UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 000-25467
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FLYCAST COMMUNICATIONS CORPORATION
----------------------------------
(Exact name of registrant as specified in its charter)
Delaware 77-0431028
-------- ----------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
181 Fremont Street, San Francisco, CA 94105
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(Address of principal executive offices including zip code)
(415) 977-1000
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(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such report) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ______
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There were 14,523,197 shares of the Registrant's Common Stock outstanding
as of July 31, 1999.
FLYCAST COMMUNICATIONS CORPORATION
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION Page
----
Item 1. Financial Statements
Balance Sheets as of December 31, 1998 and June 30, 1999................................. 3
Statements of Operations for the three months and six months
ended June 30, 1998 and 1999........................................................... 4
Statements of Cash Flows for the six months ended June 30, 1998
and 1999............................................................................... 5
Notes to Financial Statements........................................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.... 7
PART II. OTHER INFORMATION
Item 1: Legal Proceedings........................................................................ 19
Item 2: Changes in Securities and Use of Proceeds................................................ 19
Item 3: Defaults Upon Senior Securities.......................................................... 19
Item 4: Submission of Matters to a Vote of Security Holders...................................... 19
Item 5: Other Information........................................................................ 19
Item 6. Exhibits and Reports on Form 8-K......................................................... 19
Signatures.......................................................................................... 20
2
PART I. FINANCIAL INFORMATION
Item I. Financial Statements
FLYCAST COMMUNICATIONS CORPORATION
BALANCE SHEETS
(in thousands, except share amounts)
(unaudited)
DECEMBER 31, JUNE 30,
ASSETS 1998 1999
--------------- --------------
Current assets:
Cash and cash equivalents $5,010 $49,797
Short-term investments 183 31,857
Accounts receivable, net 3,449 7,517
Prepaid expenses and other assets 256 2,017
--------------- --------------
Total current assets 8,898 91,188
Property and equipment, net 1,785 6,549
Other assets 108 196
--------------- --------------
TOTAL ASSETS $10,791 $97,933
=============== ==============
LIABILITIES, MANDATORILY REDEEMABLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $2,521 $6,294
Accrued liabilities 369 3,722
Accrued compensation and benefits 460 1,450
Short-term capital lease obligations 477 711
Short-term debt 983 1,725
--------------- --------------
Total current liabilities 4,810 13,902
Long-term capital lease obligations 1,022 1,296
Long-term debt 3,682 2,819
--------------- --------------
Total liabilities 9,514 18,017
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Mandatorily redeemable preferred stock, $0.0001
par value, 9,904,000 shares authorized:
Series A, 920,000 designated, 911,295 shares issued and
outstanding at December 31, 1998; none at June 30, 1999 1,027
Series B, 5,500,000 designated, 5,324,532 shares issued and
outstanding at December 31, 1998; none at June 30, 1999 7,824
Series C, 3,484,000 designated, 497,785 shares issued and
outstanding at December 31, 1998; none at June 30, 1999 5,004
--------------- --------------
Total mandatorily redeemable preferred stock 13,855
--------------- --------------
Stockholders' equity (deficit):
Common stock, $.001 par value: 20,000,000 shares
authorized; issued 2,690,787 shares - December 31,
1998; 14,508,656 shares - June 30, 1999 912 103,855
Common stock options 2,837 3,741
Deferred stock compensation (1,690) (1,808)
Notes receivable from stockholders (606) (404)
Accumulated deficit (14,031) (25,468)
--------------- --------------
Total stockholders' equity (deficit) (12,578) 79,916
--------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $10,791 $97,933
=============== ==============
see notes to financial statements
3
L
FLYCAST COMMUNICATIONS CORPORATION
STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
----------------------- -------------------------
1998 1999 1998 1999
----------- ----------- ----------- -----------
Revenue $1,172 $6,440 $1,775 $11,097
Cost of revenue 879 4,837 1,362 8,216
----------- ----------- ----------- -----------
Gross profit 293 1,603 413 2,881
Operating expenses:
Sales and marketing 805 4,595 1,502 7,744
Research and development 505 1,737 914 3,048
General and administrative 484 1,410 899 2,440
Stock-based compensation 248 467 329 788
----------- ----------- ----------- ------------
Total operating expenses 2,042 8,209 3,644 14,020
Operating loss (1,749) (6,606) (3,231) (11,139)
Interest income (expense), net (26) 432 (6) 368
----------- ----------- ------------ ------------
Net loss ($1,775) ($6,174) ($3,237) ($10,771)
----------- ----------- ------------ ------------
Accretion of mandatorily redeemable preferred stock (164) (202) (325) (667)
----------- ----------- ------------ ------------
Loss attributable to common stockholders ($1,939) ($6,376) ($3,562) ($11,438)
=========== =========== ============ ============
Basic and diluted loss per common share ($2.37) ($0.54) ($5.41) ($1.76)
=========== =========== ============ ============
Shares used in computing basic and
diluted loss per common share 819 11,763 659 6,500
=========== =========== ============ ============
Proforma basic and diluted loss per common share ($0.27) ($0.54) ($0.52) ($1.08)
=========== =========== ============ ============
Shares used in computing proforma basic and
diluted loss per common share 7,055 11,763 6,895 10,633
=========== =========== ============ ============
See notes to financial statements
4
FLYCAST COMMUNICATIONS CORPORATION
STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
SIX MONTHS
ENDED JUNE 30,
----------------------------
1998 1999
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (3,237) $ (10,771)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 194 797
Provision for doubtful accounts 43 385
Loss on sale of property and equipment 5
Stock and warrants issued for services 47 139
Non-cash interest expense 27
Stock-based compensation expense 329 788
Changes in operating assets and liabilities:
Accounts receivable (792) (4,453)
Prepaids and other assets (157) (1,849)
Accounts payable 571 3,773
Accrued liabilities 68 4,343
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Net cash used in operating activities (2,939) (6,848)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (8) (4,507)
Proceeds from sales of property and equipment 4
Purchase of short term investments, net (168) (31,687)
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Net cash used in financing activities (172) (36,194)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 1,100
Payments on long-term debt (76) (347)
Payments on capital leases (65) (307)
Proceeds from payment of notes receivable from stockholders 58
Proceeds from issuance of common stock 24 73,889
Proceeds from issuance of preferred stock - 14,536
-------- ---------
Net cash provided by investing activities 983 87,829
-------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2,128) 44,787
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 3,560 5,010
-------- ---------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 1,469 $ 49,797
======== =========
Supplemental Disclosures of Cash Flow Information:
Cash paid for interest $ 34 $ 383
======== =========
Non-cash financing and investing activities:
Purchase of equipment through capital leases and debt $ 936 $ 1,041
======== =========
Issuance of common stock for notes receivable $ - $ 32
======== =========
Repurchase of common stock for extinguishment of debt $ 35 $ 175
======== =========
Conversion of preferred stock to common stock $ 28,856
=========
See notes to financial statements.
5
FLYCAST COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS
(unaudited)
1. BASIS OF PRESENTATION
The interim condensed financial statements are unaudited and have been prepared
on the same basis as the annual financial statements. In the opinion of
management, such unaudited financial statements include all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of the Company's financial position as of June 30, 1999 and the
results of operations for the three and six months ended June 30,1998 and 1999
and cash flows for the six months ended June 30, 1998 and 1999.
The unaudited financial statements should be read in conjunction with the
Company's audited financial statements and the notes thereto included in the
Company's Registration Statement on Form S-1 filed with the Securities and
Exchange Commission on February 5, 1999 as amended, and its periodic filings
with the Securities and Exchange Commission thereafter. The results of
operations for the three and six months ended June 30, 1999 are not
necessarily indicative of the results to be expected for any subsequent
quarter or the entire year ending December 31, 1999.
2. INITIAL PUBLIC OFFERING
On May 7, 1999, the Company closed its initial public offering of 3,000,000
shares of the Company's common stock. In addition, on June 4, 1999, the Company
sold an additional 200,000 shares under the underwriters' overallotment option.
Total net proceeds were $74.4 million. Upon the closing of the initial public
offering, the Company's convertible preferred stock converted into 6.9 million
shares of common stock.
3. BASIC AND DILUTED LOSS PER SHARE
Basic loss per share is computed by dividing the loss attributable to common
shareholders by the weighted average number of common shares outstanding for the
period (excluding shares subject to repurchase). Diluted loss per common share
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock.
Common share equivalents are excluded from the computation in loss periods, as
their effect would be antidilutive.
The following is a reconciliation of the denominators used in calculating basic
and diluted net loss per share (in thousands):
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
Shares (denominator) 1998 1999 1998 1999
-------- -------- -------- --------
Weighted average common shares
outstanding 2,194 13,225 2,296 7,957
Weighted average common shares
outstanding subject to repurchase (1,375) (1,462) (1,637) (1,457)
-------- -------- -------- --------
Shares used in computation, basic and diluted 819 11,763 659 6,500
======== ======== ======== ========
4. PROFORMA LOSS PER COMMON SHARE
Proforma basic and diluted loss per common share is computed by dividing loss
attributable to common shareholders by the weighted average number of common
shares outstanding for the period (excluding shares subject to repurchase) and
the weighted average number of common shares resulting from the assumed
conversion of outstanding mandatorily redeemable preferred stock.
6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of operations of
the Company contains forward-looking statements within the meaning of section
27A of the Securities Act of 1933 and section 21E of the Securities Exchange Act
of 1934. Such statements involve risks and uncertainties. The Company's actual
results and the timing of certain events could differ materially from those
anticipated in these forward-looking statements as a result of certain factors
including, but not limited to, those set forth under "Risk Factors that May
Affect Future Results" included in the Company's Registration Statement on Form
S-1 as amended, and elsewhere in this report.
OVERVIEW
Flycast delivers Web-based advertising solutions designed to maximize the return
on investment for response-oriented advertisers, direct marketers and electronic
commerce companies. By combining unsold advertising space from over 1,000 Web
sites, the Flycast Network offers advertisers a large audience of Web users and
high-quality advertising space at favorable prices. Additionally, by selling
advertising space on an unnamed basis, Flycast creates a supplemental revenue
opportunity for Web sites that does not conflict with their other sales efforts.
The Company closed its initial public offering of 3,200,000 shares of Common
Stock, which includes 200,000 shares from the exercise of the underwriters'
over-allotment option, at a price of $25.00 per share on May 7, 1999. The net
proceeds of approximately $74.4 million from the initial public offering were
added to the working capital of the Company. Pending use of the net proceeds,
the Company has invested such funds in short-term, interest bearing investment
grade obligations.
We commenced operations in April 1996 as a California corporation. From April
1996 through May 1997, our operating activities related primarily to developing
our AdEx technology and the Flycast Network, identifying markets and recruiting
personnel.
Revenue from advertisements delivered on the Flycast Network began in the second
quarter of 1997. We generate revenue by delivering advertisements to Web sites
in the Flycast Network. Pricing of advertising is based on cost per advertising
impression and varies depending on whether the advertising is run across the
network, across specific categories or on individual Web sites. We sell our
services through our sales and marketing staff located in San Francisco,
Atlanta, Boston, Boulder, Chicago, Dallas, Los Angeles, New York, Philadelphia,
Sarasota, Seattle and Virginia. The advertisements we deliver are typically sold
under short-term agreements that are subject to cancellation. Advertising
revenue is recognized in the period that advertisements are delivered. We pay
each Web site in the Flycast Network an agreed upon percentage of the revenue
generated by advertisements run on its site. That amount is included in cost of
revenues. Generally, we bill and collect for advertisements delivered on the
Flycast Network and assume the risk of non-payment from advertisers.
We expect to generate most of our revenue for the foreseeable future from
advertisements delivered to Web sites on the Flycast Network. Our ten largest
customers accounted for 40% of our revenue for the year ended December 31, 1998
and 35% of our revenue for the quarter ended June 30, 1999. No single customer
accounted for more than 10% of our revenue for the year ended December 31, 1998
or the quarter ended June 30, 1999. No Web site contributed more than 5% of our
advertising views served, as measured based on the fees we paid to Web sites,
during the quarter ended June 30, 1999.
We have entered into value added reseller relationships with BellSouth, SBC
Communications and U S WEST. Under these agreements, we will deliver local Web
advertising inventory to BellSouth's, SBC's and U S WEST's sales forces that
they, in turn, will offer to local advertisers. To date, these agreements have
not accounted for a material percentage of revenue. However, we anticipate that
revenue from these agreements will account for an increasing percentage of our
revenue in the future.
We have incurred significant losses since inception and, as of June 30, 1999,
had an accumulated deficit of $25.5 million. In addition, we have recorded
stock-based compensation, which represents the difference between the exercise
price and the fair market value of our common stock issuable upon the exercise
of stock options granted to employees. Stock-based compensation of $1.1 million
was amortized during the year ended December 31, 1998 and
7
$467,000 was amortized during the quarter ended June 30, 1999. Stock-based
compensation of $1.8 million will be amortized over the remaining vesting
periods of the related options, including $643,000 in the remainder of the year
ending December 31, 1999.
In light of the rapidly evolving nature of our business and our limited
operating history, we believe that period-to-period comparisons of our operating
results are not meaningful and that the results for any period should not be
relied upon as an indication of future performance. We currently expect to
increase significantly our operating expenses in order to expand our sales and
marketing operations, including our reseller network, to enhance our AdEx
technology platform and to expand internationally. As a result of these factors,
we expect to incur significant losses on a quarterly and annual basis for the
foreseeable future.
RESULTS OF OPERATIONS
REVENUE
Our revenue is derived primarily from the delivery of advertisements on Web
sites in the Flycast Network. Our revenue increased from $1.2 million for the
quarter ended June 30, 1998 to $6.4 million for the quarter ended June 30, 1999
and from $1.8 million for the six months ended June 30, 1998 to $11.1 million
for the six months ended June 30, 1999. This increase was primarily due to an
increase in the number of advertisers purchasing advertisements on the Flycast
Network and an increase in purchases made by existing advertisers.
COST OF REVENUE
Cost of revenue consists primarily of amounts we pay to Web Sites on the Flycast
Network, which represent a percentage of the revenue generated by delivering
advertisements. Cost of revenue also includes costs of the advertising delivery
system and Internet access costs. Cost of revenue increased from $879,000 for
the quarter ended June 30, 1998 to $4.8 million for the quarter ended June 30,
1999 and from $1.4 million for the six months ended June 30, 1998 to $8.2
million for the six months ended June 30, 1999. The increase in cost of revenue
was due to the related growth in advertising revenue and associated amounts paid
to Web sites, increased expenses from third-party Internet service providers and
increased depreciation related to capital investments in infrastructure to
increase our network serving capacity. These expenses increased in absolute
dollars and increased as a percentage due to investments in upgrading the
advertising delivery system.
OPERATING EXPENSES
Sales and Marketing. Sales and marketing expenses consist primarily of
compensation (including commissions), travel, advertising, trade show costs and
marketing materials expenses. Sales and marketing expenses were $805,000 or 69%
of revenue for the quarter ended June 30, 1998 and $4.6 million, or 71% of
revenue, for the quarter ended June 30, 1999 and increased from $1.5 million or
85% of revenue for the six months ended June 30, 1998 to $7.7 million or 70% of
revenue for the six months ended June 30, 1999. The increase in absolute dollars
was due primarily to the increase in sales personnel and costs related to the
continued development and implementation of our marketing campaigns. We expect
sales and marketing expenses to increase on an absolute dollar basis in future
periods as we hire additional personnel in sales and marketing, expand into new
markets and continue to promote our advertising solutions.
Research and Development. Research and development expenses were $505,000, or
43% of revenue, for the quarter ended June 30, 1998 and $1.7 million, or 27% of
revenue, for the quarter ended June 30, 1999 and increased from $914,000 or 52%
of revenue for the six months ended June 30, 1998 to $3.0 million or 28% of
revenue for the six months ended June 30, 1999. The increase in absolute dollars
was due primarily to increased personnel expenses. We believe that continued
investment in research and development is critical to attaining our strategic
objectives and, as a result, we expect research and development expenses to
increase significantly on an absolute dollar basis in the future periods.
Research and development expenses may fluctuate as a percentage of revenue over
time depending on the projects we undertake from time to time.
General and Administrative. General and administrative expenses were $484,000,
or 41% of revenue, for the quarter ended June 30, 1998, and $1.4 million, or 22%
of revenue, for the quarter ended June 30, 1999 and
8
increased from $900,000 or 51% of revenue for the six months ended June 30, 1998
to $2.4 million or 22% of revenue for the six months ended June 30, 1999. The
increase in absolute dollars was due to the growth in staffing and related
expenses subsequent to our public offering. We expect general and administrative
expenses to increase on an absolute dollar basis in future periods as we hire
additional personnel and incur additional costs related to the growth of our
business and our operations as a public company, but to decrease as a percentage
of revenue.
Stock-Based Compensation. Stock-based compensation of $248,000 and $467,000 was
amortized during the quarters ended June 30, 1998 and 1999. Stock-based
compensation of $329,000 and $788,000 was amortized during the six months ended
June 30, 1998 and 1999. Stock-based compensation of $1.8 million will be
amortized over the remaining vesting periods of the related options, including
$643,000 in the remainder of the year ending December 31, 1999.
Interest Income (Expense), Net. Interest income (expense), net consists of
interest paid on capital lease and debt obligations, offset by interest earnings
on our cash, cash equivalents and investments. Interest expense was $46,000 in
the quarter ended June 30, 1998 and $169,000 in the quarter ended June 30, 1999
and increased from $69,000 for the six months ended June 30, 1998 to $384,000
for the six months ended June 30, 1999. Interest income was $20,000 in the
quarter ended June 30, 1998 and $601,000 in the quarter ended June 30, 1999 and
increased from $63,000 for the six months ended June 30, 1998 to $752,000 for
the six months ended June 30, 1999. The increased interest income was due to
interest earned on the proceeds from our initial public offering in May 1999.
Income Taxes. No income tax benefits have been recorded for any of the periods
presented due to the company's current loss position.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1999 we had $49.8 million of cash and cash equivalents and $31.9
in short-term investments and had borrowings of $7.6 million under credit and
capital lease facilities.
Net cash used in operating activities was $2.9 million and $6.8 million for the
six months ended June 30, 1998 and 1999. Cash used in operating activities for
both periods resulted from net losses and increases in accounts receivable,
which were offset by increases in accounts payable and accrued liabilities.
Net cash used in investing activities was $172,000 and $36.2 million for the six
months ended June 30, 1998 and 1999. Cash used in investing activities was
primarily related to the investment of IPO proceeds for the six months ended
June 30, 1999.
Net cash provided by financing activities was $1.0 million and $87.8 million for
the six months ended June 30, 1998 and 1999. Cash provided by financing
activities resulted from debt proceeds in 1998 and from the sale of common stock
in our public offering in 1999.
While we do not have any material commitments for capital expenditures, we
anticipate that we will experience a substantial increase in our capital
expenditures consistent with our anticipated growth in operations,
infrastructure and personnel. We plan to incur approximately $3.0 million to
$4.0 million in capital expenditures during the remaining two quarters of 1999.
We currently anticipate that we will continue to experience significant growth
in our operating expenses for the foreseeable future and that our operating
expenses will be a material use of our cash resources. We believe that our
existing cash, cash equivalents and short-term investments and available credit
facilities, will be sufficient to meet our anticipated cash needs for working
capital, repayment of debt and capital expenditures for at least the next twelve
months.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded to
accept or recognize only two digit entries in the date code field. These systems
and software products will need to accept four digit entries to distinguish 21st
century dates from 20th century dates. As a result, computer systems and
software used by many companies and governmental agencies may need to be
upgraded to comply with Year 2000 requirements or risk system failure or
miscalculations causing disruptions of normal business activities.
9
State of Readiness. We are assessing the Year 2000 readiness of our information
technology ("IT") systems, including the hardware and software that enable us to
provide and deliver our solutions, and our non-IT systems. Our assessment plan
consists of quality assurance testing of our internally developed proprietary
software incorporated in our solutions ("AdEx Technology"); contacting third-
party vendors and licensors of material hardware, software and services that are
both directly and indirectly related to the delivery of our solutions to
advertisers and the Web sites on the Flycast Network; contacting third-party
vendors who provide important business services (non-IT systems); assessment of
repair or replacement requirements; repair or replacement; implementation; and
creation of contingency plans in the event of Year 2000 failures.
We performed a Year 2000 simulation on our AdEx Technology during the second
quarter of 1999 to test system readiness. Based on the results of our Year 2000
simulation test, we are revising the code of our AdEx Technology as necessary to
improve the Year 2000 compliance of our AdEx Technology. We have not yet begun
to contact our hardware and software component vendors. However, we have been
informed by many of our hardware and software component vendors that the
products we use are currently Year 2000 compliant. We have not yet assessed the
information provided to us, to date, to determine what proportion of our
hardware and software component vendors are Year 2000 compliant. We will require
our material hardware and software component vendors to provide assurance of
their Year 2000 compliance. We will complete this process during 1999.
We are currently assessing third party vendors that provide important business
services (non-IT systems) and will seek assurance of Year 2000 compliance from
these providers. We have not yet begun to contact these third-party vendors.
Until this testing is complete and these vendors and providers are contacted, we
will not be able to completely evaluate whether our IT systems or non-IT systems
will need to be revised or replaced. This process will also be completed during
1999.
Costs. To date, we have not incurred material expenditures in connection with
identifying or evaluating Year 2000 compliance issues. Most of our expenses have
related to, and are expected to continue to relate to, the operating costs
associated with time spent by employees and consultants in the evaluation and
conversion process and Year 2000 compliance matters generally. At this time, we
estimate the potential costs of revisions to our AdEx Technology and the
replacement of some third-party software and hardware will not be material.
Although we do not anticipate that these expenses will be material, these
expenses, if higher than anticipated, could have a material adverse effect on
our business, results of operations and financial condition.
Risks. We are not currently aware of any major Year 2000 compliance problems
relating to AdEx Technology or our IT or non-IT systems that would have a
material adverse effect on our business, results of operations or financial
condition, without taking into account our efforts to avoid or fix these
problems. We may discover additional Year 2000 compliance problems in our AdEx
Technology that will require substantial revisions. In addition, third-party
software, hardware or services incorporated into our material IT and non-IT
systems may need to be revised or replaced, all of which could be time consuming
and expensive. If we fail to fix our AdEx Technology or to fix or replace third-
party software, hardware or services on a timely basis, the result could be lost
revenues, increased operating costs, the loss of customers and other business
interruptions, any of which could have a material adverse effect on our
business, results of operations and financial condition. Moreover, the failure
to adequately address Year 2000 compliance issues in our AdEx Technology, and
our IT and non-IT systems could result in claims of mismanagement,
misrepresentation or breach of contract and related litigation, which could be
costly and time-consuming to defend.
In addition, there can no assurance that governmental agencies, utility
companies, Internet access companies, third-party service providers and non-IT
systems providers outside Flycast's control will be Year 2000 compliant. The
failure by these entities to be Year 2000 compliant could result in a systemic
failure beyond the control of Flycast, including a prolonged Internet,
telecommunications or electrical failure, which could also prevent Flycast from
delivering its services to its customers, decrease the use of the Internet or
prevent users from accessing the Web sites in the Flycast Network, which could
have a material adverse effect on Flycast's business, results of operations and
financial condition.
Contingency Plan. As discussed above, Flycast is engaged in an ongoing Year 2000
assessment and has not yet developed any contingency plans. The results of
Flycast's Year 2000 simulation testing and the responses received from third-
party vendors and service providers are being taken into account in determining
the nature and extent of
10
any contingency plans.
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
We have only a three-year operating history, making it difficult for you to
evaluate our business and your investment
We commenced operations in April 1996 and did not begin to generate revenue
until the second quarter of 1997. Thus, we have only a limited operating history
upon which you can evaluate our business. Our prospects must be considered in
light of the risks, expenses and difficulties frequently encountered by early-
stage companies in the Web advertising market, which is new and rapidly
evolving. We may not be successful in addressing these risks and our business
strategy may not be successful. These risks include our ability to:
. maintain and increase our inventory of advertising space on Web sites;
. maintain and increase the number of advertisers that use our products
. and services; and
. continue to expand the number of products and services we offer.
We have a history of losses and anticipate continued losses
Our accumulated deficit as of June 30, 1999 was $25.5 million. Although we have
experienced revenue growth in recent periods, this growth may not be sustained
and is not necessarily indicative of our future revenue. We have not achieved
profitability and, given the level of planned operating and capital
expenditures, we expect to continue to incur losses for the foreseeable future.
We plan to increase our operating expenses to expand our infrastructure to
support our current business and new lines of businesses, including our reseller
network. The timing of this expansion and the rate at which our reseller network
generates revenue could cause material fluctuations in our results of
operations. We also plan to purchase additional capital equipment. Our losses
may increase in the future and we may not be able to achieve or sustain
profitability. Even if we do achieve profitability, we may not be able to
sustain or increase profitability on a quarterly or annual basis in the future.
If our revenue grows more slowly than we anticipate, or if our operating
expenses exceed our expectations and cannot be adjusted accordingly, our
business, results of operations and financial condition will be materially and
adversely affected.
Our quarterly operating results are subject to fluctuations and seasonality that
make it difficult to predict our financial performance
Our revenue and operating results may vary significantly from quarter to quarter
due to a number of factors, some of which are outside of our control. Therefore,
you should not rely on period-to-period comparisons of results of operations as
an indication of our future performance. It is possible that in some future
periods our operating results may fall below the expectations of market analysts
and investors. In this event, the market price of our common stock would likely
fall.
The factors that affect our quarterly operating results include:
. demand for our advertising solutions;
. the number of available advertising views on Web sites in the Flycast
Network;
. the mix of types of advertising we sell, including the amount of advertising
sold at higher rates;
. changes in our pricing policies, the pricing policies of our competitors or
the pricing policies for advertising on the Web generally; and
. costs related to acquisitions of technology or businesses.
We believe that our revenue will be subject to seasonal fluctuations because
advertisers generally place fewer advertisements during the first and third
calendar quarters of each year. In addition, expenditures by advertisers tend
11
to be cyclical, reflecting overall economic conditions as well as budgeting and
buying patterns. A decline in the economic prospects of advertisers or the
economy generally, which could alter current or prospective advertisers'
spending priorities or the time periods in which they determine their budgets,
or increase the time it takes to close a sale with our advertisers, could cause
our business to be materially and adversely affected.
Revenue and operating results for the foreseeable future are difficult to
forecast. Our current and future expense estimates are based, in large part, on
our estimates of future revenue and on our investment plans. In particular, we
plan to increase our operating expenses significantly in order to expand our
sales and marketing operations, including our reseller network, to enhance AdEx,
our advertising management platform, and to expand internationally. To the
extent that these expenses precede increased revenue, our business, results of
operations and financial condition would be materially and adversely affected.
We may be unable to, or may elect not to, adjust spending quickly enough to
offset any unexpected revenue shortfall. Therefore, any significant shortfall in
revenue in relation to our expectations would also have a material adverse
effect on our business, results of operations and financial condition.
We may experience capacity constraints that could affect our advertising revenue
Our future success depends in part on the efficient performance of AdEx, as well
as the efficient performance of the systems of third parties such as our
Internet service providers. An increase in the volume of advertising delivered
through our servers could strain the capacity of the software or hardware that
we have deployed, which could lead to slower response times or system failures
and adversely affect the availability of advertisements, the number of
advertising views received by advertisers and our advertising revenues. Due to
unexpected growth in the number of advertising views that we served in 1998, we
experienced a slowdown, and in some cases an interruption, in delivering
advertisements to viewers over a three-week period that limited the number of
advertising views we were able to serve. As the numbers of Web pages and users
increase, our products, services and infrastructure may not be able to grow to
meet the demand. To the extent that we do not effectively address any capacity
constraints or system failures, our business, results of operations and
financial condition would be materially and adversely affected.
We run the risk of system failure that could adversely affect our business
The continuing and uninterrupted performance of our system is critical to our
success. Customers may become dissatisfied by any system failure that interrupts
our ability to provide our services to them, including failures affecting the
ability to deliver advertisements quickly and accurately to the targeted
audience. Sustained or repeated system failures would reduce significantly the
attractiveness of our solutions to advertisers and Web sites. Our business,
results of operations and financial condition could be materially and adversely
affected by any damage or failure that interrupts or delays our operations.
Our operations depend on our ability to protect our computer systems against
damage from a variety of sources, including telecommunications failures,
malicious human acts and natural disasters. In this regard, we lease server
space in the San Francisco Bay Area. Therefore, any of the above factors
affecting the San Francisco Bay Area would have a material adverse effect on
Flycast's business. Further, despite network security measures, our servers are
vulnerable to computer viruses and disruptions from unauthorized tampering with
our computer systems. We carry business interruption insurance, but it may not
be enough to compensate for losses that may occur as a result of any of these
events. Despite precautions, unanticipated problems affecting our systems could
cause interruptions in the delivery of our solutions in the future. Our data
storage centers incorporate redundant systems, consisting of additional servers,
but the primary system does not switch over to the backup system automatically.
We also depend upon Internet service providers that provide consumers with
access to our products and services. In the past, users have occasionally
experienced difficulties due to system failures unrelated to our systems. Any
disruption in the Internet access provided by third-party providers or any
failure of third-party providers to handle higher volumes of user traffic could
have a material adverse effect on our business, results of operations and
financial condition.
We have a limited number of customers upon whom we rely, and the loss of a major
customer could adversely affect our revenue
12
We expect that a limited number of customers will account for a significant
portion of our revenue for the foreseeable future. As a result, if we lose a
major customer, our revenue could be adversely affected. In addition, we cannot
be certain that customers that have accounted for significant revenue in past
periods, individually or as a group, will continue to generate revenue in any
future period. In particular, advertisers may not achieve desired results from
the use of our products and may therefore choose not to continue to use our
products. We also target small advertisers that have limited advertising budgets
and/or are interested in reaching small and limited target audiences. We may not
be able to generate sufficient revenue from these advertisers to lessen our
dependence on our largest customers. We typically enter into short-term
contracts with Web sites for their supply of advertising views. The loss of a
significant number of these advertising views might result in the loss of
customers, which could have a material adverse effect on our business, results
of operations and financial condition.
We depend on the evolution of Web advertising for our future success
We expect to derive substantially all of our revenue in the foreseeable future
from Web advertising. Therefore, our future success depends on increased use of
the Web as an advertising medium. If the market for Web advertising fails to
develop or develops more slowly than we expect, then our business, results of
operations and financial condition would be materially and adversely affected.
The Web has not existed long enough as an advertising medium to demonstrate its
effectiveness relative to traditional advertising media. Customers that have
relied on traditional media for advertising may be reluctant to use Web
advertising. Many customers have limited or no experience using the Web as an
advertising medium, have allocated only a limited portion of their advertising
budgets to Web advertising or may find Web advertising to be less effective for
promoting their products and services than advertising using traditional media.
In addition, advertisers and advertising agencies that have invested substantial
resources in traditional methods of advertising may be reluctant to reallocate
their media buying resources to Web advertising. We cannot assure you that the
market for Web advertising will continue to develop or be sustainable.
Substantially all of our revenue is derived from the delivery of banner
advertisements. If advertisers determine that banner advertising is not
effective or attractive as an advertising medium, we may not be able to shift to
any other form of Web advertising. Also, users can install "filter" software
programs that limit or prevent advertising from being delivered to a Web site.
The widespread adoption of filter software by Web users or the failure to
develop successful alternative forms of Web advertising could have a material
and adverse effect on the Web advertising market and our business, results of
operations and financial condition.
Our business model has a limited history, is different from other Web
advertising networks and may not succeed
Our business model is to generate revenue primarily by providing Web advertising
solutions to response-oriented advertisers. We cannot assure you that Web
advertising, response-oriented marketing or our model for providing solutions
based upon providing an improved return on investment for advertisers will
achieve broad market acceptance or generate significant revenue. Other Web
advertising companies' business models focus on selling advertising space on
premium Web sites. Many of these other Web advertising companies have a longer
history than we do. Our ability to generate significant revenue from advertisers
will depend, in part, on our ability to:
. demonstrate to advertisers the effectiveness of direct response advertising
on the Web;
. demonstrate to advertisers that they do not need to pay higher rates for
advertisements on premium Web sites in order to conduct an effective
advertising campaign on the Web;
. attract advertisers and Web sites to the Flycast Network;
. retain advertisers by differentiating the technology and services we provide
to them;
. obtain adequate available advertising space from a large base of Web sites,
whether they are small Web sites or large, premium Web sites; and
. obtain adequate advertising space from large, premium Web sites that either
have direct sales forces or are represented by Web advertising companies that
focus on selling advertising space on premium Web sites.
Further, the Web sites in the Flycast Network must continue to generate
sufficient user traffic characteristics attractive to advertisers. The intense
competition among Web sites has led to the creation of a number of pricing
alternatives for Web advertising. These alternatives make it difficult for us to
project future levels of advertising
13
revenue and applicable gross margins that can be sustained either by the Web
advertising industry or us in general. A key component of our strategy is to
enhance return on investment and other performance measurements for the
advertisers using the Flycast Network. We have limited experience in
implementing and following this strategy and we cannot assure you that this
strategy will succeed or that we will be able to achieve or maintain adequate
gross margins.
We face intense competition from more established Web advertising companies that
could adversely affect our business
We face intense competition from Web advertising networks and providers of
advertising inventory management products and services. We expect this
competition to continue to increase because there are no substantial barriers to
entry. Increased competition is likely to result in price reductions for
advertising space, reduced gross margins and loss of our market share. We may
not be able to compete successfully, and competitive pressures may materially
and adversely affect our business, results of operations and financial
condition. Many of our existing competitors, as well as a number of potential
new competitors, have longer operating histories, greater name recognition,
larger customer bases and significantly greater financial, technical and
marketing resources than we do.
We will depend on distribution relationships to increase our revenue
We believe that our future success will depend in part on our relationships with
companies that distribute or resell our Web advertising solutions. These
relationships have not generated significant revenue to date, and, in order for
us to be successful, revenue generated by our resellers must increase. Our
inability to enter into future distribution relationships might limit the number
and size of the markets that we serve. This could limit our revenue growth and
have a material adverse effect on our business, results of operations and
financial condition. We have recently initiated reseller relationships with
BellSouth, SBC Communications and U S WEST. Our agreements with them provide
that Flycast will deliver a wholesale supply of local Web advertising that their
Yellow Pages sales forces will resell to local advertisers. These resellers have
no obligation to resell our inventory of advertising space on Web sites and can
terminate their relationships with us with limited or no penalty with as little
as 120 days' notice. The loss of any reseller, the failure of any reseller to
perform under its agreement with us or our inability to attract and retain new
resellers could have a material adverse effect on our business, results of
operations and financial condition.
Intensive marketing and sales efforts may be necessary to educate prospective
local advertisers about the uses and benefits of our products and services in
order to generate demand for our services in the local advertiser market
segment. These companies may not have adequate resources available to advertise
their products and services and may not be willing to devote the staff necessary
to educate themselves on the uses and benefits of our advertising solutions for
localized or otherwise limited target customers. We will depend on our
distributors to sell our Web advertising solutions. If these distributors do not
sell our solutions in an effective manner, our business, results of operations
and financial condition may be materially adversely affected.
We need to manage our available advertising space and to establish relationships
with diverse Web sites to attract customers
We need to make available a consistent supply of attractive advertising space to
attract customers. Our failure to do so could have a material and adverse effect
on our business, results of operations and financial condition. The Web sites
that list their unsold advertising space with us are not bound by contracts that
ensure us a consistent supply of inventory. In addition, Web sites can change
the number of advertising views they make available to us at any time, subject
to monthly minimums. If a Web site publisher decides not to make advertising
space from its Web sites available to the Flycast Network, we may not be able to
replace this advertising space with advertising space from other Web sites that
have comparable traffic patterns and user demographics in time to fulfill a
buyer's request. We expect our customers' requirements to become more
sophisticated as the Web matures as an advertising medium. For example, we
expect our customers to become more precise in their requirements for
geographically-targeted advertising that we sell through our reseller network.
We cannot assure you that the amount or type of advertising space listed or the
number of Web sites listing their advertising space on the Flycast Network will
increase or even remain constant in the future.
14
We need to manage our growth effectively in a rapidly growing Web advertising
market where the requirements for success change frequently
As we continue to increase the scope of our operations, we will need an
effective planning and management process to implement our business plan
successfully in the rapidly evolving market for Web advertising. Our business,
results of operations and financial condition will be materially and adversely
affected if we are unable to manage our expanding operations effectively. We
anticipate that we will commence international operations starting in the third
quarter of 1999. We have grown from 86 employees on March 31, 1999 to 119
employees on June 30, 1999. We plan to continue to expand our sales and
marketing, customer support and research and development organizations. Past
growth has placed, and any future growth will continue to place, a significant
strain on our management systems and resources. We have recently implemented a
new financial reporting system and expect that we will need to continue to
improve our financial and managerial controls and our reporting systems and
procedures. In addition, we will need to expand, train and manage our work
force.
We depend on key personnel for our future success
Our future success depends to a significant extent on the continued service of
our key senior management, technical and sales personnel. We do not have long-
term employment agreements with any of our key personnel nor do we have key-
person insurance on any of our employees. The loss of the services of any member
of our management team, or of any other key employees, would have a material
adverse effect on our business, results of operations and financial condition.
Recently, we have experienced significant changes to our executive management
team. For example, our Chief Financial Officer, Vice President, Engineering and
Vice President, Media Sales joined Flycast in January 1999, our Executive Vice
President Finance, Administration and Corporate Development, Vice President,
Direct Marketing, Vice President, Business Development and Vice President,
Network Operations joined Flycast in March 1999. We cannot assure you that the
new members of our management team will work effectively together or with the
rest of our management. Our future success also depends on our continuing
ability to attract, retain and motivate highly skilled employees. Competition
for employees in the industry is intense. We may be unable to retain our key
employees or attract, assimilate or retain other highly qualified employees in
the future. We have experienced difficulty from time to time in attracting the
personnel necessary to support the growth of our business, and we may experience
similar difficulty in the future.
We depend on the continued growth of Internet usage and infrastructure for our
business
Our market is new and rapidly evolving. Our business would be adversely affected
if Web usage does not continue to grow. Web usage may be inhibited for a number
of reasons, such as:
. inadequate network infrastructure;
. security concerns;
. inconsistent quality of service; and
. unavailability of cost-effective, high-speed service.
If Web usage grows, the Internet infrastructure may not be able to support the
demands placed on it by this growth or its performance and reliability may
decline. In addition, Web sites have experienced interruptions in their service
as a result of outages and other delays occurring throughout the Internet
network infrastructure. If use of the Internet does not continue to grow, or if
the Internet infrastructure does not effectively support growth that may occur,
our business, results of operations and financial condition would be materially
and adversely affected.
We must keep pace with rapidly changing technologies to be successful
The Web and Web advertising markets are characterized by rapidly changing
technologies, evolving industry standards, frequent new product and service
introductions and changing customer demands. The introduction of new products
and services embodying new technologies and the emergence of new industry
standards and practices can render existing products and services obsolete and
unmarketable or require unanticipated investments in research and development.
Our future success will depend on our ability to adapt to rapidly changing
technologies, to enhance existing solutions and to develop and introduce a
variety of new solutions to address our customers' changing demands. For
15
example, advertisers may require the ability to deliver advertisements utilizing
new formats that go beyond stationary images and incorporate video, audio and
interactivity, and more precise consumer targeting techniques. In addition,
increased availability of Internet access that delivers greater amounts of data
faster is expected to enable the development of new products and services that
take advantage of this expansion in delivery capability. Our failure to adapt
successfully to these changes could adversely affect our business, results of
operations and financial condition. We may also experience difficulties that
could delay or prevent the successful design, development, introduction or
marketing of our solutions. In addition, any new solutions or enhancements that
we develop must meet the requirements of our current and prospective customers
and must achieve significant market acceptance. Material delays in introducing
new solutions and enhancements may cause customers to forego purchases of our
solutions and purchase those of our competitors.
Our planned international expansion may be affected by factors beyond our
control
We expect to initiate operations in selected international markets in the third
quarter of 1999. To date, we have not developed international versions of our
solutions. Expansion into international markets will require management
attention and resources. This initiation of operations in selected international
markets could result in significant expenditures in the second half of 1999. We
do not anticipate that revenues from international operations will be material
in the second half of 1999. We also may enter into a number of international
alliances as part of our international strategy and rely extensively on these
business partners to conduct operations, establish local networks, register Web
sites as affiliates and coordinate sales and marketing efforts. Our success in
these markets will depend on the success of our business partners and their
willingness to dedicate sufficient resources to our relationships. We cannot
assure you that we will be successful in expanding internationally.
Our patent status is uncertain
We have filed two regular patent applications and one provisional patent
application in the United States, but we do not have any issued patents. A
provisional patent application is a type of patent application under which a
patent will not issue. A provisional patent application only provides a priority
date for a regular patent application that is filed within a one-year period
following the filing of the provisional patent application. In September 1998,
we mistakenly announced that we had been issued one United States patent. At the
time of our announcement, that patent had been allowed by the United States
Patent and Trademark Office. Subsequently, the United States Patent and
Trademark Office informed us that the patent application had been withdrawn from
issue. A Patent Cooperation Treaty application covering this invention has been
filed and an application has also been filed in the European Patent Office. The
application relates to our AdEx technology, specifically the ability to serve
Web advertisements targeted to yield a viewer response. In January 1999, the
United States Patent and Trademark Office suggested a claim for interference
purposes with respect to this application. In March 1999, the United States
Patent and Trademark Office informed Flycast that all claims were allowable but
that ex parte prosecution was suspended for a period of six months due to a
potential interference. Therefore, we cannot take any action relative to this
application during the six-month period. The purpose of an interference
proceeding is to determine the relative priority between two or more applicants,
and which of the applicants, if any, will ultimately be issued the patent. The
United States Patent and Trademark Office has not informed us of the identity of
the other patent applicant(s) involved. If an interference is declared, we may
not obtain a patent with respect to the application that is the subject of the
interference or may obtain a patent only for some subset of our original claims.
Regardless of the outcome of any interference, it may take years to resolve and
it might result in substantial expense to Flycast. Patents may not be issued
with respect to our pending or future patent applications. Even if patents are
issued, the patents may not be upheld as valid or prevent the development of
competitive solutions. Third parties may have or may in the future be granted
patents that cover our technology. We may be limited in our ability to use our
technology, whether or not patented, without licenses, which may not be
available on commercially reasonable terms.
We depend on our intellectual property rights and are subject to the risk of
infringement
Our success and ability to compete are substantially dependent on our
internally-developed technologies and trademarks, including AdEx, our
advertising management platform, and applications that use the AdEx platform,
which we protect through a combination of patent, copyright, trade secret and
trademark law. We cannot guarantee that any of our patent applications or
trademark registrations will be approved. Even if they are approved, these
patents or trademarks may be successfully challenged by others or invalidated.
16
We cannot guarantee that any of our intellectual property rights will be viable
or valuable in the future since the validity, enforceability and scope of
protection of proprietary rights in Internet-related industries is uncertain
and still evolving. Any claims could subject us to significant liability for
damages and could result in the invalidation of our intellectual property
rights. Any claims or litigation from third parties may also result in
limitations on our ability to use the intellectual property subject to any
claims or litigation unless we enter into arrangements with the third parties
responsible for those claims or litigation, which may be unavailable on
commercially reasonable terms.
We are subject to privacy concerns that may limit our success
Our technology collects and utilizes data derived from user activity on the Web
sites in the Flycast Network. AdEx enables the use of personal profiles, in
addition to other mechanisms, to deliver targeted advertising, to help compile
demographic information and to limit the frequency with which an advertisement
is shown to the user. The effectiveness of our technology and the success of our
business could be limited by any reduction or limitation in the use of personal
profiles. These personal profiles contain bits of information keyed to a
specific server, file pathway or directory location that are stored in the
Internet user's hard drive and passed to a Web site's server through the user's
browser software. Personal profiles are placed on the user's hard drive without
the user's knowledge or consent, but can be removed by the user at any time
through the modification of the user's browser settings. In addition, currently
available Web browsers can be configured to prevent personal profiles from being
stored on their hard drive. Some commentators, privacy advocates and
governmental bodies have suggested limiting or eliminating the use of personal
profiles.
The European Union has recently adopted a directive addressing data privacy that
may result in limitations on the collection and use of information regarding
Internet users. These limitations may limit our ability to target advertising or
collect and use information in most European countries.
We are subject to government regulation and legal uncertainties of doing
business on the Web
Laws and regulations that apply to Internet communications, commerce and
advertising are becoming more prevalent. These regulations could affect the
costs of communicating on the Web and adversely affect the demand for our
advertising solutions or otherwise have a material and adverse effect on our
business, results of operations and financial condition. Recently, the United
States Congress enacted Internet legislation regarding children's privacy,
copyrights and taxation. A number of other laws and regulations may be adopted
covering issues such as user privacy, pricing, acceptable content, taxation and
quality of products and services. This legislation could hinder growth in the
use of the Web generally and decrease the acceptance of the Web as a
communications, commercial and advertising medium. In addition, the growing use
of the Web has burdened the existing telecommunications infrastructure and has
caused interruptions in telephone service. Telephone carriers have petitioned
the government to regulate and impose fees on Internet service providers and
online service providers in a manner similar to long distance carriers.
Due to the global nature of the Web, it is possible that, while our
transmissions originate in California, the governments of other states or
foreign countries might attempt to regulate our transmissions or levy sales or
other taxes relating to our activities. Furthermore, the European Union recently
adopted a directive addressing data privacy that may result in limits on the
collection and use of user information. The laws governing the Internet remain
largely unsettled, even in areas where there has been some legislative action.
It may take years to determine whether and how existing laws including those
governing intellectual property, privacy, libel and taxation apply to the
Internet and Internet advertising. In addition, the growth and development of
the market for Internet commerce may prompt calls for more stringent consumer
protection laws, both in the United States and abroad, that may impose
additional burdens on companies conducting business over the Internet. Our
business, results of operations and financial condition could be adversely
affected by the adoption or modification of laws or regulations relating to the
Internet, or the application of existing laws to the Internet.
We face an unknown number of Year 2000 risks
Many currently installed computer systems and software products are coded to
accept or recognize only two digit entries in the date code field. These systems
and software products will need to accept four digit entries to distinguish 21st
century dates from 20th century dates. As a result, computer systems and/or
software used by many
17
companies and governmental agencies may need to be upgraded to comply with these
Year 2000 requirements or risk system failure or miscalculations causing
disruptions of normal business activities.
We have made a preliminary assessment of our Year 2000 readiness. We performed a
Year 2000 simulation on our software during the second quarter of 1999. We are
also in the process of contacting third-party vendors, licensors and providers
of software, hardware and services regarding their Year 2000 readiness.
Following this testing and after contacting these vendors and licensors, we will
be better able to make a complete evaluation of our Year 2000 readiness, to
determine what costs will be necessary to be Year 2000 compliant, and to
determine whether contingency plans need to be developed.
We expect to experience volatility in our stock price
The price at which our common stock trades is likely to be highly volatile and
may fluctuate substantially due to factors such as:
. actual or anticipated fluctuations in our results of operations;
. changes in or failure by us to meet securities analysts' expectations;
. announcements of technological innovations;
. introduction of new services by us or our competitors;
. developments with respect to intellectual property rights;
. conditions and trends in the Internet and other technology industries; and
. general market conditions.
In addition, the stock market has from time to time experienced significant
price and volume fluctuations that have affected the market prices for the
common stocks of technology companies, particularly Internet companies. In the
past, these broad market fluctuations have been unrelated or disproportionate to
the operating performance of these companies. Any significant fluctuations in
the future might result in a material decline in the market price of our common
stock. In the past, following periods of volatility in the market price of a
particular company's securities, securities class action litigation has often
been brought against that company. We may become involved in this type of
litigation in the future. Litigation is often expensive and diverts management's
attention and resources, which could have a material adverse effect upon our
business and operating results.
We have adopted anti-takeover provisions that could affect the sale of Flycast
Provisions of our Certificate of Incorporation, our Bylaws and Delaware law,
such as the elimination of the ability to act by written consent, could make it
more difficult for a third party to acquire us, even if doing so would be
beneficial to our stockholders.
18
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
NONE
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) Changes in Securities:
NONE
(b) Use of Proceeds
On May 4, 1999, the Securities and Exchange Commission declared effective the
Company's Registration Statement on Form S-1 (333-71909). Pursuant to this
Registration Statement, and the Abbreviated Registration Statement filed on
May 4, 1999 pursuant to Rule 462(b) promulgated under the Securities Act of
1933, as amended, on May 7, 1999, the Company closed its initial public
offering of 3,000,000 shares of its Common Stock at an initial public offering
price of $25.00 per share (the "Offering"). The Offering was managed by BT
Alex.Brown, Hambrecht & Quist, Dain Raucher Wessels and Wit Capital. Net
proceeds to the Company, after calculation of the underwriters discount and
commissions, from the Offering totaled $69.75 million. In addition, on June 4,
1999, the Company sold an additional 200,000 shares under the underwriters'
overallotment option. Total net proceeds were $4.65 million. None of the
expenses incurred in the offering were direct or indirect payments to
directors, officers, general partners of the issuer or their associates, to
persons owning ten percent or more of any class of equity securities of the
issuer or to affiliates of the issuer. During the six months ended June 30,
1999, the Company used proceeds for all general corporate purposes, including
working capital and capital expenditures.
(c) Sales of Unauthorized Securities
During the three months ended June 30, 1999, Flycast granted stock options to
purchase 389,000 shares of common stock at prices ranging from $16.00 to
$27.00 per share to approximately 42 employees, consultants and directors
pursuant to its 1999 Stock Plan. The issuances described were deemed exempt
from registration under the Securities Act in reliance upon Rule 701
promulgated under the Securities Act.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 1, 1999 the stockholders constituting a) a majority of the shares of
the outstanding Common Stock, and b) two-thirds of the shares of the
outstanding Preferred Stock of the Company adopted the following resolutions
by written consent:
. that the Certificate of Incorporation of the Company be amended to
increase the number of authorized shares of Common Stock to 100,000,000
shares effective as of the closing of the initial public offering;
The number of votes cast for, and withheld (not solicited) from the approval
of each matter is set forth below:
For Withheld
--------- --------------
7,406,465 4,047,992
ITEM 5. OTHER INFORMATION
NONE
ITEM 6. EXHIBITS AND REPORT ON FORM 8-K
(a) The following exhibits are filed as part of this report:
27.1 Financial Data Schedule
(b) The Company did not file any reports on Form 8-K during the three months
ended June 30, 1999.
19
FLYCAST COMMUNICATIONS CORPORATION
FORM 10-Q
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 thereunto duly authorized.
Flycast Communications Corporation
Date: August 13, 1999 By: /s/ Ralph J. Harms
----------------------- ----------------------------
Ralph J. Harms
CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL OFFICER)
20