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
FEBRUARY 8, 2001
---------------------------------
(Date of earliest event reported)
METROMEDIA FIBER NETWORK, INC.
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
DELAWARE 000-23269 11-3168327
(State of Incorporation) (Commission File No.) (IRS Employer
Identification No.)
360 HAMILTON AVENUE,
WHITE PLAINS, NEW YORK 10601
------------------------------------------------------------
(Address of principal executive offices, including zip code)
(914) 421-6700
----------------------------------------------------
(Registrant's telephone number, including area code)
NOT APPLICABLE
-------------------------------------------------------------
(Former name or former address, if changed since last report)
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
On February 8, 2001, the Registrant completed its merger with
SiteSmith, Inc., a Delaware corporation, pursuant to an Agreement and Plan of
Merger, dated as of October 9, 2000 (the "Merger Agreement"), by and among the
Registrant, SiteSmith and Aqueduct Acquisition Corp., a Delaware corporation and
a wholly-owned subsidiary of the Registrant.
SiteSmith is a provider of comprehensive, internet infrastructure
management services. Its services are designed to maximize the performance,
reliability and security of large-scale, complex internet sites. SiteSmith
designs and architects the infrastructure for its customers' internet
operations, installs the necessary hardware and software, recommends and
establishes network connectivity, and performs ongoing monitoring and security
services. By relying on SiteSmith to manage their internet operations,
businesses can focus on their core competencies.
SiteSmith offers its customers an outsourced internet infrastructure
management solution. SiteSmith's offerings consist of core services and premium
services. SiteSmith's core services include establishing and maintaining the
infrastructure for its customers' Internet operations. SiteSmith's premium
services currently include automated monitoring, security and network
redundancy.
Pursuant to the Merger Agreement, Aqueduct Acquisition Corp. was
merged with and into SiteSmith, and each share of SiteSmith common stock was
converted into the right to receive 1.3404 shares of the Registrant's class A
common stock. Following consummation of the merger, SiteSmith became a
wholly-owned subsidiary of the Registrant.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements of Businesses Acquired
2
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders'
of SiteSmith, Inc.
In our opinion, the accompanying balance sheet and the related statements of
operations, of stockholders' deficit and of cash flows present fairly, in all
material respects, the financial position of SiteSmith, Inc. at December 31,
1999 and the results of its operations and its cash flows for the period from
September 8, 1999 (inception) through December 31, 1999, in conformity with
accounting principles generally accepted in the United States. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, 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.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered significant operating losses,
negative cash flows from operations and an accumulated deficit of $2.1 million
at December 31, 1999. These factors raise substantial doubt about the Company's
ability to continue as a going concern. The ability of the Company to continue
as a going concern is dependent upon, among other things, its ability to
(i) raise additional funds to support its business strategy and (ii) attain
satisfactory levels of future revenue, earnings and cash flows. Management's
plans with regard to these matters are also described in Note 1 to the financial
statements. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ PRICEWATERHOUSECOOPERS LLP
San Jose, California
July 28, 2000
3
SITESMITH, INC.
BALANCE SHEETS
SEPTEMBER 30,
DECEMBER 31, 2000
1999 (UNAUDITED)
------------ -------------
ASSETS
Current assets:
Cash and cash equivalents................................. $1,416,341 $ 5,098,955
Restricted cash, current.................................. -- 481,800
Accounts receivable, net.................................. 97,999 6,981,365
Prepaid expenses and other current assets................. 238,895 2,057,778
---------- -----------
Total current assets.................................... 1,753,235 14,619,898
Property and equipment, net............................... 779,835 11,906,998
Restricted cash, non-current.............................. 71,000 3,029,766
Other assets.............................................. 189,353 1,253,309
---------- -----------
Total assets............................................ $2,793,423 $30,809,971
========== ===========
LIABILITIES, MANDATORILY REDEEMABLE
CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable.......................................... $ 523,675 $ 7,250,023
Accrued liabilities....................................... 89,373 4,289,386
---------- -----------
Total current liabilities............................... 613,048 11,539,409
Commitments and contingencies (Note 7)
Mandatorily redeemable convertible preferred stock
(Note 4).................................................. 3,625,000 52,971,277
---------- -----------
Stockholders' deficit:
Common stock, $0.0001 par value; 50,000,000 shares
authorized; 8,536,000 and 16,576,513 shares issued and
outstanding at December 31, 1999 and September 30, 2000,
respectively............................................ 854 1,652
Additional paid-in capital................................ 7,130,911 49,755,183
Unearned stock-based compensation......................... (6,473,547) (30,780,895)
Notes receivable from stockholders -- (4,285,391)
Accumulated deficit....................................... (2,102,843) (48,391,264)
---------- -----------
Total stockholders' deficit............................. (1,444,625) (33,700,715)
---------- -----------
Total liabilities, mandatorily redeemable convertible
preferred stock and stockholders' deficit........... $2,793,423 $30,809,971
========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
4
SITESMITH, INC.
STATEMENTS OF OPERATIONS
PERIOD FROM
SEPTEMBER 8, 1999 NINE MONTHS
(INCEPTION) THROUGH ENDED
DECEMBER 31, 1999 SEPTEMBER 30, 2000
------------------- ------------------
(UNAUDITED)
Revenue:
Service revenue.......................................... $ 97,999 $ 9,295,928
Equipment revenue........................................ -- 4,859,958
----------- ------------
97,999 14,155,886
Costs and expenses:
Cost of service revenue (excludes stock-based compensation
of $251,741 and $4,810,490 (unaudited)).................. 484,458 16,559,372
Cost of equipment revenue.................................. -- 4,340,704
Research and development (excludes stock-based compensation
of $92,594 and $875,685 (unaudited))..................... 66,843 593,767
Sales and marketing (excludes stock-based compensation of
$131,658 and $2,734,605 (unaudited))..................... 147,060 10,074,306
General and administrative (excludes stock-based
compensation of $186,925 and $3,479,116 (unaudited))..... 860,651 17,493,844
Stock-based compensation................................... 662,918 11,899,896
----------- ------------
Total costs and expenses............................... 2,221,930 60,961,889
----------- ------------
Loss from operations....................................... (2,123,931) (46,806,003)
Interest income, net....................................... 21,088 517,582
----------- ------------
Net loss................................................... (2,102,843) (46,288,421)
Accretion of redemption premium on mandatorily redeemable
convertible preferred stock............................ (60,000) (2,276,377)
----------- ------------
Net loss attributable to common stockholders............. $(2,162,843) $(48,564,798)
=========== ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
5
SITESMITH, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
NOTES
COMMON STOCK ADDITIONAL UNEARNED RECEIVABLE
--------------------- PAID-IN STOCK-BASED FROM ACCUMULATED
SHARES AMOUNT CAPITAL COMPENSATION STOCKHOLDERS DEFICIT TOTAL
---------- -------- ----------- ------------- ------------ ------------ ------------
Issuance of common stock to
founders in October 1999..... 8,500,000 $ 850 $ 7,650 $ -- $ -- $ -- $ 8,500
Issuance of common stock for
services provided............ 36,000 4 46,796 -- -- -- 46,800
Accretion of redemption premium
on Series A mandatorily
redeemable convertible
preferred stock.............. -- -- (60,000) -- -- -- (60,000)
Unearned employee stock-based
compensation................. -- 7,136,465 (7,136,465) -- -- --
Amortization of unearned
employee stock-based
compensation................. -- -- -- 662,918 -- -- 662,918
Net loss....................... -- -- -- -- -- (2,102,843) (2,102,843)
---------- ------ ----------- ------------ ------------ ------------ ------------
Balance at December 31, 1999... 8,536,000 854 7,130,911 (6,473,547) -- (2,102,843) (1,444,625)
Issuance of common stock for
services provided
(unaudited).................. 102,000 10 175,430 -- -- -- 175,440
Issuance of common stock
warrants for services
provided (unaudited)......... -- -- 2,276,047 -- -- -- 2,276,047
Issuance of preferred stock
warrants in connection with
equipment lease
(unaudited).................. -- -- 573,094 -- -- -- 573,094
Issuance of common stock
options for services provided
(unaudited).................. -- -- 278,120 -- -- -- 278,120
Accretion of redemption premium
on Series A, B and C
mandatorily redeemable
convertible preferred stock
(unaudited).................. -- -- (2,276,377) -- -- -- (2,276,377)
Exercise of common stock
options in exchange for notes
receivable (unaudited)....... 2,409,525 241 4,216,427 -- (4,216,668) -- --
Issuance for common stock for
options exercised
(unaudited).................. 5,639,740 559 997,114 -- -- -- 997,673
Repurchase of common stock
(unaudited).................. (110,752) (12) (27,240) -- -- -- (27,252)
Compensation expense as a
result of acceleration of
options (unaudited).......... -- -- 204,413 -- -- -- 204,413
Unearned employee stock-based
compensation (unaudited)..... -- -- 34,430,351 (34,430,351) -- -- --
Amortization of unearned
employee stock-based
compensation (unaudited)..... -- -- -- 11,704,433 -- -- 11,704,433
Unearned stock-based
compensation for services
provided (unaudited)......... -- -- 1,776,893 (1,776,893) -- -- --
Amortization of stock-based
compensation for services
provided (unaudited)......... -- -- -- 195,463 -- -- 195,463
Interest accrued on notes
receivable from stockholders
(unaudited).................. -- -- -- -- (68,723) -- (68,723)
Net loss (unaudited)........... -- -- -- -- -- (46,288,421) (46,288,421)
---------- ------ ----------- ------------ ------------ ------------ ------------
Balance at September 30, 2000
(unaudited).................. 16,576,513 $1,652 $49,755,183 $(30,780,895) $(4,285,391) $(48,391,264) $(33,700,715)
========== ====== =========== ============ ============ ============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
6
SITESMITH, INC.
STATEMENTS OF CASH FLOW
PERIOD FROM
SEPTEMBER 8,
1999 NINE MONTHS
(INCEPTION) ENDED
THROUGH SEPTEMBER 30,
DECEMBER 31, 2000
1999 (UNAUDITED)
------------ -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $(2,102,843) $(46,288,421)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................... 24,687 1,171,284
Allowance for doubtful accounts and returns............. -- 838,515
Issuance of common stock for services................... 46,800 175,440
Issuance of common stock warrants and options for
services.............................................. -- 2,554,167
Interest income on stockholder note receivables......... -- (68,723)
Stock based compensation as a result of acceleration of
options............................................... -- 204,413
Amortization of stock-based compensation................ 662,918 11,899,896
Changes in assets and liabilities:
Accounts receivable..................................... (97,999) (7,721,881)
Prepaid expenses and other assets....................... (238,895) (1,245,789)
Other assets............................................ (189,353) (1,063,956)
Accounts payable........................................ 523,675 6,726,348
Accrued liabilities..................................... 89,373 4,200,013
----------- ------------
Net cash used in operating activities................. (1,281,637) (28,618,694)
----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment........................ (804,522) (12,298,447)
Restricted cash........................................... (71,000) (3,440,566)
----------- ------------
Net cash used in investing activities................. (875,522) (15,739,013)
----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock.................... 8,500 997,673
Repurchase of common stock................................ -- (27,252)
Proceeds from issuance of preferred stock, net of issuance
costs................................................... 3,565,000 47,069,900
----------- ------------
Net cash provided by financing activities............. 3,573,500 48,040,321
----------- ------------
Net increase in cash and cash equivalents................... 1,416,341 3,682,614
Cash and cash equivalents at beginning of period............ -- 1,416,341
----------- ------------
Cash and cash equivalents at end of period.................. $ 1,416,341 $ 5,098,955
=========== ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
7
SITESMITH, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1: THE COMPANY
SiteSmith, Inc. ("SiteSmith" or the "Company") was incorporated as
SiteBrigade, Inc. in Delaware on September 8, 1999. On November 15, 1999, the
Board of Directors approved the change of the Company's name to SiteSmith, Inc.
SiteSmith provides outsourced internet infrastructure management services
designed to maximize the performance, reliability, and security of large-scale,
complex internet sites. SiteSmith offers its customers an outsourced internet
infrastructure management solution. Our offerings consist of core services and
premium services. Our core services include establishing the infrastructure for
our customers' internet operations. Our premium services includes automated
monitoring, security and network redundancy.
The Company has been successful in completing several rounds of private
equity financing. Since inception, the Company has incurred substantial losses
and negative cash flows from operations. For the period from September 8, 1999,
(inception) through September 30, 2000, the Company incurred a loss from
operations of approximately $48.4 million (unaudited) and negative cash flows
from operations of $28.6 million (unaudited). Management expects operating
losses and negative cash flows to continue for the foreseeable future because of
additional costs and expenses related to brand development, marketing and other
promotional activities, hiring consultants, continued development of the
information technology infrastructure, and expansion of product offerings.
Certain of these costs could be reduced if working capital decreased
significantly. Management believes there is sufficient cash on hand and
borrowings available to continue operations until early 2001. However, after
that date, the Company will need to raise additional financing. Failure to
generate sufficient revenues, raise additional capital or reduce certain
discretionary spending could have a material adverse effect on the Company's
ability to continue as a going concern and to achieve its intended business
objectives.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from these estimates.
CASH AND CASH EQUIVALENTS
Cash equivalents consist of highly liquid investment instruments with
original maturities of 90 days or less. The carrying value of cash equivalents
approximates their estimated fair market value.
RESTRICTED CASH
At December 31, 1999 and the nine months ended September 30, 2000, cash
balances of approximately $71,000 and $3,511,566 (unaudited), respectively, were
restricted from withdrawal and held by a bank in the form of certificates of
deposit. These certificates of deposit serve as a collateral supporting standby
letters of credit issued as a guarantee of payment to certain vendors and to the
Company's landlords as security deposits, which will not be available until the
leases for the Company's facilities expire.
8
SITESMITH, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PRINCIPLES OF CONSOLIDATION
In July 2000, the Company opened a subsidiary in the United Kingdom. The
accompanying financial statements as of and for the period ended September 30,
2000, are reported on a consolidated basis. Activity for the year to date period
is immaterial and all intercompany balances have been eliminated in
consolidation.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash and cash equivalents
and accounts receivable. The Company places its cash primarily in checking and
money market accounts. The Company's investment policy limits the amount of
credit exposure to any one issuer. The Company's customer base is primarily
composed of businesses throughout the United States. The Company performs
ongoing credit evaluations of its customers.
For the period from September 8, 1999 (inception) through December 31, 1999,
five customers accounted for 31%, 21%, 13%, 12% and 10% of both the Company's
revenue and accounts receivable, respectively. For the nine months ended
September 30, 2000, no customers accounted for 10% or more of revenues or
accounts receivable (unaudited).
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments, including cash and cash equivalents,
accounts receivable, accounts payable and accrued liabilities are carried at
cost, which approximate fair value due to the short-term maturity of these
instruments. Redeemable convertible preferred stocks are recorded at their
redemption amounts which is considered to approximate fair value.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is computed on a straight-line basis over estimated useful lives of
three to six years. Amortization of leasehold improvements is computed on a
straight-line basis over the shorter of the facility lease term or the estimated
useful lives of the improvements. Major additions and improvements are
capitalized, while replacements, maintenance and repairs that do not improve or
extend the life of the assets are charged to operations. In the period assets
are retired or otherwise disposed of, the costs and related accumulated
depreciation and amortization are removed from the accounts, and any gain or
loss on disposal is included in results of operations.
The Company periodically evaluates the carrying value of property and
equipment to be held and used when events and circumstances warrant such a
review. The carrying value of property and equipment is considered impaired when
the anticipated undiscounted cash flows from the asset are separately
identifiable and are less than its carrying value. In that event, a loss is
recognized based on the amount by which the carrying value exceeds the fair
value of the asset. Fair value is determined primarily using the anticipated
cash flows discounted at a rate commensurate with the risk involved.
General and administrative costs include expenses incurred by the Company to
develop its internal software. The Company recognizes software development costs
in accordance with Statement of Position ("SOP") 98-1, "Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use." As such, the
Company expenses all costs incurred that relate to the planning and post
9
SITESMITH, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
implementation phases of development. Costs incurred in the development phase
are capitalized and recognized over the product's estimated useful life if the
product is expected to have a useful life beyond one year. Costs associated with
maintenance and training are included in general and administration expenses in
the accompanying statement of operations.
REVENUE RECOGNITION
The Company's revenues consist of (i) monthly fees for providing internet
infrastructure management services, (ii) fees for project-based professional
services and (iii) revenues from sales of third-party equipment to customers.
Service revenues from providing monthly infrastructure management are
generally recognized ratably over the term of the contract, which is generally
one year. The monthly infrastructure management fees are based on fixed
contractual rates. If the services rendered in any given month exceed the
contract amount, then any incremental services are billed on a time and
materials basis according to the contractual standard rates and are recognized
as the services are provided. Advance billings are classified as deferred
revenue.
Project-based service revenues are recognized on a time and materials basis
as the services are provided.
The Company also recognizes revenue from equipment sales, net of estimated
sales returns, when the equipment is delivered to the customer or the internet
data center. For all equipment sales transactions with its customers, the
Company acts as a principal, takes title to all products sold upon shipment,
establishes prices charged to customers, bears credit risk, and bears inventory
risk of loss for returned equipment that is not eligible to be returned to
suppliers. Implementation of the equipment, if required, is performed under a
separate service contract and is billed at the contractual rate per hour as
services are provided.
ADVERTISING
Advertising is expensed as incurred. Advertising and public relations
expenses for the period from September 8, 1999 (inception) through December 31,
1999 and for the nine months ended September 30, 2000 totaled $36,675 and
$5,736,871 (unaudited), respectively.
INCOME TAXES
Income taxes are accounted for using an asset and liability approach which
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; 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.
STOCK-BASED COMPENSATION
The Company follows the disclosure provisions of Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation." The Company has elected to continue
10
SITESMITH, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
accounting for stock-based compensation issued to employees using Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees," and, accordingly, pro forma disclosures required under SFAS No. 123
have been presented (see Note 6). Under APB No. 25, compensation expense is
based on the difference, if any, on the date of the grant, between the fair
value of the Company's stock and the exercise price of the option.
Stock, stock options and warrants for stock issued to non-employees have
been accounted for in accordance with the provisions of SFAS No. 123 and
Emerging Issues Task Force Issue No. 96-18, "Accounting for Equity Instruments
that are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services."
BUSINESS SEGMENTS
The Company follows SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information." The Company identifies its operating
segments based on business activities and management responsibility. The Company
conducts its business within a single business segment providing internet
infrastructure management services.
COMPREHENSIVE INCOME
The Company follows SFAS No. 130, "Reporting Comprehensive Income" ("SFAS
No. 130"). SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. There was no material difference between the Company's net
loss and its comprehensive loss for any of the periods presented in the
accompanying consolidated statements of operations.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," was issued. SFAS No. 133 establishes accounting and
reporting standards for derivative financial instruments and hedging activities
related to those instruments, as well as other hedging activities. The Company
does not currently hold any derivative instruments and does not engage in
hedging activities. The Company expects the adoption of SFAS No. 133 will not
have a material impact on its financial position, results of operations or cash
flow. The Company will be required to adopt SFAS No. 133 for the year ending
December 31, 2001.
In December 1999, the SEC issued Staff Accounting Bulletin ("SAB 101"),
"Revenue Recognition in Financial Statements," which provides guidance on the
recognition, presentation, and disclosure of revenue in financial statements
filed with the SEC. SAB 101 outlines the basic criteria that must be met to
recognize revenue and provides guidance for disclosures related to revenue
recognition policies. The adoption of SAB 101 did not have a material effect on
the financial position or results of operations of the Company.
In March 2000, the FASB issued Interpretation No. 44, ("FIN 44"), Accounting
for Certain Transactions Involving Stock Compensation--an Interpretation of APB
25. This Interpretation clarifies (a) the definition of employee for purposes of
applying Opinion 25, (b) the criteria for determining whether a plan qualifies
as a noncompensatory plan, (c) the accounting consequence of various
modifications to the terms of a previously fixed stock option or award, and
(d) the accounting for an
11
SITESMITH, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
exchange of stock compensation awards in a business combination. This
Interpretation is effective July 1, 2000, but certain conclusions in this
Interpretation cover specific events that occur after either December 15, 1998,
or January 12, 2000. The adoption of the conclusions of FIN 44 did not have a
material impact on the Company's financial position and results of operations.
NOTE 3: BALANCE SHEET COMPONENTS
CASH AND CASH EQUIVALENTS
As of December 31, 1999 cash and cash equivalents included a cash reserve
with a variable interest rate.
Restricted cash consisted of the following:
DECEMBER 31, 1999 SEPTEMBER 30, 2000
----------------- ------------------
(UNAUDITED)
Due within one year......................... $ -- $ 481,800
Due after one year through six years........ 71,000 3,029,766
------- ----------
71,000 3,511,566
Less: Current portion....................... -- 481,800
------- ----------
$71,000 $3,029,766
======= ==========
ACCOUNTS RECEIVABLE
Accounts receivable consisted of the following:
DECEMBER 31, 1999 SEPTEMBER 30, 2000
----------------- ------------------
(UNAUDITED)
Accounts receivable--trade.................. $97,999 $7,819,880
Allowance for doubtful accounts and
returns................................... -- (838,515)
------- ----------
$97,999 $6,981,365
======= ==========
PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consisted of the following:
DECEMBER 31, 1999 SEPTEMBER 30, 2000
----------------- ------------------
(UNAUDITED)
CURRENT
Prepaid expenses............................ $124,169 $1,525,077
Deposits and other assets................... 114,726 532,701
NONCURRENT
Prepaid expenses............................ 636 --
Deposits and other assets................... 188,717 1,253,309
-------- ----------
$428,248 $3,311,087
======== ==========
12
SITESMITH, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 3: BALANCE SHEET COMPONENTS (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment is comprised of the following:
USEFUL LIVES DECEMBER 31, SEPTEMBER 30,
IN YEARS 1999 2000
------------ ------------ -------------
(UNAUDITED)
Computer equipment...................... 3 $ 509,118 $ 7,526,205
Computer software....................... 3 14,959 2,217,631
Office equipment........................ 5 -- 107,919
Furniture and fixtures.................. 5 230,398 750,245
Leasehold improvements.................. 5-6 25,247 996,952
Construction in progress................ -- 24,800 1,504,017
---------- -----------
804,522 13,102,969
Less: Accumulated depreciation and
amortization...................... (24,687) (1,195,971)
---------- -----------
Total................................... $ 779,835 $11,906,998
========== ===========
Property and equipment depreciation and amortization expenses from inception
through December 31, 1999 and for the nine months ended September 30, 2000 were
$24,687 and $1,171,284 (unaudited), respectively.
ACCRUED LIABILITIES
Accrued liabilities consisted of the following:
DECEMBER 31, 1999 SEPTEMBER 30, 2000
----------------- ------------------
(UNAUDITED)
Accrued compensation........................ $58,880 $2,028,749
Accrued professional fees................... 25,000 1,665,492
Accrued other............................... 5,493 595,145
------- ----------
$89,373 $4,289,386
======= ==========
NOTE 4: MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK
The Company is authorized to issue 20,539,290 (unaudited) shares of
preferred stock of which 7,200,000 shares have been designated as Series A
Preferred and 8,610,861 (unaudited) shares have been designated as Series B
Preferred and 4,728,429 (unaudited) has been designated as Series C Preferred.
On October 26, 1999, the Company issued a total of 7,200,000 shares of its
Series A mandatorily redeemable preferred stock ("Series A") for net proceeds of
$3,565,000 (net of $35,000 of issuance costs).
In January and February 2000, the Company issued a total of 8,610,861 shares
of its Series B mandatorily redeemable preferred stock ("Series B") for net
proceeds of $20,456,849 (net of $37,000 of issuance costs).
13
SITESMITH, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 4: MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK (CONTINUED)
In July 2000, the Company issued a total of 4,717,372 (unaudited) shares of
its Series C manditorily redeemable preferred stock ("Series C") for net
proceeds of $26,613,051 (unaudited) (net of $40,081 (unaudited) of issuance
costs) (see Note 10).
From inception through September 30, 2000, the Company issued preferred
stock as follows:
AMOUNT NET LIQUIDATION AND
ORIGINAL OF SHARES ISSUED AND PAR VALUE REDEMPTION
ISSUE PRICE ISSUANCE COSTS AUTHORIZED OUTSTANDING AMOUNT AMOUNT
----------- -------------- ---------- ----------- ----------- ---------------
Series A................... $0.50 $ 3,565,000 7,200,000 7,200,000 $ 0.0001 $ 3,840,000
Series B................... $2.38 20,456,849 8,610,861 8,610,861 $ 0.0001 21,433,150
Series C (unaudited)....... $5.65 26,613,051 4,968,429 4,717,372 $ 0.0001 27,181,729
----------- ---------- ---------- -----------
Total...................... $50,634,900 20,779,290 20,528,233 -- $52,454,879
=========== ========== ========== ===========
CONVERSION
Each issued share of Series A and Series B is convertible at the election of
the holder into one share of common stock, and is subject to adjustment in
accordance with antidilution provisions contained in the Company's Articles of
Incorporation. All shares of preferred stock shall automatically be converted
into shares of common stock upon the closing of an underwritten public offering
having an aggregate offering price of at least $25,000,000 and a per share
offering price of at least $5.00.
DIVIDENDS
The holders of Series A and Series B are entitled to receive noncumulative
dividends at the per share rate of $0.005 and $0.0238, respectively, per annum
if and when declared by the Board of Directors. The Company may not make a
distribution to common stockholders until the preferred stock dividends have
been paid in full. The Company has no current intention of declaring dividends.
VOTING RIGHTS
The holder of each share of preferred stock is entitled to vote based on the
number of shares of common stock into which it is convertible.
LIQUIDATION PREFERENCES
In the event of a liquidation, dissolution, winding up of the Company,
Series A and Series B stockholders are entitled to a per share distribution in
preference to common stockholders equal to the original issue price per share of
$0.50 and $2.38 per share, respectively, plus any declared but unpaid dividends.
After this distribution, the remaining assets will be distributed pro rata to
the holders of the common stock and Series A and Series B on an as if converted
basis. In the event funds are insufficient to make a complete distribution to
the holders of Series A and Series B, the holders shall share ratably in any
distribution.
REDEMPTION
Upon the request of the holder of the majority of the outstanding shares of
Series A and Series B at any time after January 13, 2005, but on a date within
thirty days after receipt by the Company of a
14
SITESMITH, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 4: MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK (CONTINUED)
written request, the shares are redeemable in two equal installments, beginning
no earlier than February 13, 2005, and continuing thereafter on the next
anniversary date. The shares may be redeemed at a price equal to the original
issue price, subject to adjustments for any stock dividends, combinations,
reclassifications, splits, and declared and unpaid dividends. The Company shall
also pay 10% redemption premium, based on the redemption price as outlined
above, to the holders of Series A or Series B for every full year a holder of
Series A or Series B has held such stock. This amount is being accreted ratably
over the period from issuance until the first redemption date.
NOTE 5: COMMON STOCK
The Company's Certificate of Incorporation, as amended, authorizes the
Company to issue 30,000,000 shares of common stock. Each share of common stock
has the right to one vote. The holders of common stock are also entitled to
receive dividends whenever funds are legally available and when declared by the
Board of Directors, subject to the prior rights of the holders of preferred
stock at the time outstanding. In July 2000, the Company amended and restated
its Certificate of Incorporation to increase the authorized share capital to
50,000,000 shares of common stock (See Note 10).
The Company had reserved shares of common stock for future issuance as
follows:
DECEMBER 31, SEPTEMBER 30,
1999 2000
------------ -------------
(UNAUDITED)
Conversion of Series A mandatorily redeemable
convertible preferred stock....................... 7,200,000 7,200,000
Conversion of Series B mandatorily redeemable
convertible preferred stock....................... -- 8,610,861
Conversion of Series C mandatorily redeemable
convertible preferred stock....................... -- 4,968,429
Exercise of options................................. 9,500,000 19,500,000
---------- ----------
16,700,000 40,279,290
========== ==========
The Company had not declared or paid cash dividends as of September 30, 2000
(unaudited).
Through September 30, 2000, upon the termination of employment, the Company
repurchased 110,752 (unaudited) shares of common stock previously issued upon
the exercise of options.
FOUNDERS STOCK AGREEMENT
Certain common stock was issued to the founders of the Company and is
subject to repurchase in the event of voluntary termination or involuntary
termination with cause. Certain founder shares vest over a twelve month period,
50% of the shares vest at the end of six month period and the remaining 50% vest
at the end of the second six month period. Certain other shares vest over four
years. At December 31, 1999 and September 30, 2000, 6,662,500 and 4,265,625
(unaudited) shares, respectively, of outstanding common stock were subject to
repurchase by the Company at the original purchase price of $.001.
15
SITESMITH, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 6: STOCK OPTION PLAN
The Company's 1999 Stock Option Plan (the "Option Plan"), authorizes the
Board of Directors to grant up to 9,500,000 incentive stock options and
nonstatutory stock options to employees, directors and consultants. In
April 2000, the Board of Directors has authorized the Company to increase the
authorized number of shares of common stock in the option pool to 15,500,000
shares. The Option Plan provides that incentive stock options may be granted to
employees of the Company and nonstatutory stock options may be granted to
consultants and directors of the Company. Under the Option Plan, no incentive
stock options may be granted to a person who, at the time of grant, owns stock
possessing more than 10% of the total combined voting power of all classes of
stock of the Company unless at the time such options are granted the option
price is at least 110% of the fair market value of the stock. Furthermore, such
options granted shall not be exercisable after ten years from the date of grant.
In July 2000, the Company's Board of Directors adopted the 2000 Executive
Stock Incentive Plan, (the "Executive Plan"). The Company has reserved a total
of 4,000,000 shares of common stock for issuance under the Executive Plan.
The Option Plan is administered by the Board of Directors or its designees
and provides generally that the option price shall not be less than the fair
market value of the shares on the date of grant and no portion may be exercised
beyond ten years from that date. Stock options may be exercised at any time
subsequent to grant. Stock obtained through exercise of unvested options is
subject to repurchase at the original purchase price. The Company's repurchase
rate decreases as the shares vest under the original option terms. Options
granted generally vest 25% on the first anniversary of the date of grant with
the balance vesting in 36 equal monthly increments.
Activity under the Plan is as follows:
OUTSTANDING OPTIONS
---------------------
WEIGHTED
SHARES AVERAGE
AVAILABLE NUMBER EXERCISE
FOR GRANT OF SHARES PRICE
----------- ---------- --------
Shares authorized.......................... 9,500,000 -- --
Options granted............................ (5,807,500) 5,807,500 $0.05
Options exercised.......................... -- -- $ --
Options canceled........................... 80,000 (80,000) $0.05
----------- ----------
Balances, December 31, 1999................ 3,772,500 5,727,500 $0.05
Shares authorized (unaudited).............. 10,000,000 --
Options granted (unaudited)................ (10,741,353) 10,741,353 $1.25
Options exercised (unaudited).............. -- (8,049,265) $0.85
Options canceled (unaudited)............... 656,948 (656,948) $0.46
----------- ----------
Balances, September 30, 2000 (unaudited)... 3,688,095 7,762,640 $0.85
=========== ==========
16
SITESMITH, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 6: STOCK OPTION PLAN (CONTINUED)
The following tables summarizes information with respect to stock options
outstanding and exercisable at December 31, 1999:
OPTIONS OUTSTANDING WEIGHTED EXERCISE
------------------------- ----------------------
WEIGHTED
AVERAGE
REMAINING
CONTRACTUAL
NUMBER LIFE AVERAGE OPTIONS
EXERCISE PRICE OUTSTANDING (YEARS) PRICE EXERCISABLE
- -------------- ----------- ----------- -------- -----------
$0.05 5,727,500 9.92 $0.05 5,727,500
--------- ----- ----- ----------
5,727,500 $0.05 5,727,500
--------- ===== ==========
FAIR VALUE DISCLOSURES
The fair value of each option grant has been estimated on the date of grant
using the minimum value method with the following assumptions:
PERIOD FROM
SEPTEMBER 8, 1999
(INCEPTION) NINE MONTHS
THROUGH ENDED
DECEMBER 31, 1999 SEPTEMBER 30, 2000
----------------- ------------------
(UNAUDITED)
Weighted average fair values.............................. $ 1.26 $ 3.69
Assumptions:
Risk-free interest rates.............................. 5.75% 5.92%
Expected lives........................................ 5 years 3 years
Dividend yield........................................ 0% 0%
Had compensation cost for the Company's stock option plan been determined
based on the fair market values of these stock options at the grant dates
consistent with the provisions of SFAS No. 123, the Company's net loss would
have changed to the pro forma amounts as follows:
PERIOD FROM
SEPTEMBER 8, 1999
(INCEPTION) NINE MONTHS
THROUGH ENDED
DECEMBER 31, 1999 SEPTEMBER 30, 2000
----------------- ------------------
(UNAUDITED)
Net loss attributable to common stockholders--as reported... $(2,162,843) $(48,564,798)
Net loss attributable to common stockholders--pro forma..... $(2,170,291) $(49,104,330)
The effects of applying SFAS No. 123 in this pro forma disclosure may not be
indicative of future amounts. Additional awards in future years are anticipated.
UNEARNED STOCK-BASED COMPENSATION
In connection with certain employee stock option grants, the Company
recorded unearned stock-based compensation totaling $34,430,351 (unaudited) at
September 30, 2000, which is being amortized over the vesting periods of the
related options, generally four years using the method set out in FASB
17
SITESMITH, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 6: STOCK OPTION PLAN (CONTINUED)
Interpretation No. 28 ("FIN 28"). Under the FIN 28 method, each vested tranche
of options is accounted for as a separate option grant awarded for past
services. Accordingly, the compensation expense is recognized over the period
during which the services have been provided. This method results in higher
compensation expense in the earlier vesting periods of the related options.
Amortization of this stock-based compensation recognized during the period from
inception to December 31, 1999 and for the nine months ended September 30, 2000
totaled approximately $663,000 and $11,704,433 (unaudited), respectively.
In connection with certain consultant and Technical Advisory Board Member
stock option grants, the Company recorded unearned stock-based compensation
totaling $1,776,893 (unaudited) at September 30, 2000, which is being amortized
over the vesting periods of the related options. Amortization of this
stock-based compensation recognized during the nine months ended September 30,
2000 totaled approximately $195,463 (unaudited). These option grants are subject
to variable accounting due to the fact that vesting is based on performance,
which may result in substantial increases in the compensation expense, as the
fair value of the Company's common stock may increase in future periods.
The Company's calculation for stock option grants to non-employees and
Technical Advisory Board members were made using the Black-Scholes options
pricing model with the following weighted average assumptions for the period
from September 8, 1999 (inception) to December 31, 1999 and the nine months
ended September 30, 2000 (unaudited): deemed fair value per share $2.42-$15.74,
dividend yield of 0%; expected volatility of 70%; risk-free interest rates of
5.75% for the period from September 8, 1999 (inception) to December 31, 1999 and
5.92% for the nine month period ended September 30, 2000; and a contractual life
of 5 years.
NOTE 7: COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases office space in California, Illinois, New York, New
Jersey and Virginia under noncancelable operating leases with expiration dates
through the year 2010. In addition to office leases, the Company also leases
equipment under noncancelable leases with expiration dates through the year
2002. Rent expense for the year ended December 31, 1999 and for the nine months
ended September 30, 2000 totaled $98,403 and $2,608,682 (unaudited),
respectively.
Future minimum lease payments under noncancelable operating leases at
December 31, 1999 are as follows:
YEARS ENDING DECEMBER 31,
- -------------------------
2000........................................................ $ 1,261,638
2001........................................................ 2,242,869
2002........................................................ 1,896,257
2003........................................................ 1,729,049
2004........................................................ 1,788,441
Thereafter.................................................. 4,560,353
-----------
Total minimum lease payments................................ $13,478,607
===========
18
SITESMITH, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 7: COMMITMENTS AND CONTINGENCIES (CONTINUED)
EQUIPMENT LEASE LINE
In June 2000, the Company entered into a two year equipment financing
agreement which provided for borrowings of up to $2,000,000, secured by the
assets acquired, and restricted cash equal to six months of lease payments.
CONTINGENT LIABILITIES
From time to time, the Company may have certain contingent liabilities that
arise in the ordinary course of its business activities. The Company accrues
contingent liabilities when it is probable that future expenditures will be made
and such expenditures can be reasonably estimated. In the opinion of management,
there are no pending claims of which the outcome is expected to result in a
material adverse effect in the financial position or results of operations of
the Company.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with certain officers and
employees of the Company. The agreements generally provide for annual bonuses
and incentive stock options as determined by the Board of Directors as well as
covenants not-to-compete during the employment term and for a period thereafter.
The employment agreements also generally provide for severance and accelerated
vesting clauses in the event the individual is terminated without cause, or a
significant change in control occurs.
EMPLOYEE BENEFIT PLAN
The Company has a qualified 401(k) plan available to substantially all
employees over the age of 21 years. Participants may contribute up to
20 percent of their annual compensation to the plan, limited to a maximum amount
set by the Internal Revenue Service. The Company may make contributions to the
401(k) plan at the discretion of the Board of Directors. No Company
contributions have been made to the plan since inception.
NOTE 8: INCOME TAXES
No provision for federal and state income taxes has been recorded as the
Company has incurred net operating losses since inception.
At December 31, 1999 and September 30, 2000, the Company had net operating
loss carryforwards available to offset future regular and alternative minimum
taxable income of approximately $1,379,000 and $35,000,000 (unaudited),
respectively. These carryforwards expire between 2007 through 2019, if not
utilized before these dates.
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 year include, but are not limited to,
a cumulative ownership change of more than 50% as defined, over a three-year
period. SiteSmith has not yet determined the extent to which its net operating
loss benefit will be limited.
19
SITESMITH, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 8: INCOME TAXES (CONTINUED)
The Company's deferred tax assets and liabilities at December 31, 1999 are
as follows (in thousands):
DECEMBER 31, 1999
-----------------
Deferred tax assets (current):
Net operating loss carry forwards........................... $549,000
Other accruals.............................................. 31,000
--------
Deferred tax assets......................................... 580,000
Deferred tax liabilities (non-current):
Depreciation................................................ (14,000)
--------
Deferred tax liabilities.................................... (14,000)
Net deferred tax assets..................................... 566,000
Valuation allowance......................................... (566,000)
--------
$ --
========
Due to the uncertainty surrounding the realization of favorable tax
attributes in future tax returns, the Company has placed a valuation allowance
against all of its net deferred tax assets. At such time as it is determined
that it is more likely than not that the deferred tax assets are realizable, the
valuation allowance will be reduced.
NOTE 9: SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
PERIOD FROM
SEPTEMBER 8,
1999
(INCEPTION) NINE MONTHS
THROUGH ENDED
DECEMBER 31, 1999 SEPTEMBER 30, 2000
----------------- ------------------
(UNAUDITED)
SUPPLEMENTAL DISCLOSURES OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Common stock issued for services
provided................................ $ 46,800 $ 175,440
Preferred stock issued in connection with
lease................................... $ -- $ 573,094
Unearned stock-based compensation for
services provided....................... $ -- $ 1,776,893
Unearned stock-based compensation relating
to employee stock option grants......... $7,136,465 $34,430,351
Accretion of redemption premium on
mandatorily redeemable convertible
preferred stock......................... $ 60,000 $ 2,276,377
NOTE 10: SUBSEQUENT EVENT (UNAUDITED)
In June 2000, the Company issued approximately $5 million in convertible
promissory notes. The notes bear interest at a rate of 9.5% per annum and are
payable in full in September 2000. The notes
20
SITESMITH, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 10: SUBSEQUENT EVENT (UNAUDITED) (CONTINUED)
are convertible into shares of the Company's equity securities issued and sold
at the close of the Company's next equity financing. The notes shall be
convertible into the number of shares of equity securities based on the
principle amount of the notes plus accrued and unpaid interest divided by the
price paid for the equity securities by third parties. As discussed below, the
Company closed an eligible equity financing on July 20, 2000 and as a result the
notes and accrued interest were converted into 889,554 shares of Series C
mandatorily redeemable convertible preferred stock.
On July 1, 2000, Mark F. Spagnolo joined SiteSmith as chief executive
officer. His employment agreement provides for the grant of an option to
purchase 3,000,000 shares of common stock at the fair market value on the grant
date. The option shall vest as follows: 750,000 are fully vested on grant date
and 25% of the remaining 2,250,000 shall vest on the first anniversary of his
start date with the balance vesting in 36 equal monthly increments. The
agreement also provides for a loan to purchase common stock. The loan is full
recourse and will be secured by any shares of stock obtained by exercising the
options described above and other personal property. In July 2000, Mr. Spagnolo
exercised 1,409,525 of his options to purchase common stock by executing a
full-recourse promissory note for $2,466,528. The promissory note is payable on
the earlier of July 1, 2004 or 60 days after his employment with the Company
terminates for any reason and bears an interest of 6.51% of the unpaid principal
balance each year. The agreement further provides acceleration of options and
the payment of certain bonuses and severance in the event of a change in control
or involuntary termination.
In July 2000, David C. Winn joined SiteSmith as a managing director. His
employment agreement provides for the grant of an option to purchase 1,000,000
shares of common stock at the fair market value on the grant date. The option
shall vest as follows: 25% shall vest on the first anniversary of his start date
with the balance vesting in 36 equal monthly increments. The agreement also
provides for a loan to purchase common stock. The loan is full recourse and will
be secured by any shares of stock obtained by exercising the options described
above and other personal property. In July 2000, Mr. Winn exercised 1,000,000 of
his options to purchase common stock by executing a full-recourse promissory
note for $1,749,900. The promissory note is payable on the earlier of
September 1, 2004 or 30 days after his employment with the Company terminates
for any reason and bears an interest of 6.51% of the unpaid principal balance
each year. The agreement further provides acceleration of options, the payment
of certain bonuses and severance in the event of a change in control or in
voluntary termination.
On July 19 and August 1, 2000, upon the completion of a successful executive
search by Heidrick & Struggles, Inc., the Company issued two fully vested
nonforfeitable and exercisable warrants the first to purchase an aggregate of
437,500 shares and the second to purchase 83,333 shares of common stock at an
exercise price of $1.75 per share. The warrants expire on (i) the earlier of one
year after an initial public offering (ii) upon a merger, or (iii) seven years
after the date of issuance. The Company valued the warrants using the
Black-Scholes option pricing model, applying an expected life of seven years, a
weighted average risk free interest rate of 6.43%, an expected dividend yield of
zero percent, a volatility of 70% and a deemed fair value of common stock of
$5.09 per share. The fair value of the warrants of approximately $2,275,000 was
expensed in full during the third quarter.
In July 2000, the Company entered into an operating lease agreement for its
new facility in Santa Clara, California. The agreement is for a minimum of ten
years, with future minimum lease payments of $1,375,836; $2,806,704; $2,918,970;
$3,035,730; $3,157,164 and $19,742,472 for fiscal years 2000, 2001, 2002, 2003,
2004 and thereafter, respectively. Concurrent with the execution of the lease,
the Company
21
SITESMITH, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 10: SUBSEQUENT EVENT (UNAUDITED) (CONTINUED)
posted a letter of credit in the amount of $2,850,000, which expires on
October 1, 2001. In connection with the lease agreement, the Company granted the
lessor warrants to purchase up to 10,000 shares of the Company's preferred stock
at an exercise price per share equal to the price paid for the preferred stock
in the Company's next private equity financing. The Company completed a
Series C preferred stock round of financing on July 23, 2000 at a price of $5.65
per share. The warrants expire on the earlier of (i) April 2007, (ii) the sale
of all or substantially all the capital stock on substantially all the assets of
the Company in a merger, business combination or other form of business
transaction in which more than fifty percent (50%) of the voting power of the
Company is disposed of or, (iii) the closing of a firm commitment underwritten
public offering with an offering price not less than $5.00 per share and
aggregate proceeds of $25,000,000. The warrants were valued at $40,680 using the
Black-Scholes option pricing model and will be recorded as additional rent
expense over the life of the lease. The following assumptions were used in
determining the fair value of the warrants: deemed fair value per share of
$5.65, dividend yield of 0%, expected volatility of 70%, risk-free interest rate
of 6.43% and a contractual life of 7 years.
On July 20, 2000, the Company sold 3,827,818 shares of Series C mandatorily
redeemable convertible preferred stock for net proceeds of $21,627,000. Upon the
closing of this financing, the $4,999,999 convertible promissory notes and
accrued interest were automatically converted into 889,554 shares of Series C
mandatorily redeemable convertible preferred stock. The rights, preferences and
privileges of the Series C redeemable preferred stock are consistent with those
outlined for Series A and Series B in Note 4, except as follows:
- Dividends are payable at a rate of $0.45 per share.
- Holders have a liquidation preference at $5.65 per share plus all declared
but unpaid dividends.
In August, the conversion and dividend rights, preferences and privileges of
the Series A mandatorily redeemable convertible and Series B mandatorily
redeemable convertible preferred stock were amended as follows:
- Dividends are payable at a rate of $0.04 per share for Series A
mandatorily redeemable convertible preferred stock and at $0.19 per share
for Series B mandatorily redeemable convertible preferred stock.
- All shares of mandatorily redeemable convertible preferred stock shall
automatically be converted, on a one for one basis, into shares of common
stock upon the closing of an underwritten public offering having an
aggregate offering price of at least $35,000,000 and a per share offering
price of at least $11.30.
In August 2000, the Board of Directors adopted the 2000 Directors' Stock
Plan under which 500,000 shares were reserved for issuance. The plan will become
effective on the effective date of the Registration Statement of the Company's
initial public offering. The plan provides that each person who becomes a
non-employee director after the effective date will be granted a non-statutory
stock option to purchase 25,000 shares of common stock which will vest over four
years. On the date of the Company's annual stockholder meeting each year, an
additional 5,000 shares of common stock which vest over one year will be granted
to non-employee directors who have served on the Board of Directors for at least
six months. Options granted will have an exercise price equal to the fair market
value of the common stock on the date of grant and will have a term of ten
years.
22
SITESMITH, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 10: SUBSEQUENT EVENT (UNAUDITED) (CONTINUED)
The Company's Board of Directors adopted the 2000 Executive Stock Incentive
Plan, (the "Executive Plan"), in July 2000. The Company has reserved a total of
4,000,000 shares of common stock for issuance under the Executive Plan. As of
August 1, 2000, 2,409,525 options have been exercised, options to purchase a
total of 1,590,475 shares at a weighted average exercise price of $1.75 per
share were outstanding and no shares remained available for future option or
stock purchase right grants. The Company does not intend to grant any additional
options or stock purchase rights under the Executive Plan after the date of the
Company's initial public offering. Unless terminated earlier, the Executive Plan
will terminate in 2010. The terms of options and stock purchase rights under the
Executive Plan are generally the same as those that may be issued under the
Option Plan, except that the Executive Plan does not impose a limitation on the
number of shares subject to options and stock purchase rights that may be issued
to any individual employee.
In August 2000, the 2000 Employee Stock Purchase Plan (the "Purchase Plan"),
was adopted by the Board of Directors. A total of 750,000 shares of common stock
has been reserved for issuance under the Purchase Plan, plus an annual increase
on the first day of each fiscal year beginning in 2001 and ending in 2010 equal
to the lesser of (i) 500,000 shares; (ii) 1% of the outstanding stock on the
last day of the immediately preceding fiscal year; or (iii) a lesser number
determined by the Board of Directors. This plan will become effective on the
effective date of the Registration Statement of the Company's initial public
offering. The Purchase Plan permits eligible employees to purchase common stock
through payroll deductions, which in any event may not exceed 15% of an
employee's eligible compensation, at a price equal to the lower of 85% of the
fair market value of the common stock at the beginning of the offering period or
at the end of an offering period. Employees may end their participation in the
Purchase Plan at any time during an offering period, and participation ends
automatically on termination of employment. Purchases of common stock will occur
on May 1 and November 1 of each year. The value of shares purchased in any
calendar year may not exceed $25,000. In addition, no employee may purchase more
than 1,000 shares of common stock under the Purchase Plan in any one purchase
period.
In September 2000, the Company amended and restated its Certificate of
Incorporation to change the authorized share capital to 50,000,000 of common
stock and 20,779,290 of mandatorily redeemable convertible preferred stock, of
which 7,200,000 has been designated to Series A, 8,610,681 has been designated
to Series B and 4,968,429 has been designated as Series C.
During the period from October 1, 2000 through January 19, 2001 the Company
granted options to purchase an aggregate of 1,257,186 shares of common stock
resulting in an additional deferred compensation of approximately $7,505,000.
On September 29, 2000, the Company entered into a Master Lease Agreement
with Comdisco ("Comdisco"). Under the terms of the Master Lease Agreement, the
Company leases certain equipment, software and improvements as defined in the
agreement from Comdisco. The amount of financing to be provided is up to
$3,200,000 for equipment and $800,000 for software and leasehold improvement.
Repayments at borrowing are made monthly over either 36 months for equipment and
30 months for software and improvements. Interest accrues at 9% per annum. On
November 9, 2000, a Purchase/Leaseback Agreement was fully executed by the
Company and Comdisco for $799,696. On November 21, 2000, a Purchase/Leaseback
Agreement was fully executed by the Company and Comdisco for $3,199,967.
23
SITESMITH, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 10: SUBSEQUENT EVENT (UNAUDITED) (CONTINUED)
In connection with the Master Lease Agreement, the Company granted Comdisco
a warrant to purchase 35,398 shares of the Company's Series C mandatorily
redeemable preferred stock at $5.65 per share. The warrant is immediately
exercisable and expires after ten years from the date of grant. The fair value
of the warrant was determined to be approximately $573,000 using the
Black-Scholes option pricing model with the following assumptions: deemed fair
market value per share of $16.19, dividend yield of 0%, expected volatility of
70%, risk-free interest rate of 5.92%, and a contractual life of 10 years. Such
amount will be recorded as a discount to the related capital lease obligation
and will be amortized as interest expense, using the effective interest method,
over the life of the agreement.
On October 9, the Company entered into a $3,000,000 Loan and Security
Agreement with Comdisco Inc. Under the terms of the Loan and Security Agreement,
Comdisco will lend the Company up to $3,000,000 in minimum advances of $500,000
for working capital purposes. Principal balances of each advance bear interest
of 12% per annum and are due and payable in 36 equal monthly installments of
principal and interest. The loan is collateralised by substantially all the
Company's assets, Copyrights, Patents, and Trademarks.
In connection with the Loan and Security Agreement, Comdisco received an
option to purchase up to 132,743 shares of the Company's Series C mandatorily
redeemable preferred stock at $5.65 per share. The option can be exercised at
any time, at Comdisco's sole and absolute discretion until the effective date of
a liquidity event, which includes the pending merger with Metromedia Fiber
Network, Inc. The relative fair value of this option is approximately $2,446,000
using the Black-Scholes option pricing model with the following assumptions:
deemed fair market value per share of $18.43, dividend yield of 0%, expected
volatility of 70%, risk-free interest rate of 5.92%, and a contractual life of
3 months. On December 19, 2000, Comdisco Inc. elected to exercise its Purchase
Option with respect to 132,743 shares of the Series C mandatorily redeemable
preferred stock at $5.65 per share. Comdisco elected to pay the Aggregate
Purchase Price of $750,000 by conversion and tender of the Company's Note dated
October 9, 2000. The $750,000 represents a portion of the original Note in the
Principal amount of $3,000,000.
On October 9, 2000, the Company entered into a definitive agreement with
Metromedia Fiber Network, Inc. ("Metromedia") to exchange all outstanding shares
of its common and preferred stock for the right to receive between 55 million
and 62.5 million shares of Metromedia class A common stock. The exchange ratio
will depend on the average closing price of Metromedia class A common stock
during the 20 trading day period ending on the fourth business day prior to the
effective time of merger. The average closing price of Metromedia Fiber class A
common stock for the 20 days ending January 19, 2001, is $13.79 per share. This
transaction is expected to close during the first quarter of fiscal 2001,
subject to various closing conditions.
The aggregate merger consideration will be based on the average trading
price of Metromedia Fiber class A common stock on The Nasdaq National Market
during the twenty trading day period ending four days prior to consummation of
the merger subject to the following conditions:
- If the average trading price is greater than or equal to $24.00 and less
than or equal to $27.2727, then the aggregate merger consideration will be
the number of shares obtained by dividing $1,500,000,000 by the average
trading price.
- If the average trading price is less than $24.00, then the aggregate
merger consideration will be 62,500,000 shares.
24
SITESMITH, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 10: SUBSEQUENT EVENT (UNAUDITED) (CONTINUED)
- If the average trading price is greater than $27.2727, then the aggregate
merger consideration will be 55,000,000 shares.
On November 8, 2000, the Company entered into a $2,850,000 Reimbursement and
Security Agreement for Letter of Credit with Comdisco Inc. Under the terms of
the Reimbursement and Security Agreement for Letter of Credit, Comdisco will
establish a landlord's letter of credit of up to $2,850,000. The letter of
credit shall expire on July 22, 2005.
In connection with the Reimbursement and Security Agreement for Letter of
Credit, Comdisco received a warrant to purchase up to 70,619 shares of the
Company's Series C mandatorily redeemable preferred stock at $5.65 per share.
The warrant is immediately exercisable and expires after ten years from the date
of grant. The fair value of the warrant was determined to be approximately
$1,565,000 using the Black-Scholes option pricing model with the following
assumptions: deemed fair market value per share of $22.16, dividend yield of 0%,
expected volatility of 70%, risk-free interest rate of 5.92%, and a contractual
life of 10 years. The warrant value will be amortized as interest expense using
the effective interest method, over the life of the agreement.
On November 30, 2000, December 8, 2000, January 5, 2001, and January 11,
2001, the Company issued 4 separate Promissory Notes to Metromedia for
$5,000,000, $2,600,000, $3,500,000, and $5,000,000 in cash, respectively. Under
the terms of the Promissory Notes, the Company agrees to use the monies solely
for Working Capital purposes and not to incur any additional indebtedness, other
than payables incurred in the ordinary course of business. The principal
balances bear interest of 9.5% per annum and are payable in one installment of
$5,000,000, $2,600,000, $3,500,000, and $5,000,000 respectively, together with
any accrued but unpaid interest, on May 29, 2001, June 21, 2001, July 4, 2001,
and July 10, 2001, respectively.
On December 8, 2000, SiteSmith canceled its plan for an initial public
offering of its common stock as a result of this transaction.
25
(b) Pro Forma Financial Information
METROMEDIA FIBER UNAUDITED PRO FORMA CONDENSED COMBINING FINANCIAL INFORMATION
THE FOLLOWING UNAUDITED PRO FORMA CONDENSED COMBINING FINANCIAL INFORMATION
ILLUSTRATES THE EFFECT OF THE MERGER OF SITESMITH WITH AQUEDUCT ACQUISITION
CORP., METROMEDIA FIBER'S WHOLLY-OWNED SUBSIDIARY, UNDER THE TERMS OF THE MERGER
AGREEMENT DATED OCTOBER 9, 2000.
BASIS FOR THE CONVERSION RATIO
Each share of SiteSmith common stock was converted into a number of
shares of Metromedia Fiber class A common stock equal to the aggregate merger
consideration divided by the total number of shares of SiteSmith common stock on
the date of consummation of the merger on a diluted basis (i.e., assuming that
all outstanding options, warrants, preferred stock or other securities
exercisable for or convertible into SiteSmith common stock have been exercised
or converted). The holders of SiteSmith series A, B and C preferred stock
received the number of shares of Metromedia class A common stock that they
would have received if those holders had converted their preferred stock into
SiteSmith common stock immediately prior to consummation of the merger.
The aggregate merger consideration was based on the average closing
price of Metromedia Fiber class A common stock on the Nasdaq National Market
during the twenty trading day period ending four business days prior to the
closing of the merger, subject to certain adjustments:
Based on applying this formula, the average closing price of Metromedia
Fiber stock was $24.00, the total number of shares of SiteSmith common stock
on a diluted basis was equal to 46,628,151 and, therefore, the exchange ratio
was 1.3404.
The unaudited pro forma condensed combining statements of operations for the
nine months ended September 30, 2000 and for the period ended December 31, 1999
give effect to the above transactions as if they had been consummated on January
1, 1999. The unaudited condensed combining balance sheets give effect to the
above transaction as if it had occurred on September 30, 2000.
ACCOUNTING TREATMENT
Metromedia Fiber plans to record the acquisition of SiteSmith using the
purchase method of accounting. Accordingly, the assets acquired and liabilities
assumed will be recorded at their estimated fair values, which are subject to
further adjustment based upon appraisals and other analyses.
The pro forma adjustments are based upon available information and
assumptions that Metromedia Fiber believes are reasonable at the time made. The
unaudited pro forma condensed combining financial statements do not purport to
present Metromedia Fiber's financial position or results of operations had the
acquisition occurred on the dates specified, nor are they necessarily indicative
of the financial position or results of operations that may be achieved in the
future. The unaudited pro forma condensed combining statements of operations do
not reflect any adjustments for synergies that Metromedia Fiber expects to
realize following consummation of the acquisitions. No assurances can be made as
to the amount of cost savings or revenues enhancements, if any, that may be
realized.
The unaudited pro forma condensed combining financial statements should be
read in conjunction with the consolidated financial statements and notes of
Metromedia Fiber included in its filings on Form 10-K and 10-Q and of
SiteSmith, included elsewhere in this Form 8-K.
26
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
PRO FORMA CONDENSED COMBINING STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
SITESMITH METROMEDIA
HISTORICAL HISTORICAL ADJUSTMENTS(1) PRO FORMA
---------- ---------- -------------- ---------
Revenue...................................... $ 14,156 $ 127,118 $ (578)(2) $ 140,696
Expenses:
Cost of sales.............................. 20,900 133,466 (578)(2) 153,788
Selling, general and administrative........ 26,991 94,363 121,354
Deferred compensation...................... 11,900 919 91,986 (3) 104,805
Depreciation and amortization.............. 1,171 118,567 81,732 (4) 201,470
-------- --------- --------- ---------
Loss from operations......................... (46,806) (220,197) (173,718) (440,721)
Interest income.............................. 518 93,194 -- 93,712
Interest expense (including financing
costs)..................................... -- (142,745) -- (142,745)
Income (loss) from joint ventures............ -- (2,739) -- (2,739)
-------- --------- --------- ---------
Net loss..................................... (46,288) (272,487) (173,718) (492,493)
Accretion of redemption premium on
mandatorily redeemable convertible
preferred stock............................ (2,276) -- 2,276 (5) --
-------- --------- --------- ---------
Net loss available for common stockholders... $(48,564) $(272,487) $(171,442) $(492,493)
======== ========= ========= =========
Net loss per share........................... $ (0.51) $ (0.85)
========= =========
Weighted average number of shares outstanding
(6)........................................ 538,811 580,942
========= =========
SEE ACCOMPANYING NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINING FINANCIAL
STATEMENTS.
27
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
PRO FORMA CONDENSED COMBINING STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
METROMEDIA
SITESMITH FIBER
HISTORICAL PRO FORMA ADJUSTMENTS (1) PRO FORMA
---------- ---------- --------------- ---------
Revenue...................................... $ 98 $ 96,491 $ (18)(2) $ 96,571
Expenses:
Cost of sales.............................. 484 74,958 (18)(2) 75,424
Selling, general and administrative........ 1,050 70,252 -- 71,302
Consulting and employment incentives....... -- 1,051 -- 1,051
Settlement agreement....................... -- 1,932 -- 1,932
Deferred compensation...................... 663 -- 122,648 (3) 123,311
Depreciation and amortization.............. 25 107,791 108,976 (4) 216,792
------- --------- --------- ---------
Loss from operations......................... (2,124) (159,493) (231,624) (393,241)
Interest income.............................. 21 36,785 -- 36,806
Interest expense (including financing
costs)..................................... -- (74,142) -- (74,142)
Income (loss) from joint ventures............ -- (2,003) -- (2,003)
------- --------- --------- ---------
Net loss..................................... (2,103) (198,853) (231,624) (432,580)
Accretion of redemption premium on
mandatorily redeemable convertible
preferred stock............................ (60) -- 60 (5) --
------- --------- --------- ---------
Net loss available for common stockholders... $(2,163) $(198,853) $(231,564) $(432,580)
======= ========= ========= =========
Net loss per share........................... $ (0.41) $ (0.82)
========= =========
Weighted average number of shares
outstanding (6)............................ 488,474 530,605
========= =========
SEE ACCOMPANYING NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINING FINANCIAL
STATEMENTS.
28
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
PRO FORMA CONDENSED COMBINING BALANCE SHEETS
(UNAUDITED)
SEPTEMBER 30, 2000
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
SITESMITH METROMEDIA
HISTORICAL HISTORICAL ADJUSTMENTS(1) PRO FORMA
---------- ---------- -------------- ----------
ASSETS
Current Assets:
Cash and cash equivalents................. $ 5,099 $1,492,513 $ (3,121)(1) $1,494,491
Restricted cash, current.................. 482 -- 482
Marketable securities..................... -- 188,433 188,433
Accounts receivable....................... 6,981 86,249 93,230
Prepaid expenses and other current
assets.................................. 2,058 33,291 35,349
-------- ---------- ---------- ----------
Total current assets.................... 14,620 1,800,486 (3,121) 1,811,985
Fiber optic transmission network and related
equipment, net............................ -- 2,049,166 2,049,166
Property and equipment,net.................. 11,907 32,613 44,520
Restricted cash............................. 3,030 52,605 55,635
Investment in/advance to joint venture...... -- 23,068 23,068
Other assets................................ 1,253 97,642 98,895
Goodwill, net............................... -- 1,604,259 1,089,762 (1) 2,694,021
-------- ---------- ---------- ----------
Total assets............................ $ 30,810 $5,659,839 $1,086,641 $6,777,290
======== ========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................... 7,250 91,242 98,492
Accrued expenses.......................... 4,290 257,674 261,964
Deferred revenue, current................. -- 21,048 21,048
Capital lease obligations and notes
payable, current........................ -- 8,037 8,037
-------- ---------- ---------- ----------
Total current liabilities............... 11,540 378,001 -- 389,541
Mandatorily redeemable convertible preferred
stock..................................... 52,971 (52,971)(1) --
Senior notes payable........................ -- 1,660,900 1,660,900
Convertible subordinated notes payable...... -- 975,281 975,281
Capital lease obligations and notes
payable................................... -- 34,389 34,389
Deferred revenue............................ -- 226,278 226,278
Other long term liabilities................. -- 16,445 16,445
Total stockholders' (deficit) equity.... (33,701) 2,368,545 1,139,612 (1) 3,474,456
-------- ---------- ---------- ----------
Total liabilities and stockholders'
equity................................ $ 30,810 $5,659,839 $1,086,641 $6,777,290
======== ========== ========== ==========
SEE ACCOMPANYING NOTES TO UNAUDITED PRO FORMA COMBINING FINANCIAL STATEMENTS
29
METROMEDIA FIBER NETWORK, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(1) Reflects the acquisition by Metromedia Fiber of SiteSmith at September 30,
2000 for the balance sheet and January 1, 1999 for the statement of
operations as follows:
(a) September 30, 2000 information for SiteSmith has been adjusted to
reflect the issuance of 559,566 stock options from October 1 to
October 24, 2000, and 698,974 common stock warrants, at exercise prices
ranging from $1.75 to $5.65 per warrant. Series C manditorily redeemable
convertible preferred stock and common stock warrants are assumed to
convert to Metromedia Fiber Class A common stock based on the exchange
ratio.
(b) The issuance of 50,832,083 shares of Metromedia Fiber class A common
stock in exchange for shares of SiteSmith common stock, including the
conversion of SiteSmith's Series A, Series B and Series C mandatorily
redeemable convertible preferred stock, and the exercise of warrants to
purchase common stock, at a ratio of 1.3404, using a price of $24.00
for Metromedia Fiber's class A common stock based on the average closing
price.
(c) Issuance of shares of Metromedia Fiber class A common stock
Number of shares issued to acquire SiteSmith (including
shares subject to repurchase)......................... 50,832,083
Per share price of stock................................ $ 24.00
-----------
Value of shares issued.................................. $1,219,970,000
Value of Metromedia Fiber options issued in exchange for
SiteSmith's options................................... 253,885,000
Less value of restricted shares and unvested options
accounted for as deferred compensation................ (367,943,000)
Transaction costs....................................... 5,000,000
--------------
Total acquisition costs................................. 1,110,912,000
Fair value of SiteSmith's net tangible assets
acquired.............................................. (21,150,000)
--------------
Excess of cost over net tangible assets acquired........ $1,089,762,000
==============
Metromedia Fiber has made a preliminary allocation to intangible assets of
excess cost over fair value of net tangible assets acquired as SiteSmith's
tangible assets and liabilities are estimated to approximate fair value.
However, there can be no assurance that the actual allocation will not
differ significantly from the pro forma allocation.
(2) Reflects elimination of intercompany sales.
(3) Reflects amortization of deferred compensation over the remaining vesting
period which is estimated to be three years.
(4) Reflects additional amortization of the excess of cost over tangible assets
acquired in the merger by use of the straight-line method over ten years.
(5) Reflects conversion of mandatorily redeemable preferred stock to common
stock.
(6) The average common shares outstanding used in calculating pro forma loss per
common share are calculated assuming that the number of shares of Metromedia
Fiber's class A common stock issued in the merger were outstanding from the
beginning of the periods presented. Further, 8,701,000 shares of class A
common stock subject to repurchase were deducted from shares outstanding.
30
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.
METROMEDIA FIBER NETWORK, INC.
By: /s/ Gerard Benedetto
-------------------------------------
Name: Gerard Benedetto
Title: Chief Financial Officer
Date: February 14, 2001