stock options. As of January
31, 1999, neither the Common Stock nor the stock options have been issued. In
May 1999, the Company received a letter from the Consultant claiming that it is
owed $1,184,000 due to the Company's failure to deliver all of the stock and
options pursuant to the original agreement. Management is unable to determine
whether the outcome of this complaint will have a material adverse effect on its
financial position, results of operations and cash flows. An accrual has not
been recorded in the financial statements for any loss that may result from the
outcome of this litigation.
The Company is a defendant in several complaints in which management believes
that i) it is not probable that a liability has been incurred and ii) the amount
of any potential loss cannot be reasonably estimated. Accordingly, an accrual
has not been recorded in the financial statements.
The Company and its shareholder (Note 11) have been subject to certain claims
related to contracts entered into by former management of the Company. The
Company and its shareholder intend to defend such claims as they arise; however,
no assertion can be made that additional claims for similar contracts will not
be made. In addition, the Company is involved in certain litigation other than
that described above arising in the normal course of business. The Company
believes any liability with respect to such routine litigation, individually or
in the aggregate, is not likely to be material to the Company's financial
position, results of operations and cash flows. An accrual of $8,510,000 has
been recorded for amounts management believes the Company will incur and pay for
the aggregate losses resulting from the outcome of the aforementioned
litigation.
Compaq has agreed to assume any liability that currently exists or may exist as
a result of the outcome of the Company's threatened and pending litigation.
EMPLOYMENT AGREEMENT
In June 1998, the President, Chief Executive Officer, and director (the "Former
Officer") of the Company resigned. Pursuant to a Termination and Buy Out
Agreement, the Former Officer will receive payments totaling $500,000, with
$100,000 paid on or before July 31, 1998 and the balance due in $50,000
increments on or before each succeeding fiscal quarter end, beginning October
31, 1998 until fully paid. In addition, the Former Officer received options to
purchase 150,000 shares of the Company's Common Stock at an exercise price of
$16.00 per share. The Company recorded a charge for the estimated fair value of
the options (Note 7). In September 1998, the Company approved the conversion of
$350,000 of its unpaid liability related to the Termination and Buy Out
Agreement for Common Stock at the then fair market value of $1.37 per share,
resulting in an issuance of 255,474 common shares.
21
<PAGE>
SHOPPING.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
________________________________________________________________________________
LEASES
The Company leases facilities for its corporate offices under non-cancelable
operating lease agreements that expire in 2002 and 2004, and have annual rent
increases of approximately 4% and 5%, respectively. The Company also leases
certain office equipment under operating and non-cancelable capital lease
arrangements. Future minimum lease payments follow:
<TABLE>
<CAPTION>
Year Ending
January 31, Operating Capital
<S> <C> <C>
2000 $1,008,000 $ 283,000
2001 1,220,000 58,000
2002 1,271,000 31,000
2003 1,205,000 15,000
2004 1,218,000
Thereafter 204,000
---------- ---------
$6,126,000 387,000
========== ---------
Amount representing interest (45,000)
---------
Capital lease obligations $ 342,000
=========
</TABLE>
Rent expense for 1998 and 1999 was $116,000 and $221,000, respectively.
NOTE 10 - RELATED PARTY TRANSACTIONS
Total employee advances outstanding as of January 31, 1998 and 1999 were $18,000
and $2,000, respectively, which are included in accounts receivable. As of
January 31, 1999, $36,000 in advances to a shareholder were included in accounts
receivable. During 1998, the Company made $154,000 in advances to a then current
officer of the Company, which was fully repaid during the year. During 1998, the
Company made $16,000 in advances to CyberDepot, which were fully repaid during
the year. A then current officer of the Company is the principal shareholder of
CyberDepot.
During 1998 and 1999, the Company entered into an agreement with a consultant
who was also a shareholder of the Company, under which the Company incurred
$23,000 and $52,000, respectively, in consulting expenses.
During 1998 and 1999, the Company sold $342,000 and $124,000 in products to its
lead underwriter in its IPO and current shareholder of the Company. As of
January 31, 1998 and 1999, $96,000 and $28,000 is included in accounts
receivable, respectively.
During 1998 and 1999, the Company incurred legal expenses of approximately
$528,000 and $283,000, respectively, from law firms that are also shareholders
of the Company. As of January 31, 1998 and 1999, approximately $354,000 and
$155,000 remains outstanding which are included in other accrued liabilities,
respectively.
22
<PAGE>
SHOPPING.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
________________________________________________________________________________
During 1998 and 1999, the Company purchased $233,000 and $85,000 of products
from a shareholder of the Company. As of January 31, 1998, $114,000 was due to
this shareholder.
During 1999, the Company paid $69,000 in consulting fees to an entity in which a
then current officer and director of the Company is the president and principal
shareholder.
In June 1998, the Company entered into a three year consulting agreement with
CyberDepot whereby CyberDepot will receive $22,000 per month and received
100,000 options to purchase shares of the Company's Common Stock at $21.00 per
share. The Company recorded a charge for the estimated fair value of the options
(Note 7). A then former officer and current shareholder of the Company is the
principal shareholder of CyberDepot. During 1999, the Company paid $165,000 in
consulting fees under the agreement. The Company paid $581,000 to CyberDepot in
February 1999 which represents the total monthly fees over the remaining three
year term. This payment was made as a result of the change in control provision
included in the agreement.
During 1998, the Company issued promissory notes for a total of $305,000 to an
affiliate of the Company's lead underwriter in its IPO. The note was paid in
full from the proceeds of the IPO.
NOTE 11 - SUBSEQUENT EVENT - COMPAQ PURCHASE
On January 15, 1999, Compaq announced a tender offer to purchase all of the
outstanding shares of the Common Stock of the Company for $19.00 per share as
set forth in the Offer to Purchase agreement. On January 21, 1999, the offer
price was reduced to $18.25 per share. Effective February 15, 1999, Compaq
completed the acquisition of the Company.
NOTE 12 - SUBSEQUENT EVENTS
PURCHASE BY CMGI
On June 29, 1999, Compaq announced it entered into an agreement to exchange a
portion of its ownership in both the AltaVista business and two of its
second-tier subsidiaries, Shopping.com and Zip2 Corporation, among other assets
("Alta Vista Business") to CMGI, Inc. Compaq will retain 18.5% equity ownership
in AltaVista or its successor. In return, Compaq will receive 18,994,975 CMGI
common shares and CMGI preferred shares convertible into 1,809,045 CMGI common
shares, which combined, would represent a 16.4% equity ownership in CMGI, on a
fully diluted basis. In addition, CMGI will issue a $220 million three-year note
to Compaq, bringing total consideration for CMGI's 81.5% ownership in the
AltaVista Business to approximately $2.3 billion. The agreement, subject to
normal regulatory approvals, is binding on both parties and does not require
shareholder approval for the closing.
23
<PAGE>
SHOPPING.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
________________________________________________________________________________
ARBITRATION
In July 1999, an arbitration proceeding against the Company commenced demanding
damages in amount to be proven, but no less than $300,000,000 and/or an order
for specific performance related to agreements entered into in December and
January of 1999. The agreements included provisions in which the Company would
receive a portion of the sale proceeds from products and services to be provided
by a vendor (the "Vendor") and sold on the Company's website. The Vendor has
also made a settlement demand of $35,000,000. Management is unable to determine
whether the outcome of this complaint will have a material effect on its
financial position, results of operations and cash flows. An accrual has not
been recorded in the financial statements for any loss that may result from the
outcome of this litigation.
24
