EXHIBIT 99.1
Report of Independent Auditors
The Board of Directors
IDS Software Systems, Inc.
We have audited the accompanying balance sheets of IDS Software Systems, Inc. as
of September 30, 2002 and 2001, and the related statements of operations,
stockholders' deficit, 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 auditing standards generally accepted
in the United States. 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, the financial statements referred to above present fairly, in
all material respects, the financial position of IDS Software Systems, Inc. at
September 30, 2002 and 2001, and the results of its operations and its cash
flows for the years then ended in conformity with accounting principles
generally accepted in the United States.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As more fully described in Note 1, the
Company has a working capital deficiency, expects to experience cash flow
problems in its operations and has a stockholders' deficit of $3,833,589. These
conditions raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regard to these matters are also described
in Note 1. The financial statements do not include any adjustments to reflect
the possible future effects on the recoverability and classification of assets
or the amounts and classification of liabilities that may result from the
outcome of this uncertainty.
(Ernst & Young LLP)
November 12, 2002,
Palo Alto, California
1
IDS Software Systems, Inc.
Balance Sheets
SEPTEMBER 30 JUNE 30
2002 2001 2003
-------------------------------------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 312,474 $ 33,301 $ 33,850
Investments 16,997 808,440 -
Accounts receivable, net 1,072,497 188,286 917,415
Taxes receivable - - 238,200
Prepaid expenses and other current assets 57,879 26,933 122,083
-------------------------------------------
Total current assets 1,459,847 1,056,960 1,311,548
Property and equipment, net 351,101 250,163 300,757
Deferred tax asset 111,575 321,464 111,575
Deposits 112,974 101,546 85,052
-------------------------------------------
Total assets $ 2,035,497 $ 1,730,133 $ 1,808,932
===========================================
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Line of credit $ 500,000 $ - $ -
Accounts payable 716,673 813,283 401,567
Accrued expenses 435,031 326,456 722,155
Deferred revenue 3,776,913 6,260,839 4,304,817
Deferred rent 90,391 55,497 81,241
Taxes payable 350,078 850,223 -
Short-term debt - 444,590 -
-------------------------------------------
Total current liabilities 5,869,086 8,750,888 5,509,780
Line of credit - 120,000 -
Commitments and contingencies (Note 4)
Stockholders' deficit:
Common stock, $.001 par value:
Authorized shares - 40,000,000; 15,821,620, 15,766,320
and 15,781,620 shares issued and outstanding as of
September 30, 2002 and 2001 and June 30, 2003,
respectively 15,821 15,766 15,781
Additional paid-in capital 4,358,100 4,341,565 6,212,213
Deferred stock compensation - - (425,199)
Notes receivable from stockholders (3,008,271) (2,763,422) (3,050,877)
Accumulated other comprehensive loss - (76,327) -
Accumulated deficit (5,199,239) (8,658,337) (6,452,766)
-------------------------------------------
Total stockholders' deficit (3,833,589) (7,140,755) (3,700,848)
-------------------------------------------
Total liabilities and stockholders' deficit $ 2,035,497 $ 1,730,133 $ 1,808,932
===========================================
See accompanying notes.
2
IDS Software Systems, Inc.
Statements of Operations
YEAR ENDED SEPTEMBER 30 NINE MONTHS ENDED JUNE 30
2002 2001 2003 2002
----------------------------------------------------------
(UNAUDITED) (UNAUDITED)
Revenues:
License $ 5,456,009 $ 1,256,828 $ 1,783,073 $ 1,395,794
Service 3,230,950 2,609,411 2,801,073 2,494,781
----------------------------------------------------------
Total revenues 8,686,959 3,866,239 4,584,146 3,890,575
Costs and expenses:
Cost of license revenue 76,432 174,465 17,151 80,827
Cost of service revenue 259,264 156,325 433,547 160,276
Product development 2,912,805 3,073,582 2,598,194 2,145,448
Sales and marketing 732,815 873,815 810,933 506,760
General and administrative 794,017 792,867 959,255 536,029
Stock compensation expense - 333,028 1,409,419 -
----------------------------------------------------------
Total costs and expenses 4,775,333 5,404,082 6,228,499 3,429,340
----------------------------------------------------------
Income (loss) from operations 3,911,626 (1,537,843) (1,644,353) 461,235
Interest and other income 156,639 108,938 58,466 132,184
Interest and other expense 359,649 550,307 125,880 96,994
----------------------------------------------------------
Income (loss) before taxes 3,708,616 (1,979,212) (1,711,767) 496,425
Provision (benefit) for income taxes 249,518 376,701 (458,240) 33,417
----------------------------------------------------------
Net income (loss) $ 3,459,098 $(2,355,913) $(1,253,527) $ 463,008
==========================================================
See accompanying notes.
3
IDS Software Systems, Inc.
Statements of Stockholders' Deficit
COMMON STOCK ADDITIONAL DEFERRED
----------------------------- PAID-IN STOCK
SHARES PAR VALUE CAPITAL COMPENSATION
---------------------------------------------------------------
Balances at September 30, 2000 15,574,320 $ 15,574 $ 4,006,809 $ -
Unrealized loss on available-for-sale securities - - - -
Net loss - - - -
Comprehensive loss - - - -
Sale of common stock to Directors 192,000 192 1,728 -
Stock compensation - - 333,028 -
Net advances to stockholder - - - -
---------------------------------------------------------------
Balances at September 30, 2001 15,766,320 15,766 4,341,565 -
Realized loss on available-for-sale securities - - - -
Net income - - - -
Comprehensive income - - - -
Sale of common stock 7,300 7 2,183 -
Exercise of options to purchase common stock 48,000 48 14,352 -
Net advances to stockholder - - - -
---------------------------------------------------------------
Balances at September 30, 2002 15,821,620 15,821 4,358,100 -
NOTES RECEIVABLE ACCUMULATED OTHER TOTAL
FROM COMPREHENSIVE ACCUMULATED STOCKHOLDERS'
STOCKHOLDERS LOSS DEFICIT DEFICIT
-------------------------------------------------------------------
Balances at September 30, 2000 $ (2,194,036) $ (74,122) $ (6,302,424) $ (4,548,199)
Unrealized loss on available-for-sale securities - (2,205) - (2,205)
Net loss - - (2,355,913) (2,355,913)
------------
Comprehensive loss - - - (2,358,118)
Sale of common stock to Directors - - - 1,920
Stock compensation - - - 333,028
Net advances to stockholder (569,386) - - (569,386)
--------------------------------------------------------------------
Balances at September 30, 2001 (2,763,422) (76,327) (8,658,337) (7,140,755)
Realized loss on available-for-sale securities - 76,327 - 76,327
Net income - - 3,459,098 3,459,098
------------
Comprehensive income - - - 3,535,425
Sale of common stock - - - 2,190
Exercise of options to purchase common stock - - - 14,400
Net advances to stockholder (244,849) - - (244,849)
-------------------------------------------------------------------
Balances at September 30, 2002 (3,008,271) - (5,199,239) (3,833,589)
4
<Caption>
COMMON STOCK ADDITIONAL DEFERRED
--------------------------- PAID-IN STOCK
SHARES PAR VALUE CAPITAL COMPENSATION
--------------------------------------------------------------
Net loss and comprehensive loss (unaudited) - - - -
Issuance of common stock in exchange for
services (unaudited) 12,000 12 11,988 -
Exercise of options to purchase common stock
(unaudited) 2,500 3 747 -
Repurchase of common stock (unaudited) (79,500) (80) (715) -
Deferred stock compensation on stock options
issued to employees (unaudited) - - 454,713 (454,713)
Amortization of deferred stock compensation
(unaudited) - - - 29,514
Stock compensation expense related to stock
transfers by a principal stockholder
(unaudited) - - 1,128,400 -
Stock compensation expense related to
modifications of stock options and to grants
of stock options to non-employees (unaudited) - - - 251,505 -
Net advances to stockholder (unaudited) - - -
Exercise of options to purchase common stock
for a note receivable (unaudited) 25,000 25 7,475 -
--------------------------------------------------------------
Balances at June 30, 2003 (unaudited) 15,781,620 $ 15,781 $ 6,212,213 $ (425,199)
==============================================================
<Caption>
NOTES RECEIVABLE ACCUMULATED TOTAL
FROM COMPREHENSIVE ACCUMULATED STOCKHOLDERS'
STOCKHOLDERS LOSS DEFICIT DEFICIT
-----------------------------------------------------------------
Net loss and comprehensive loss (unaudited) - - (1,253,527) (1,253,527)
Issuance of common stock in exchange for
services (unaudited) - - - 12,000
Exercise of options to purchase common stock
(unaudited) - - - 750
Repurchase of common stock (unaudited) - - - (795)
Deferred stock compensation on stock options
issued to employees (unaudited) - - - -
Amortization of deferred stock compensation
(unaudited) - - - 29,514
Stock compensation expense related to stock
transfers by a principal stockholder
(unaudited) - - - 1,128,400
Stock compensation expense related to
modifications of stock options and to grants
of stock options to non-employees (unaudited) - - - - 251,505
Net advances to stockholder (unaudited) (35,106) - - (35,106)
Exercise of options to purchase common stock
for a note receivable (unaudited) (7,500) - - -
-----------------------------------------------------------------
Balances at June 30, 2003 (unaudited) $ (3,050,877) $ - $ (6,452,766) $ (3,700,848)
=================================================================
See accompanying notes.
5
IDS SOFTWARE SYSTEMS, INC.
Statements of Cash Flows
YEAR ENDED SEPTEMBER 30 NINE MONTHS ENDED JUNE 30
2002 2001 2003 2002
-----------------------------------------------------------
(UNAUDITED) (UNAUDITED)
OPERATING ACTIVITIES
Net income (loss) $ 3,459,098 $(2,355,913) $(1,253,527) $ 463,008
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Stock compensation expense related to stock and stock
options issued for services - 333,028 1,421,419 -
Realized loss on available-for-sale securities 316,757 497,165 2,383 62,027
Depreciation and amortization 154,328 119,102 127,277 88,908
Net changes in operating assets and liabilities:
Accounts receivable (884,211) 288,217 155,082 (2,201,693)
Prepaid expenses and other current assets (30,946) 40,258 (64,204) (22,017)
Taxes receivable - - (238,200) -
Deferred tax asset 209,889 (21,490) - -
Deposits (11,428) (101,546) 27,922 (2,700)
Accounts payable (96,610) (111,675) (315,106) 75,831
Accrued expenses 108,575 166,268 287,124 (58,204)
Deferred revenue (2,483,926) 1,997,740 527,904 1,857,326
Deferred rent 34,894 55,497 (9,150) 40,362
Taxes payable (500,145) 333,856 (350,078) (501,011)
-----------------------------------------------------------
Net cash provided by (used in) operating activities 276,275 1,240,507 318,846 (198,163)
INVESTING ACTIVITIES
Purchases of available-for-sale securities (328,596) (2,260,935) - (298,172)
Sales of available-for-sale securities 879,609 1,456,709 14,614 310,327
Purchases of property and equipment (255,266) (179,926) (76,933) (199,764)
-----------------------------------------------------------
Net cash provided by (used in) investing activities 295,747 (984,152) (62,319) (187,609)
FINANCING ACTIVITIES
Proceeds from borrowings on line of credit and short-term debt 2,553,000 327,791 - 380,000
Repayments of borrowings on line of credit and short-term debt (2,617,590) - (500,000) (53,428)
Proceeds from issuance of common stock 16,590 1,920 750 16,590
Repurchase of common stock - - (795) -
Net advances to stockholder (244,849) (569,386) (35,106) 46,313
Repayment of loans from stockholders - (71,000) - -
-----------------------------------------------------------
Net cash used in financing activities (292,849) (310,675) (535,151) 389,475
-----------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 279,173 (54,320) (278,624) 3,703
Cash and cash equivalents at beginning of period 33,301 87,621 312,474 33,301
-----------------------------------------------------------
Cash and cash equivalents at end of period $ 312,474 $ 33,301 $ 33,850 $ 37,004
===========================================================
SUPPLEMENTAL DISCLOSURES
Cash paid for interest $ 30,298 $ 11,913 $ 16,309 $ 10,831
===========================================================
Cash paid for income taxes $ 540,248 $ 70,000 $ 69,000 $ 58,750
===========================================================
See accompanying notes.
6
IDS SOFTWARE SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION, DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
IDS Software Systems, Inc. (the "Company" or "IDS") was incorporated in
California on October 4, 1991. The Company was reincorporated in Delaware on
January 22, 2001. The Company provides data and yield management software tools
used by the semiconductor and related industries. The Company markets its
products primarily in the United States, Europe and Japan.
A majority of the Company's stock is owned and controlled by its founder and
Chief Technology Officer ("CTO") and his spouse (the "Controlling
shareholders"). The CTO also owns and controls a software development and
service business, Global Software Services Inc. ("GSSI"), located in the
Palestinian Authority, that provided services to the Company during 2001 and a
part of 2002. The accompanying financial statements present only the accounts of
IDS Software Systems, Inc. The Company operates primarily in one segment, the
license, implementation and support of its software applications. Since the
Company operates in one segment and in one group of similar products and
services, all financial segment and product line information required by SFAS
No. 131 can be found in the financial statements.
In January 1999, the Company entered into a consulting services and software
development agreement with GSSI pursuant to which GSSI performed development and
support services for the Company. These services included software development,
as well as customization services provided under specific customer arrangements.
The accompanying financial statements include charges of $240,000 and $1,361,183
for services invoiced by GSSI to the Company for the years ended September 30,
2002 and 2001, respectively, and are classified as product development expenses.
The Company had recorded liabilities for services invoiced by GSSI to the
Company of $650,000 and $400,000 as of September 30, 2001 and 2002, respectively
and $100,000 as of June 30, 2003. This agreement was terminated effective June
30, 2002.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. The Company has a working capital deficiency,
expects to experience cash flow problems in its operations and has a
stockholders' deficit of $3,833,589 as of September 30, 2002. Future financing
requirements depend on many factors, including the Company's ability to execute
its business plan. Should additional financing be required, there can be no
assurance that the Company will be able to raise additional financing or that
financing will be available on satisfactory terms. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
IDS SOFTWARE SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ORGANIZATION, DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION (CONTINUED)
The accompanying financial statements do not include any adjustments to reflect
the future possible effects on the recoverability and classification of assets
and liabilities that may results from the outcome of this uncertainty.
Management believes that, to the extent that existing resources and anticipated
revenues are insufficient to fund the Company's planned activities, additional
debt or equity financing will be available from existing investors or others.
See note 8 regarding discussion of acquisition by PDF Solutions, Inc.
UNAUDITED INTERIM FINANCIAL INFORMATION
The interim financial statements as of June 30, 2003 and for the nine months
ended June 30, 2003 and 2002 are unaudited but they include all adjustments,
consisting only of normal recurring adjustments that management considers
necessary for a fair presentation of the Company's financial position at that
date and its results of operations and cash flows for those periods. Operating
results for such periods are not necessarily indicative of results to be
expected for the full fiscal year or for any other future periods.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make certain
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. Actual results could differ from those estimates.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentrations of
risk include cash and cash equivalents and trade receivables. Cash and cash
equivalents consist primarily of demand deposits, money market accounts and
highly liquid instruments with original maturities of three months or less
primarily held with one financial institution with a high credit rating.
The Company performs ongoing credit evaluations of its customers and generally
does not require collateral. Losses on accounts receivable have been
insignificant to date and the Company has not established a reserve for doubtful
accounts receivable. Future credit losses may differ from the Company's
estimates and could have a material impact on the Company's future results of
operations. For the year ended September 30, 2002, four customers individually
accounted for approximately 28%, 21%, 21% and 16% of revenues. For the year
ended September 30, 2001, three customers individually accounted
8
IDS SOFTWARE SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CONCENTRATION OF CREDIT RISK (CONTINUED)
for approximately 23%, 22%, and 12% of revenues. For the nine months ended June
30, 2003, three customers accounted for 22%, 21% and 12 % of revenues. For the
nine months ended June 30, 2002, three customers individually accounted for 44%,
18% and 13% of revenues. As of September 30, 2002, three customers individually
represent 54%, 11% and 9% of trade receivables. As of September 30, 2001, three
customers individually represent 31%, 28%, and 16% of trade receivables. As of
June 30, 2003, three customers individually represent 35%, 32% and 15% of trade
receivables.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash and cash equivalents, accounts receivable, accounts payable, and accrued
liabilities are carried at cost, which approximates fair value due to the short
maturity of these instruments.
INVESTMENTS
The Company accounts for its investments in marketable securities in accordance
with Statement of Financial Accounting Standards No. 115, Accounting for Certain
Investments in Debt and Equity Securities ("SFAS 115"). Under SFAS 115, all debt
and equity securities must be classified as held to maturity, trading or
available for sale. Management determines the appropriate classification of
securities at the time of purchase and reevaluates such designation as of each
balance sheet date.
All investments in marketable securities have been classified as available for
sale. Available-for-sale securities are recorded at fair value, with unrealized
gains and losses reported as a separate component of stockholders' deficit, if
material. Realized gains and losses and decline in value judged to be other than
temporary, if any, on available-for-sale securities are included in other
income. The cost of securities sold is based on the specific- identification
method. Interest on securities classified as available for sale is included in
interest income.
The Company records the fair value of marketable securities based on current
quoted market prices. At September 30, 2002 and 2001, cash equivalents and cost
of investments in marketable securities and their approximate fair values are as
follows:
9
IDS SOFTWARE SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVESTMENTS (CONTINUED)
2002
---------------------------------------------------
UNREALIZED FAIR MARKET
COST LOSSES VALUE
---------------------------------------------------
Cash and cash equivalents $ 312,474 $ - $ 312,474
Marketable securities 16,997 - 16,997
---------------------------------------------------
$ 329,471 $ - $ 329,471
===================================================
2001
---------------------------------------------------
UNREALIZED FAIR MARKET
COST LOSSES VALUE
---------------------------------------------------
Cash and cash equivalents $ 33,301 $ - $ 33,301
Marketable securities 884,767 (76,327) 808,440
---------------------------------------------------
$ 918,068 $ (76,327) $ 841,741
===================================================
The company had no marketable securities as of June 30, 2003.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets, typically three years for computer equipment and
five years for furniture, fixtures and office equipment.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates the recoverability of long-lived assets in accordance with
Statement of Financial Accounting Standards No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of
("SFAS 121"). SFAS 121 requires recognition of impairment of long-lived assets
if the net book value of such assets exceeds the estimated future undiscounted
cash flows attributable to such assets.
10
IDS SOFTWARE SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
IMPAIRMENT OF LONG-LIVED ASSETS (CONTINUED)
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets ("SFAS 144"). The Company adopted SFAS 144 on
October 1, 2002. The provisions of this statement did not have a significant
impact on the Company's financial condition or operating results.
REVENUE RECOGNITION
The Company derives revenue principally from software license sales, software
maintenance, integration services, training and consulting services. The Company
recognizes revenue in accordance with Statement of Position ("SOP") 97-2,
Software Revenue Recognition, as amended, and in certain instances in accordance
with SOP 81-1, Accounting for Performance of Construction-Type and Certain
Production-Type Contracts.
License fee revenues are recognized when a binding agreement is in force, the
product has been shipped, the license fee is fixed or determinable, and
collectibility is probable. If the fee is not fixed or determinable, revenue is
recognized as payments become due from the customer. Certain of the Company's
software arrangements include rights to multiple software products and/or
services. The Company allocates the total fee among each of the deliverables
using the residual method. Revenue is allocated to undelivered elements based on
vendor-specific objective evidence ("VSOE") of fair value of such undelivered
elements and the residual amounts of revenue are allocated to delivered
elements. If no VSOE of fair value exists for undelivered elements, the Company
defers all revenue until the Company has delivered all elements or until VSOE of
fair value is established for the undelivered elements.
If the services are essential to the functionality of the software or payment of
the license fees is dependent upon the performance of the services, both the
software license and consulting fees are recognized under the completed contract
method of contract accounting upon completion of the contract or customer's
acceptance. Due to the unique requirements contracted by customers in these
instances, the Company is unable to accurately estimate contract costs for each
arrangement.
Software maintenance revenues are recognized ratably over the term of the
maintenance period, which is generally one year. Software maintenance includes
unspecified product maintenance updates on an if and when available basis,
Internet-based technical support and telephone support. Revenues derived from
consulting and integration services, which
11
IDS SOFTWARE SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION (CONTINUED)
are not essential to the functionality of the software, under time and materials
arrangements and for training are recognized as services are performed.
Deferred revenue is primarily comprised of support revenue not yet earned and
deferred license revenue as a result of undelivered elements and or extended
payment terms.
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company accounts for employee stock options in accordance with Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees ("APB
25"), and has adopted the disclosure-only option of the Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation ("SFAS
123"). Equity instruments issued to non-employees are accounted for at their
fair value at the date of grant. Options granted to non-employees are accounted
for using the Black-Scholes method prescribed by SFAS 123 in accordance with
Emerging Issues Task Force consensus No. 96-18, Accounting for Equity
Instruments That Are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services.
ADVERTISING EXPENSE
Advertising costs are expensed when incurred and included in sales and marketing
expense. The Company had $48,401, $100,371 and $49,567 of advertising costs for
the years ended September 30, 2002 and 2001, and the nine months ended June 30,
2003, respectively.
SOFTWARE DEVELOPMENT COSTS
The Company accounts for software development costs in accordance with Statement
of Financial Accounting Standards No. 86, Accounting for the Costs of Computer
Software to be Sold, Leased, or Otherwise Marketed, under which certain software
development costs incurred subsequent to the establishment of technological
feasibility are capitalized and amortized over the estimated lives of the
related products. Technological feasibility is established upon completion of a
working model. To date, the Company has not incurred significant costs
subsequent to the establishment of its products' technological feasibility.
Therefore, all software development costs have been charged to product
development expense in the accompanying statements of operations.
12
IDS SOFTWARE SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
The Company uses the liability method to account for income taxes as required by
Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes. Under this method, deferred tax assets and liabilities are determined
based on differences between financial reporting and tax bases of assets and
liabilities. Deferred tax assets and liabilities are measured using enacted tax
rates and laws that will be in effect when the differences are expected to
reverse.
OTHER COMPREHENSIVE INCOME (LOSS)
Other comprehensive income (loss) includes other changes to stockholders' equity
not reflected in net income (loss). The Company's components of other
comprehensive income (loss) consist of unrealized gain/loss on
available-for-sale securities.
2. RELATED PARTY TRANSACTIONS
As further described in Note 1, Organization, Description of Business and Basis
of Presentation, and Note 6, Shareholders' Deficit, the accompanying financial
statements include significant transactions with GSSI, an entity owned and
controlled by the Company's founder and CTO.
See Note 6 of the financial statements with regard to shares of common stock
granted to employees and others and with regard to loans of $3,008,271 as of
September 30, 2002 to the Company's founder and CTO.
13
IDS SOFTWARE SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. PROPERTY AND EQUIPMENT
Property and equipment and software license at cost consist of the following:
SEPTEMBER 30, 2003 JUNE 30,
2002 2001 2003
---------------------------------------------
(UNAUDITED)
Computer equipment $ 464,883 $ 429,600 $ 484,040
Furniture, fixtures and office equipment 277,708 257,725 281,484
Software license 200,000 - 254,000
---------------------------------------------
942,591 687,325 1,019,524
Less accumulated depreciation (591,490) (437,162) (718,767)
---------------------------------------------
$ 351,101 $ 250,163 $ 300,757
=============================================
4. COMMITMENTS AND CONTINGENCIES
The Company leases its office facilities under two noncancelable operating
leases, which expire in 2004 and 2007.
The future minimum lease payments for operating leases are as follows:
For years ending September 30,
2003 $ 362,504
2004 391,560
2005 122,082
2006 86,198
2007 89,760
-----------------
Total minimum lease payments $ 1,052,104
=================
Rent expense aggregated approximately $291,000, $211,000 and $302,979 for the
years ended September 30, 2002 and 2001 and for the nine months ended June 30,
2003, respectively.
14
IDS SOFTWARE SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. COMMITMENTS AND CONTINGENCIES (CONTINUED)
From time to time, the Company may be subject to legal proceedings and claims in
the ordinary course of business. These claims, even if not meritorious, could
result in the expenditure of significant financial and other resources. The
Company is not currently aware of any material legal proceedings or claims, and
management does not believe that the Company is subject to claims that would
constitute material contingencies.
5. BORROWING ARRANGEMENTS
In September 2001, the Company entered into a loan and security agreement with a
bank, which provides for borrowings of up to $500,000 for general corporate
purposes. All outstanding principal plus accrued unpaid interest was due on
November 15, 2002. Borrowings bear interest at the bank's prime rate plus 150
base points (7.5% at September 30, 2002) and are secured by the Company's
equipment and accounts receivable, along with a personal guaranty given by the
Company's founder and CTO. As of September 30, 2002, outstanding borrowings
under the line of credit amounted to $500,000.
6. SHAREHOLDERS' DEFICIT
COMMON STOCK
The Company is authorized to issue 40,000,000 shares of common stock.
In January 1999, the Company sold 10,172,990 shares of common stock to
employees, and others for $.001 per share. The Company determined the fair value
to be $0.395 per share and recorded a total compensation charge of $4,006,809.
(See Note 1, Accounting for Stock-Based Compensation.)
In February 2001, the Company sold 192,000 shares of common stock to members of
the Board of Directors for a price of $.01 per share. The Company determined
that the fair value per share was $1.7445 and a total compensation charge of
$333,028 was recorded.
The fair values of $0.395 and $1.7445 in the years 1999 and 2001, respectively,
were determined based on a valuation from a proposed merger transaction in June
2002. The compensation charge recorded was noncash based.
15
IDS SOFTWARE SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. SHAREHOLDERS' DEFICIT (CONTINUED)
COMMON STOCK (CONTINUED)
During nine months ended June 30, 2003, the Company granted options to purchase
1,749,000 shares of the Company's common stock to employees. Deferred stock
compensation of $454,713 was recorded during the nine months ended June 30,
2003, for the excess of fair value of the common stock underlying the options at
the date of grant over the exercise price of the options. This amount is being
amortized on a straight-line basis over the vesting period, generally four
years.
In June 2003, the Company's CTO who is majority shareholder transferred 620,000
of his personal shares in the Company to two employees. While the issuance of
such shares was not made directly by the Company, it has been deemed a capital
contribution for accounting purposes and accordingly, the Company has recognized
stock-based compensation expense of $1,128,400 during nine months ended June 30,
2003, as a result of this transaction.
STOCK SPLIT
In October 2001, the Company completed a 10-for-1 stock split of the common
stock. All share information presented in these financial statements has been
updated to reflect this stock split.
STOCK OPTION/STOCK ISSUANCE PLAN
In October 2001, the Company adopted a stock option plan. The Company issued
options for 1,580,000 shares of common stock to employees and an option for
48,000 shares of common stock to a consultant. The options generally vest at 25%
after the first year and then at 1/48 of the granted options at each month
thereafter. All options expire 10 years after the grant date. The vesting for
certain options is accelerated upon a change in control.
16
IDS SOFTWARE SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. SHAREHOLDERS' DEFICIT (CONTINUED)
STOCK OPTION/ISSUANCE PLAN (CONTINUED)
Information related to the Plan for the year ended September 30, 2002 is as
follows:
OUTSTANDING OPTIONS
-----------------------------
WEIGHTED-
SHARES AVERAGE
AVAILABLE NUMBER EXERCISE
FOR GRANT OF SHARES PRICE
---------------------------------------------
Shares authorized in 2002 3,000,000
Options and stock purchase rights granted (1,628,000) 1,628,000 $ 0.67
Options and stock purchase rights exercised - (48,000) $ 0.30
---------------------------------------------
Balance at September 30, 2002 1,372,000 1,580,000 $ 0.69
=============================================
The outstanding options at September 30, 2002 have exercise prices of $0.30 to
$1.00 and a weighted-average remaining contractual life of 9.73 years.
The weighted-average fair value of the options granted during the year ended
September 30, 2002 was $0.69.
In accordance with the provisions of SFAS 123, the Company applies APB 25 and
related interpretations in accounting for its stock option plans and stock
purchase plan. Accordingly, the Company does not recognize compensation cost for
stock options to employees granted at fair market value.
The effect of applying the minimum value method of SFAS 123 to options granted
to employees in 2002 and the nine-month period ended June 30, 2003 did not
result in pro forma net income (loss) that is materially different from the
amount reported. Therefore, such pro forma information is not presented herein.
The minimum value method was applied using the following weighted-average
assumptions for 2002 and the nine months ended June 30, 2003: a risk-free
interest rate of 4.0%, an expected life of five years, and no dividends.
17
IDS SOFTWARE SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. SHAREHOLDERS' DEFICIT (CONTINUED)
LOANS RECEIVABLE FROM STOCKHOLDER
Included within stockholders' deficit in the accompanying financial statements
at September 30, 2002 and 2001, are amounts receivable from the Company's
CTO/majority stockholder of approximately $3,000,000 and $2,763,000,
respectively. The loan is unsecured, accrues interest at 6.0% per annum and is
due on November 30, 2003.
7. INCOME TAXES
The provision for income taxes in fiscal 2002 and 2001 consists of the
following:
2002 2001
---------------------------------
Current:
Federal $ 38,829 $ 306,958
State 800 91,233
---------------------------------
39,629 398,191
Deferred:
Federal 209,889 (21,490)
State - -
---------------------------------
209,889 (21,490)
---------------------------------
Total provision for income taxes $ 249,518 $ 376,701
=================================
18
IDS SOFTWARE SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. INCOME TAXES (CONTINUED)
The reconciliations of the provision (benefit) for income taxes computed at the
U.S. federal statutory tax rate to the effective rates are as follows:
2002 2001
-------------------------
U. S. statutory rate $ 1,260,929 $ (672,932)
State income taxes 528 60,214
Changes in valuation allowance (960,644) 873,579
Utilization of research credit (53,647) -
Stock compensation expense - 113,230
Other 2,352 2,610
-------------------------
Provision for income taxes $ 249,518 $ 376,701
=========================
Deferred income taxes reflect the net tax effects of temporary differences
between carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets are as follows:
2002 2001
-------------------------
Deferred tax assets:
Accrual and reserves $ 54,992 $ 156,530
Deferred revenue 995,152 2,312,253
Other 348,684 198,043
-------------------------
Total deferred tax assets 1,398,828 2,666,826
Valuation allowance (1,287,252) (2,345,362)
-------------------------
Net deferred assets $ 111,576 $ 321,464
=========================
Realization of deferred tax assets is dependent on future earnings, if any, the
timing and amount of which are uncertain. Accordingly, a valuation allowance in
an amount approximately equal to the net deferred tax assets as of September 30,
2002 and 2001 has been established to reflect these uncertainties. The valuation
allowance decreased by $1,058,110 and increased by $1,029,390 during the years
ended September 30, 2002 and 2001, respectively.
19
IDS SOFTWARE SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. INCOME TAXES (CONTINUED)
The Company had recorded a benefit of income taxes for the nine months ended
June 30, 2003 for $(458,240). The tax benefit is calculated by applying the
estimated effective annual tax rate for the fiscal year ending September 30,
2003 to the year to date pretax loss. The estimated effective tax rate is based
upon expected pretax income for the fiscal year ending September 30, 2003 less
anticipated research credits.
8. SUBSEQUENT EVENTS (UNAUDITED)
In December 2002, the company entered into a loan and security agreement with a
bank to borrow $400,000. The loan was subsequently repaid by the Company. The
borrowings bear interest at index rate plus 4.5% and were secured by the
Company's equipment and accounts receivable, along with a personal guaranty
given by the Company's majority stockholder.
In August 2003, the Company's CTO/majority stockholder exchanged 981,665 shares
of the Company's common stock in consideration for repayment of his outstanding
loan receivable to the Company. The value of the shares exchanged for the
repayment of the loan was based on the value of the Company's common stock at
the date of the exchange of $3.21 per share.
In September 2003, PDF Solutions, Inc. acquired all of the outstanding common
shares of the Company, at which time IDS became a wholly owned subsidiary of PDF
Solutions, Inc.
20