EXHIBIT 99.1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
AdForce, Inc.:
We have audited the accompanying consolidated balance sheet of AdForce, Inc., 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 AdForce, Inc 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 31, 2000
ADFORCE, INC.
CONSOLIDATED BALANCE SHEET
(in thousands)
DECEMBER 31,
1999
------------
ASSETS
Current assets:
Cash & cash equivalents $ 17,114
Short-term investments 44,797
Accounts receivable, net of allowance of $2,216 5,164
Prepaid expenses and other current assets 1,571
---------
Total current assets 68,646
Property and equipment, net 10,146
Intangible assets, net 1,187
Other non-current assets 440
---------
Total assets $ 80,419
=========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of captial lease obligations $ 3,158
Accounts payable 3,842
Accrued compensation and related benefits 1,729
Accrued expenses 1,211
Deferred revenue 114
---------
Total current liabilities 10,054
Long-term capital lease obligations 5,122
Minority interest in AdForce Asia 1,295
Stockholders' equity
Common stock, $0.001 par value:
25,000,000 shares authorized, 5,016,603 shares issued and outstanding as of
100,000,000 shares authorized, 20,170,397 shares issued and outstanding 20
Additional paid-in capital 119,796
Deferred stock compensation (4,386)
Note receivable from stockholder (42)
Unrealized loss on available for sale securities (125)
Accumulated deficit (51,315)
---------
Total stockholders' equity 63,948
---------
Total liabilities and stockholders' equity $ 80,419
=========
See accompanying notes to consolidated financial statements.
ADFORCE, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share amounts)
YEAR ENDED
DECEMBER 31,
1999
--------
Net revenue $ 18,971
Cost of revenue:
Data center operations 12,511
Amortization of intangible assets and
deferred stock compensation 1,497
--------
Total cost of revenue 14,008
--------
Gross profit 4,963
Operating expenses:
Research and Development 10,333
Marketing and selling 10,807
General and administrative 4,762
Amortization of intangible assets and
deferred stock compensation 7,334
--------
Total operating expenses 33,236
--------
Loss from operations (28,273)
Minority interest 101
Interest income 2,525
Interest expense (892)
--------
Net loss $(26,539)
========
Basic and diluted net loss per share $ (1.90)
========
Weighted average shares of common stock
outstanding used in computing basic and
diluted net loss per share 13,937
========
See accompanying notes to consolidated financial statements.
ADFORCE, INC.
CONSOLIDATED STATEMENT OF COMMON STOCKHOLDERS' EQUITY (DEFICIT)
(in thousands)
CONVERTIBLE
PREFERRED COMMON STOCK ADDITIONAL
-------------------- --------------------- PAID-IN DEFERRED NOTE
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION RECEIVABLE
----------- -------- --------------------------------- ---------------------------
Balances at December 31, 1998 4,733,559 $ 5 5,016,603 $ 5 $ 41,679 $ (2,802) $ (70)
Issuance of common stock through Initial Public - - 5,175,000 $ 5 70,684 - -
Offering, net of issuance cost of 6,937
Issuance of common stock from option and warrant
exercise net - - 511,676 1 405 - -
Deferred stock compensation related to certain
options granted to employees - - - - 6,837 (6,837) -
Amortization of deferred stock compensation - - - - - 5,253 -
Compensation related to acceleration of vesting
of employee option - - - - 195 - -
Forgiveness of stockholder note receivable - - - - - - 28
Conversion of preferred shares of stock into
comom shares of stock (4,733,559) (5) 9,467,118 9 (4) - -
Change in unrealized loss on available-for-sale
securities - - - - - - -
Net loss - - - - - - -
----------- -------- --------------------------------- ---------------------------
Balances at December 31, 1999 - $ - 20,170,397 $ 20 $119,796 $ (4,386) $ (42)
=========== ======== ================================= ===========================
NET UNREALIZED TOTAL
LOSS ON ACCUMULATED STOCKHOLDERS'
SECURITIES DEFICIT EQUITY
--------------- ------------- --------------
Balances at December 31, 1998 $ - $ (24,776) $ 14,041
Issuance of common stock through Initial Public
Offering, net of issuance cost of 6,937 - - 70,689
Issuance of common stock from option and warrant
exercise net - - 406
Deferred stock compensation related to certain
options granted to employees - - -
Amortization of deferred stock compensation - - 5,253
Compensation related to acceleration of vesting
of employee option - - 195
Forgiveness of stockholder note receivable - - 28
Conversion of preferred shares of stock into
comom shares of stock - - -
Change in unrealized loss on available-for-sale
securities (125) - (125)
Net loss - (26,539) (26,539)
--------------- ------------- --------------
Balances at December 31, 1999 $ (125) $ (51,315) $ 63,948
=============== ============= ==============
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
YEAR ENDED
DECEMBER 31,
1999
--------------
Cash flows from operating activities:
Net Loss $ (26,539)
Reconciliation of net loss to net cash used in operating activities:
Depreciation, amortization and write-off of intangible 6,572
Amortization of deferred stock compensation and
other compensation charges 5,448
Loss on sale of assets 17
Other non-cash charges 34
Minority interest (101)
Changes in operating assets and liabilities:
Accounts receivable (4,004)
Prepaid expenses and other current assets
and other non-current assets (646)
Accounts payable 2,762
Accrued compensation and related benefits 1,271
Deferred revenue 104
Accrued liabilities 412
----------
Net cash used in operating activities (14,670)
----------
Cash flows from investing activities:
Purchases of short term investments, net (44,352)
Investment in note receivable (500)
Capital expenditures (3,561)
----------
Net cash used in investing activities (48,413)
----------
Cash flows from financing activities:
Principal payments on capital lease obligations (2,333)
Proceeds from issuance of common stock, net 71,089
Minority investment in AdForce Asia 1,396
----------
Net cash (used in) provided by financing activities 70,152
----------
Net increase in cash and cash equivalents 7,069
Cash and cash equivalents at beginning of period 10,045
----------
Cash and cash equivalents at end of period $ 17,114
==========
Supplemental schedule of noncash investing/financing activities
Property and equipment acquired under capital leases $ 6,001
==========
Increase in deferred stock compensation $ 6,838
==========
See accompanying notes to consolidated financial statements.
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
AdForce was incorporated as Imgis, Inc. in the state of California on January
16, 1996. Effective on April 30, 1999, Imgis' stockholders approved its
reincorporation in the state of Delaware as AdForce, Inc. AdForce is a provider
of centralized, outsourced ad management and delivery services on the Internet.
AdForce's services offer sophisticated campaign design, inventory management,
targeting, ad delivery, tracking, measuring and reporting capabilities.
AdForce has incurred operating losses to date and had an accumulated deficit
of $51,315,000 at December 31, 1999. AdForce's activities have been primarily
financed through private placements of equity securities, capital lease
financing and in May 1999, the sale of 5,175,000 shares of common stock for
$77,625,000, yielding net proceeds of $70,684,000 in its initial public
offering. AdForce may need to raise additional capital through the issuance of
debt or equity securities and capital lease financing. Such financing may not be
available on terms satisfactory to AdForce, if at all. If adequate funds are not
available, AdForce may be required to reduce its level of spending.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the
Company and its majority-owned subsidiary. The interests of the outside
investors in AdForce Asia are presented as minority interests in the
accompanying consolidated financial statements. All significant inter-company
accounts and transactions are eliminated in consolidation.
In August 1999, AdForce entered a joint venture agreement to create AdForce
Asia. AdForce Asia was incorporated in November 1999. AdForce owns 61.36% of
AdForce Asia with Sina.com and Compuserve owning the remaining 38.64%.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Concentration of Credit Risk
AdForce sells and grants credit for its services to its customers without
requiring collateral or third-party guarantees. To date, all of AdForce's
customers are participants in the Internet industry, including ad agencies, Web
sites, and ad rep firms. Few companies in the Internet industry have a
demonstrated history of profitability, and, accordingly, granting unsecured
credit to such customers carries with it a significant risk of loss. AdForce
monitors its exposure for credit losses and maintains appropriate allowances. If
one or more of AdForce's customers are unable to pay for its services, AdForce's
quarterly and annual results of operations could be materially or adversely
affected. During 1999, 26%, 25% and 14% of net revenue related to three
customers. Two customers accounted for approximately 49% and 23% of AdForce's
net accounts receivable at December 31, 1999.
Netscape, one of AdForce's top three customers for 1999, was acquired by
America Online during the first quarter of 1999, and transitioned Netscape's
domestic and European Netcenter advertising serving (which represented the
substantial majority of AdForce's business with Netscape) from AdForce to
America Online's internal system following the expiration on November 22, 1999
of AdForce's contract with Netscape. Netscape accounted for 14% of AdForce's
net revenues during 1999. In addition, 24/7 Media has stated that it is
currently developing and implementing an internal ad delivery technology that is
intended to serve as its sole ad delivery solution, which they had expected to
deploy in the fourth quarter of 1999. 24/7 Media has also stated that, unless
and until the development of and transition to its own ad delivery technology is
complete, it will be primarily dependent on AdForce to deliver ads to its
networks and Web sites. 24/7 Media accounted for 26% of AdForce's net revenues
during 1999.
Cash and Cash Equivalents
AdForce considers all highly liquid investments with an original maturity from
the date of purchase of three months or less to be cash equivalents. As of
December 31, 1999, cash and cash equivalents consisted primarily of investments
in money market accounts and commercial paper, and their cost approximated fair
value. AdForce places its cash and cash equivalents in high-quality U.S.
financial institutions and, to date, has not experienced any losses on any of
its investments.
Marketable Securities
AdForce accounts for investments in marketable securities in accordance
with Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities" ("FAS 115"). AdForce
classifies its short-term investments as available-for-sale. Accordingly, these
investments, primarily commercial paper and corporate bonds, are carried at fair
value. Changes in market values are reflected as unrealized gains or losses,
calculated on the specific identification method, and reported as a net amount
in a separate component of stockholders' equity.
Fair Value of Financial Instruments and Associated Risk
Statement of Financial Accounting Standards ("FAS") No. 107, "Disclosures
About Fair Value of Financial Instruments," requires that fair values be
disclosed for most of AdForce's financial instruments. The carrying amounts of
cash and cash equivalents, accounts receivable, notes receivable, current
liabilities, and capital lease obligations are considered to be representative
of their respective fair values.
Financial instruments that potentially subject AdForce to credit risk
consist of short-term investments and trade receivables. AdForce is subject to
concentrations of credit risk and interest rate risk related to its short-term
investments. AdForce's credit risk is managed by limiting the amount of
investments placed with any one portfolio manager, investing in money market
funds, short-term commercial paper, and A1 rated corporate bonds with a weighted
average months to maturity of approximately 4.5 months as of December 31, 1999.
Intangible Assets, Net
Intangible assets consist primarily of purchased technology and other
intangibles related to an acquisition accounted for using the purchase method
and the value of the warrants issued to a data vendor in connection with a
demographic data agreement. Amortization of the purchased technology and other
intangibles related to the acquisition is provided on a straight-line basis over
the respective useful lives of the assets, which range from two to three years.
Purchased in-process research and development without an alternative future use
was expensed when acquired. The data vendor warrant was being amortized over
the three year life of the agreement starting July 14, 1999. However, in
November 1999, the net realizable value of the demographic data agreement was
deemed to be impaired and the entire amount of the intangible was expensed.
As of December 31, 1999, the Company has accumulated amortization related to
intangible assets of $4,811,000.
The Company evaluates its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of such assets or
intangibles may not be recoverable. Recoverability of assets to be held and used
is measured by a comparison of the carrying amount of an asset to future
undiscounted net cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less costs to sell.
Depreciation and Amortization
AdForce records property and equipment at cost and calculates depreciation
using the straight-line method over the estimated useful lives of the assets,
generally three to five years. Equipment acquired under capital leases is
amortized on a straight-line basis over the shorter of its lease term or
estimated useful life, generally two to three-and-one-half years.
Advertising Costs
Advertising costs are charged to expense when incurred. Advertising expense
was $1,779,000 for the year ended December 31, 1999.
Revenue Recognition
To date, substantially all of AdForce's revenues have been generated from the
provision of Internet ad management and delivery services for its customers.
AdForce recognizes revenues from these services based on the number of ads
delivered. Revenue is recognized at the time the service is delivered, provided
AdForce does not have any significant remaining obligations and collection of
the resulting receivable is probable. Prepaid amounts for advertising management
and delivery services are recorded as deferred revenue until the related
services are delivered.
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.
Research and Development Costs
Costs incurred in the development of new software (and substantial
enhancements to existing software) to be used in connection with AdForce's
services are expensed to operations as incurred until technological feasibility
of such software has been established, at which time any additional costs would
be capitalized in accordance with FAS No. 86. Because AdForce believes that its
present process for developing software is completed essentially concurrently
with the establishment of technological feasibility, no research and development
costs have been capitalized to date.
Net Loss per Share
Basic and diluted net loss per share are presented in conformity with FAS No.
128, "Earnings Per Share" ("FAS 128"), for the period presented. Pursuant to
Securities and Exchange Commission Staff Accounting Bulletin No. 98, common
stock and convertible preferred stock issued or granted for nominal
consideration prior to the anticipated effective date of AdForce's initial
public offering are included in the calculation of basic and diluted net loss
per share as if they had been outstanding for all periods presented. To date,
AdForce has not had any issuances or grants for nominal consideration. In
accordance with
FAS 128, basic and diluted net loss per share has been computed using the
weighted average number of shares of common stock outstanding during the period,
less shares subject to repurchase.
Historical basic and diluted net loss per share are as follows (in thousands,
except per share amounts):
YEAR ENDED
------------
DECEMBER 31,
------------
1999
------------
Historical:
Net loss.............................. $(26,539)
============
Basic and diluted shares:
Weighted average shares of common 14,770
stock outstanding....................
Less weighted average shares subject
to repurchase........................ (833)
Weighted average shares of common
stock outstanding used in computing
basic and diluted net per loss share. 13,937
============
Basic and diluted net loss per share.. $ (1.90)
============
If AdForce had reported net income, diluted net income per share would have
included the shares used in the computation of pro forma net loss per share as
well as approximately 4,772,700 common equivalent shares related to outstanding
options and warrants to purchase common stock not included above for the year
ended December 31, 1999. The common equivalent shares from options and warrants
would be determined on a weighted average basis using the treasury stock method.
Comprehensive Loss
In June 1997, the Financial Accounting Standards Board issued FAS No. 130,
"Reporting Comprehensive Income" ("FAS 130"). FAS 130 establishes standards for
the reporting and display of comprehensive income and its components in a full
set of general purpose financial statements and is effective for fiscal years
beginning after December 15, 1997. AdForce adopted FAS 130 during the year ended
December 31, 1998. During the year ended December 31, 1999, unrealized loss on
securities of $125,000 increased total comprehensive loss to $26.7 million.
Segment Information
In June 1997, the Financial Accounting Standards Board issued FAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("FAS
131"). FAS 131 changes the way companies report selected segment information in
annual financial statements and requires companies to report selected segment
information in interim financial reports to stockholders. FAS 131 also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. AdForce adopted FAS 131 in the year ended
December 31, 1998. AdForce operates solely in one segment, the provision of
Internet advertising management and delivery services, and therefore there is no
impact on AdForce's financial statements of adopting FAS 131. For the year ended
December 31, 1999, revenues from customers outside the United States were
$1,090,000. Forward Slash, 24/7 Media Europe and Netscape International
represented 41%, 15% and 14%, respectively, of revenue from outside the United
States.
New Accounting Pronouncements
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. AdForce 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 April 1998, the AICPA issued SOP No. 98-5, "Reporting on the Costs of
Start-Up Activities." SOP No. 98-5 requires that all start-up costs related to
new operations must be expensed as incurred. In addition, all start-up costs
that were capitalized in the past must be written off when SOP No. 98-5 is
adopted. AdForce implemented SOP No. 98-5 on January 1, 1999. The adoption of
SOP No. 98-5 had no effect on its financial position or results of operations.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
establishes methods for derivative financial instruments and hedging activities
related to those instruments, as well as other hedging activities. AdForce will
be required to implement SFAS No. 133 for the year ending December 31, 2001.
Because AdForce does not currently hold any derivative instruments and does not
engage in hedging activities, AdForce does not expect that the adoption of SFAS
No. 133 will have a material impact on its 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.
2. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following (in thousands):
DECEMBER 31,
------------
1999
------------
Computer hardware and software.................................. $14,311
Office furniture and equipment.................................. 1,156
Leasehold improvements.......................................... 1,049
------------
16,516
Less accumulated depreciation and amortization.................. 6,370
------------
$10,146
============
As of December 31, 1999 property and equipment included amounts acquired under
capital leases of $11,203,000 with related accumulated depreciation of
$4,361,000.
3. RELATED PARTIES
For a portion of 1999 two of AdForce's founders, who are current stockholders
but no longer employees at AdForce, held executive management positions with one
of AdForce's customers. Net revenue recognized from sales to this customer was
$4,717,000 during the year ended December 31, 1999.
During 1999, AdForce recorded approximately $320,000 of expense relating to a
recruiting firm owned by the spouse of one of AdForce's Vice Presidents.
4. LICENSE AGREEMENT AND DEMOGRAPHIC DATA AGREEMENT
In July 1998, AdForce entered into a License Agreement and a Demographic Data
Agreement with America Online, Inc. In addition, AdForce sold 728,332 shares of
Series E convertible preferred stock to America Online for a purchase price of
$10,000,000. In connection with the sale of Series E convertible preferred stock
to America Online, AdForce also issued to America Online a warrant to purchase
up to 509,831 shares of Series E convertible preferred stock at an exercise
price of $13.73 per share. The warrant is exercisable at any time on or before
July 14, 2003 (See Note 6). AdForce determined the fair value of the warrants to
be $3,686,000 using the Black-Scholes method. Approximately $1,669,000 of the
value of the warrant was attributable to the Series E preferred stock agreement
and approximately $2,019,000 of the value of the warrant was attributable to the
Demographic Data Agreement. AdForce determined the allocation of the warrant
value between the Series E preferred stock agreement and the Demographic Data
Agreement primarily based on the decrease to the conversion rate (benefit to the
Company and its other equity holders) of the Series D preferred stock as a
result of the sale and issuance of the Series E preferred stock and warrant.
Under the License Agreement, AdForce licensed its technology to America Online
and its affiliates to be used internally by America Online and on sites
associated with America Online. The licensed technology included future
enhancements to AdForce's technology and is warranted to perform according to
its specifications. The license was nonexclusive, perpetual, worldwide and
nontransferable except for certain assignments and included source code. AdForce
could terminate the license only in the event of a material, uncorrected breach
of the License Agreement or Demographic Data Agreement by America Online. For
the duration of the license, if requested, AdForce would provide technical
support, development services and ad serving services on a cost or cost plus
basis if America Online was not in default. AdForce would provide these services
at cost if America Online provided AdForce access to demographic data under the
Demographic Data Agreement and America Online was not in breach of the
Demographic Data Agreement. Otherwise, AdForce can mark up the cost of our
services by certain percentages. Under the License Agreement, America Online
will use commercially reasonable efforts to encourage others associated with
America Online to use AdForce's technology, and AdForce will use commercially
reasonable efforts to encourage its customers to use America Online in the sale
of interactive advertising.
Under the Demographic Data Agreement, America Online would authorize AdForce
to use demographic information about America Online users in connection with the
targeting and delivery of ads to these users. After AdForce had access to the
demographic data, AdForce would pay America Online quarterly fees based on the
greater of a certain percentage of the consideration charged for targeted
advertising or a certain percentage of the incremental revenue charged for the
targeting feature. Such fees would total at least $10,000,000 for the first
three years after America Online provides access to the demographic data. The
term of the Demographic Data Agreement would expire on the earlier of July 14,
2002 or three years after AdForce has access to the demographic data. America
Online could elect to renew the Demographic Data Agreement on a year-to-year
basis with 90 days' notice on the same terms and conditions, subject to
establishing mutually agreeable minimum annual fees. America Online could elect
to terminate the Demographic Data Agreement upon payment of a fee to AdForce in
the event a third party offers more favorable terms for access to the
demographic data and AdForce does not match such terms. AdForce has proposed a
preliminary implementation schedule that was subject to America Online's
approval. The amount related to the Demographic Data Agreement was being
amortized over the three year term of the agreement beginning July 14, 1999, but
was written down to zero in November 1999 when AOL indicated that they were
withholding access to the Demographic Data by AdForce.
5. COMMITMENTS
At December 31, 1999, AdForce was leasing its operating and administrative
facilities and certain equipment under non-cancelable operating lease agreements
that expire in October 2005. Rent expense was approximately $2,987,000 for the
years ended December 31, 1999.
During the years ended December 31, 1999, AdForce executed one lease-line
agreement for a total of $4,000,000 in lease-line credit availability. At
December 31, 1999, related lease obligations bore interest at
effective rates ranging from 3.55% to 18.07% and were secured by the related
property and equipment. Approximately $171,000 in unused lease-line credit
remained available under these lease agreements at December 31, 1999.
As of December 31, 1999, minimum lease payments under all noncancelable lease
agreements were as follows (in thousands):
DECEMBER 31, 1999
---------------------------
CAPITAL OPERATING
LEASES LEASES
----------- ------------
1999....................................................... $4,017 $ 4,044
2000....................................................... 3,392 4,104
2001....................................................... 2,150 2,975
2002....................................................... 364 1,094
2003....................................................... - 331
Thereafter................................................. - 142
------------
Total minimum lease payments............................... 9,923 $12,690
=============
Less amount representing interest.......................... 1,643
------------
Present value of minimum lease payments.................... 8,280
Less current portion of capital lease obligations.......... 3,158
------------
Long-term portion of capital lease obligations............. $5,122
============
In February 2000, AdForce executed a lease-line agreement for a total of
$3,000,000 in lease-line credit availability. Obligations under the lease-line
will be secured by the related equipment and will be payable over a 42 month
period.
6. STOCKHOLDERS' EQUITY
General
AdForce has retroactively restated the par value of it common stock in these
financial statements to reflect the reincorporation in Delaware on April 30,
1999.
On May 7, 1999, AdForce sold 5,175,000 shares of Common Stock in its initial
public offering at a price of $15.00 per share. AdForce received net proceeds
from the offering of $70.7 million.
Common Stock
At December 31, 1998, AdForce had reserved 1,085,198 shares of its common
stock for issuance upon the exercise of outstanding warrants and 3,687,502
shares of common stock for issuance upon exercise of options outstanding and
available under the 1997 and 1999 Stock Plans. On May 7, 1999 all of the
Company's outstanding shares of Series A, B, C, D and E Convertible Preferred
Stock were automatically converted into 9,467,118 shares of Common Stock.
At December 31, 1999, 337,500 shares of common stock held by an officer were
subject to repurchase by AdForce at their original purchase price of $0.125 per
share. Such repurchase rights lapse ratably over the 48-month vesting period of
the underlying options to purchase common stock.
A total of 800,000 shares of common stock issued in conjunction with AdForce's
acquisition of StarPoint to three of StarPoint's founders, two of whom remain as
employees of AdForce, were subject to certain repurchase rights held by AdForce.
At December 31, 1999, 55,556 of these shares of common stock had been
repurchased and 44,444 of these shares of common stock remained subject to
repurchase. The repurchase rights lapsed as to 22/48 of the shares on the date
of acquisition, as to 9/48 of the shares after the employees had completed nine
months of continuous employment at AdForce and as to 1/48 of these shares each
month thereafter.
Note Receivable From Stockholder
During 1997, AdForce received a note receivable from a stockholder of AdForce
upon his exercise of an option to purchase 900,000 shares of common stock. As of
December 31, 1999, 337,500, of the shares issued were subject to repurchase by
AdForce at the original exercise price. The repurchase rights lapse ratably over
the 48 month vesting period of the underlying option. The note bears interest at
6.8% and is secured by the related stock. The note and related interest is being
forgiven ratably over a period of four years of service/employment. AdForce is
recording compensation expense related to the forgiveness of the note as the
note is forgiven.
Warrants
In association with certain transactions, AdForce issued warrants to third
parties for the purchase of AdForce's common stock and convertible preferred
stock. The warrants that remained outstanding at December 31, 1999 were as
follows:
SHARES
NATURE OF RELATED DATE OF UNDER EXERCISE EXPIRATION OF FAIR VALUE
PARTY CLASS OF STOCK TRANSACTION ISSUANCE WARRANT PRICE EXERCISABILITY (IN THOUSANDS)
- ----------------- -------------------- ------------------------- --------- --------- -------- -------------- --------------
Private Investors Series D convertible Series D convertible July 1998 32,768 $13.73 July 14, 2003 $ 267
preferred stock preferred stock agreement
Private Investor/ Series E convertible Series E convertible July 1998 509,831 $13.73 July 14, 2003 $3,686
Vendor preferred stock preferred stock agreement
and Demographic Data
Agreement
Warrants to purchase 32,768 shares of Series D convertible preferred stock and
509,831 shares of Series E convertible preferred stock, respectively, included
above, expire on the later of July 14, 2003 or the closing of any merger, tender
offer, or other transaction in which all of the holders of AdForce's outstanding
common stock and preferred stock (if any) receive only cash or cash and other
securities payable only in cash.
The value of the warrants granted to third parties, excluding the value
attributable to equity investments of approximately $1.9 million, is being
charged to the related expense over the term of the respective agreements.
AdForce recognized expense of $70,000 during the year ended December 31, 1999,
related to the estimated fair market value of these warrants. The value of each
of the warrants has been determined using the Black-Sholes method, with an
expected dividend yield of zero, a risk-free interest rate of 5%, and a
volatility factor of 20% was used. The lives used to value each of the warrants
was based on the term of each warrant as set forth in the preceding table or
described in the preceding paragraph.
Stock Option Plans
The Company's stock option plans (the "Plans") provide for the grant of up to
6,379,093 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 495,333 shares subject to repurchase at December 31
1999.
1999 Equity Incentive Plan
In February 1999, the Board of Directors adopted the 1999 Equity Incentive
Plan and reserved 2,000,000 shares for issuance thereunder, subject to
stockholder approval. The 1999 Equity Incentive Plan
became effective on the effective date of the initial public offering and serves
as the successor to the Plan. Options granted under the Plan before its
termination will remain outstanding according to their terms, but no further
options were granted under the Plan after the effective date of the initial
public offering. The 1999 Equity Incentive Plan will terminate in February 2009,
unless sooner terminated in accordance with its terms. The 1999 Equity Incentive
Plan authorizes the award of incentive stock options and nonqualified stock
options, restricted stock awards and stock bonuses.
1999 Directors Stock Option Plan
In February 1999, the Board of Directors adopted the 1999 Directors Stock
Option Plan and reserved a total of 200,000 shares of common stock for issuance
under the 1999 Directors Stock Option Plan, subject to stockholder approval.
Members of the Board of Directors who are not employees of AdForce, or any
parent, subsidiary or affiliate of AdForce, are eligible to participate in the
1999 Directors Stock Option Plan. Option grants under the 1999 Directors Stock
Option Plan are automatic and nondiscretionary, and the exercise price of the
options is the fair market value of the common stock on the date of grant. Each
eligible director who first becomes a member of the Board of Directors on or
after the effective date of the initial public offering will initially be
granted an option to purchase 10,000 shares of common stock on the date he or
she becomes a member of the Board of Directors. Each eligible director who first
became a member of the Board of Directors prior to the effective date of the
initial public offering would have received an initial grant immediately
following the first annual meeting of stockholders of AdForce after the
effective date of the initial public offering, provided that he or she is
elected a member of the Board of Directors at the first annual meeting of
stockholders. Immediately following each annual meeting of stockholders of
AdForce, each eligible director will automatically be granted an additional
option to purchase 5,000 shares of common stock if he or she has served
continuously as a member of the Board of Directors for a period of at least one
year since the date of his or her initial grant under this Plan. The options
have ten-year terms. They will terminate seven months following the date the
director ceases to be a director or a consultant to AdForce, or twelve months if
the termination is due to death or disability. All options granted under the
1999 Directors Stock Option Plan will vest as to 12/48 of the shares on the
first anniversary of the date of grant and as to 1/48 of the shares each month
thereafter, provided the optionee continues as a member of the Board of
Directors or as a consultant to AdForce. In the event of a merger or other
transaction in which AdForce is not the surviving corporation, all options
issued under the 1999 Directors Stock Option Plan will accelerate and become
exercisable in full prior to the consummation of the transaction.
A summary of activity under all option plans and non-plan options follows:
SHARES AVAILABLE WEIGHTED
FOR GRANT OPTIONS OUTSTANDING PRICE PER SHARE AVERAGE EXERCISE PRICE
-------------------- -------------------- --------------- ----------------------
Balances at December 31, 1998................ 702,768 1,922,860 $0.125-$1.500 $ 0.760
Shares authorized........................... 2,910,000 - - -
Options granted............................. (3,137,185) 3,137,185 $1.500-$72.00 $14.506
Options repurchased......................... 79,813 - $0.125-$1.500 $ 0.320
Options exercised........................... - (451,040) $0.125-$29.00 $ 0.920
Options canceled............................ 775,738 (921,503) $0.125-$29.00 $ 4.617
Balances at December 31, 1999................ 1,331,134 3,687,502 $ 0.21-$72.00 $11.471
The following table summarizes information concerning outstanding options at
December 31, 1999:
WEIGHTED
AVERAGE REMAINING WEIGHTED
CONTRACTUAL LIFE (IN YEARS) AVERAGE
RANGE OF EXERCISE PRICES NUMBERS OF SHARES OPTIONS OUTSTANDING EXERCISE PRICE
- --------------------------- -------------------- ----------------------------- ----------------
$0.21 - $0.25 555,836 7.96 $ 0.2495
$0.70 - $1.50 1,001,171 8.86 $ 1.4137
$7.50 - $18.38 959,656 9.4 $10.6118
$19.00 - $44.75 1,131,189 9.72 $25.0440
$51.94 - $72.00 39,650 9.96 $56.3013
All outstanding options to purchase common stock of AdForce granted through
the 1997 plan were exercisable at December 31, 1999. None of the outstanding
options to purchase common stock of AdForce granted through the 1999 plan were
exercisable at December 31, 1999. As of December 31, 1999, options to purchase
491,350 shares of common stock were vested.
From January 1, 1999 to December 31, 1999, the Company sold 451,040 shares of
Common Stock to 80 employees and/or optionees pursuant to exercises of options
granted under the Company's stock plans at a weighted average exercise price of
$0.92 per share. Options granted under the 1997 plan are immediately
exercisable and subject to repurchase by the Company at the exercise price until
they vest. Generally, options vest as to 1/4 of the shares on the first
anniversary of the date of grant, with the balance vesting as to 1/36 of the
remaining shares each month until fully vested. The Company received an
aggregate of $413,879 in cash for the stock issued. All sales of stock pursuant
to these option exercises were made in reliance on Rule 701 under the Securities
Act of 1933.
In connection with the grant of certain options to employees during the year
ended December 31, 1999, AdForce recorded deferred stock compensation of
approximately $6,837,000 for the difference between the exercise prices of those
options at their respective dates of grant and the deemed fair values for
accounting purposes of the shares of common stock subject to such options. Such
amounts are included as a reduction of stockholders' equity and are being
amortized on a graded vesting method. The compensation expense of $5,253,000
during 1999 relates to options awarded to employees in all operating expense
categories, as well as employees in data center operations. These amounts have
not been separately allocated between operating expense categories.
Pro forma information regarding net loss is required by FAS 123, computed as
if AdForce had accounted for its employee stock options granted or otherwise
modified under the fair value-based accounting method of that statement. The
value for these options was estimated at the date of grant using the minimum
value method with the following weighted average assumptions:
1999
--------------------------
Expected dividend yield............................. 0.00%
Weighted average risk-free interest rate............ 4.6% - 6.19%
Weighted average expected life...................... 5 years
Average volatility rate............................. 135%
The weighted average fair value of options granted during 1999 with an
exercise price equal to the fair value of AdForce's common stock on the date of
grant was $21.18. The weighted-average fair value of options granted during 1999
with an exercise price below the deemed fair value of AdForce's common stock on
the date of grant was $7.15.
1999
------------
Pro forma net loss................................................... ($32,365)
Pro forma basic and diluted net loss per share....................... ($2.32)
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. Future pro forma net
income (loss) results may be materially different from actual future amounts
reported.
1999 Employee Stock Purchase Plan
In February 1999, the Board of Directors adopted the 1999 Employee Stock
Purchase Plan and reserved a total of 300,000 shares of common stock for
issuance thereunder, subject to stockholder approval. On each January 1, the
aggregate number of shares reserved for issuance under the 1999 Employee Stock
Purchase Plan will be increased automatically by the number of shares purchased
under the 1999 Employee Stock Purchase Plan in the preceding calendar year. The
aggregate number of shares issued over the term of the 1999 Employee Stock
Purchase Plan may not exceed 3,000,000 shares. The 1999 Employee Stock Purchase
Plan became effective on the effective date of the initial public offering.
Employees generally will be eligible to participate in the 1999 Employee Stock
Purchase Plan if they are customarily employed by AdForce or its parent or any
subsidiaries that AdForce designates for more than 20 hours per week and more
than five months in a calendar year. Under the 1999 Employee Stock Purchase
Plan, eligible employees are permitted to acquire shares of AdForce's common
stock through payroll deductions. Eligible employees may select a rate of
payroll deduction between 2% and 10% of their compensation and are subject to
certain maximum purchase limitations described in the 1999 Employee Stock
Purchase Plan. Each offering period under the 1999 Employee Stock Purchase Plan
will be for two years and consist of six-month purchase periods. The first
offering period began on May 7, 1999. Offering periods and purchase periods
thereafter will begin on February 1 and August 1. The purchase price for
AdForce's common stock purchased under the 1999 Employee Stock Purchase Plan is
85% of the lesser of the fair market value of AdForce's common stock on the
first day of the applicable offering period or the last day of each purchase
period. The 1999 Employee Stock Purchase Plan will terminate in February 2009,
unless earlier terminated pursuant to the terms of the 1999 Employee Stock
Purchase Plan. The Board of Directors will have the authority to amend,
terminate, or extend the term of the 1999 Employee Stock Purchase Plan.
In conjunction with the reincorporation in Delaware, the Company changed the
number of authorized shares of preferred stock to 5,451,663 and the number of
authorized shares of common stock to 100,000,000. The par value of the
Company's preferred and common stock has been retroactively reflected in the
accompanying financial statements.
7. OTHER NON-CURRENT ASSETS
During the third quarter of 1999, we provided financing of $500,000 in the
form of an unsecured convertible promissory note to Neta4, Ltd., a Delaware
corporation devoted to combining direct advertising with electronic mail
technology. The $500,000 unsecured convertible promissory note receivable is
due on August 17, 2000, and bears interest at a rate of 8% per annum. The
interest was payable in monthly installments beginning November 17, 1999. Neta4
is a development stage entity, with a history of operating losses. At December
31, 1999, the convertible promissory note has been fully reserved.
8. INCOME TAXES
The Company's effective tax rate differs from the statutory federal income tax
rate of 34% as shown in the following schedule:
DECEMBER 31, 1999
-----------------
Income tax benefit at statutory rate 34.00%
Permanent differences (8.60%)
State tax (0.10%)
Operating losses with no current tax benefit (25.30%)
------
(0.00%)
======
The tax effects of temporary differences that give rise to significant portions
of deferred tax assets/(liabilities) are presented below:
DECEMBER 31, 1999
-----------------
Deferred tax assets:
Net operating losses $ 15,131,396
Accruals and reserves 2,075,212
Tax credit carryforwards 1,444,264
Tangibles and intangibles 544,502
------------
Total deferred tax assets 19,195,374
Valuation allowance (18,228,166)
------------
Net deferred tax assets 967,208
Deferred tax liabilities:
State taxes (967,208)
------------
Net deferred tax assets and liabilities $ -
============
The Company established 100% valuation allowance at December 31, 1999 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 $38,000,000 and $26,000,000 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 had federal
and state research and development tax credit carryforwards of approximately
$747,000 and $656,000, respectively. The federal research and development
credits begin to expire in 2011. The California research and development
credits may be carried forward indefinitely until utilized. The
Company also has California manufacturers' investment credit carryforwards of
approximately $41,000, which begin to expire in 2006.
Included in the deferred tax assets above, is approximately $800,000 related
to stock option compensation for which the benefit, when realized, will be an
adjustment to equity.
The Company has a valuation allowance as of December 31, 1999, which fully
offsets its gross deferred tax assets due to the Company's historical losses and
the fact that there is no guarantee the Company will generate sufficient taxable
income in the future to be able to realize any or all of the deferred tax
assets. The net change in the total valuation allowance for the year ended
December 31, 1999 was an increase of $10,521,166.
Internal Revenue Code Section 382 and similar California rules place a
limitation on the amount of taxable income which can be offset by NOL
carryforwards after a change in control (generally greater than 50% change in
ownership). Due to these provisions, utilization of the NOL and tax credit
carryforwards may be limited.
9. LEGAL MATTERS
In April 1999, Dirk Wray, an AdForce director, filed and action against Chad
Steelberg, a founder of AdForce, in the Orange County, California Superior Court
alleging that Mr. Steelberg failed to perform certain obligations pursuant to a
1996 agreement between Messrs. Wray and Steelberg.
In June 1999, Mr. Steelberg filed a cross-complaint against Mr. Wray, certain
investors in AdForce, AdForce and AdForce's President, Chief Executive Officer
and Chairman, Charles W. Berger, claiming AdForce is obligated to defend and
indemnify Mr. Steelberg against Mr. Wray's allegations and seeking additional
damages. On October 22, 1999, the Company and Mr. Berger jointly filed a
demurrer to the Cross-Complaint. The demurrer was subsequently denied.
In December 1999, Mr. Wray commenced settlement discussions with the
Company and with Mr. Steelberg. In February 2000, the parties reached oral
agreement on a settlement under which Mr. Wray would transfer certain shares of
Company stock held by Mr. Wray to Mr. Steelberg or per Mr. Steelberg's
direction, Mr. Wray and the Company would agree to a full mutual release of
claims with no other payments by either party to the other, and Mr. Steelberg
would pay to the Company $550,000 as compensation for legal fees and other
damages incurred by the Company. The Company expects the settlement to be
documented by March 31, 2000. However, should the settlement not be completed,
the Company continues to believe the causes of action in the Cross-Complaint
claimed against the Company and Mr. Berger are without merit, intends to
indemnify Mr. Berger pursuant to the Company's certificate of incorporation,
bylaws and a written indemnification agreement, and to defend itself and Mr.
Berger vigorously.
On November 2, 1999, AdForce filed a complaint in the Superior Court of
California, County of Orange, Central Justice Center, against Language Force
seeking to collect in excess of $267,000 in sums due for ad management and
delivery services pursuant to an AdForce Services Agreement dated June 14, 1999
between the Company and Language Force. Language Force answered on December 10,
1999, denying all claims. The Company has commenced discovery, and plans to
vigorously pursue its claims. A trial date has been set for October 30, 2000.
Effective November 22, 1999, the Company terminated the employment of Anthony
P. Glaves, then the Company's Vice President of Worldwide Sales and Business
Development. The Company offered Mr. Glaves a severance package, which he
rejected by making a counteroffer, requesting the amount that would have
otherwise been due him under the Company's Retention and Severance Plan dated
September 19, 1999 had he been terminated without cause following the merger of
AdForce with CMGI. The Company has since made it clear to Mr. Glaves that it has
no further obligations to him, and that his sole severance is the two weeks of
pay provided at the time of his termination. Mr. Glaves has retained counsel,
but has not commenced litigation. The Company believes that any claims by Mr.
Glaves for additional compensation are without merit, and intends to vigorously
defend itself if Mr. Glaves elects to proceed with litigation in this matter.
By letter dated January 7, 2000, the Company advised America Online that,
among other things, AOL has unreasonably withheld its consent to the deemed
assignment of the Demographic Data Agreement between the Company and America
Online (the "DDA") as a result of the merger of AdForce with a wholly-owned
subsidiary of CMGI, Inc. AdForce further advised America Online of its belief
that America Online is in default under the DDA. The Company has not yet
received a response from America Online, and cannot presently assess the
potential losses or expenses that would occur should this matter be litigated.
Except as provided above, AdForce is not currently subject to any potentially
material legal proceeding. AdForce may from time to time become a party to
various legal proceedings arising in the ordinary course of its business.
10. AGREEMENT AND PLAN OF MERGER
On September 20, 1999, AdForce entered into a definitive Agreement and Plan of
Merger with CMGI, Inc., which develops and operates Internet and direct
marketing companies, and a wholly owned subsidiary of CMGI. Pursuant to the
Agreement and Plan of Merger and subject to the terms and conditions set forth
therein, the CMGI subsidiary will be merged with and into AdForce, and AdForce
will survive the merger and become a wholly owned subsidiary of CMGI. At the
effective time of the merger, each outstanding share of AdForce common stock
will be exchanged and converted into 0.262 shares of CMGI common stock, and
options and warrants to purchase shares of AdForce common stock will be assumed
and become options and warrants, as applicable, to purchase shares of CMGI's
common stock. The exercise price and number of shares of our common stock
subject to each such assumed option and warrant will be appropriately adjusted
to reflect the exchange ratio. The merger is intended to qualify as a tax-free
reorganization and will be accounted for as a purchase.
In connection with the execution of the Agreement and Plan of Merger, AdForce
entered into a Stock Option Agreement with CMGI, pursuant to which AdForce
granted to CMGI an option to purchase up to 19.9% of the outstanding shares of
our common stock. The option is exercisable upon the occurrence of certain
events relating to the termination of the Agreement and Plan of Merger, all as
specified in the Stock Option Agreement. The merger was finalized in January
2000.