EXHIBIT 99.2
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
InterStep, Inc.:
We have audited the accompanying balance sheets of InterStep, Inc. (the
"Company") as of December 31, 1997 and 1998, and the related statements of
operations, stockholders' equity, and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits 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 audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 1997 and
1998, and the results of its operations and its cash flows for the years then
ended in conformity with generally accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
Boston, Massachusetts
October 18, 1999
INTERSTEP, INC.
BALANCE SHEETS
DECEMBER 31, 1997 AND 1998
AND JUNE 30, 1999 (UNAUDITED)
================================================================================
June 30,
1999
(Unaudited)
ASSETS 1997 1998 (Note 1)
CURRENT ASSETS:
Cash and cash equivalents $ 32,952 $ 187,277 $ 302,039
Accounts receivable 133,820 352,564 197,587
Prepaid expenses and other current assets 913 11,369 14,753
--------- --------- ---------
Total current assets 167,685 551,210 514,379
PROPERTY AND EQUIPMENT, Net 42,803 160,080 152,598
--------- --------- ---------
TOTAL ASSETS $ 210,488 $ 711,290 $ 666,977
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 35,347 $ 40,477 $ 31,430
Accrued liabilities 3,552 5,726 16,395
Note payable to stockholders 57,881 61,782 63,666
Short-term capital lease obligations -- 13,006 13,603
--------- --------- ---------
Total current liabilities 96,780 120,991 125,094
LONG-TERM CAPITAL LEASE OBLIGATIONS -- 19,258 16,716
--------- --------- ---------
Total liabilities 96,780 140,249 141,810
--------- --------- ---------
COMMITMENTS AND CONTINGENCIES - (Note 8)
STOCKHOLDERS' EQUITY:
Common stock, $0.0001 par value, 1,250,000 shares authorized;
1,000,000 shares issued and outstanding in 1997 and 1998 9,500 9,500 9,595
Additional paid-in capital -- -- 104,131
Common stock options -- 92,078 190,288
Deferred stock compensation -- (80,848) (113,654)
Retained earnings 104,208 550,311 334,807
--------- --------- ---------
Total stockholders' equity 113,708 571,041 525,167
--------- --------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 210,488 $ 711,290 $ 666,977
========= ========= =========
See notes to financial statements.
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INTERSTEP, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997 AND 1998
AND SIX MONTHS ENDED JUNE 30, 1998 AND 1999 (UNAUDITED)
================================================================================
Years Ended Six Months
December 31, Ended June 30,
--------------------------- --------------------------
1997 1998 1998 1999
(Unaudited)
REVENUE $ 304,150 $ 1,253,204 $ 446,651 $ 438,588
COST OF REVENUE 44,305 173,155 74,616 3,321
----------- ----------- ----------- -----------
GROSS PROFIT 259,845 1,080,049 372,035 435,267
----------- ----------- ----------- -----------
OPERATING EXPENSES:
Sales and marketing 9,237 48,158 23,410 85,562
Research and development 97,120 388,545 138,085 185,942
General and administrative 81,309 184,962 40,052 138,670
Stock-based compensation -- 11,230 -- 169,630
----------- ----------- ----------- -----------
Total operating expenses 187,666 632,895 201,547 579,804
----------- ----------- ----------- -----------
OPERATING INCOME (LOSS) 72,179 447,154 170,488 (144,537)
----------- ----------- ----------- -----------
OTHER INCOME (EXPENSE):
Interest income 3,133 5,557 1,153 3,085
Interest expense on note payable
to shareholders (3,813) (6,152) (2,591) (6,024)
----------- ----------- ----------- -----------
Total other expense (680) (595) (1,438) (2,939)
----------- ----------- ----------- -----------
NET INCOME (LOSS) BEFORE
INCOME TAXES 71,499 446,559 169,050 (147,476)
INCOME TAXES 456 456 228 228
----------- ----------- ----------- -----------
NET INCOME (LOSS) $ 71,043 $ 446,103 $ 168,822 $ (147,704)
=========== =========== =========== ===========
PRO FORMA INFORMATION (UNAUDITED):
Net income (loss) $ 446,103 $ (147,704)
Pro forma incremental C corporation income
tax provision 186,000 128,000
----------- -----------
PRO FORMA NET INCOME (LOSS) $ 260,103 $ (275,704)
=========== ===========
See notes to financial statements.
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INTERSTEP, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997 AND 1998
AND SIX MONTHS ENDED JUNE 30, 1999 (UNAUDITED)
================================================================================
Additional Common Deferred Total
Common Stock Paid-in Stock Stock Retained Stockholders'
Shares Amount Capital Options Compensation Earnings Equity
BALANCE, JANUARY 1, 1997 950,000 $ 9,500 $ -- $ -- $ -- $ 33,165 $ 42,665
Net income -- -- -- -- -- 71,043 71,043
--------- --------- --------- --------- --------- --------- ---------
BALANCE, DECEMBER 31, 1997 950,000 9,500 -- -- -- 104,208 113,708
Issuance of common stock options -- -- -- 92,078 (92,078) -- --
Amortization of deferred stock compensation -- -- -- -- 11,230 -- 11,230
Net income -- -- -- -- -- 446,103 446,103
--------- --------- --------- --------- --------- --------- ---------
BALANCE, DECEMBER 31, 1998 950,000 9,500 -- 92,078 (80,848) 550,311 571,041
Issuance of common stock for service 9,500 95 104,131 -- -- -- 104,226
Issuance of common stock options -- -- -- 98,210 (98,210) -- --
Amortization of deferred stock compensation -- -- -- -- 65,404 -- 65,404
Subchapter S distribution -- -- -- -- -- (67,800) (67,800)
Net loss -- -- -- -- -- (147,704) (147,704)
--------- --------- --------- --------- --------- --------- ---------
BALANCE, JUNE 30, 1999 959,500 $ 9,595 $ 104,131 $ 190,288 $(113,654) $ 334,807 $ 525,167
========= ========= ========= ========= ========= ========= =========
See notes to financial statements.
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INTERSTEP, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997 AND 1998
AND SIX MONTHS ENDED JUNE 30, 1998 AND 1999 (UNAUDITED)
================================================================================
Years Ended December 31 Six Months Ended June 30,
----------------------- -------------------------
1997 1998 1998 1999
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 71,043 $ 446,103 $ 168,822 $(147,704)
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation 19,789 54,478 19,777 39,388
Stock-based compensation expense -- 11,230 -- 169,630
Changes in operating assets and liabilities:
Accounts receivable (84,299) (218,744) 29,206 154,977
Prepaid expenses and other current assets -- (10,456) (11,900) (3,384)
Accounts payable 35,347 5,130 (25,569) (9,047)
Accrued liabilities 4,950 6,075 30,377 17,062
--------- --------- --------- ---------
Net cash provided by operating activities 46,830 293,816 210,713 220,922
--------- --------- --------- ---------
CASH FLOWS USED IN INVESTING ACTIVITIES -
Purchases of property and equipment (25,225) (120,586) (48,799) (31,905)
--------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital lease obligations -- (18,906) (12,827) (6,359)
Payments to notes payable to stockholders (5,000) -- -- --
Subchapter S distributions -- -- -- (67,800)
--------- --------- --------- ---------
Net cash used in financing activities (5,000) (18,906) (12,827) (74,159)
--------- --------- --------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 16,605 154,324 149,087 114,858
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 16,347 32,952 32,952 187,277
--------- --------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 32,952 $ 187,276 $ 182,039 $ 302,135
========= ========= ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid for interest $ -- $ 2,251 $ 640 $ 4,141
========= ========= ========= =========
Cash paid for taxes $ 456 $ 456 $ 456 $ --
========= ========= ========= =========
NONCASH FINANCING AND INVESTING ACTIVITIES -
Purchase of equipment under capital lease $ -- $ 51,169 $ 51,169 $ --
========= ========= ========= =========
See notes to financial statements.
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INTERSTEP, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization - InterStep, Inc. (the "Company"), a Massachusetts
corporation, is a closely held, electronic mail ("e-mail") management
company founded in 1995. The Company provides publishers with e-mail
content management, list management, and distribution services on an
outsourced basis. The Company has a suite of web-based management tools
and a three-tier, back-end distribution architecture.
Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
Cash Equivalents - Cash equivalents consist of money market funds and
certificates of deposit with original maturities of three months or less
at the time of acquisition.
Property and Equipment - Property and equipment are stated at cost.
Property and equipment under capital leases are stated at the present
value of minimum lease payments. Depreciation on property and equipment is
calculated using the straight-line method over the estimated useful lives
of the assets. Equipment held under capital leases is amortized using the
straight-line method over the shorter of the lease term or the estimated
useful life of the asset.
Revenue Recognition - Revenues derived from the delivery of e-mail content
are recognized in the period the e-mail contents are delivered, provided
collection of the resulting receivable is probable. Revenues from list
management and distribution services are recognized when services have
been performed.
Advertising Expenses - Advertising expenses are charged to operations as
incurred. Advertising expenses were not significant in 1997 or 1998.
Research and Development Expenses - Research and development expenses are
charged to operations as incurred.
Income Taxes - The Company elected to be taxed under the provisions of
Subchapter S of the Internal Revenue Code ("Subchapter S") which provides
that the stockholders are taxed on their proportionate share of the
taxable income. As a result of the Company's Subchapter S election, the
accompanying statements of operations do not include an income tax
provision for federal income taxes.
Concentration of Credit Risk - Financial instruments that potentially
subject the Company to concentration of credit risk consist of trade
receivables. The Company's credit risk is mitigated by the Company's
credit evaluation process and the reasonably short collection terms. The
Company does not require collateral or other security to support accounts
receivable. One customer represented 50% and 77% of total revenue for the
years ended December 31, 1997 and 1998, respectively. Another customer
represented 44% of total revenues for the year ended December 31, 1997.
The amounts outstanding for these customers are $120,000 and $244,000 at
December 31, 1997 and 1998, respectively.
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Financial Instruments - The Company's financial instruments include cash
and cash equivalents, accounts receivable, accounts payable and note
payable to stockholders. At December 31, 1997 and 1998, the fair values of
these instruments approximated their financial statement carrying amount.
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. In addition, accounting recognition is given to stock options
granted to employees (including directors) at less than fair market value
(see Note 7). The Company accounts for stock grants issued to nonemployees
in accordance with the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation," and
Emerging Issues Task Force Issue No. 96-18 under the fair-value-based
method.
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of -
The Company evaluates its long-lived assets for impairment whenever events
or changes in circumstances indicate that the carrying amount of such
assets or intangibles may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an
asset to future undiscounted net cash flows expected to be generated by
the asset. If such assets are considered to be impaired, the impairment to
be recognized is measured by the amount by which the carrying amount of
the assets exceeds the 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.
Recently Issued Accounting Standards - In June 1997, the Financial
Accounting Standards Board ("FASB") issued SFAS No. 130, "Reporting
Comprehensive Income," which requires an enterprise to report, by major
components and as a single total, the change in its net assets during the
period from nonowner sources; and SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information," which establishes
annual and interim reporting standards for an enterprise's business
segments and related disclosures about its products, services, geographic
areas and major customers. The Company had no comprehensive income items
to report for either of the two years in the period ended December 31,
1998. The Company currently operates one reportable segment under SFAS No.
131. Adoption of these statements currently does not impact the Company's
financial position, results of operations, cash flows, or financial
statement disclosures.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which defines derivatives, requires
that all derivatives be carried at fair value, and provides for hedge
accounting when certain conditions are met. SFAS No. 133 is effective for
the Company in fiscal 2001. Although the Company has not fully assessed
the implications of SFAS No. 133, the Company does not believe adoption of
this statement will have a material impact on the Company's financial
position or results of operations.
In March 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of
Position ("SOP") 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use." SOP 98-1 provides guidance for an
enterprise on accounting for the costs of computer software developed or
obtained for internal use. SOP 98-1 is effective for the Company in 1999.
The Company anticipates that accounting for transactions under SOP 98-1
will not have a material impact on the Company's financial position or
results of operations.
Pro Forma Information (Unaudited) - An unaudited pro forma adjustment to
include an incremental income tax provision, at an effective tax rate of
40%, has been made to the historical results of operations to make the pro
forma presentation comparable to what would have been reported had the
Company operated as a C Corporation for federal and state tax purposes.
- 7 -
Interim Financial Information (Unaudited) - The interim financial
information as of June 30, 1999 and for the six months ended June 30, 1998
and 1999, is unaudited and has been prepared on the same basis as the
audited financial statements. In the opinion of management, such unaudited
information includes all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of the interim information.
Operating results for the six months ended June 30, 1999, are not
necessarily indicative of the results that may be expected for the year
ending December 31, 1999.
2. PROPERTY AND EQUIPMENT
Property and equipment as of December 31 consisted of the following:
1997 1998
Computer equipment and purchased software $ 74,786 $ 157,978
Computer equipment under capital lease 44,416
Furniture, fixtures and office equipment 2,834 46,981
--------- ---------
Total 77,620 249,375
Less accumulated depreciation (34,817) (89,295)
--------- ---------
Net $ 42,803 $ 160,080
========= =========
The accumulated depreciation associated with computer equipment under
capital lease was $0 and $10,487 at December 31, 1997 and 1998,
respectively.
3. NOTES PAYABLE TO STOCKHOLDERS
The Company has notes payable to two stockholders, payable on demand
bearing an annual interest rate of 6.74%. The outstanding amounts as of
December 31, 1997 and 1998 are $57,881 and $61,782, respectively. Interest
expense incurred amounted to $3,800 and $3,900 for the years ended
December 31, 1997 and 1998, respectively.
4. DEBT
In 1997, the Company entered into a revolving line-of-credit agreement
with a bank under which the Company may borrow up to $12,000 at an
interest rate of prime plus 5%. The borrowings under the line of credit
are unsecured. There are no amounts outstanding on the line of credit as
of December 31, 1997 and 1998.
5. INCOME TAXES
As of December 31, 1998, the Company has available state research and
development tax credit carryforwards of $15,100 which expire in 2003.
State rules place limitations on use of research and development tax
credits after a change in control. Due to these provisions, utilization of
the research and development tax credit carryforwards may be limited.
The Company, under the provisions of subchapter S, is subject to a state
income tax of $456, and accordingly, such amounts have been recorded as
income taxes in the accompanying financial statements.
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6. STOCKHOLDERS' EQUITY
Common Stock - On August 20, 1998, the Company's Board of Directors
approved a 950-for-1 stock split and authorized an increase of common
stock from 1,000 shares without par value to 1,250,000 shares with par
value of $0.01 per share. All references to number of shares in the
financial statements have been adjusted to reflect the stock split on a
retroactive basis.
In February 1999, the Company granted 9,500 common shares of the Company
to a nonemployee consultant. Accordingly, the Company recorded $104,226 as
the value of such stock granted and a corresponding stock-based
compensation expense in the six-month period ended June 30, 1999.
Stock Option Plan - The Company's 1998 Stock Option Plan (the "Plan")
provides for the grant of up to 50,000 incentive or nonstatutory options
to employees, officers, directors, consultants and advisors 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 Plan
generally vest ratably over a period of three and a half years and expire
10 years from the date of the grant.
Deferred Stock Compensation - At December 31, 1998, the Company had
$80,848 in deferred stock compensation related to options granted to
employees. This amount will be amortized to stock-based compensation
expense through 2002.
Stock-Based Compensation - During the six months ended June 30, 1999, the
Company issued 10,000 common stock options at $1.15 per share, which was
less than the deemed fair value of $11.00 per share. Accordingly, the
Company recorded $98,210 as the value of such options. Stock-based
compensation of $65,404 was amortized to expense in the six-month period
ended June 30, 1999. The Company had $113,654 in deferred stock
compensation, which will be amortized to expense through 2003.
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6. STOCKHOLDERS' EQUITY (CONTINUED)
During 1998, the Company issued 9,000 common stock options at less than
the fair value of its common stock. The fair value of the common stock
granted in 1998 was $0.74 per share, which was less than the deemed fair
value of $11.00 per share. Accordingly, the Company recorded $92,078 as
the value of such options in 1998. Stock-based compensation of $11,230 was
amortized to expense in 1998, and at December 31, 1998, the Company had
$80,848 in deferred stock compensation related to such options, which will
be amortized to expense through 2002.
A summary of the Company's stock option activity follows:
Weighted-
Average
Outstanding Exercise
Options Price
Balance, December 31, 1997 -- $ --
Granted 9,000 0.74
------ --------
Balance, December 31, 1998 9,000 $ 0.74
====== ========
Available for future grant at
December 31, 1998 41,000
======
The following table summarizes information about currently outstanding and
vested stock options at December 31, 1998:
Options Outstanding Options Vested
---------------------------------------------- -----------------------
Weighted- Weighted-
Outstanding at Weighted-Average Average Vested at Average
Range of December 31, Remaining Exercise December 31, Exercise
Exercise 1998 Contractual Life Price 1998 Price
Price
$ 0.74 9,000 9.67 $ 0.74 500 $ 0.74
Additional Stock Plan Information - As discussed in Note 1, the Company
accounts for its stock-based awards using the intrinsic-value method in
accordance with APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and its related interpretations.
SFAS No. 123, "Accounting for Stock-Based Compensation," requires the
disclosure of pro forma net income had the Company adopted the fair value
method since the Company's inception. Under SFAS No. 123, the fair value
of stock-based awards to employees is calculated through the use of
option- pricing models, even though such models were developed to estimate
the fair value of freely tradable, fully transferable options without
vesting restrictions, which significantly differ from the Company's stock
option awards.
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6. STOCKHOLDERS' EQUITY (CONTINUED)
Additional Stock Plan Information (Continued) - The Company's calculations
for employee grants were made using the minimum value, option-pricing
model with the following weighted-average assumptions for the year ended
December 31, 1998:
Dividend yield None
Risk-free interest rate 4.60%
Expected term 3.5 years
The weighted-average minimum value per option as of the date of grant for
options granted during 1998 was $1.34.
If the computed minimum values of the Company's stock-based awards to
employees had been amortized to expense over the vesting period of the
awards as specified under SFAS No. 123, net income on a pro forma basis
(as compared to such items as reported) would have been as follows at
December 31, 1998:
Loss attributable to common stockholders:
As reported $446,103
Pro forma 445,310
7. COMMITMENTS AND CONTINGENCIES
Leases - Future minimum net lease payments under noncancellable operating
leases (with initial or remaining lease terms in excess of one year) and
future minimum capital lease payments as of December 31, 1998 are as
follows:
Capital Operating
Year Ending December 31 Leases Leases
1999 $ 15,381 $ 41,783
2000 15,381 45,042
2001 5,127 19,167
Thereafter -- --
-------- --------
Total 35,889 $105,992
========
Less amount representing interest (3,625)
--------
Present value of net minimum capital lease payments 32,264
Less current installments of obligations under capital lease (13,006)
--------
Obligations under capital leases, excluding current installments $ 19,258
========
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Total rent expense under operating leases for the years ended December 31,
1997 and 1998 was $8,690 and $22,808, respectively.
Litigation - From time to time, the Company is involved in routine
litigation that arises in the ordinary course of its business. There are
no pending legal proceedings which management of the Company believes
could materially affect the Company's financial position or results of
operations.
8. SUBSEQUENT EVENTS
On August 30, 1999, Flycast Communications Corporation ("Flycast")
completed the acquisition of the Company through a merger with Fremont
Acquisition Corporation, a Massachusetts corporation and wholly owned
subsidiary of Flycast. As a result of this acquisition, the Company became
a wholly owned subsidiary of Flycast. In the transaction, which will be
accounted for as a pooling-of-interests, Flycast issued 480,337 shares of
common stock to the Company's stockholders. Of the 480,337 shares of
common stock, 47,558 shares are held by an escrow agent to serve as
security for the indemnity provided by some of the stockholders of the
Company.
On September 30, 1999, Flycast announced that a definitive agreement was
entered into for Flycast to be acquired by CMGI, Inc. ("CMGI") in a
stock-for-stock merger. Under the terms of the agreement, CMGI will issue
.4738 CMGI shares for every share of Flycast held on the closing date of
the transaction. Closing of the merger is subject to customary conditions
including formal approval by Flycast stockholders. In connection with the
merger, Flycast also entered into a stock-option agreement, dated as of
September 29, 1999, whereby Flycast granted CMGI an option to purchase up
to 19.9% of the outstanding shares of Flycast common stock, which option
may be exercised in the event that the merger agreement is terminated
under certain circumstances.
* * * * * *
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