.
.
.
EXHIBIT 99.1
UROAM, INC. AND SUBSIDIARIES (FORMERLY FILANET CORPORATION)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<Table>
<Caption>
Page
Report of Independent Certified Public Accountants 2
Consolidated Balance Sheet 3
Consolidated Statement of Operations 4
Consolidated Statement of Stockholders' Deficit 5
Consolidated Statement of Redeemable Convertible Preferred Stock 6
Consolidated Statement of Cash Flows 7
Notes to Consolidated Financial Statements 8 - 25
</Table>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors
uRoam, Inc. (formerly Filanet Corporation)
Sunnyvale, California
We have audited the accompanying consolidated balance sheet of uRoam, Inc. and
its subsidiaries (formerly Filanet Corporation) as of December 31, 2002 and the
related consolidated statements of operations, stockholders' deficit, redeemable
convertible preferred stock, and cash flows for the year then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion. We did not audit the
financial statements of the Company's foreign subsidiary, which statements
reflect total assets of $767,000 included in assets of discontinued operations,
net of intercompany balances, as of December 31, 2002. Those financial
statements were audited by other auditors whose report has been furnished to us,
and our opinion, insofar as it relates to the amounts included for such
subsidiary, is based solely on the report of the other auditors.
In our opinion, based on our audit and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of uRoam, Inc. (formerly Filanet
Corporation) and its subsidiaries at December 31, 2002 and the results of their
operations and their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has sustained recurring losses
from operations, and has a net capital deficiency and negative working capital
at December 31, 2002. These conditions raise substantial doubt about the ability
of the Company to continue as a going concern. Management's plans as to these
matters are also discussed in Note 1. The consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
s\BDO Seidman, LLP
San Francisco, California
June 12, 2003, except for Note 11 which is as of July 2, 2003
2
UROAM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2002
(In thousands, except share amounts)
<Table>
ASSETS
Current assets:
Cash $ 279
Accounts receivable 477
Prepaid expenses and other current assets 140
----------
Total current assets 896
Property and equipment, net 5
Goodwill 1,322
Other intangible assets, net 1,031
Other assets 135
Total assets of discontinued operations, net 1,527
----------
Total assets $ 4,916
==========
TOTAL LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT
Current liabilities:
Short-term debt $ 7,358
Current portion of capital lease obligation 382
Accounts payable 117
Accrued liabilities 325
Deferred revenue 331
Total liabilities of discontinued operations 4,689
----------
Total current liabilities 13,202
Commitments and contingencies
Redeemable convertible preferred stock 15,940
Stockholders' deficit:
Common stock, no par value; 41,958,300 shares authorized; 868,926 shares issued and outstanding 25,548
Stockholder receivables (75)
Accumulated deficit (49,699)
----------
Total stockholders' deficit (24,226)
----------
Total liabilities, redeemable convertible preferred stock and stockholders' deficit $ 4,916
==========
</Table>
See accompanying notes to consolidated financial statements
3
UROAM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2002
(In thousands)
<Table>
Net revenues:
Product sales $ 92
Maintenance services 8
--------
100
--------
Costs and expenses:
Cost of revenue 3
Selling and marketing 633
Research and development 790
General and administrative 461
--------
Total costs and expenses 1,887
--------
Operating loss (1,787)
Interest and other expense:
Interest expense (244)
Other expense (4)
--------
Total interest and other expense: (248)
--------
Loss from continuing operations (2,035)
Loss from discontinued operations (13,161)
--------
Net loss $(15,196)
========
</Table>
See accompanying notes to consolidated financial statements
4
UROAM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
YEAR ENDED DECEMBER 31, 2002
(In thousands, except share data)
<Table>
<Caption>
NOTES
COMMON STOCK RECEIVABLE
-------------------- FROM ACCUMULATED
SHARES AMOUNT STOCKHOLDERS DEFICIT TOTAL
------- -------- ------------ ----------- --------
Balances at January 1, 2002 86,311 $ 331 $ (88) $ (34,503) $(34,260)
Exercise of stock options 450,809 9 -- -- 9
Common stock issued for services 150,000 3 -- -- 3
Vesting of non-employee stock options -- 2 -- -- 2
Repayment of stockholder notes receivable -- -- 16 -- 16
Accrued interest on stockholder notes receivable -- 3 (3) -- --
Series A and Series B preferred stock converted
to common stock 181,806 25,127 -- -- 25,127
Issuance of warrants to purchase common stock in
connection with bridge financing and guarantee of
line of credit -- 73 -- -- 73
Net loss -- -- -- (15,196) (15,196)
------- -------- ------------ ----------- --------
Balances at December 31, 2002 868,926 $ 25,548 $ (75) $ (49,699) $(24,226)
======= ======== ============ =========== ========
</Table>
See accompanying notes to consolidated financial statements
5
UROAM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF REDEEMABLE CONVERTIBLE PREFERRED STOCK
YEAR ENDED DECEMBER 31, 2002
(In thousands, except share data)
<Table>
<Caption>
REDEEMABLE CONVERTIBLE PREFERRED STOCK
----------------------------------------------------------------------------------------
SERIES A SERIES B SERIES A-1 SERIES B-1 TOTAL
------------------- ------------------- ---------------------- --------------------- --------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
-------- --------- -------- --------- ----------- --------- ---------- ---------
Balances at January 1, 2002 98,217 $ 5,823 83,589 $ 19,304 -- $ -- -- $ -- $ 25,127
Sale of Series A-1, net of
cash issuance costs of $186 30,461,570 5,410 5,410
Conversion of debt and
accrued interest into
Series A-1 1,044,386 9,080 9,080
Conversion of accrued
employee compensation into
Series A-1 323,655 62 62
Issuance of Series A-1 for
services (executive
severance, rent negotiations
and consulting) 1,870,752 358 358
Issuance of Series B-1 in
connection with merger 3,338,286 1,030 1,030
Series A and Series B
preferred stock converted
to common stock (98,217) (5,823) (83,589) (19,304) (25,127)
-------- --------- -------- --------- ----------- --------- ---------- --------- --------
Balances at December 31, 2002 -- $ -- -- $ -- 33,700,363 $ 14,910 3,338,286 $ 1,030 $ 15,940
======== ========= ======== ========= =========== ========= ========== ========= ========
</Table>
See accompanying notes to consolidated financial statements
6
UROAM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2002
(In thousands)
<Table>
OPERATING ACTIVITIES:
Loss from continuing operations $ (2,035)
Adjustments to reconcile loss from continuing operations to net cash used in continuing operations:
Depreciation and amortization 69
Non-cash interest expense 50
Compensation expense relating to stock options issued to consultants 2
Compensation expense relating to common stock issued for services 3
Changes in operating assets and liabilities, net of assets acquired and liabilities assumed:
Accounts receivable (232)
Prepaid expenses and other current assets (120)
Other assets (135)
Accounts payable (115)
Other accrued liabilities 341
Deferred revenue 290
--------
Net cash used in continuing operations (1,882)
--------
Loss from discontinued operations (13,161)
Change in assets and liabilities of discontinued operations 3,690
--------
Net cash used in operating activities (11,353)
--------
INVESTING ACTIVITIES:
Payment of acquiree company liabilities prior to acquisition, net of cash acquired and other
acquisition costs (491)
--------
Net cash used in investing activities (491)
--------
FINANCING ACTIVITIES
Proceeds from short-term debt 7,381
Principal payments on short-term debt (767)
Proceeds from exercise of common stock options 9
Payments received on shareholder receivable 16
Proceeds from issuance of Series A-1 convertible preferred stock 5,596
Payment of preferred stock issuance costs (186)
--------
Net cash provided by financing activities 12,049
--------
NET INCREASE IN CASH 205
CASH, beginning of year 74
--------
CASH, end of year $ 279
========
NONCASH INVESTING AND FINANCING ACTIVITIES:
Conversion of Series A and Series B preferred stock into common stock $ 25,127
Conversion of 2002 bridge notes into Series A-1 preferred stock 9,080
Issuance of Series B-1 preferred stock in connection with acquisition 1,030
Issuance of Series A-1 preferred stock for rental renegotiation, executive separation agreement
and executive search services 358
Conversion of accrued employee compensation into Series A-1 preferred stock 62
Issuance of warrants to purchase common stock in connection with 2002 bridge financing and
guarantee of line of credit 73
Accrued interest on stockholder notes receivable 3
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ --
========
Cash paid during the year for income taxes $ 800
========
</Table>
See accompanying notes to consolidated financial statements
7
UROAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2002
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
uRoam, Inc. (collectively with its subsidiaries, the "Company" or "uRoam") was
incorporated in California in 1998. From December 2000 through December 2002,
the Company, originally doing business as Filanet Corporation ("Filanet"),
marketed a low-cost, broadband solid-state appliance with integrated router and
server functionality to small/remote offices. This product, known as the
InterJak Internet Service Appliance ("InterJak Product"), enabled broadband
service providers to offer a myriad of remotely managed value-added services to
telecommuters and small to medium-size businesses from a single extensible
platform. On October 1, 2002, the Company acquired all of the outstanding stock
of uRoam, Inc. ("Predecessor uRoam"), also incorporated in California.
Subsequent to the completion of the acquisition, the Company changed its name to
uRoam, Inc. With this acquisition, the Company refocused its investment and
resources on applications and software. Since October 1, 2002, the Company's
focus has been to develop, market and sell a complete solution for secure user
access to applications and desktops, and collaborative tools for real time
information sharing.
As further described in Note 3, in December 2002, the Company decided to
discontinue the operations formerly conducted by Filanet. As such, in accordance
with generally accepted accounting principles, net assets and the results of the
discontinued operations have been reflected as Discontinued Operations in the
consolidated financial statements. With the discontinuance of the operations
formerly conducted by Filanet, the Company's continuing operations are comprised
of the business activities acquired from Predecessor uRoam and the corporate
activities of the merged companies. These continuing operations are treated as a
single business segment, and the Company's continuing operations have
historically been conducted primarily in the United States of America, with some
quality assurance and test activities being performed in Russia.
Liquidity and basis of presentation
The accompanying consolidated financial statements have been prepared on a basis
that contemplates the realization of assets and the satisfaction of liabilities
and commitments in the normal course of business. The Company has incurred
losses since its inception, has an accumulated deficit of $50 million and a
deficit in working capital at December 31, 2002, and expects that it will
continue to incur losses for the foreseeable future. The Company has been
dependent on its investors to provide financing and loan guarantees to fund
operating activities, and management anticipates that the Company will continue
to require additional financing to fund operations. At December 31, 2002, the
Company was relying on funds provided by a revolving line of credit facility
guaranteed by certain investors to fund its operations. At December 31, 2002,
the principal balance of this line of credit was $3 million, and there were no
remaining funds available to the Company under this facility. Through April 30,
2003, the facility and related guarantees were increased to $4.89 million, and
the maturity date has been extended to June 30, 2003. These circumstances raise
substantial doubt about the Company's ability to continue as a going concern.
Management plans to continue to pursue additional financing sufficient to fund
operations of the Company until revenues from the product sales are sufficient
to fund operations. Management is also exploring a possible sale of the Company.
Although management continues to pursue these plans, there is no assurance that
the Company will be successful in obtaining additional financing, or that the
Company can be sold. If management is unable to obtain additional financing or
complete a sale of the Company, operations will need to be ceased. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
8
UROAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2002
Principles of Consolidation
The consolidated financial statements include the Company and its wholly-owned
subsidiaries. All significant intercompany accounts and transactions have been
eliminated in consolidation. As more fully discussed in Note 3, in December
2002, the Company discontinued all operations attributable to its business
activities related to the InterJak Product line, including the operations of the
Company's subsidiary located in Denmark, Filanet Europe ApS. Accordingly, these
operations have been reflected as discontinued in the consolidated balance
sheets and statements of operations.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America 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. Such estimates include, but are not limited to,
inventory, deferred revenue, the allowance for uncollectible accounts
receivable, the valuation of the acquisition of Predecessor uRoam, the valuation
allowance for deferred tax assets and accrued liabilities. Actual results could
differ from those estimates.
Concentration of Credit Risk and Significant Customers
Financial instruments that potentially subject the Company to concentrations of
credit risk consist primarily of accounts receivables. The Company sells its
products to a limited number of companies in diverse industries and generally
does not require its customers to provide collateral to support accounts
receivable. During 2002, revenues recognized from five customers represented
approximately 32%, 20%, 13%, 13% and 10% of total consolidated revenues. As of
December 31, 2002, 50%, 17% and 10% of accounts receivable was due from three
customers. To reduce credit risk, management performs ongoing credit evaluations
of its customers' financial condition and includes any accounts receivable
balances that are determined to be uncollectible, along with a general reserve,
as necessary, in the overall allowance for doubtful accounts based on historical
losses and existing economic conditions. After all attempts to collect a
receivable have failed, the receivable is written off against the allowance.
Based on the information available, management believes no allowance for
doubtful accounts is required as of December 31, 2002. However, actual
write-offs might be necessary in the future.
Fair Value of Financial Instruments
The Company's financial instruments include cash, accounts receivable and
short-term debt. Cash is reported at fair value. The recorded carrying amount of
accounts receivable and short-term debt approximates their fair value due to
their short-term maturities.
Property and Equipment
Property and equipment, including leasehold improvements, are recorded at cost
and are depreciated using the straight-line method over the shorter of the lease
term or estimated useful lives of the underlying assets. Estimated useful lives
range from two to five years. Included in property and equipment at December 31,
2002 is computer software with a cost basis of $6,000 and accumulated
depreciation of $1,000. During 2002, as a result of current and expected future
negative net operating cash flows due to the discontinuance of the InterJak
Product line, the Company recorded a $434,000 impairment loss relating to the
recoverability of certain property and equipment (see Note 3).
9
UROAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2002
Revenue Recognition
The Company derives revenue primarily from sales of its FirePass server product
and from related maintenance services. The Company recognizes revenue from
product sales in accordance with Statement of Position ("SOP") 97-2, "Software
Revenue Recognition" since the software component is not considered incidental
to its products as a whole. In accordance with SOP 97-2 and Securities and
Exchange Commission Staff Accounting Bulletin ("SAB") 101, the Company
recognizes revenue upon meeting all of the following criteria: execution of a
written customer agreement and purchase order signed by the Company and the
customer; product delivery has occurred; the fee for the product is fixed or
determinable; collection is reasonably assured and vendor specific objective
evidence ("VSOE") of fair value exists to allocate the total fee to elements of
the arrangement.
The Company is migrating its business model to sell to resellers/distributors;
however, the Company has historically sold to end customers. When agreements
with distributors provide for stock rotation or price protection rights, the
Company defers recognition of revenue until sell-through to the end customer has
occurred.
The Company defers a portion of its product revenues based on the value of
certain maintenance arrangements when these arrangements are included with a
product sale and recognizes these revenues over the applicable maintenance
period. The Company also derives a portion of its revenues from sales of
separate extended maintenance arrangements. Revenue from extended maintenance
arrangements is recognized over the period of coverage purchased by the
customer.
Inventory
Inventory is stated at the lower of standard cost, which approximates actual
(first-in, first-out method), or net realizable value. The valuation of
inventories at the lower of standard cost or market value requires the use of
estimates regarding the amount of inventory that will be sold and the prices at
which current inventory will be sold. These estimates are dependent on the
Company's assessment of current and expected orders from its customers. The
Company has historically not carried significant quantities of FirePass
inventory in excess of amounts pertaining to current orders from customers;
however, because of lead times associated with components used in manufacturing
the InterJak Product line, significant inventories were carried in connection
with that product line prior to its discontuance.
Valuation of Long-Lived Assets Including Goodwill and Other Intangible Assets
The Company reviews property, plant and equipment, goodwill and other intangible
assets for impairment whenever events or circumstances indicate the carrying
amount of the assets may not be recoverable. The Company's review of goodwill
and other intangible assets is based on the estimated future cash flows the
assets are expected to generate. The Company's review is based on its best
estimate of a variety of factors, including future market growth, forecasted
revenues and costs and a strategic review of its business and operations. In the
event the Company determines that an asset is impaired in the future, an
adjustment to the value of the asset would be charged to earnings in the period
such determination is made.
10
UROAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2002
Software Development Costs
Costs for the development of new software products and substantial enhancements
to existing software products are expensed as incurred until technological
feasibility has been established, at which time any additional costs would be
capitalized in accordance with Statement of Financial Accounting Standards
("SFAS") No. 86, "Computer Software To Be Sold, Leased or Otherwise Marketed."
The costs to develop such software have not been capitalized, as the Company
believes its current software development process is essentially completed
concurrent with the establishment of technological feasibility.
Research and Development
Research and development costs are expensed as incurred.
Stock-Based Compensation
The Company accounts for stock-based awards to employees using the intrinsic
value method in accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"). Since the inception of
the Company, no stock options were granted at an exercise price below the
estimated fair market value of the common stock.
The Company accounts for stock-based awards to nonemployees in accordance with
the provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," and
Emerging Issues Task Force ("EITF") Issue No. 96-18, "Accounting for Equity
Instruments that Are Issued to Other Than Employees for Acquiring or in
Conjunction with Selling Goods or Services," under the fair value method. SFAS
No. 123 also requires the disclosure of pro forma net loss as if the Company had
adopted the fair value method for stock-based awards to employees. Under SFAS
No. 123, the fair value of the 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. These models also require subjective assumptions, including
expected time to exercise, which greatly affect the calculated values. The
Company's calculations were made using the minimum value method with the
following assumptions: expected life one year from vest date; risk free interest
rate of 4%, and no dividends during the expected term.
The following table represents the effect on net loss if the Company had applied
the fair value based method and recognition provisions of SFAS No. 123 (in
thousands):
<Table>
<Caption>
2002
---------
Net loss, as reported $ (15,196)
Add: Stock-based employee compensation expense included in reported loss --
Deduct: Total stock-based employee compensation expense determined under
fair value based method for all awards (10)
---------
Pro forma net loss $ (15,206)
=========
</Table>
11
UROAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2002
Foreign Currency Translation
The functional currency of the Company's foreign subsidiary is its local
currency. The assets and liabilities are translated into U.S. dollars at
period-end rates of exchange, and income and expenses are translated at average
exchange rates during the period. Since the operations of the foreign subsidiary
were discontinued in 2002, gains and losses resulting from translating financial
statements into U.S. dollars have been included in loss from discontinued
operations. Gains and losses from foreign currency transactions are included in
loss from discontinued operations.
Recently Issued Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 141 requires that all business combinations initiated after
June 30, 2001 be accounted for under the purchase method and addresses the
initial recognition and measurement of goodwill and other intangible assets
acquired in a business combination. SFAS No. 142 addresses the initial
recognition and measurement of intangible assets acquired outside of a business
combination and the accounting for goodwill and other intangible assets
subsequent to their acquisition. SFAS No. 142 provides that intangible assets
with finite useful lives be amortized and that goodwill and intangible assets
with indefinite lives not be amortized, but rather be tested at least annually
for impairment. The Company adopted SFAS No. 142 for its fiscal year beginning
January 1, 2002. As the Company did not carry any goodwill or other intangible
assets on its balance sheet as of December 31, 2001, the adoption of SFAS No.
141 and SFAS No. 142 did not have an impact on the Company's financial position,
results of operations or cash flows.
In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations". SFAS 143 requires that a liability for an asset retirement
obligation be recognized when incurred and the associated asset retirement costs
be capitalized as part of the carrying amount of the long-lived asset and
subsequently allocated to expense over the asset's useful life. The provisions
of SFAS 143 were effective for the Company as of the beginning of fiscal year
2003. The Company does not believe it has any assets at December 31, 2002 that
are subject to retirement obligations requiring recognition under SFAS 143.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities," which addresses accounting for restructuring
and similar costs. SFAS No. 146 supersedes previous accounting guidance,
principally EITF Issue No. 94-3. The Company is required to adopt SFAS No. 146
for restructuring activities initiated after December 31, 2002. SFAS No. 146
requires that the liability for costs associated with an exit or disposal
activity be recognized when the liability is incurred. Under EITF 94-3, a
liability for an exit cost was recognized at the date of the Company's
commitment to an exit plan. SFAS No. 146 also established that the liability
should initially be measured and recorded at fair value. Accordingly, SFAS No.
146 may affect the timing of recognizing future restructuring plans.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure," an amendment of SFAS No. 123.
Although it does not require use of fair value method of accounting for
stock-based employee compensation, it does provide alternative methods of
transition. It also amends the disclosure provisions of SFAS No. 123, to require
disclosure in the summary of significant accounting policies of the effects of
an entity's accounting policy with respect to stock-based employee compensation
on reported net income and earnings per share in financial statements. SFAS No.
148's amendment of the transition and annual disclosure requirements is
effective for fiscal years ending after December 15, 2002. The Company has
adopted the disclosure requirements of this standard in the accompanying
consolidated financial statements.
12
UROAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2002
In November 2002, the FASB issued Financial Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). The interpretation elaborates
on the existing disclosure requirements for most guarantees, including loan
guarantees such as standby letters of credit. It also clarifies that at the time
a company issues a guarantee, the company must recognize an initial liability
for the fair value, or market value, of the obligations it assumes under the
guarantee and must disclose that information in its interim and annual financial
statements. The provisions related to recognizing a liability at inception of
the guarantee for the fair value of the guarantor's obligations do not apply to
product warranties or to guarantees accounted for as derivatives. The initial
recognition and initial measurement provisions apply on a prospective basis to
guarantees issued or modified after December 31, 2002. The disclosure provisions
are effective for financial statements for annual or interim periods ending
after December 15, 2002. The Company has provided disclosures of its guarantees
in the accompanying footnotes. The effect of the adoption of the recognition and
measurement provisions FIN 45 will be based on the nature of guarantees
prospectively issued after December 31, 2002, and is not yet determinable.
In January 2003, the FASB issued Financial Interpretation No. 46, "Consolidation
of Variable Interest Entities" ("FIN 46"), which requires the consolidation of
certain variable interest entities. FIN 46 is applicable to financial statements
issued after 2002, however, disclosures are required currently if the Company
expects to consolidate any variable interest entities. There are no entities
that will be consolidated with the Company's financial statements as a result of
FIN 46.
2. BUSINESS ACQUISITION
As described in Note 1, on October 1, 2002, the Company acquired all of the
outstanding stock of Predecessor uRoam. Prior to the acquisition, the Company
conducted business under the name of Filanet. Subsequent to the acquisition, the
Company changed its name to uRoam, Inc. For acquisition accounting purposes,
Filanet was determined to be the acquiring company.
The value of the purchase price totaled $1.575 million and the transaction was
accounted for as a purchase. The Company exchanged 3.3 million shares of its
Series B-1 Preferred Stock stock with a fair value of $1.03 million for all of
the outstanding stock of Predecessor uRoam. The total purchase price also
includes $400,000 in pre-acquisition liabilities of Predecessor uRoam paid by
Filanet and an estimate of the direct costs associated with the transaction
totaling approximately $145,000. All pre-existing Predecessor uRoam stock
options and warrants were converted to Predecessor uRoam's common stock or were
cancelled immediately prior to the acquisition.
The acquisition has been accounted for under the purchase method of accounting
in accordance with SFAS No. 141, "Business Combinations." Under the purchase
method of accounting, the total purchase price is allocated to the tangible and
intangible assets acquired and the liabilities assumed based on their estimated
fair values. The excess of the purchase price over those fair values is recorded
as goodwill. The fair values assigned to the tangible and intangible assets
acquired and liabilities assumed are based on estimates and assumptions provided
by management, and other information compiled by management, including an
independent valuation, prepared by an independent valuation specialist, that
utilizes established valuation techniques appropriate for the high technology
industry. In accordance with SFAS No. 142, "Goodwill and Other Intangible
Assets," goodwill will not be amortized but instead will be reviewed
periodically for impairment.
13
UROAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2002
A summary of the total purchase price is as follows (in thousands):
<Table>
Series B-1 preferred stock $ 1,030
Pre-acquisition payments of uRoam liabilities made by Filanet 400
Estimated direct costs of the acquisition 145
-------
Total purchase price $ 1,575
=======
</Table>
The total purchase price has been preliminarily allocated as follows (in
thousands):
<Table>
Cash $ 42
Accounts receivable 228
Other assets 37
Liabilities assumed (1,154)
--------
Fair value of net liabilities assumed (847)
Purchased technology 900
Customer base 50
Trademark 100
Non-Compete 50
Goodwill 1,322
--------
Total purchase price $ 1,575
========
</Table>
The fair value of net liabilities assumed was reduced by $103,000 resulting from
subsequent renegotiation and settlement of certain liabilities assumed in the
acquisition.
Predecessor uRoam incurred operating losses through the acquisition date. The
potential value of the combined companies, products and technologies contributed
to a purchase price that resulted in the recognition of goodwill.
Intangible assets
Of the total purchase price, $1.1 million was allocated to intangible assets,
including purchased technology, customer base, trademark and non-compete
agreements. All of the intangible assets were valued using the income approach,
which measures present worth and anticipated future benefits of the intangible
asset. This approach calculates the value of the intangible asset as being the
present value of the after tax cash flows potentially attributable to it, net of
adjustments made to account for the replacement and obsolescence of technology
and a fair rate of return on other assets that contribute to the income stream
attributable to the intangible asset.
Purchased technology and trademark consists of products that have reached
technological feasibility and includes Predecessor uRoam's FirePass product line
and the related trademark name. The Company is amortizing the fair value of the
purchased technology and trademark on a straight-line basis over an estimated
useful life of four years. The customer base represents the value of an
installed base of customers that are expected to result in additional licenses
under these customers' existing applications. The fair value of the customer
base is being amortized based on estimated revenue from identified existing
customers over a three year period. Non-compete agreements represent the value
of non-compete agreements signed by key executives of Predecessor uRoam. The
Company is amortizing the
14
UROAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2002
fair value of the non-compete agreements on a straight-line basis over an
estimated useful life of three years.
The components of intangible assets as of December 31, 2002 follows (in
thousands):
<Table>
<Caption>
Gross Carrying Accumulated Net Carrying
Amount Amortization Amount
-------------- ------------ ------------
Amortized intangible assets:
Purchased technology $ 900 $56 $844
Customer base 50 4 46
Trademark 100 6 94
Non-Compete agreements 50 3 47
-------------- ------------ ------------
Total gross and net carrying amounts $1,100 $69 $1,031
============== ============ ============
</Table>
Total amortization expense for the year ended December 31, 2002 was $69,000.
Estimated amortization expense for the next four years is as follows (in
thousands):
<Table>
<Caption>
Year Estimated Amortization
Expense
----------------------
2003 $ 275
2004 275
2005 275
2006 206
----------------------
$1,031
======================
</Table>
3. DISCONTINUED OPERATIONS
In December 2002, the Company's board of directors, who also comprised a
controlling shareholder interest, unanimously authorized and directed management
to discontinue the operations formerly conducted by Filanet prior to the
Company's acquisition of Predecessor uRoam on October 1, 2002. The decision to
discontinue these operations was based on the low margins being achieved in that
business, and a decision to concentrate management's efforts and all of the
Company's resources on the operations newly acquired from Predecessor uRoam. As
a result of the decision to discontinue the operations formerly conducted by
Filanet, management issued termination notices to substantially all employees
associated with the InterJak Product operation on or around December 31, 2002,
which resulted in a severance accrual totaling $516,000, and management began
taking steps to limit the remaining liabilities associated with this business.
In addition, the Company recorded impairment charges of $2,278,000 and $434,000
to reduce the carrying values of inventories and property and equipment,
respectively, of the discontinued business to their estimated net realizable
values.
In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," assets and liabilities of the discontinued business have
been segregated from continuing operations in the 2002 and 2001 consolidated
balance sheets, and the related operating results have been segregated and
reported as discontinued operations in the accompanying consolidated statements
of operations and cash flows, and related notes.
Revenues of the discontinued operation were $4.7 million in 2002. There were no
income tax expenses or benefits recognized in 2002.
15
Balance sheet details of discontinued operations as of December 31, 2002
consisted of the following (in thousands):
<Table>
Assets of discontinued operations:
Accounts receivable $ 623
Inventory 670
Prepaid expenses and other current assets 19
Property and equipment, net 17
Other assets 198
-------
Total assets of discontinued operations $ 1,527
=======
Liabilities of discontinued operations:
Capital lease obligations $ 428
Accounts payable 2,547
Accrued liabilities 1,517
Deferred revenue 197
-------
Total liabilities of discontinued operations $ 4,689
=======
</Table>
4. OTHER ACCRUED LIABILITIES
Other accrued liabilities as of December 31, 2002 consisted of the following (in
thousands):
<Table>
Professional fees $ 50
Accrued interest 56
Compensation and related benefits 107
Other accrued liabilities 112
-------
Total $ 325
=======
</Table>
5. SHORT-TERM DEBT
Short-term debt as of December 31, 2002 consisted of the following (in
thousands):
<Table>
Line of credit $ 3,000
Short-term bridge notes payable 4,381
Discount relating to bridge loan facility (23)
-------
Total $ 7,358
=======
</Table>
In March 2002, the Company issued 1,044,386 shares of Series A-1 Preferred Stock
to the holders of certain outstanding promissory notes in return for the
cancellation of outstanding principal and accrued interest totaling $9,080,000.
In August, September, and December 2002, the Company obtained bridge loan
financing for an aggregate principal amount of $4,381,000 under Secured
Subordinated Convertible Notes ("2002 Bridge Loans") and issued to the lenders
warrants to purchase 2,154,992 shares of common stock with an exercise price per
share of $0.02. The 2002 Bridge Loans bear interest at the rate of 4.5% per
annum and are due on the earlier of one year from issuance or conversion of the
notes to demand notes whereby the notes will
16
UROAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2002
become immediately due and payable upon consent by the noteholders representing
at least 75% of the aggregate principal amount of the notes ("Majority in
Interest"). The 2002 Bridge Loans are subordinated to the Company's obligations
under capital leases, secured by substantially all of the Company's assets
(except those assets acquired under capital leases) and convertible into
preferred stock at the per share price sold in the Company's next round of
preferred stock financing of at least $2.5 million (excluding any notes
outstanding which are convertible into preferred stock) upon consent by the
Majority in Interest. In the event that the Company undergoes a liquidation,
dissolution, winding up or Liquidation Transaction (as defined in the Company's
fifth amended and restated articles of incorporation), the Company is obligated
to repay 2.5 times the outstanding principal and interest due under the 2002
Bridge Loans prior to any payments to the Company's unsecured creditors and
common or preferred stockholders. The Company has allocated the proceeds between
the respective estimated fair values of the 2002 Bridge Loans and related
warrants resulting in a $35,000 discount to the 2002 Bridge Loans to be
amortized to interest expense over a one-year period ending in August 2003 using
the effective interest method. The Company recorded $12,000 in interest expense
resulting from the amortization of this discount.
In October 2002, the Company entered into a revolving line of credit ("Line of
Credit") with a bank to provide financing for current operations of the Company.
The Line of Credit provides for maximum borrowings of $3,000,000 at the prime
interest rate (4.25% at December 31, 2002) and was scheduled to mature on
January 1, 2003. In addition, $15,000 in loan fees paid during 2002 in
connection with the line of credit agreement were charged to interest expense.
The Line of Credit does not have any financial covenants. During 2003, the Line
of Credit was increased and maturity date extended (see Note 11).
In connection with a guarantee of the Line of Credit provided by the Company's
majority stockholders, the Company issued 2,067,958 warrants to purchase common
stock at $0.02 per share. In addition, the Company issued 516,988 warrants to
the guarantors in both November and December 2002. The $38,000 value of these
warrants was recorded as interest expense during 2002. The Company will continue
to issue 516,988 warrants per month under the same terms to the guarantors as
long as the Line of Credit is outstanding. Through June 12, 2003, the Company
had issued 5,686,874 warrants to purchase common stock at $0.02 per share in
connection with this guarantee.
6. COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases its office facilities under various noncancelable-operating
leases. These leases expire at various dates through February 2007 and generally
require monthly payment of the prorata share of common area operating expenses.
Future minimum lease payments under all noncancelable-operating leases, as of
December 31, 2002, are as follows (in thousands):
<Table>
<Caption>
Year ended December 31, Amount
--------
2003 $ 463
2004 308
2005 323
2006 339
2007 57
--------
Total minimum lease payments $ 1,490
========
</Table>
Rent expense was approximately $661,000 for the year ended December 31, 2002.
17
UROAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2002
In August 2001, the Company entered into an amendment to one of its office
facility lease agreements whereby future monthly cash payments due under the
original lease were reduced by approximately $433,000 in aggregate. As
consideration of this amendment, the Company issued approximately $433,000 worth
of fully vested shares of Series B Preferred Stock. This amount was recorded as
an asset to be amortized to rent expense over the remaining lease term. The
Company also entered into another facility lease agreement with the same
landlord commencing in August 2001, which required monthly payments of
approximately $13,000 through November 2005. In March 2002, the Company amended
its agreements with the above landlord, which reduced monthly payments for both
facilities to approximately $13,000 each, but extended the lease term for both
facilities to February 2007. In connection with these amendments, the Company
issued 500,000 shares of Series A-1 Preferred Stock with a value of $96,000.
This amount, along with the $305,000 unamortized balance of the prepaid rent
relating to the Series B Preferred Stock issued in August 2001 existing as of
the lease modification date in March 2002, is being amortized to rent expense on
a straight line basis over the amended lease term.
In connection with the Company's decision to discontinue the operations formerly
conducted by Filanet, in December 2002, the Company gave notice of termination
to the landlord of one of its office facility leases located in Denmark.
Accordingly, the Company accrued $38,000 for a lease termination liability
relating to the fair value of this leasehold and wrote off a $46,000 lease
deposit.
Legal matters
The Company is involved in various other legal proceedings incidental to its
normal business activities. The amount of ultimate liability with respect to
these actions cannot be reasonably estimated. However, in the opinion of
management, any liability resulting from an unfavorable outcome will not
materially affect the financial position of the Company.
Guarantees
The following is a summary of the Company's agreements that have been determined
are within the scope of FIN 45.
Under its bylaws, the Company has agreed to indemnify its officers and directors
for certain events or occurrences arising as a result of the officer or
director's serving in such capacity. The term of the indemnification period is
for the officer's or director's lifetime. The Company has a separate
indemnification agreement with one of its directors that requires it, subject to
certain exceptions, to indemnify him to the fullest extent authorized or
permitted by its bylaws and the California Corporation Code. The maximum
potential amount of future payments the Company could be required to make under
these indemnification agreements is unlimited. The Company believes the
estimated fair value of these indemnification agreements is minimal and has no
liabilities recorded for these agreements as of December 31, 2002.
As a result of the acquisition of Predecessor uRoam, the Company assumed a
potential liability for events or occurrences that took place prior to the date
of acquisition. The maximum potential amount of future payments the Company
could be required to make for such obligations is undeterminable at this time.
Therefore, the Company has no amounts recorded for these possible liabilities as
of December 31, 2002.
The Company enters into indemnification provisions under (i) its agreements with
other companies in its ordinary course of business, typically with business
partners, contractors, and customers, landlords and (ii) its agreements with
investors. Under these provisions the Company generally indemnifies and holds
18
UROAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2002
harmless the indemnified party for losses suffered or incurred by the
indemnified party as a result of the Company's activities or, in some cases, as
a result of the indemnified party's activities under the agreement. These
indemnification provisions often include indemnifications relating to
representations made by the Company with regard to intellectual property rights.
These indemnification provisions generally survive termination of the underlying
agreement. The maximum potential amount of future payments the Company could be
required to make under these indemnification provisions is unlimited. The
Company has not incurred material costs to defend lawsuits or settle claims
related to these indemnification agreements. As a result, the Company believes
the estimated fair value of these agreements is minimal. Accordingly, the
Company has no liabilities recorded for these agreements as of December 31,
2002.
7. REDEEMABLE CONVERTIBLE PREFERRED STOCK
In March 2002, the Board of Directors of the Company consented to the automatic
conversion to common shares of all outstanding shares of Series A and Series B
preferred stock. In accordance with this consent, the Series A and Series B
preferred stock were converted into 181,806 common shares at a 1:1 exchange
ratio immediately prior to the closing of the Series A-1 Offering in March 2002.
In March and April 2002, the Company sold an aggregate of 30,461,570 shares of
Series A-1 Preferred Stock for proceeds totaling $5,410,000 (net of cash
issuance costs of $186,000). In connection with this sale of Series A-1
Preferred Stock, the Company also issued 1,044,386 shares of Series A-1
Preferred Stock in exchange for the cancellation of outstanding principal and
accrued interest totaling $9,080,000 due under certain notes payable.
Additionally, the Company issued 500,000, 65,274, 323,655 and 1,305,478 shares
of fully vested Series A-1 Preferred Stock at $0.1915 per share in exchange for
renegotiation of rental payments, executive search services, accrued
compensation, and severance, respectively. The Company recorded the deemed fair
value of the shares issued for severance ($250,000) and in exchange for
executive search services ($12,000) as an expense in 2002. The fair value of the
shares issued for renegotiation of rental payments ($96,000) is being amortized
to rent expense on a straight line basis over the amended five year term of the
lease agreement.
The significant terms of the preferred stock are as follows:
Conversion Rights. Each share of Series A-1 and Series B-1 preferred stock is
convertible at the option of the holder or will automatically be converted to
common stock upon a public offering of common stock at a public offering price
of at least $0.9575 per share and which yields gross proceeds of at least
$20,000,000 or written consent of at least two thirds of the outstanding shares
of all classes of preferred stock. Each share of Series A-1 preferred stock is
convertible into such number of shares of common stock as determined by dividing
$0.1915 by $0.29070358. According to this conversion ratio, the 33,700,363
shares of Series A-1 preferred stock outstanding as of December 31, 2002 is
convertible into 22,200,000 shares of common stock. Each share of Series B-1
preferred stock is convertible into one share of common stock. The conversion of
preferred stock is subject to adjustment for events of dilution, and the
preferred stock has the same voting rights as the number of common shares into
which it is convertible.
Dividends. If and when declared by the Board of Directors, and in preference to
dividends on the common and Series B-1 preferred Stock, the holders of the
Series A-1 preferred stock are entitled to receive noncumulative dividends of
$0.013405 per share per annum. After the Series A-1 convertible preferred
stockholders receive their dividend preference, any additional dividends shall
be distributed among the holders of Series A-1 Preferred Stock, Series B-1
Preferred Stock and common stock pro rata
19
UROAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2002
based on the number of shares of common stock then held by each holder (assuming
conversion of all preferred stock to common stock).
Redemption rights. The Company shall redeem the Series A-1 Preferred Stock at
any time after January 31, 2006 upon notice from at least two-thirds of the
Series A-1 holders. The Series A-1 Preferred Stock is redeemable at a price of
$0.1915 per share plus all declared or accumulated unpaid dividends. If
redemption of fewer than all of the outstanding shares of Series A-1 Preferred
Stock is requested, the Company shall redeem such stock on a pro rata basis. The
Series B-1 Preferred Stock is not mandatorily redeemable.
Liquidation Preference. Holders of Series A-1 and Series B-1 preferred stock
have a liquidation preference over the common stock holders of $0.1915 per share
for each share of Series A-1 and $0.3085 per share for each share of Series B-1,
plus any declared but unpaid dividends. After this payment to the holders of the
Series A-1 and Series B-1 preferred stock, the entire remaining assets and funds
of the Company shall be distributed among the holders of the common, Series A-1
and Series B-1 preferred stock in proportion to the equivalent number of shares
of common stock on an "as converted basis" then held by them until each holder
of the Series A-1 and Series B-1 preferred stock shall have received $0.5745 and
$0.9255 per share, respectively.
Voting Rights. The holder of each share of Series A-1 and Series B-1 Preferred
Stock shall have the right to one vote for each share of common stock into which
such preferred stock could be converted. With respect to such vote, holders have
full voting rights and powers equal to those of the holders of common stock and
are entitled to notice of any stockholders' meeting.
Because each series of convertible preferred stock has conditions for
liquidation or redemption that are deemed outside the control of the Company,
such preferred stock has been classified outside of stockholders' deficit.
At December 31, 2002, there were 37,038,663 authorized shares of preferred
stock, 33,700,363 shares of which were designated Series A-1 Preferred Stock;
3,338,300 shares of which were designated Series B-1 Preferred Stock.
A summary of Convertible Preferred Stock outstanding at December 31, 2002 is as
follows (in thousands, except share amounts):
<Table>
<Caption>
December 31, 2002
--------
Series A-1, 33,700,363 shares authorized, issued and outstanding (aggregate liquidation
preference and redemption value of $6,454) $ 14,910
Series B-1, 3,338,300 shares authorized; 3,338,286 shares issued and outstanding (aggregate
liquidation preference - $1,030) 1,030
--------
$ 15,940
========
</Table>
8. STOCKHOLDERS' EQUITY
In March 2002, the Board of Directors of the Company declared a reverse stock
split whereby each outstanding share of common stock including outstanding
warrants and options to purchase shares of common stock were converted into
0.00907281 shares of Common Stock. All share and per share amounts have been
adjusted to give effect to this reverse stock split.
20
UROAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2002
Common Stock
During the years ended December 31, 2002 and 2001, the Company issued 450,809
and 5,143 shares of common stock upon the exercise of stock options resulting in
$9,000 and $44,000 of proceeds, respectively.
During the year ended December 31, 2002, 154,912 fully vested shares of common
stock with a value of $3,000 were issued to consultants as compensation for
services rendered.
At December 31, 2002, there were 41,958,300 authorized shares of Common Stock.
1998 Stock Option Plan
The 1998 Stock Option Plan (the "1998 Plan") authorized the grant of options to
purchase up to 8,000,000 shares of the Company's common stock. Under the 1998
Plan, incentive options may be granted at a price per share no less than the
fair market value of common stock at the date of grant. Nonqualified stock
options may be granted at a price per share no less than 85% of the fair market
value on the date of grant. Options granted to any 10% stockholder may have an
exercise price per share that is not less than 110% of the fair market value per
share of common stock on the date of grant. Options granted are immediately
exercisable, and unvested shares are subject to repurchase by the Company at the
amount originally paid. Options granted generally have a maximum term of ten
years and generally vest over four years. In March 2002, the Company terminated
the 1998 Plan and no longer grants stock options or make any additional
issuances under the 1998 Plan. The options vested and existing as of the
termination date under the 1998 Plan were not cancelled as part of the
termination of the 1998 Plan. At December 31, 2002, 15,166 shares issued under
the 1998 Plan were subject to repurchase by the Company at a weighted average
price of $11.33 per share because such shares were not vested.
2002 Stock Option Plan
The 2002 Stock Option Plan (the "2002 Plan") authorized the grant of options to
purchase up to 7,350,000 shares of the Company's common stock. Under the 2002
Plan, incentive options may be granted at a price per share no less than the
fair market value of common stock at the date of grant. Nonqualified stock
options may be granted at a price per share no less than 85% of the fair market
value on the date of grant. Options granted to any 10% stockholder may have an
exercise price per share that is not less than 110% of the fair market value per
share of common stock on the date of grant. Options granted are immediately
exercisable, and unvested shares are subject to repurchase by the Company at the
amount originally paid. Options granted generally have a maximum term of ten
years and generally vest over four years. For certain employees whose employment
commenced prior to December 31, 2001, options vest over the first year at a rate
ranging from 28% to 50%, then ratably over the remaining three years. At
December 31, 2002, 108,334 shares issued under the 2002 Plan were subject to
repurchase by the Company at a weighted average price of $0.02 per share because
such shares were not vested.
21
UROAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2002
Stock option activity under the 1998 and 2002 Plans is summarized as follows:
<Table>
<Caption>
Options Outstanding
Weighted
Number of Average
Shares Exercise Price
------------ --------------
Balance, January 1, 2002 32,492 $ 17.58
Granted (weighted average fair value of $0.01 per share) 7,781,146 0.02
Exercised (450,809) 0.02
Canceled (863,543) 0.31
------------ ------------
Balance, December 31, 2002 6,499,286 $ 0.07
============ ============
</Table>
Options Outstanding
At December 31, 2002, 458,549 shares were available under the 2002 Plan for
future grant. The following table summarizes information concerning stock
options outstanding as of December 31, 2002:
<Table>
<Caption>
Options Outstanding Options Vested
------------------------------------------ ---------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Number of Contractual Exercise Number of Exercise
Range of Exercise Prices Shares Life (Years) Price Shares Price
------------ ------------ ------------ ------------ ------------
$0.02 6,480,951 9.51 $ 0.02 2,991,342 $ 0.02
$5.39 - $22.02 18,335 7.86 17.25 18,335 17.25
------------ ------------ ------------ ------------ ------------
6,499,286 9.50 $ 0.07 3,009,677 $ 0.12
============ ============ ============ ============ ============
</Table>
Non-Employee Stock Options Issued for Services
In 2002, the Company granted 40,000 nonstatutory stock options at an exercise
price of $0.02 per share to nonemployees. The values attributable to the grants
are determinable at each vesting date and have been amortized over the service
period. For the year ended December 31, 2002, the Company recorded $2,000 in
fair value of such awards as an expense using the Black-Scholes option pricing
model with the following assumptions: contractual term of three years; risk-free
interest rate of 4.49%; annualized volatility of 70% and no dividends during the
expected term.
The Company allows the early exercise of certain employee and non-employee stock
options, resulting in the exercise of 450,809 stock options and $9,000 in
proceeds to the Company in 2002. However, under the terms of the Early Exercise
and Restricted Stock Purchase Agreement entered into with these individuals, the
Company reserves the right to repurchase any unvested shares at the original
price per share over the remaining option vesting period. As of December 31,
2002, 123,500 stock options exercised under this arrangement with an aggregate
exercise price totaling $174,000 may be repurchased by the Company.
22
UROAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2002
Warrants
On January 1, 2002, the Company had 924 and 108 warrants outstanding to purchase
Series A and Series B Preferred Stock at an exercise price of $59.52 and
$217.13, respectively. These warrants expire at various dates through October
2007. These warrants were amended to purchase shares of common stock at the
exercise prices noted above in connection with the conversion of the Series A
and Series B Preferred Stock to common stock in March 2002 and were still
outstanding as of December 31, 2002.
In 2002, in connection with obtaining bridge financing in the form of Secured
Convertible Promissory Notes, the Company issued warrants to purchase 2,154,992
shares of common stock at $0.02 per share with a term of ten years. The warrants
were valued at $35,000 using the Black-Scholes pricing model with the following
assumptions: contractual life of ten years; risk free interest rate of 4.26%;
volatility of 70% and no dividends during the expected term. The value of the
warrants was classified as a debt discount, of which $12,000 was amortized to
interest expense in 2002.
In 2002, in connection with a guarantee of a line of credit provided by the
Company's majority stockholders, the Company issued warrants to purchase common
stock at $0.02 per share with a term of approximately 3 1/2 years. The number of
shares of common stock that can be purchased under the warrants is 2,067,958
plus 516,988 warrants for every month that the guarantee on the line of credit
is outstanding. The 3,101,934 warrants issued during 2002 were valued at
approximately $38,000 using the Black-Scholes option pricing model with the
following assumptions: contractual life of 3 1/2 years; risk-free interest rate
range of 4.26%; volatility of 70% and no dividends during the expected term. The
entire value of the warrants was recorded as interest expense in 2002.
At December 31, 2002, the Company had 5,257,958 warrants outstanding to purchase
common stock with a weighted average exercise price of $0.03 per share.
Common Stock Reserved
The Company has reserved shares of common stock for issuance at December 31,
2002 as follows:
<Table>
Conversion of Series A-1 Preferred Stock 22,200,000
Conversion of Series B-1 Preferred Stock 3,338,286
Exercise of stock options 6,060,947
Options available under the 2002 Plan for future grant 458,549
Exercise of warrants and conversion of underlying stock 5,257,958
-------------
Total 37,315,740
=============
</Table>
9. RELATED PARTY TRANSACTIONS
As more fully described in Note 5, the Company received bridge loans from its
majority stockholders. As of December 31, 2002, the balance of these bridge
notes due to majority stockholders was $4,381,000. In addition, the Company's
majority shareholders have guaranteed the Company's line of credit with a bank.
In connection with this guarantee, the Company issued 3,101,934 warrants to
purchase common stock at $0.02 per share to the guarantors during 2002.
23
UROAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2002
10. INCOME TAXES
The Company accounts for income taxes using an asset and liability approach.
Deferred tax liabilities are recognized for future taxable amounts and deferred
tax assets are recognized for future deductions and operating loss
carryforwards, net of a valuation allowance to reduce net deferred tax assets to
amounts more likely than not to be realized. No income taxes were provided for
any periods presented due to the Company's net losses.
The Company's deferred income tax assets at December 31, 2002 are comprised of
the following (in thousands):
<Table>
Net deferred tax assets:
Net operating loss carryforwards $ 18,203
Deferred income 89
Accruals deductible in different periods 91
Research and development credits 1,693
Depreciation and amortization (27)
------------
Total deferred tax assets 20,049
Valuation allowance (20,049)
------------
Net deferred tax assets $ --
============
</Table>
Due to the uncertainty surrounding the realization of the benefits of its
favorable tax attributes in future tax returns, as of December 31, 2002, the
Company has fully reserved its net deferred tax assets.
At December 31, 2002, the Company has available net operating loss ("NOL")
carryforwards of approximately $46,000,000 and $35,000,000 to offset future
federal and state taxable income, respectively. The federal NOL carryforwards
expire in various years through 2022, while the state NOL carryforwards expire
in various years through 2010.
At December 31, 2002, the Company also has research and development credit
carryforwards of approximately $765,000 and $928,000 available to offset future
federal and state income taxes, respectively. The federal credit carryforward
expires in various years through 2022, while the state credit carryforward has
no expiration.
Current tax laws impose substantial restrictions on the utilization of net
operating loss and credit carryforwards in the event of an "ownership change,"
as defined by the Internal Revenue Code. If there should be an ownership change,
the Company's ability to utilize its carryforwards could be limited. California
has disallowed the use of net operating losses in the 2002 and 2003 tax years.
11. SUBSEQUENT EVENTS
In January 2003, the Company entered into a memorandum of understanding with a
creditor providing equipment financing under capital leases whereby the creditor
agreed to forebear collecting January and February rental payments until
February 28, 2003, at which time all past due rental payments would be payable.
The Company did not make the required February 28, 2003 payment or the March
through June 2003 monthly payments due under the master lease agreement. This
represents an event of default under the master lease agreement, which allows
the creditor to request an acceleration of the remaining payments due from the
Company. As of December 31, 2002, the Company owed $705,000 to this
24
UROAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2002
creditor under the master lease agreement, all of which is reflected in total
liabilities of discontinued operations.
In January and February 2003, the Company received $506,000 of additional bridge
loans from its majority stockholders under the same terms as the previous 2002
Bridge Loans.
In March, April, May, and June 2003, the Company entered into successive
amendments to its revolving line of credit, which have ultimately increased the
principal amount to $6.453 million. Additionally, the maturity date for the line
of credit was extended to July 15, 2003. In connection with these amendments,
the guarantors of the line of credit continued to increase their guarantee of
the Company's debt under the line of credit to the amended principal amount.
On April 29, 2003, the Company entered into a memorandum of understanding with
one of its landlords providing the Company the option to terminate two of its
office facility lease agreements. Under the terms of this agreement, the Company
would continue to pay rentals due under the lease agreements through the
projected lease termination date on July 31, 2003, at which time the Company had
the option to make a termination payment of approximately $313,000 and forego
the $50,000 security deposit on the leases. In July 2003, the Company terminated
these leases and $334,000 of prepaid rents relating to the issuance of Series B
and Series A-1 preferred stock, of which $167,000 is reflected in total assets
of discontinued operations, was written off.
Subsequent to December 31, 2002, the Company entered into settlement agreements
with certain of its vendors which provided for the settlement and release from
payment of approximately $280,000 of trade accounts payable. The effects of
these settlement agreements will be recorded in the period that the settlement
agreement was entered into.
On June 30, 2003, the Company signed a non-binding term sheet whereby
substantially all of the Company's assets would be acquired. The completion of
the merger transaction is contingent upon, among other things, the satisfactory
performance of due diligence and execution of a definitive merger agreement.
On July 2, 2003, the Company received a copy of a complaint filed by a company
alleging breach of contract and other claims related to exclusivity provisions
of a March 2003 cover letter for a preliminary non-binding term sheet in
contemplation of the plaintiff's proposed acquisition of the Company. The
complaint indicates that the plaintiff incurred damages of no less than $2
million and seeks to recover all damages and require the Company's performance
with respect to the March 2003 letter agreement. The Company believes that the
complaint is without merit and has hired litigation counsel to defend itself
vigorously should the plaintiff continue to pursue its claims.
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