Exhibit 10.1
ULTRADATA Corporation
Index to Financial Statements
Page
Independent Auditors' Report - Deloitte & Touche LLP F-2
Independent Auditors' Report - KPMG LLP F-3
Balance Sheets as of December 31, 1998 and 1997 F-4
Statements of Operations for the years ended December 31,
1998, 1997 and 1996 F-5
Statements of Stockholders' Equity for the years ended
December 31, 1998, 1997 and 1996 F-6
Statements of Cash Flows for the years ended December 31,
1998, 1997 and 1996 F-7
Notes to Financial Statements F-8
F-1
Independent Auditors' Report
To the Board of Directors and Stockholders of ULTRADATA Corporation:
We have audited the accompanying balance sheet of ULTRADATA Corporation
("Company") as of December 31, 1998, and the related statements of operations,
stockholders' equity, and cash flows for the year 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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 1998 financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 1998, and the
results of its operations and its cash flows for the year then ended in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
San Jose, California
February 5, 1999
F-2
Independent Auditors' Report
Board of Directors
ULTRADATA Corporation:
We have audited the accompanying balance sheet of ULTRADATA Corporation as of
December 31, 1997, and the related statements of operations, stockholders'
equity and cash flows for each of the years in the two year period ended
December 31, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of ULTRADATA Corporation as of
December 31, 1997, and the results of its operations and its cash flows for each
of the years in the two year period ended December 31, 1997, in conformity with
generally accepted accounting principles.
KPMG LLP
Mountain View, California
February 12, 1998
F-3
ULTRADATA CORPORATION
Balance Sheets
(In thousands, except share data and par value amounts)
December 31,
Assets 1998 1997
--------------- -----------------
Current assets:
Cash and cash equivalents $ 2,418 $ 486
Short term investments - 303
Restricted cash 321 536
Trade accounts receivable, net 6,387
6,523
Inventories, including third-party product licenses 815
1,932
Prepaid expenses and other current assets 456
383
Income tax receivable
- 53
--------------- -----------------
Total current assets 11,577 9,036
Property and equipment, net 3,312 4,533
=============== =================
Total assets $ 14,889 $ 13,569
=============== =================
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of capital lease and debt obligations $ 481 $ 663
Current portion, third-party product licenses 594 -
Accounts payable 2,284
1,545
Accrued expenses 1,239
1,646
Deferred revenue and customer advances 1,479 1,852
--------------- -----------------
Total current liabilities 5,745 6,038
Deferred revenue and customer advances 682 1,113
Capital lease and debt obligations 7 120
Long-term portion, third-party product licenses 625 -
--------------- -----------------
Total liabilities 7,059 7,271
--------------- -----------------
Commitments and contingencies (Notes 4 and 8)
Stockholders' equity:
Preferred stock; par value $.001; 2,000,000 shares authorized; none - -
outstanding
Common stock; par value $.001; 23,000,000 shares authorized; 7,725,674
and 7,607,133 shares outstanding in 1998 and 1997, respectively 8 8
Additional paid in capital 15,515 15,202
Accumulated deficit (7,693) (8,912)
--------------- -----------------
Total stockholders' equity 7,830 6,298
--------------- -----------------
Total liabilities and stockholders' equity $ 14,889 $ 13,569
=============== =================
See accompanying notes to financial statements.
F-4
ULTRADATA CORPORATION
Statements of Operations
(In thousands, except per share amounts)
Years Ended December 31,
----------------------------------------------
1998 1997 1996
-------------- -------------- --------------
Revenue
Software $ 11,063 $ 7,062 $ 9,452
Services 16,501 16,548 16,741
-------------- -------------- --------------
Subtotal 27,564 23,610 26,193
Hardware 3,197 5,493 14,251
-------------- -------------- --------------
Total revenue 30,761 29,103 40,444
-------------- -------------- --------------
Cost of goods sold
Software 1,979 1,034 2,202
Services 10,889 11,770 13,502
-------------- -------------- --------------
Subtotal 12,868 12,804 15,704
Hardware 2,844 4,115 10,331
-------------- -------------- --------------
Total cost of goods sold 15,712 16,919 26,035
-------------- -------------- --------------
Gross margin 15,049 12,184 14,409
-------------- -------------- --------------
Product development 4,689 4,608 6,180
Selling, general and administrative 9,201 11,964 15,518
Gain on transfer of service bureau contracts (162) (558) -
-------------- -------------- --------------
Total operating expenses 13,728 16,014 21,698
-------------- -------------- --------------
Operating income (loss) 1,321 (3,830) (7,289)
Interest income 40 120 365
Interest expense (179) (102) (36)
Other income 59 352 -
-------------- -------------- --------------
Income (loss) before income taxes 1,241 (3,460) (6,960)
Income tax expense 22 - -
-------------- -------------- --------------
Net income (loss) $ 1,219 $ (3,460) $ (6,960)
============== ============== ==============
Net income (loss) per share information:
Basic net income (loss) per share $ 0.16 $ (0.46) $ (0.97)
Diluted net income (loss) per share
0.15 (0.46) (0.97)
Shares used to compute basic net income
(loss) per share
7,687 7,585 7,195
Shares used to compute dilutive net income
(loss) per share
7,924 7,585 7,195
See accompanying notes to financial statements.
F-5
ULTRADATA CORPORATION
Statements of Stockholders' Equity
(In thousands)
Common Stock
Additional Retained Total
Shares Paid-In Earnings Stockholders'
Outstanding Amount Capital (Accumulated Equity
Deficit)
-------------- ------------- ------------ ------------- ----------------
Balances as of January 1, 1996 $ 5,742,000 $ 6 $ 4 $ 1,508 $ 1,518
Net proceeds from initial public offering 1,650,000 1 14,241 --- 14,242
Net proceeds from issuance of common
stock 133,864 --- 696 --- 696
Net loss --- --- --- (6,960) (6,960)
-------------- ------------- ------------ ------------- ----------------
Balances as of December 31, 1996 7,525,864 7 14,941 (5,452) 9,496
Net proceeds from issuance of common
stock 81,269 1 261 --- 262
Net loss --- --- --- (3,460) (3,460)
-------------- ------------- ------------ ------------- ----------------
Balances as of December 31, 1997 7,607,133 8 15,202 (8,912) 6,298
Net proceeds from issuance of common
stock 118,541 --- 313 --- 313
Net income --- --- --- 1,219 1,219
============== ============= ============ ============= ================
Balances as of December 31, 1998 $ 7,725,674 $ 8 $ 15,515 $ (7,693) $ 7,830
============== ============= ============ ============= ================
See accompanying notes to financial statements.
F-6
ULTRADATA CORPORATION
Statements of Cash Flows
(In thousands)
Years ended December 31,
1998 1997 1996
------------------- ----------------- ----------------
Cash flows from operating activities:
Net income (loss) $ 1,219 $ (3,460) $ (6,960)
Adjustments to reconcile net income (loss) to net cash provided
by (used for) operating activities:
Depreciation and amortization 1,528 1,436 864
Deferred income taxes - - 907
Gain on sale of joint venture - (238) -
Equity in earnings of unconsolidated subsidiary - (16) (62)
Loss on disposition of property and equipment 67 - 250
Changes in operating assets and liabilities:
Trade accounts receivable, net (136) 4,069 (3,962)
Inventories 365 358 78
Prepaid expenses and other assets 73 579 (253)
Income taxes receivable 53 1,023 (958)
Accounts payable (739) (1,375) (1,560)
Accrued expenses 158 (887) 166
Deferred revenue and customer advances (804) (1,856) (458)
------------------- ----------------- ----------------
Net cash provided by (used for) operating activities 1,784 (367) (11,948)
------------------- ----------------- ----------------
Cash flows from investing activities:
Capital expenditures (353) (2,997) (1,706)
Proceeds from disposition of service bureau assets - 192 -
Proceeds from disposition of other assets - 368 -
Sale of joint venture - 500 -
Purchases of short-term investments - - (4,276)
Sale of short-term investments 303 1,117 2,856
Repayment of stockholder notes receivable - - 1,453
------------------- ----------------- ----------------
Net cash used for investing activities (50) (820) (1,673)
------------------- ----------------- ----------------
Cash flows from financing activities:
Bank borrowings and long term obligations, net - 474 (1,000)
Proceeds from debt - 250 388
Decrease (increase) in restricted cash 215 (536) -
Repayment of debt (330) (360) (246)
Net proceeds from initial public offering - - 14,242
Net proceeds from issuance of common stock 313 262 696
------------------- ----------------- ----------------
Net cash provided by financing activities 198 90 14,080
------------------- ----------------- ----------------
Net increase (decrease) in cash and cash equivalents 1,932 (1,097) 459
Cash and cash equivalents at beginning of year 486 1,583 1,124
------------------- ----------------- ----------------
Cash and cash equivalents at end of year $ 2,418 $ 486 $ 1,583
=================== ================= ================
Non cash operating, investing and financing activities:
Property and equipment acquired under capital leases $ 21 $ -- $ --
=================== ================= ================
Remaining obligation on third party product licenses $ 1,482 $ -- $ --
=================== ================= ================
Supplemental disclosure of cash flow information:
Cash paid for taxes $ 22 $ 1 $ 87
Cash paid for interest $ 179 $ 102 $ 36
See accompanying notes to financial statements.
F-7
Note 1 Summary of Significant Accounting Policies
The Company
ULTRADATA Corporation (the "Company") provides information management software
and solutions for relationship-oriented financial institutions. These solutions
allow the Company's customers to provide, among other things, financial services
such as checking, savings and investment accounts, home banking, credit and
debit cards, ATM access and consumer lending. The Company's products are
primarily targeted at large and mid-sized credit unions for use as an in-house
installation and to value-added resellers ("VARs") for distribution to
small-sized credit unions that operate in service bureau environments.
Revenue Recognition
The Company recognizes revenues from licenses of computer software provided that
a noncancelable license agreement has been signed, the software and related
documentation have been shipped, there are no material uncertainties regarding
customer acceptance, and collection of the resulting receivable is deemed
probable. Maintenance revenues are deferred and recognized over the related
contract period, generally three months to five years. Services and other
revenues generated from professional consulting and training services and
software customization services are recognized as the services are performed.
Hardware revenues are recognized upon shipment.
Software cost of revenues includes direct costs of software purchased from third
parties and royalties. Services and other cost of revenues include maintenance,
the direct and indirect costs of providing training and installation, and
consulting services relating to customer contracts. Hardware cost of revenues
includes the costs of the hardware and freight.
Statement of Position (SOP) 97-2 "Software Revenue Recognition," which was
issued October 27, 1997, supersedes SOP 91-1 and became effective for the
Company in 1998.
Concentration of Credit Risk and Fair Value of Financial Instruments
Financial instruments that potentially expose the Company to a concentration of
credit risk principally consist of cash and cash equivalents, restricted cash,
trade accounts receivable and short term investments. The carrying value of the
Company's financial instruments approximates fair market value.
The Company's current customers are primarily comprised of credit unions
throughout the United States. Although the Company is directly affected by the
financial cycles of the credit union industry, management does not believe that
significant credit risks existed as of December 31, 1998. The Company maintains
a reserve for potential bad debts aggregating $521,000 and $1,094,000 as of
December 31, 1998 and 1997, respectively.
No customer accounted for more than 10% of the Company's total revenues in 1998,
1997 or 1996. No customer accounted for more than 10% of the Company's accounts
receivables in 1998. One customer accounted for 13% of total trade accounts
receivable at December 31, 1997.
Financial Statement Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. Such
estimates include allowances for potentially uncollectible accounts receivable,
sales returns and a valuation allowance for deferred tax assets. Actual results
could differ from those estimates.
F-8
Cash and Cash Equivalents
Cash equivalents consist of short-term financial instruments with original
maturities of three months or less that are carried at cost, which approximates
market.
Short-Term Investments
Short-term investments as of December 31, 1997 consisted of municipal
obligations with amortized cost approximating fair market value.
Inventories
Inventories consist of hardware and software purchased from third parties
pending shipment to customers recorded at the lower of cost or market, on a
first in, first out basis.
Software Development Costs
Capitalization of computer software costs, when material, begins upon the
establishment of technological feasibility. Such costs are amortized over
periods not exceeding three years. To date, software development costs incurred
subsequent to the establishment of technological feasibility have not been
material.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using the
straight-line method over the shorter of the estimated useful life (three to
five years for computer equipment and software and five to ten years for
furniture and fixtures) or the lease term.
Income Taxes
The Company utilizes the asset and liability method of accounting for income
taxes. Deferred tax assets and liabilities are established to recognize the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. The measurement of deferred tax assets is reduced, if
necessary, by a valuation allowance for any tax benefits of which future
realization is uncertain.
Net Income (Loss) Per Share
Basic income (loss) per share excludes dilution and is computed by dividing net
income (loss) by the weighted-average number of common shares outstanding, less
shares subject to repurchase by the Company, for the period. Diluted income
(loss) per share reflects the potential dilution that could occur if securities
or other contracts to issue common stock were exercised or converted into common
stock. Common share equivalents are excluded from the computation in loss
periods as their effect would be antidilutive.
Stock-Based Compensation
The Company accounts for its stock-based compensation plans in accordance with
the provisions of Accounting Principles Board ("APB") Opinion No. 25, Accounting
for Stock Issued to Employees, and related interpretations.
F-9
Impairment of Long-Lived Assets and Long-Lived Assets To Be Disposed Of
The Company evaluates its long-lived assets and certain identifiable intangibles
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to the future net cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets. Assets to be disposed of are reported at the lower of
carrying amount or fair value less costs to sell.
Reclassifications
Certain amounts in the accompanying 1997 and 1996 financial statements have been
reclassified to conform with the 1998 presentation.
Recently Issued Accounting Standards
In 1998, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 130, "Reporting Comprehensive Income," which requires an enterprise
to report, by major components and as a single total, the change in net assets
during the period from nonowner sources. Adoption of this standard did not have
an impact on the Company's financial position, results of operations or cash
flows. During 1998, 1997 and 1996 the Company's sole source of comprehensive
income is its net income (loss).
The Financial Accounting Standards Board issued SFAS No. 131, "Disclosure about
Segments of an Enterprise and Related Information." SFAS No. 131 establishes
annual and interim reporting standards for an enterprise's business segments and
related disclosures about its products, services, geographic areas and major
customers. The Company has determined that it operates in three segments:
software, services and hardware. Management reviews the operating results of
these segments only at the gross margin level and assets are not allocated by
operating segment.
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities." This statement requires companies to record
derivatives on the balance sheet as assets or liabilities, measured at fair
value. Gains or losses resulting from changes in the values of those derivatives
would be accounted for depending on the use of the derivative and whether it
qualifies for hedge accounting. SFAS No. 133 will be effective for the Company's
year ending December 31, 2000. Management believes that this statement will not
have a significant impact on the Company's financial position, results of
operations or cash flows.
Note 2 Accounts Receivable
Accounts receivable consists of (in thousands):
December 31,
------------------------------------------
1998 1997
---- ----
------------------------------------------
Trade accounts receivable $3,998 $4,520
Unbilled revenues 3,046 2,961
-------------------------------------------
Accounts receivable, gross 7,044 7,481
Allowance for bad debts (521) (1,094)
-------------------------------------------
Accounts receivable, net $6,523 $6,387
===========================================
F-10
Note 3 Property and Equipment
Property and equipment consists of (in thousands):
December 31,
------------------------
1998 1997
---- ----
------------------------
Computer equipment $ 4,073 $ 3,958
Furniture and fixtures 2,841 2,687
Software 1,432 1,424
-------------------------
Property and equipment, gross 8,346 8,069
Accumulated depreciation and amortization (5,034) (3,536)
-------------------------
Property and equipment, net $ 3,312 $ 4,533
=========================
Note 4 Accrued Expenses
Accrued expenses consists of (in thousands):
December 31,
---------------------------
1998 1997
---- ----
------------- -------------
Accrued royalties and loss contract accrual $ 314 $ 305
Accrued vacation 613 598
Other 719 336
------------- -------------
Total accrued expenses $ 1,646 $1,239
============= =============
Note 5 Bank Borrowings and Debt
Bank Borrowings
In 1997 the Company entered into a factoring agreement which provides for
borrowing by the Company of up to $1.5 million, to be effected by the bank's
purchase of eligible accounts receivable and payment to the Company of an amount
equal to 80% of the purchased accounts receivable. Purchases of receivables and
corresponding advances to the Company are at the discretion of the bank. There
is a 0.5% administrative fee for each receivable purchased and a 1.75% monthly
finance charge for as long as each purchased receivable remains outstanding. The
agreement also provides that the borrowings under the factoring agreement are
secured by all tangible and intangible assets of the Company. To date, no
amounts have been borrowed under the factoring agreement. In addition, as of
December 31, 1998 and 1997, the outstanding balance on a capital equipment
facility was $321,000 and $539,000, respectively. The capital equipment facility
bears interest at a rate equal to 0.25% above the prime rate and will be due in
June of 2000. This facility was secured by cash collateral, and was retired in
January 1999.
F-11
Other Debt
In the second quarter of 1997, the Company entered into an agreement to
distribute certain products developed by a third party. As a part of this
agreement, the Company purchased certain products with payments due through 2001
with interest imputed at 12.5%. Future principal payments under this agreement
as of December 31, 1998 are as follows:
Year Ending Principal
December 31, Payments
(in thousands)
1999 $741
2000 323
2001 302
============
Total Payments $1,366
============
In addition, the Company entered into a non-cancelable maintenance agreement
related to the purchased licenses with an annual expense of $204,000 in 1998 and
$326,000 each year thereafter through 2004.
Interest expense incurred during the years ended December 31, 1998, 1997, and
1996 was $179,000, $102,000 and $36,000, respectively.
Note 6 Income Taxes
The components of income tax expense (benefit) for the years ended December 31,
1998, 1997, and 1996 consisted of the following (in thousands):
Current Deferred Total
-------------- ------------- --------------
1998:
Federal $ 15 $ -- $ 15
State 7 -- 7
-------------- ------------- --------------
Total income tax expense $ 22 $ -- $ 22
============== ============= ==============
1997:
Federal $ (25) $ -- $ (25)
State 25 -- 25
-------------- ------------- --------------
Total income tax expense $ -- $ -- $ --
============== ============= ==============
1996:
Federal $ (932) $ 621 $ (311)
State 25 286 311
-------------- ------------- --------------
Total income tax expense $ (907) $ 907 $ --
============== ============= ==============
F-12
The difference between the "expected" income tax expense (benefit) computed at
the 35% statutory federal income tax rate and the Company's actual income tax
expense for the years ended December 31, 1998, 1997 and 1996 was as follows (in
thousands):
For the years ended December 31,
1998 1997 1996
------------- -------------- -------------
Computed "expected" tax expense (benefit) $ 434 $ (1,176) $ (2,366)
State income taxes, before valuation allowance adjustment,
net of federal income tax effect 72 25 25
Change in the beginning of the year valuation allowance
on deferred tax assets (672) --- 907
Current year losses and temporary differences for
which no benefit was recognized 185 1,134 1,329
Nondeductible expenses 3 39 37
Other, net --- (22) 68
------------- -------------- -------------
Actual income tax expense $ 22 $ 0 $ 0
============= ============== =============
The tax effects of significant temporary differences that comprise deferred tax
assets are as follows (in thousands):
December 31,
1998 1997
Deferred tax assets:
Accounts receivable reserves $ 223 $ 628
Vacation accrual 208 244
Deferred revenue 915 787
Net operating loss carryforwards 1,199 1,867
Tax credit carryforwards 922 894
Other 242 12
Gross deferred tax assets 3,709 4,432
Less valuation allowance (3,609) (4,281)
Deferred tax assets, net of
valuation allowance 100 151
-------- ---------
Deferred tax liabilities - accumulated
depreciation (100) (151)
-------- ---------
Net deferred tax assets $ --- $ ---
======== =========
The net change in the valuation allowance for the year ended December 31, 1998
and 1997 was a decrease of approximately $672,000 and an increase of
approximately $1,277,000. Management believes that sufficient uncertainty exists
as to whether the deferred tax assets will be realized, and accordingly, a
valuation allowance is required.
The Company has net operating loss carryforwards for federal and California
income tax purposes of approximately $3,200,000 and $1,000,000, respectively.
The federal net operating loss carryforward will expire if it is not utilized by
the year 2011 through 2012. The California net operating loss carryforward will
expire if it is not utilized by the year 2001 through 2002. The Company has
research credit carryforwards for federal and California income tax purposes of
approximately $540,000 and $320,000, respectively. The federal research credit
carryforward will expire if not utilized beginning in the year 2008 through
2011. The California research credit carries forward indefinitely until
utilized. The Company also has minimum tax credit carryforwards for federal
income tax purposes of approximately $62,000, which will carry forward
indefinitely until utilized.
F-13
The Tax Reform Act of 1986 and the California Conformity Act of 1987 impose
restrictions on the utilization of net operating loss and tax credit
carryforwards in the event of an "ownership change" as defined by the Internal
Revenue Code. If an "ownership change," as defined by the Internal Revenue Code,
has occurred, the Company's ability to utilize its net operating loss and tax
credit carryforwards may be subject to restriction pursuant to these provisions.
Note 7 Stockholders' Equity
The following is a reconciliation of the denominators used in computing diluted
net income (loss) per share (in thousands):
1998 1997 1996
---- ---- ----
Shares used to compute basic net income (loss) per
share - weighted average number of common
shares outstanding 7,687 7,585 7,195
Effect of dilutive common equivalent shares - stock
options outstanding 237 --- ---
============= ============ ============
Shares used to compute diluted net income (loss) per
share 7,924 7,585 7,195
============= ============ ============
For the above mentioned periods, the Company had options outstanding of
1,910,587, 1,911,740 and 1,820,149 as of the end of 1998, 1997 and 1996,
respectively which could potentially dilute basic and diluted net income (loss)
per share in the future but were excluded in the computation of diluted net
income (loss) per share in the periods presented as their effect would have been
antidilutive.
Employee Stock Option and Purchase Plans
1994 Equity Incentive Plan
The 1994 Equity Incentive Plan (the "1994 Plan") was adopted in March 1994. The
1994 Plan provides for the grant of incentive stock options and stock bonuses
and the issuance of restricted stock by the Company to its employees, officers,
directors, consultants, independent contractors and advisors. There are
1,300,000 shares of the Company's common stock reserved for issuance under the
1994 plan, of which 318,243 are available for grant as of December 31, 1998.
These options vest 25% after one year and ratably over thirty-six months
thereafter, and expire ten years from the date of grant.
1995 Directors Stock Option Plan
The 1995 Directors Stock Option Plan (the "Directors Plan") was adopted in July
1996. The Directors Plan provides non-qualified stock options to non-employee
directors of the Company. There are 150,000 shares of the Company's common stock
reserved for issuance, of which 55,000 are available for grant as of December
31, 1998. Members of the Board of Directors who are not employees, consultants
or independent contractors of the Company, or any parent, subsidiary or
affiliate of the Company are eligible to participate in the Directors Plan.
These options vest 25% in each of four consecutive years. As of December 31,
1998, 95,000 options have been granted under the Directors Plan.
F-14
Nonqualified Stock Option Grants
On July 31, 1995, the Company granted to the Company's then Chief Executive
Officer, who is currently a director of the Company, outside of the 1994 Plan,
nonqualified options to purchase 600,000 shares of common stock at $6.00 per
share all of which were vested by December 31, 1998. On October 17, 1996, the
Company granted to the Company's current President, outside of the 1994 Plan,
nonqualified options to purchase 600,000 shares of common stock at $3.50 per
share. Options for 25% of this grant vested on October 17, 1997 and the
remaining shares vest in equal monthly increments over the following 36 months.
1995 Employee Stock Purchase Plan
In September 1995, the Board of Directors adopted the 1995 Employee Purchase
Plan (the "Purchase Plan") and reserved 250,000 shares of the Company's common
stock for issuance thereunder. The Purchase Plan permits eligible employees to
acquire shares of the Company's common stock through payroll deductions. Each
offering under the Purchase Plan will be for a period of six months commencing
on February 1 and August 1 of each year. Eligible employees may select a rate of
payroll deduction between 2% and 10% of their compensation, up to an aggregate
total payroll deduction not to exceed $21,250 in any calendar year.
The purchase price for the Company's common stock purchased under the Purchase
Plan is 85% of the lesser of the fair market value of the Company's common stock
on the first day of the applicable offering period or the last day of that
offering period.
Accounting for Stock-Based Compensation
A summary of the status of the Company's fixed option plans and nonplan grants
is presented below:
December 31, 1998 December 31, 1997 December 31, 1996
----------------- ----------------- -----------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
Outstanding at beginning
of year 1,911,740 $4.71 1,820,149 $5.16 1,209,663 $5.64
Granted 334,050 $4.87 475,600 $3.91 918,600 $4.76
Exercised (25,609) $4.12 -- $ -- (103,747) $5.00
Canceled (72,331) $4.54 (384,009) $5.83 (204,367) $6.27
--------------- -------------
Outstanding at end of year 2,147,850 $4.75 1,911,740 $4.71 1,820,149 $5.16
=============== ============= =============
Exercisable at end of year 1,255,490 $5.13 952,142 $5.47 561,119 $5.67
============== ============= =============
Weighted-average fair value of
options granted during the year
at exercise price equal to fair
value at grant date $1.94 $1.97 $2.39
The Company has elected to use the intrinsic value-based method to account for
all of its employee stock-based compensation plans. Under APB Opinion No. 25,
Accounting for Stock Issued to Employees, the Company has recorded no
compensation costs related to its stock options granted to employees for the
years ended December 31, 1998, 1997, and 1996 because the exercise price of each
option equaled or exceeded the fair value of the underlying common stock as of
its grant date.
Pursuant to SFAS No. 123, Accounting for Stock-Based Compensation, the Company
is required to disclose the pro forma effects on net income (loss) and net
income (loss) per basic and diluted share as if the Company had elected to
F-15
use the fair value approach to account for all of its employee stock-based
compensation plans. Had compensation cost for the Company's plans been
determined consistent with the fair value approach described in SFAS No. 123,
the Company's net income (loss) and net income (loss) per basic and diluted
share for the years ended December 31, 1998, 1997 and 1996 would have been as
indicated below (in thousands, except per share data):
Years Ended
December 31,
1998 1997 1996
---- ----- ----
Net income (loss):
As reported $1,219 $(3,460) $(6,960)
Pro forma $ 502 $(4,261) $(7,623)
Basic net income (loss) per share:
As reported $ 0.16 $ (0.46) $ (0.97)
Pro forma $ 0.07 $ (0.56) $ (1.06)
Diluted net income (loss) per share:
As reported $ 0.15 $ (0.46) $ (0.97)
Pro forma $ 0.06 $ (0.56) $ (1.06)
The Company's fair value calculations on stock-based awards were made using the
Black-Scholes option pricing model with the following weighted average
assumptions: expected life, 3.5 years from the date of grant in 1996 and 1997,
and 4.25 years in 1998; stock volatility, 63% in 1996 and 1997 and 51% in 1998;
risk-free interest rate, 6.08% in 1996 and 1997 and 5% in 1998; and no dividends
during the expected term. The Company's calculations are based on a single
option award valuation approach, and forfeitures are recognized as they occur.
The Company's fair value calculations on stock-based awards under the Purchase
Plan for all years presented were also made using the Black-Scholes option
pricing model with the following weighted average assumptions: expected life, 6
months; stock volatility, 51%; risk-free interest rate, 5%; and no dividends
during the expected term.
The following table summarizes information about fixed stock options outstanding
as of December 31, 1998:
Options Outstanding Options Vested
-----------------------------------------------------------------------------------------
Options Weighted Options Weighted
Outstanding at Average Weighted Vested Average
Range of December 31, 1998 Remaining Average at December Exercise
Exercise Prices Contractual Life Exercise Price 31, 1998 Price
----------------------------------------------------------------------------------------------------------
$2.63 - 3.50 785,550 7.7 $3.46 368,341 $3.48
$4.00 - 6.00 1,254,900 7.1 $5.32 817,268 $5.65
$6.25 - 11.00 107,400 7.1 $7.52 69,881 $7.69
------------------- -----------------
$2.63 - 11.00 2,147,850 7.4 $4.75 1,255,490 $5.13
=================== =================
Note 7 Employee Benefit Plan
In 1987, the Company adopted a defined contribution retirement plan (the
"Retirement Plan"), which has been determined by the Internal Revenue Service to
be qualified under Section 401(k) of the Internal Revenue Code of 1986. The
Retirement Plan covers essentially all full-time employees. Eligible employees
may make voluntary contributions to the Retirement Plan up to 15% of their
annual compensation. The Company contributed $187,000, $177,000 and $0 to the
plan during the years ended December 31, 1998, 1997 and 1996, respectively.
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Note 8 Commitments
Leases
The Company leases its principal facility under a noncancelable operating lease
through January 2007. The Company is also party to a lease for its prior office
space which has been subleased through July 2002. The Company has an office in
Carrollton, Texas, which houses the corporate and customer disaster recovery
center. The Company signed a new lease for this facility for 36 months beginning
January 1, 1999. Rental expense for operating leases for the years ended
December 31, 1998, 1997 and 1996 amounted to $746,000, $1,070,000 and
$1,060,000, respectively, net of 1998 and 1997 rental income of $310,000 and
$124,000, respectively, under the sublease.
The Company leases its facilities and certain equipment under noncancelable
capital and operating leases. Future minimum lease payments under the Company's
capital and operating leases and the present value of minimum lease payments
under capital leases as of December 31, 1998 are as follows (in thousands):
Year Ending Capital Operating
December 31, Leases Leases
------------ ------------- --------------
1999 $16 $739
2000 9 739
2001 --- 783
2002 --- 902
2003 --- 1,116
Thereafter --- 3,784
-------------- --------------
Future minimum lease payments $25 $8,063
==============
Amounts representing interest (5)
==============
Present value of future minimum lease payments $20
==============
Future payments under operating leases are net of sub-lease payments totaling
approximately $276,000 for each of the years 1999 through 2001 and approximately
$161,000 for 2002.
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