FINANCIAL STATEMENTS
HigherMarkets, Inc. (a development stage company) for the period from February
15, 2000 (inception) through December 31, 2000 with Report of Independent
Auditors
HigherMarkets, Inc.
(a development stage company)
Financial Statements
Period from February 15, 2000 (inception)
through December 31, 2000
Contents
Report of Independent Auditors.................................................1
Financial Statements
Balance Sheet..................................................................2
Statement of Operations........................................................3
Statement of Redeemable Convertible Preferred Stock and Stockholders' Deficit..4
Statement of Cash Flows........................................................6
Notes to Financial Statements..................................................7
Report of Independent Auditors
The Board of Directors and Stockholders
HigherMarkets, Inc.
We have audited the accompanying balance sheet of HigherMarkets, Inc. (a
development stage company) as of December 31, 2000 and the related statements of
operations, redeemable convertible preferred stock and stockholders' deficit,
and cash flows for the period from February 15, 2000 (inception) through
December 31, 2000. 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 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 audit provides 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 HigherMarkets, Inc. at December
31, 2000, and the results of its operations and its cash flows for the period
from February 15, 2000 (inception) through December 31, 2000, in conformity with
generally accepted accounting principles in the United States.
The accompanying financial statements have been prepared assuming that
HigherMarkets will continue as a going concern. As more fully described in Note
1, the Company has incurred operating losses since inception and forecasts
indicate that the Company may not have sufficient cash to fund its development
activities through 2001. 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.
/s/ Ernst & Young LLP
San Francisco, California
March 5, 2001
3
HigherMarkets, Inc.
(a development stage company)
Balance Sheet
December 31, 2000
Assets
Current assets:
Cash $ 7,686,139
Restricted cash 507,422
Short-term investments 39,074
Prepaid expenses and other current assets 122,029
------------
Total current assets 8,354,664
Certificate of deposit 469,942
Other assets 24,406
Property and equipment, net 2,956,408
------------
Total assets $ 11,805,420
============
Liabilities and stockholders' deficit
Current liabilities:
Accounts payable $ 1,323,250
Accrued expenses 40,492
Accrued dividend on redeemable
convertible Series B preferred stock 276,760
Due to related party 160,409
Capital lease obligations, current portion 93,862
------------
Total current liabilities 1,894,773
Capital lease obligations 41,094
Redeemable convertible Series B preferred stock,
$0.001 par value, liquidation preference $3.72:
Authorized shares - 11,440,323
Issued and outstanding shares - 11,159,678 13,906,033
Stockholders' deficit:
Series A preferred stock, $0.001 par value,
liquidation preference $0.39:
Authorized shares - 3,589,746
Issued and outstanding shares - 3,589,746 3,590
Common stock, $0.001 par value:
Authorized shares - 26,000,000
Issued and outstanding shares - 7,324,500 7,325
Additional paid-in capital 1,506,137
Deferred compensation (6,650)
Deficit accumulated during the development stage (5,546,882)
------------
Total stockholders' deficit (4,036,480)
------------
Total liabilities and stockholders' deficit $ 11,805,420
============
See accompanying notes.
4
HigherMarkets, Inc.
(a development stage company)
Statement of Operations
Period from February 15, 2000 (inception) through December 31, 2000
Operating expenses:
Product development $ 2,134,929
General and administrative 2,153,249
Marketing 702,436
Depreciation and amortization 94,551
-----------
Total operating expenses 5,085,165
Other income and (expense):
Interest income 112,448
Interest expense (297,405)
-----------
Net other (184,957)
-----------
Net loss $(5,270,122)
===========
See accompanying notes.
5
HigherMarkets, Inc.
(a development stage company)
Statement of Redeemable Convertible Preferred Stock and Stockholders' Deficit
Period from February 15, 2000 (inception) through December 31, 2000
Stockholders' Deficit
-----------------------------------------------------
Redeemable Convertible Convertible
Preferred Stock Series B Preferred Stock Series A Common Stock
----------------------------------------------------------------------------------
Shares Amount Shares Amount Shares Amount
----------------------------------------------------------------------------------
Issuance of common stock to
founders and investor for cash,
net of issuance costs of $4,020 -- $ -- -- $ -- 6,174,500 $ 6,175
Issuance of Series A preferred
stock, net of issuance costs of
$25,464 -- -- 3,589,746 3,590 -- --
Issuance of common stock to
employee for cash -- -- -- -- 1,150,000 1,150
Repurchase of common stock from
founder for cash, net of
compensation expense -- -- -- -- (375,000) (375)
Issuance of common stock to
employee for cash -- -- -- -- 375,000 375
Issuance of warrants to purchase
Series B redeemable convertible
preferred stock in conjunction
with issuance of convertible
notes payable -- 291,000 -- -- -- --
Issuance of Series B redeemable
convertible preferred stock for
cash and conversion of
convertible note payable and
related accrued interest, net of
issuance costs of $222,968 11,159,678 13,615,033 -- -- -- --
Stockholders' Deficit
--------------------------------------------------------
Deficit
Accumulated
Additional During Total
Paid-In Deferred Development Stockholders'
Capital Compensation Stage Deficit
----------- ----------- ----------- -----------
Issuance of common stock to
founders and investor for cash,
net of issuance costs of $4,020 $ (4,020) $ -- $ -- $ 2,155
Issuance of Series A preferred
stock, net of issuance costs of
$25,464 1,370,947 -- -- 1,374,537
Issuance of common stock to
employee for cash 90,850 -- -- 92,000
Repurchase of common stock from
founder for cash, net of
compensation expense (32,915) -- -- (33,290)
Issuance of common stock to
employee for cash 74,625 -- -- 75,000
Issuance of warrants to purchase
Series B redeemable convertible
preferred stock in conjunction
with issuance of convertible
notes payable -- -- -- --
Issuance of Series B redeemable
convertible preferred stock for
cash and conversion of
convertible note payable and
related accrued interest, net of
issuance costs of $222,968 -- -- -- --
6
HigherMarkets, Inc.
(a development stage company)
Statement of Redeemable Convertible Preferred Stock and
Stockholders' Deficit (continued)
Period from February 15, 2000 (inception) through December 31, 2000
Stockholders' Deficit
--------------------------------------------------------
Redeemable Convertible Convertible
Preferred Stock Series B Preferred Stock Series A Common Stock
------------------------------------------------------------------------------------
Shares Amount Shares Amount Shares Amount
------------------------------------------------------------------------------------
Issuance of common stock warrants
in connection with office lease - $ - - $ - - $ -
Dividend accrual in conjunction
with Series B redeemable
convertible preferred stock - - - - - -
Net loss - - - - - -
------------------------------------------------------------------------------------
Balance at December 31, 2000 11,159,678 $ 13,906,033 3,589,746 $ 3,590 7,324,500 $ 7,325
====================================================================================
Stockholders' Deficit
------------------------------------------------------------
Deficit
Accumulated
Additional During Total
Paid-In Deferred Development Stockholders'
Capital Compensation Stage Deficit
------------------------------------------------------------
Issuance of common stock warrants
in connection with office lease $ 6,650 $ (6,650) $ - $ -
Dividend accrual in conjunction
with Series B redeemable
convertible preferred stock - - (276,760) (276,760)
Net loss - - (5,270,122) (5,270,122)
------------------------------------------------------------
Balance at December 31, 2000 $ 1,506,137 $ (6,650) $ (5,546,882) $ (4,036,480)
============================================================
See accompanying notes.
7
HigherMarkets, Inc.
(a development stage company)
Statement of Cash Flows
Period from February 15, 2000 (inception) through December 31, 2000
Operating activities
Net loss $ (5,270,122)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 94,551
Interest expense in connection with Series B Stock warrants 291,000
Interest expense on convertible notes payable 1,727
Compensation expense related to repurchase of shares from founder 41,710
Changes in operating assets and liabilities:
Restricted cash (507,422)
Prepaid expenses and other assets (122,029)
Other assets (24,406)
Accounts payable 1,323,250
Accrued expenses 40,492
Due to related party 160,409
------------
Net cash used in operating activities (3,970,840)
Investing activities
Purchases of property and equipment (2,855,923)
Purchases of short-term investments and certificate of deposit (509,016)
------------
Net cash used in investing activities (3,364,939)
Financing activities
Net proceeds from issuance of convertible Series A preferred stock 1,374,537
Net proceeds from issuance of redeemable convertible Series B preferred stock 12,803,306
Principal payments on capital lease obligations (60,080)
Net proceeds from issuance of common stock 169,155
Repurchase of common stock from founder (75,000)
Proceeds from issuance of convertible notes payable 810,000
------------
Net cash provided by financing activities 15,021,918
------------
Net increase in cash 7,686,139
Cash at beginning of period --
------------
Cash at end of period $ 7,686,139
============
Supplemental disclosure of non-cash transactions
Property, plant and equipment acquired under capital lease obligations $ 195,036
============
Deferred compensation related to stock option grants and common stock issuances
and issuance of common stock warrants $ 6,650
============
Accrual of dividend on redeemable convertible Series B preferred stock $ 276,760
============
Conversion of convertible notes payable and related accrued interest to $ 811,727
redeemable convertible Series B preferred stock
============
See accompanying notes.
8
HigherMarkets, Inc.
(a development stage company)
Notes to Financial Statements
December 31, 2000
1. Company
HigherMarkets, Inc. (the "Company") was incorporated in the state of Delaware on
February 15, 2000. The Company is a development stage application service
provider that is developing an e-procurement solution for universities and other
educational institutions. The Company's activities since inception have
consisted primarily of raising capital, recruiting key personnel, and the
initial design and development of the e-procurement software. Accordingly, the
Company is considered to be in the development stage.
The Company has generated operating losses since inception and forecasts that it
may not have sufficient cash to fund its development activities through 2001.
This situation raises substantial doubt about the Company's ability to continue
as a going concern. Management is actively pursuing the sale of its
e-procurement solution to several customers and is also pursuing additional
sources of financing. However, there can be no assurances that the Company will
be able to generate cash flow from operations or additional financing in
sufficient amounts to meet its development and operating needs, or that such
financing would be available on terms acceptable to the Company.
2. Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent liabilities in the financial statements and
accompanying notes. Actual results could differ materially from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three
months or less at the date of purchase to be cash equivalents. The Company's
cash equivalents consist mainly of money market funds and certificates of
deposit.
9
HigherMarkets, Inc.
(a development stage company)
Notes to Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
Certificate of Deposit
The certificate of deposit is restricted and secures a letter of credit related
to the Company's lease agreement (see Note 5). The carrying amount approximates
fair value.
Concentration of Credit Risk
The Company is subject to concentrations of credit risk from its cash
investments. The Company's credit risk is managed through monitoring the
stability of the financial institutions utilized and diversification of its
financial resources.
Property and Equipment
Property and equipment is stated at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over estimated useful
lives of the respective assets, ranging from two to five years.
The Company capitalizes certain internal use software costs in accordance with
Statement of Position 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use. Capitalized internal use software costs
with an expected useful life in excess of one year are amortized on a
straight-line basis over their estimated useful lives ranging from 18 months to
three years.
Income Taxes
The Company utilizes the liability method of accounting, under which deferred
tax assets and liabilities are determined based on differences between financial
reporting and tax reporting 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.
10
HigherMarkets, Inc.
(a development stage company)
Notes to Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
Stock Based Compensation
The Company has elected to follow Accounting Principles Board Opinion No. 25,
Accounting for Stock issued to Employees (APB 25), and related interpretations,
in accounting for its employee stock options rather than the alternative fair
value accounting allowed by Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation ("SFAS 123"). APB No. 25 provides that
the compensation expense relative to the Company's employee stock options is
measured based on the intrinsic value of the stock option. SFAS 123 requires
companies that continue to follow APB 25 to provide a pro forma disclosure of
the impact of applying the fair value of SFAS 123 (see Note 7).
3. Property and Equipment
Property and equipment consists of the following at December 31, 2000:
Computers and equipment $ 317,518
Furniture and fixtures 17,744
Capitalized software 2,440,195
Leasehold improvements 275,502
----------
3,050,959
Less: accumulated depreciation and amortization 94,551
----------
$2,956,408
==========
The Company leases certain furniture, office and computer equipment under
noncancelable lease agreements that are accounted for as capital leases. Such
cost for furniture, office and computer equipment under capital lease
arrangements, included in property and equipment, aggregated approximately
$195,036 as at December 31, 2000. Related accumulated amortization was
approximately $26,913 at December 31, 2000.
Amortization expense related to the capitalized software was $54,158.
11
HigherMarkets, Inc.
(a development stage company)
Notes to Financial Statements (continued)
4. Income Taxes
The Company has deferred tax assets of approximately $2,094,000 at December 31,
2000. The deferred tax assets relate primarily to start-up costs and software
development costs and have been fully offset by a valuation allowance.
5. Commitments and Contingencies
Capital and Operating Leases
The Company leases its office space under an operating lease with fixed rental
payments through January 2006. Under the lease arrangement, the Company is
required to maintain a letter of credit secured by a certificate of deposit
totaling $469,942. Rent expense totaled $116,891 for the period from February
15, 2000 (inception) to December 31, 2000.
Future minimum commitments under noncancelable capital leases and operating
leases with initial terms of one year or more are as follows:
Capital Operating
Leases Leases
------------------------
2001 $ 102,020 $ 841,000
2002 42,756 860,000
2003 -- 805,000
2004 -- 676,000
2005 and thereafter -- 697,000
------------------------
Total minimum lease payments 144,776 $3,879,000
==========
Less interest 9,820
----------
Present value of minimum lease payments 134,956
Less current portion 93,862
----------
Capital lease obligations, less current portion $ 41,094
==========
12
HigherMarkets, Inc.
(a development stage company)
Notes to Financial Statements (continued)
5. Commitments and Contingencies (continued)
The Company has executed a three year contract with an internet service provider
to host its website and e-procurement software. The contract contains a
cancellation penalty equal to the net present value of $4,000 per month for the
remaining term, discounted at 5%. The contract term ends in July 2003.
The Company is obligated to pay a minimum royalty of 1% of annual revenue in
connection with software it has licensed from a third party. No royalty
liability has been incurred for 2000.
Bank Line of Credit
In December 2000, the Company secured a $500,000 bank line of credit expiring in
one year with interest at the bank's prime rate, 9.5% at December 31, 2000. The
line of credit is secured by a certificate of deposit held with the financial
institution, which has been classified as restricted cash. No borrowings have
been made under this agreement.
13
HigherMarkets, Inc.
(a development stage company)
Notes to Financial Statements (continued)
6. Convertible Notes and Redeemable Convertible Series B Preferred Stock
Convertible Notes Payable
In September 2000, the Company issued convertible notes payable for total cash
proceeds of $810,000. The notes were convertible into shares of Series B
redeemable preferred stock at approximately $1.24 per share. The notes had an
original maturity date of March 2001 and were subject to interest at 6% per
annum. The notes and $1,727 in accrued but unpaid interest were converted into
shares of Series B redeemable convertible preferred stock in September 2000. In
conjunction with this debt issuance, the company issued to the holders of the
notes warrants to purchase 162,000 shares of the Company's Series B redeemable
convertible preferred stock at an exercise price of $1.24 per share. The
warrants have a contractual life of ten years. At the date of grant, the value
ascribed to the warrants was approximately $0.96, based on a Black-Scholes
valuation model (using volatility of 1.0, risk free interest rate of 6%,
dividend yield of 0% and expected life of ten years). The amount was recorded as
a discount to convertible notes payable. The fair value of the warrants and the
resulting beneficial conversion associated with the notes, determined in
accordance with EITF 00-27 Application of EITF Issue No. 98-5, "Accounting for
Convertible Securities with Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios," to Certain Convertible Instruments totaled
$291,000 and were recorded as interest expense. None of the warrants were
exercised as of December 31, 2000.
In September 2000, the Company issued 11,159,678 shares of Series B redeemable
preferred stock ("Series B") at $1.24 per share in exchange for cash proceeds of
$13,026,274 and the conversion of notes payable and related accrued interest
expense of $811,127, net of issuance costs of $222,968.
Each share of the Series B redeemable convertible preferred stock is, at the
option of the holder, convertible into shares of common stock, subject to
certain antidilution adjustments, in accordance with the conversion formula
provided in the Company's Articles of Incorporation (currently a 1:1 ratio).
Outstanding Series B shares automatically convert into common stock: a) at
the election of at least a majority of the outstanding shares or b) upon the
closing of an initial public offering of the Company's common stock in which
gross proceeds exceed $25,000,000 and a minimum per share price equal to or
in excess of $4.96 per share, subject to certain antidilution adjustments.
14
HigherMarkets, Inc.
(a development stage company)
Notes to Financial Statements (continued)
15
HigherMarkets, Inc.
(a development stage company)
Notes to Financial Statements (continued)
6. Convertible Notes and Redeemable Convertible Series B Preferred Stock
(continued)
Holders of Series B are entitled to receive a cumulative dividend of $0.0992 per
share per annum. A dividend of $276,760 has been accrued at December 31, 2000,
but is not subject to payment until declared by the Board of Directors.
Series B stockholders are entitled to the number of votes equal to the number of
shares of common stock into which their shares could be converted. In addition,
Series B stockholders have the right to elect two directors voting together as a
single class.
At any time after September 29, 2005, upon the written consent of a majority of
the holders of the outstanding shares of Series B, the Company must redeem all
issued, outstanding, and unconverted shares. The redemption price for each share
of Series B is an amount equal to the greater of the original issue price for
Series B or the fair value of such shares. The difference between the original
purchase price of the Series B shares and its fair value will be accreted via a
charge to accumulated deficit over the period extending to September 29, 2005.
There was no charge to accumulated deficit for the period from February 15, 2000
(inception) to December 31, 2000.
Upon liquidation, the Series B preferred stockholders would receive a return
equal to $3.72 per share and any accrued but unpaid dividends. In the event of a
liquidation not sufficient to satisfy the intended liquidation provisions,
Series B preferred stockholders will generally have preference over Series A
preferred stockholders.
16
HigherMarkets, Inc.
(a development stage company)
Notes to Financial Statements (continued)
7. Stockholders' Deficit
Series A Convertible Preferred Stock
In March, May and July 2000, the Company issued a total of 3,589,746 shares of
Series A Convertible Preferred Stock for cash proceeds of $1,374,537, net of
issuance costs of $25,464.
Each share of the Series A convertible preferred stock is, at the option of the
holder, convertible into shares of common stock, subject to certain antidilution
adjustments, in accordance with the conversion formula provided in the Company's
Articles of Incorporation (currently a 1:1 ratio). Outstanding Series A
preferred shares automatically convert into common stock: a) at the election of
at least a majority of the outstanding Series A shares or b) upon the closing of
an initial public offering of the Company's common stock in which gross proceeds
exceed $10,000,000 and a minimum per share price equal to or in excess of $1.17
per share, subject to certain antidilution adjustments.
Each share of convertible preferred stock is entitled to the number of votes
equal to the number of shares of common stock into which such shares could be
converted. In addition, Series A stockholders have the right to elect one
director, voting together as a single class.
Upon liquidation, Series A preferred stockholders will receive $0.39 per share
plus any declared but unpaid dividends. In the event of a liquidation not
sufficient to satisfy the intended liquidation provisions, Series B preferred
stockholders will be given preference over the Series A preferred stockholders.
Common Stock
Under certain conditions, the Company has the option to repurchase all or a
portion of the unvested shares of common stock issued to the Company's founders
and certain employees of the Company at the original purchase price per share.
At December 31, 2000, 3,870,225 shares were unvested and will continue to vest
at various rates through October 2004.
17
HigherMarkets, Inc.
(a development stage company)
Notes to Financial Statements (continued)
7. Stockholders' Deficit (continued)
2000 Stock Plan
In July 2000, the Board approved the adoption of the 2000 Stock Plan (the
"Plan"), which authorizes the issuance of 2,800,000 shares of common stock under
the plan. Under the terms of the Plan, the Board of Directors may grant
incentive stock options ("ISOs") to employees and nonstatutory stock options
("NSOs") to employees, officers, directors, and consultants.
Generally, the Company grants stock options at a price not less than 85% of the
fair market value of the common stock on the date of the grant, as determined by
the Company's Board of Directors. Options generally vest over a four-year period
at a rate of 25% one year from the grant date and 1/48 monthly thereafter and
expire a maximum of ten years from the date of grant. The stock options are
exercisable immediately upon vesting.
A summary of activity under the Plan is as follows:
Outstanding Options
------------------------------
Shares Weighted-
Available for Number of Average Exercise
Grant Shares Price Per Share
----------------------------------------------
Initial authorized shares 2,800,000 -- $ --
Granted (1,521,500) 1,521,500 0.11
Canceled 75,000 (75,000) 0.08
----------------------------------------------
Outstanding at December 31, 2000 1,353,500 1,446,500 $0.11
==============================================
The weighted average fair value of options granted to employees under the Plan
in 2000 was $0.10 per share. The weighted average remaining contractual life of
options outstanding under the Plan at December 31, 2000 is 9.51 years.
18
HigherMarkets, Inc.
(a development stage company)
Notes to Financial Statements (continued)
7. Stockholders' Deficit (continued)
2000 Stock Plan (continued)
The following table summarizes information about stock options outstanding and
exercisable at December 31, 2000:
Outstanding Options
Weighted-
Weighted- Average
Average Remaining Number of
Number of Exercise Price Contractual Options
Shares Per Share Life (Years) Exercisable
Exercise Price
$0.08 1,104,500 $0.08 9.43 80,000
$0.20 342,000 $0.20 9.78 --
---------
1,446,500
=========
Pro Forma Disclosures of the Effect of Stock-Based Compensation
The Company has elected to follow APB 25 and related interpretations in
accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under FAS 123 requires the use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, when the exercise price of the Company's employee
stock options equals or exceeds the market price of the underlying common stock
on the grant date, no compensation expense is recorded.
For the period ended December 31, 2000, pro forma net loss and pro forma net
loss per share were as follows:
Net loss $5,270,122
Incremental pro forma compensation expense under FAS 123 15,641
----------
Net loss - pro forma $5,285,763
==========
19
HigherMarkets, Inc.
(a development stage company)
Notes to Financial Statements (continued)
7. Stockholders' Deficit (continued)
Pro Forma Disclosures of the Effect of Stock-Based Compensation (continued)
The fair value of each option grant is estimated at the date of grant using a
Black-Scholes option pricing model, assuming no expected dividends and with the
following weighted-average assumptions for the period ended December 31, 2000:
Volatility 1.0
Risk-free interest rate 6%
Expected life of the option 10 years
Expected dividend yield 0%
The pro forma impact of options on the net loss for the period ended December
31, 2000 is not representative of the effects on net income (loss) for future
years, as future years will include the effects of additional years of stock
option grants.
Common Stock Warrants and Options
The Company has granted 35,000 warrants to certain lessors. Such warrants were
fully vested and exercisable at the issuance date and expire in December 2010.
The fair value of these warrants is charged to expense over the period of the
related lease term or the period in which services are received. In addition,
the company has granted 10,000 options to a service provider that vested during
the year. The fair value of these warrants and options is included in general
and administrative expense. The value of the warrants and options was estimated
using the Black-Scholes option pricing model based on a weighted average,
risk-free interest rate of approximately 6%, an exercise period equal to the
life of the warrant and option, volatility of 1.0 and, no dividend yield.
20
HigherMarkets, Inc.
(a development stage company)
Notes to Financial Statements (continued)
7. Stockholders' Deficit (continued)
Common Stock Reserved for Future Issuance
The following shares of common stock were reserved at December 31, 2000:
Stock option plan 2,800,000
Conversion of common stock warrants 35,000
Conversion of Series A preferred stock 3,589,746
Conversion of Series B redeemable preferred stock 11,159,678
Exercise and conversion of Series B redeemable preferred
stock warrants 162,000
----------
17,746,424
----------
8. Related Party Transactions
The Company reimbursed a Series B Redeemable convertible stockholder for
$160,409 of legal expenses incurred in connection with the purchase of Series B
redeemable convertible shares.
21