<PAGE>
EXHIBIT 99.2
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Flycast Communications Corporation:
We have audited the accompanying consolidated balance sheet of Flycast
Communications Corporation, a wholly owned subsidiary of CMGI, (the "Company")
as of December 31, 1999, and the related consolidated statements of operations,
common stockholders' equity (deficit) and cash flows for the year ended December
31, 1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Flycast
Communications Corporation at December 31, 1999, and the results of its
operations and its cash flows for the year ended December 31, 1999 in conformity
with generally accepted accounting principles.
/s/ KPMG LLP
San Francisco, California
March 8, 2000
<PAGE>
FLYCAST COMMUNICATIONS CORPORATION
CONSOLIDATED BALANCE SHEET AT DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 9,973
Investments............................................ 46,217
Accounts receivable, net of allowance for doubtful
accounts of $1,304..................................... 21,386
Prepaid expenses and other assets...................... 1,800
-------
Total current assets................................. 79,376
-------
Property and equipment, net.............................. 11,357
Other assets............................................. 316
-------
Total assets......................................... $91,049
=======
LIABILITIES AND COMMON STOCKHOLDERS' EQUITY
Current liabilities:
Short-term capital lease obligations................... $ 883
Current potions of long-term debt...................... 1,914
Accounts payable....................................... 12,458
Accrued liabilities.................................... 2,176
Accrued compensation and related expenses.............. 2,864
-------
Total current liabilities............................ 20,295
-------
Long-term capital lease obligations...................... 1,042
Long-term debt........................................... 1,770
Common stockholders' equity:
Common stock, $0.0001 par value, 20,000,000 shares
authorized, 15,257,298 shares issued and outstanding
in 1999................................................ 109,037
Deferred stock compensation............................ (1,269)
Notes receivable from stockholders..................... (344)
Accumulated deficit.................................... (39,482)
-------
Total common stockholders' equity.................... 67,942
-------
Total liabilities and common stockholders'
equity............................................... $91,049
=======
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
FLYCAST COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<S> <C>
Revenue..................................................... $ 46,154
Cost of revenue............................................. 32,100
--------
Gross profit................................................ 14,054
--------
Operating expenses:
Sales and marketing....................................... 20,971
Research and development.................................. 8,132
General and administrative................................ 9,674
Stock-based compensation.................................. 1,596
--------
Total operating expenses................................ 40,373
--------
Operating loss.............................................. (26,319)
Interest income............................................. 1,855
Interest expense............................................ (871)
--------
Net loss.................................................... $(25,335)
========
Accretion of mandatorily redeemable preferred stock......... (666)
--------
Loss attributable to common stockholders.................... $(26,001)
========
Basic and diluted loss per share............................ $ (2.81)
========
Shares used in basic and diluted loss per share............. 9,255
========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
FLYCAST COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENT OF COMMON STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK DEFERRED
----------------- STOCK NOTES ACCUMULATED
SHARES AMOUNT COMPENSATION RECEIVABLE DEFICIT TOTAL
------ -------- ------------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1998......... 3,132 $ 3,851 $(1,771) $(606) $(13,481) $(12,007)
Issuance of common stock for
cash............................. 3,200 73,023 -- -- -- 73,023
Exercise of common stock
options.......................... 669 1,946 -- (31) -- 1,915
Repurchase of common stock......... (140) (175) -- 175
Payment on notes receivable........ -- -- -- 197 -- 197
Issuance of common stock for
services......................... -- 247 -- -- -- 247
Compensatory stock arrangements.... -- 1,094 (1,094) -- -- --
Amortization of deferred stock
compensation..................... -- -- 1,596 -- -- 1,596
Conversion of preferred stock...... 8,396 29,051 -- -- -- 29,051
Distributions to stockholders...... -- -- -- (79) -- (79)
Accretion of mandatorily
Redeemable preferred stock....... -- -- -- -- (666) (666)
Net loss........................... -- -- -- -- (25,335) (25,335)
------ -------- ------- ----- -------- --------
Balance, December 31, 1999......... 15,257 $109,037 $(1,269) $(344) $(39,482) $ 67,942
====== ======== ======= ===== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
FLYCAST COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS)
<TABLE>
<S> <C>
Cash flows from operating activities:
Net loss.................................................. $(25,335)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation............................................ 2,668
Provision for bad debts................................. 1,340
Stock and warrants issued for services.................. 247
Noncash interest expense................................ 100
Stock-based compensation expense........................ 1,596
Changes in operating assets and liabilities:
Accounts receivable.................................... (18,924)
Prepaid expenses and other assets...................... (1,741)
Accounts payable....................................... 9,897
Accrued liabilities.................................... 4,205
--------
Net cash used in operating activities................. (25,947)
--------
Cash flows used in investing activities:
Purchases of property and equipment...................... (10,854)
Purchases of short term investments...................... (46,034)
--------
Net cash used in investing activities................. (56,888)
--------
Cash flows from financing activities:
Payments on long term debt............................... (1,143)
Payments on capital leases............................... (838)
Proceeds from payment of notes receivable from
stockholders............................................ 197
Proceeds from issuance of common stock................... 74,938
Distributions to stockholders............................ (79)
Proceeds from issuance of preferred stock................ 14,536
--------
Net cash provided by financing activities............. 87,611
--------
Net increase in cash and cash equivalents................. 4,776
Cash and cash equivalents, beginning of period............ 5,197
--------
Cash and cash equivalents, end of period.................. $ 9,973
========
Supplemental disclosures of cash flow information:
Cash paid for interest................................... $ 749
========
Noncash financing and investing activities:
Purchase of equipment under capital lease............... $ 1,232
========
Issuance of common stock for notes receivable........... $ 31
========
Repurchase of common stock for extinguishment of
debt................................................... $ 175
========
Conversion of preferred stock to common stock........... $ 29,051
========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
FLYCAST COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION -- Flycast Communications Corporation ("Flycast" or the
"Company") commenced operations on April 14, 1996 (inception). Flycast is a
leading provider of Web-based advertising solutions designed to maximize the
return on investment for direct response advertisers and e-commerce companies.
Flycast is headquartered in San Francisco.
On September 30, 1999, the Company announced that it entered into a
definitive agreement to be acquired by CMGI, Inc. ("CMGI") in a stock-for-stock
merger. Under the terms of the agreement, CMGI will issue 0.9476 CMGI shares for
every Flycast share held on the closing date of the transaction. Closing of the
merger is subject to customary conditions, including formal approval by the
Company's shareholders. In connection with the merger, the Company also entered
into a stock option agreement dated as of September 29, 1999, whereby the
Company granted CMGI an option to purchase up to 19.9% of the outstanding shares
of the Company common stock, which option may be exercised in the event that the
merger agreement is terminated under certain circumstances.
BASIS OF PRESENTATION -- On August 30, 1999, Flycast completed a merger
with InterStep, Inc., a Massachusetts corporation which commenced operations in
1995. InterStep provides publishers with e-mail content management, list
management and distribution services on an outsourced basis. In the transaction,
Flycast issued 480,337 shares of common stock to InterStep's stockholders, of
which 47,558 shares are held by an escrow agent to serve as security for the
indemnity provided by stockholders of InterStep. The Company also assumed all
outstanding InterStep common stock options, which were converted to options to
purchase approximately 10,012 shares of the Company's common stock. No
adjustments were required to conform accounting policies of the entities. There
were no significant intercompany transactions requiring elimination.
The above transaction has been accounted for as a pooling of interests and,
accordingly, the consolidated financial statements of the Company include the
accounts of Interstep.
USE OF ESTIMATES -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
The Company performs ongoing credit evaluations of its customers' respective
financial conditions, and, generally, requires no collateral from its customers.
The Company maintains an allowance for uncollectible accounts receivable based
on the expected collectibility of accounts receivable.
CASH EQUIVALENTS consist of money market funds and certificates of deposit
with original maturities of three months or less at the time of acquisition.
INVESTMENTS consist of certificates of deposit with an original maturity
date of greater than three months at the time of acquisition. Such investments
are considered available for sale and have carrying values which approximate
fair value.
PROPERTY AND EQUIPMENT -- Property and equipment are stated at cost.
Equipment held under capital leases is stated at the present value of minimum
lease payments. Depreciation on property and equipment is calculated on the
straight- line method over the estimated useful lives of the assets. Equipment
held under capital leases is amortized on the straight-line method over the
shorter of the lease term or the estimated useful life of the asset.
<PAGE>
FLYCAST COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1999
REVENUE RECOGNITION -- Revenues derived from the delivery of advertising
impressions through third-party Web sites and delivery of e-mail content are
recognized in the period the advertising impressions or e-mail contents are
delivered provided collection of the resulting receivable is probable. Revenues
from list management and distribution services are recognized when services have
been performed. Amounts payable to third party Web sites for advertisements
displayed on such sites are recorded as cost of revenue in the period the
advertising impressions or e-mails are delivered.
The Company becomes obligated to make payments to third-party Web sites,
which have contracted with Flycast to be part of the networks, in the period the
advertising impressions are delivered, irrespective of the receipt of payments
from customers. The Company therefore reports revenue using the gross method.
ADVERTISING EXPENSES are charged to operations as incurred.
RESEARCH AND DEVELOPMENT EXPENSES are charged to operations as incurred.
INCOME TAXES -- Deferred tax liabilities are recognized for future taxable
amounts, and deferred tax assets are recognized for future deductions, net of a
valuation allowance to reduce net deferred tax assets to amounts that are more
likely than not to be realized.
CONCENTRATION OF CREDIT RISK -- Financial instruments that potentially
subject the Company to concentration of credit risk consist of trade
receivables. The Company's credit risk is mitigated by the Company's credit
evaluation process and the reasonably short collection terms. The Company does
not require collateral or other security to support accounts receivable and
maintains reserves for potential credit losses.
FINANCIAL INSTRUMENTS -- The Company's financial instruments include cash
and cash equivalents, short-term investments, notes receivable from stockholders
and long-term debt. At December 31, 1999, the fair values of these instruments
approximated their financial statement carrying amounts.
STOCK-BASED COMPENSATION -- The Company accounts for its employee stock
option plan in accordance with the provisions of Accounting Principles Board
(APB) Opinion No. 25, "Accounting for Stock Issued to Employees." Accordingly,
no accounting recognition is given to stock options granted to employees
(including directors) at fair market value until they are exercised. Upon
exercise, the net proceeds are credited to stockholders' equity (deficit).
Compensation expense is recognized over the vesting term for stock options
granted to employees (including directors) at less than fair market value.
The Company accounts for stock options issued to non-employees in
accordance with the provisions of Statement of Financial Accounting Standards
(SFAS) No. 123, "Accounting for Stock-Based Compensation" and Emerging Issues
Task Force Issue No. 96-18 under the fair value based method.
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF --
The Company evaluates its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of such assets or
intangibles may not be recoverable. Recoverability of assets to be held and used
is measured by a comparison of the carrying amount of an asset to future
undiscounted net cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the
<PAGE>
FLYCAST COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1999
fair value of the assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less costs to sell.
LOSS PER COMMON SHARE -- Basic loss per common share excludes dilution and
is computed by dividing loss attributable to common stockholders by the weighted
average number of common shares outstanding for the period (excluding 1,339,194
shares subject to repurchase). Diluted loss per common share reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock. Potential common
shares are excluded from the computation in loss periods as their effect would
be antidilutive.
RECENTLY ISSUED ACCOUNTING STANDARDS -- In June 1997, the Financial
Accounting Standards Board (FASB) issued SFAS No. 130, "Reporting Comprehensive
Income," which requires an enterprise to report, by major components and as a
single total, the change in its net assets during the period from nonowner
sources; and SFAS No. 131, "Disclosures About Segments of an Enterprise and
Related Information," which establishes annual and interim reporting standards
for an enterprise's business segments and related disclosures about its
products, services, geographic areas and major customers. The Company currently
operates one reportable segment under SFAS No. 131. Adoption of these
statements in 1998 did not impact the Company's financial position, results of
operations or cash flows.
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued SOP no. 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use." SOP No. 98-1 requires entities to
capitalize certain costs related to internal-use software once certain criteria
have been met. The Company implemented SOP No. 98-1 on January 1, 1999. The
adoption of SOP No. 98-1 did not have a material impact on its financial
position or results of operations.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which defines derivatives, requires that
all derivatives be carried at fair value, and provides for hedge accounting when
certain conditions are met. SFAS No. 133 is effective for the Company in fiscal
2001. Although the Company has not fully assessed the implications of SFAS No.
133, the Company does not believe that adoption of this statement will have a
material impact on the Company's financial position or results of operations.
In December 1999, the SEC staff issued Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements" (SAB 101) which specifies that
revenue is recognizable when persuasive evidence of an arrangement exists,
delivery has occurred or services have been rendered, the seller's price to the
buyer is fixed or determinable, and collectibility is reasonably assured. This
statement must be adopted no later than the first fiscal quarter of the fiscal
year beginning after December 15, 1999. The Company does not believe that
adoption of this statement will have a material impact on the Company's
financial position or results of operations.
<PAGE>
FLYCAST COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1999
2. PROPERTY AND EQUIPMENT
Property and equipment as of December 31, 1999 consisted of the following
(in thousands):
<TABLE>
<S> <C>
Computer equipment and purchased software................... $11,271
Computer equipment under capital lease...................... 2,734
Furniture, fixtures and office equipment.................... 822
-------
Total................................................... 14,827
Less accumulated depreciation............................... (3,470)
-------
Net......................................................... $11,357
=======
</TABLE>
The accumulated depreciation associated with computer equipment under
capital lease was $1,141,000 at December 31, 1999.
3. DEBT
In 1998, the Company borrowed $600,000 from a lending institution at an 8%
interest rate. Principal and interest payments are due in monthly installments
through July 2001. As of December 31, 1999, the outstanding obligation was
$277,000.
In 1998, the Company obtained a $175,000 letter of credit as a security
deposit on office space leased. In 1999, the letter was increased to $300,000 to
secure additional space at the same location. The increase was under the same
terms as the original letter. The letter of credit is collateralized by all
assets of the Company.
In 1998, the Company entered into a financing agreement with a preferred
stockholder and lender for $2,500,000, due in April 2002 with interest at 11%
per annum, and for an additional $2,000,000, due in August 2001 with interest at
14%. The Company granted this lender Series C preferred stock warrants to
purchase 55,409 shares at $4.51 per share, and 72,324 shares of preferred stock
at $4.42 per share. The estimated fair value allocated to the warrants of
$304,000 is being accreted over the life of the financing agreements. As of
December 31, 1999, the recorded obligation totaled $3,407,000 and $3,000,000 is
available for future borrowing.
Debt outstanding excluding capital lease obligations (Note 8) as of
December 31, 1999 will be due in annual principal payments of $1,914,000,
$1,578,000 and $192,000 in 2000, 2001 and 2002, respectively.
<PAGE>
FLYCAST COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1999
4. INCOME TAXES
The Company's deferred income tax assets and liabilities at December 31,
1999 are as follows (in thousands):
<TABLE>
<S> <C>
Deferred tax assets:
Net operating loss carryforwards............................ $16,957
Research and development tax credit......................... 136
-------
Total gross deferred tax assets before valuation
allowance.................................................. 17,093
Valuation allowance......................................... (14,018)
Deferred tax liabilities:
State Taxes................................................. $ 478
Accrual to cash adjustments................................. 2,489
Tangibiles and intangibles.................................. 108
-------
Total gross deferred liabilities............................ 3,075
-------
Net deferred tax assets..................................... $ --
=======
</TABLE>
At December 31, 1999, the Company had a 100% valuation allowance due to the
uncertainty of realizing future tax benefits from its net operating loss
carryforwards and other deferred tax assets.
At December 31, 1999, the Company had net operating loss ("NOL")
carryforwards of approximately $44,161,000 and $21,973,000 for federal and state
income tax purposes, respectively. These carryforwards begin to expire in 2011
for federal purposes and 2004 for state income tax purposes. The Company also
has federal and state research and development tax credit carryforwards of
$77,000 and $58,000, respectively, which will begin to expire in 2011. The
California research and development credits may be carried forward indefinitely
until utilized.
Internal Revenue Code Sections 382 and 383 and similar California rules
place a limitation on the amount of taxable income which can be offset by NOL
carryforwards after a change in control (generally greater than 50% change in
ownership). Due to these provisions, utilization of the NOL and tax credit
carryforwards may be limited. (Note 5.)
The Company did not provide for pro forma income taxes for InterStep, Inc.
as both the Company and InterStep had losses for the period presented.
<PAGE>
FLYCAST COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1999
5. STOCKHOLDERS' EQUITY (DEFICIT)
In January 1999, the Company sold 1,496,347 shares of Series C preferred
stock at $9.04 per share for proceeds of $13,527,000.
On May 4, 1999, the Company completed an initial public offering of
3,000,000 shares of common stock. In addition, on June 4, 1999, the Company sold
an additional 200,000 shares under the underwriters' overallotment option. Total
net proceeds were $73 million. During 1999, prior to and in anticipation of the
initial public offering, warrants for 167,747 shares of Series C preferred Stock
were exercised for total proceeds of $1,009,000. Upon the closing of the initial
public offering, Flycast's mandatorily redeemable preferred stock converted into
8.4 million shares of common stock.
On August 30, 1999, Flycast acquired InterStep, Inc. by issuing 480,337
shares of common stock for all of the outstanding shares of InterStep, Inc. in
transaction that was accounted for as a pooling-of-interests. As a result,
InterStep became a wholly owned subsidiary of Flycast. For purposes of financial
statement presentation, historical financial information for InterStep has been
consolidated into the statements presented herein.
On September 30, 1999, the Company announced the signing of a definitive
agreement to be acquired by CMGI, Inc. in a stock-for-stock merger. Under the
terms of the agreement, CMGI will issue 0.9476 CMGI shares for every Flycast
share held on the closing date of the transaction. The transaction closed in
January 2000. The Company incurred approximately $25 million in expenses as a
result of the acquisition of which approximately $2.0 million was expensed in
1999 and the balance will be recorded in 2000 when the merger becomes final.
NOTES RECEIVABLE FROM STOCKHOLDERS
In July 1997, the Company issued an aggregate of 2,275,011 shares of common
stock to officers and members of the Board of Directors. In connection with such
issuance, the Company's board members paid for the stock by issuing notes
payable (secured by the shares of the Company's common stock purchased) to the
Company. The secured note payable bears interest at 6.65% per annum with the
entire principal balance of the note, together with all accrued and unpaid
interest, due and payable on the earlier of (a) nine months after the closing of
an initial public offering of the Company's common stock or (b) July 2002 or (c)
termination of employment. The shares vest over a four year period. Any unvested
shares purchased are subject to repurchase rights by the Company upon occurrence
of certain events or conditions, such as employment termination, at the original
purchase price. Of such shares, there were 1,181,023 shares subject to
repurchase at December 31, 1999.
In September 1998, two officers of the Company exercised options to
purchase 357,000 shares with an exercise price of $1.25 by issuing notes payable
(secured by the shares of the Company's common stock purchased). The secured
note payable bear interest at 5.54% per annum with the entire principal balances
of the notes, together with all accrued and unpaid interest, due and payable on
the earlier of (a) nine months after the closing of an underwritten public
offering, (b) September 2003 or (c) termination of employment.
<PAGE>
FLYCAST COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1999
Additionally, in March, April and December 1999, employees and officers of
the Company exercised options to purchase 23,200 shares with exercise prices
ranging from $1.25 to $8.00 by issuing notes payable (secured by the shares of
the Company's common stock purchased). The secured notes payable bear interest
ranging from 5.54% to 6.74% per annum with the entire principal balances of the
notes, together with all accrued and unpaid interest, due and payable on the
earlier of (a) nine months after the closing of an underwritten public offering,
(b) September 2003 or (c) termination of employment.
As a result of the Company's Initial Public offering on May 4, 1999, all of
the above notes, together with all accrued and unpaid interest, will become due
and payable on February 4, 2000.
STOCK OPTION PLANS
The Company's stock option plans (the "Plans") provide for the grant of up
to 5,850,000 incentive or non-statutory options to employees, directors and
consultants of the Company at the fair market value of the common stock on the
date of grant as determined by the Board of Directors. Options granted under the
Plans generally vest ratably over periods of up to four years and expire ten
years from the date of grant. Of the two Plans, the 1997 Stock Option Plan also
provides for early exercise of options prior to full vesting. Any unvested
shares purchased are subject to repurchase rights by the Company upon occurrence
of certain events or conditions, such as employment termination, at the original
purchase price. There were 1.2 million shares subject to repurchase at December
31 1999.
On January 4, 1999, the Board of Directors adopted the 1999 Stock Option
Plan (the "1999 Stock Plan"). The 1999 Stock Plan will serve as the successor
equity incentive program to the Company's existing 1997 Stock Option Plan. A
total of 2,000,000 shares of common stock were initially reserved for issuance
under the 1999 Stock Plan. On March 30, 1999, the Board of Directors adopted an
amendment to the 1999 Stock Plan that increased the shares of common stock
reserved for issuance to 3,500,000.
On January 28, 1999, the Board of Directors adopted the 1999 Directors'
Stock Option Plan (the "Directors' Plan"). Under the Directors' Plan, each
person who becomes a non-employee director after the effective date of the
Directors' Plan may be granted non-statutory stock options. A total of 200,000
shares of common stock have initially been reserved for issuance under the
Directors' Plan.
Additionally, on January 28, 1999, the Board of Directors adopted, the 1999
Employee Stock Purchase Plan (the "Purchase Plan"). Under the Purchase Plan,
eligible employees are allowed to have salary withholdings of up to 10% of their
base compensation to purchase shares of common stock at a price equal to 85% of
the lower of the market value of the stock at the beginning or end of defined
purchase periods. The initial purchase period commences upon the effective date
for the initial public offering of the Company's common stock. The Company has
initially reserved 350,000 shares of common stock for issuance under this plan.
OPTIONS AND WARRANTS GRANTED TO NON-EMPLOYEES
In 1999, the Company granted options and warrants for common stock to
non-employees for services performed and to be performed through 2002. In
connection with these awards, the Company recognized $247,000 in stock-based
compensation expense related to such options which vested during 1999. At
December 31, 1999, there were no unvested options granted to non-employees.
<PAGE>
FLYCAST COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1999
STOCK-BASED COMPENSATION
During 1998 and 1999, the Company issued common stock options at less than
the fair value of its common stock and the Company recorded $1,094,000 as the
value of such options in 1999. Stock-based compensation of $1,596,000 was
amortized to expense in 1999 and at December 31, 1999, the Company had
$1,269,000 in unamortized deferred stock compensation related to such options.
The fair value of the common stock options granted in 1999, was $19.47 per
share.
STOCK OPTION ACTIVITY
A summary of the Company's stock option activity follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
OUTSTANDING EXERCISE
OPTIONS PRICE
------------ --------
<S> <C> <C>
Balance, December 31, 1998................ 1,938,705 $ 1.85
Granted................................... 3,319,832 19.47
Exercised................................. (547,191) 3.26
Canceled or expired....................... (324,418) 8.54
---------
Balance, December 31, 1999................ 4,386,928 $13.89
=========
Available for grant at December 31, 1999.. 814,910
=========
</TABLE>
The following table summarizes information about currently outstanding
stock options at December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS VESTED
------------------------------------------ -------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF NUMBER OF REMAINING AVERAGE NUMBER OF AVERAGE
EXERCISE PRICE SHARES CONTRACTUAL LIFE EXERCISE PRICE SHARES EXERCISE PRICE
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 0.10 87,120 7.27 $ 0.10 59,459 $ 0.10
0.13 - 1.25 1,000,384 8.48 1.15 380,146 1.15
1.40 - 8.50 533,533 8.95 6.04 395,906 5.27
8.75 694,330 9.08 8.75 156,640 8.75
9.00 - 12.00 783,779 9.24 11.93 175,083 11.91
16.00 - 24.00 576,642 9.60 20.81 5,977 16.80
24.75 - 43.00 456,200 9.60 32.53 15,545 25.11
44.32 - 73.50 239,800 9.83 54.40 -- --
78.75 8,000 9.93 78.75 -- --
82.75 7,140 9.93 82.75 -- --
--------- ---- ------ --------- ------
4,386,928 9.09 $13.89 1,188,756 $ 5.45
========= ====== ========= ======
</TABLE>
<PAGE>
FLYCAST COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1999
ADDITIONAL STOCK PLAN INFORMATION
As discussed in Note 1, the Company accounts for its stock-based awards to
employees using the intrinsic value method in accordance with APB Opinion No.
25, "Accounting for Stock Issued to Employees," and its related interpretations.
SFAS No. 123, "Accounting for Stock-Based Compensation," requires the
disclosure of pro forma net income (loss) and earnings (loss) per share had the
Company adopted the fair value method since the Company's inception. Under SFAS
No. 123, the fair value of stock-based awards to employees is calculated through
the use of option pricing models, even though such models were developed to
estimate the fair value of freely tradable, fully transferable options without
vesting restrictions, which significantly differ from the Company's stock option
awards.
The Company's calculations for employee grants were made using the fair
value approach with the following weighted average assumptions:
<TABLE>
<S> <C>
Dividend yield.............................................. None
Risk free interest rate..................................... 5.2%
Expected term, in years..................................... 2.5
Volatility.................................................. 94%
</TABLE>
The weighted average value per option as of the date of grant for options
granted during 1999 was $11.49.
If the computed values of the Company's stock-based awards to employees had
been amortized to expense over the vesting period of the awards as specified
under SFAS No. 123, loss attributable to common stockholders and basic and
diluted loss per share on a pro forma basis (as compared to such items as
reported) would have been (in thousands):
<TABLE>
<S> <C>
Loss attributable to common stockholders:
As reported............................................ $(26,001)
Pro forma.............................................. $(39,577)
Basic and diluted net loss per share:
As reported............................................ $ (2.81)
Pro forma.............................................. $ (4.28)
</TABLE>
<PAGE>
FLYCAST COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1999
6. NET LOSS PER SHARE
The following is a reconciliation of the denominators used in computing
basic and diluted net loss per share.
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31, 1999
-----------------
<S> <C>
Shares (denominator):
Weighted average common shares outstanding.......... 10,594
Weighted average common shares outstanding subject
to repurchase....................................... (1,339)
------
Shares used in computation, basic and diluted......... 9,255
======
</TABLE>
Diluted net loss per common share does not include the effects of options
to purchase 3,026,540 shares of common stock, as the effect of their inclusion
is anti-dilutive for the period presented.
7. COMBINING FINANCIAL INFORMATION
The acquisition of InterStep, Inc. has been accounted for as a
pooling-of-interests and accordingly, the Company's historical consolidated
financial statements have been restated to include the accounts and results of
operations of InterStep, Inc. The results of operations previously reported by
the separate businesses and the combined amounts presented in the accompanying
consolidated financial statements are presented below.
<TABLE>
<CAPTION>
EIGHT MONTHS ENDED
AUGUST 31, 1999
------------------
(UNAUDITED)
<S> <C>
REVENUE
Interstep.......................................... $ 602
Flycast............................................ 18,252
--------
Total............................................ 18,854
NET INCOME (LOSS)
Interstep.......................................... (180)
Flycast............................................ (18,513)
--------
Total............................................ (18,693)
========
</TABLE>
The Company has restated its previously reported results. The results for
the eight-month period ended August 31, 1999 of InterStep have been included in
the results for the year ended December 31, 1999. The equity accounts of the
separate entities were combined. There were no significant transactions between
the Company and InterStep prior to the combination.
<PAGE>
FLYCAST COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1999
8. COMMITMENTS AND CONTINGENCIES
LEASES
Future minimum net lease payments under non-cancelable operating leases
(with initial or remaining lease terms in excess of one year) and future minimum
capital lease payments as of December 31, 1999 are as follows (in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
<S> <C> <C>
Year ending December 31:
2000.............................................. $883 $1,348
2001.............................................. 784 1,350
2002.............................................. 249 908
2003.............................................. 9 910
Thereafter........................................ 830
------ ------
Total.............................................. $1,925 $5,346
====== ======
Present value of net minimum capital lease payments.... 1,925
Less current installments of obligations under capital
leases................................................. (883)
------
Obligations under capital leases, excluding current
installments........................................... $1,042
======
</TABLE>
Total rent expense under operating leases for the year ended 1999 was $1.1
million.
LEGAL MATTERS
On January 28, 1999, the Board of Directors approved, the re-incorporation
of the Company in the State of Delaware and the associated exchange of one share
of common stock or preferred stock of the Company for every share of common
stock or preferred stock, as the case may be, of the Company's California
predecessor. Such re-incorporation and stock exchange became effective prior to
the effective date of the initial public offering contemplated by the Company.
The Company is involved in various other claims and legal actions.
Management does not expect that the outcome of these other claims and actions
will have a material effect on the Company's financial position or results of
operations.
9. SUBSEQUENT EVENT
On January 18, 2000, Flycast Communications' Parent Company (CMGI)
announced that a definitive agreement was entered into to sell Flycast
Communications to Engage Technologies in a stock-for-stock transaction. Closing
of the merger is subject to customary conditions, including formal approval by
the Parent Company's shareholders.
