[DESCRIPTION] EXHIBIT 99.1
Exhibit 99.1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
WITI Corporation and Subsidiaries
Boulder, CO
We have audited the accompanying consolidated balance sheet of WITI Corporation
(a subsidiary of the University Corporation for Atmospheric Research Foundation)
and subsidiaries (the Company) as of September 30, 1999, and the related
consolidated statements of operations, stockholders' deficiency, 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 auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the 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, such consolidated financial statements present fairly, in all
material respects, the financial position of WITI Corporation and subsidiaries
as of September 30, 1999, and the results of their operations and their cash
flows for the year then ended in conformity with accounting principles generally
accepted in the United States of America.
DELOITTE & TOUCHE LLP
Denver, Colorado
November 5, 1999, except for Note 6, as to which the date is March 29, 2000
WITI CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1999
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ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 540,951
Accounts receivable 203,136
Prepaid and other current assets 5,946
---------
Total current assets 750,033
EQUIPMENT, at cost 384,627
Less accumulated depreciation 245,969
---------
Equipment, net 138,658
---------
TOTAL $ 888,691
=========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
Accounts payable and other current liabilities:
Related parties (Notes 2 and 3) $ 549,766
Other 102,496
Note payable - related party (Note 3) 100,000
Billings in excess of costs and estimated earnings on
uncompleted contracts 135,434
Deferred revenue 6,442
---------
Total current liabilities 894,138
---------
LONG-TERM DEBT - related party (Note 3) 718,233
COMMITMENTS AND CONTINGENCIES (Notes 1 and 3)
STOCKHOLDERS' DEFICIENCY (Note 4):
Series A convertible preferred stock, $.001 par value -
4,000,000 shares authorized; 3,500,000 shares issued and
outstanding; liquidation preference of $.10 per share 3,500
Series B preferred stock, $.001 par value - 10,000 shares
authorized; 10,000 shares issued and outstanding;
liquidation preference of $1.00 per share 10
Common stock, $.001 par value; 10,000,000 shares authorized;
1,032,750 shares issued and outstanding 1,033
Additional paid-in capital 50,635
Accumulated deficit (778,358)
---------
Total stockholders' deficiency (723,680)
---------
TOTAL $888,691
========
See notes to consolidated financial statements.
CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 1999
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OPERATING REVENUES:
Consulting services $ 988,653
Other 1,661
----------
Total operating revenues 990,314
----------
COST OF OPERATING REVENUES (Note 2):
Consulting services 492,886
Other (63)
----------
Total cost of operating revenues 492,823
----------
Gross margin 497,491
----------
OPERATING EXPENSES (Note 2):
General and administrative 620,787
Selling and marketing 109,585
Research and development 255,834
----------
Total operating expenses 986,206
----------
LOSS FROM OPERATIONS (488,715)
OTHER INCOME (EXPENSE):
Interest income 7,395
Interest expense (57,657)
----------
LOSS BEFORE INCOME TAXES (538,977)
Current income tax expense (6,694)
----------
NET LOSS $ (545,671)
==========
See notes to consolidated financial statements.
WITI CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIENCY
YEAR ENDED SEPTEMBER 30, 1999
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Series A Series B Additional
Preferred Stock Preferred Stock Common Stock Paid-in
Shares Amount Shares Amount Shares Amount Capital
BALANCE, OCTOBER 1, 1998 3,500,000 $ 3,500 10,000 $ 10 1,032,750 $ 1,033 $ 50,885
Return of capital (250)
Net loss
----------- ------- -------- ----- ----------- ------- --------
BALANCE, SEPTEMBER 30, 1999 3,500,000 $ 3,500 10,000 $ 10 1,032,750 $ 1,033 $ 50,635
=========== ======= ======== ===== =========== ======= ========
Total
Accumulated Stockholders'
Deficit Deficiency
BALANCE, OCTOBER 1, 1998 $ (233,187) $ (177,759)
Return of capital (250)
Net loss (545,671) (545,671)
---------- ----------
BALANCE, SEPTEMBER 30, 1999 $ (778,858) $ (723,680)
========== ==========
See notes to consolidated financial statements.
WITI CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SEPTEMBER 30, 1999
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(545,671)
Adjustments to reconcile net loss to net cash used in operating activities-
Depreciation 51,490
Net changes in operating assets and liabilities:
Accounts receivable (185,933)
Prepaid and other current assets 127,011
Accounts payable and other current liabilities (43,016)
Billings in excess of costs and estimated earnings on uncompleted contracts 128,525
Deferred revenue (1,456)
---------
Net cash used in operating activities (469,050)
---------
CASH FLOWS FROM INVESTING ACTIVITIES - Purchase of equipment (126,604)
---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock
Borrowings under related party notes payable 818,233
Return of capital (250)
---------
Net cash provided by financing activities 817,983
---------
NET INCREASE IN CASH AND CASH
EQUIVALENTS 222,329
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 318,622
---------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 540,951
=========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 38,757
=========
Income taxes $ 5,940
=========
See notes to consolidated financial statements.
WITI CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED SEPTEMBER 30, 1999
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1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization - Weather Information Technologies, Inc. was founded
in 1989 by the University Corporation for Atmospheric Research Foundation
(the Foundation) for the purpose of commercializing certain technical
expertise and know-how developed by the University Corporation for
Atmospheric Research (UCAR).
Effective October 1996, Weather Information Technologies, Inc.
was restructured. WITI Corporation was formed to become the parent of
Weather Information Technologies, Inc. and WITI Pacific Limited. The
transaction was accomplished by contributions of the then outstanding
preferred and common stock of Weather Information Technologies, Inc. in
exchange for newly issued shares of Series A and B preferred stock of WITI
Corporation (see Note 4). Contemporaneously, the stock of WITI Pacific
Limited was distributed from Weather Information Technologies, Inc. to WITI
Corporation.
The primary business of WITI Corporation involves development and
sale of interactive broadcast products, which generally have as one of
their components proprietary software. The interactive weather related
broadcast products sold by WITI Corporation are derived from development
work done by WITI Corporation employees and by various subcontractors,
including UCAR. WITI Corporation is a subsidiary of the Foundation, which
is controlled by UCAR.
Weather Information Technologies, Inc. provides weather related
products and services. A significant portion of the products and services
provided by Weather Information Technologies, Inc. are derived from
technical expertise made available to Weather Information Technologies,
Inc. by UCAR.
WITI Pacific Limited provides aviation-related safety consulting
services. The services offered by WITI Pacific Limited are delivered via
the use of subcontractors engaged by WITI Pacific Limited.
Basis of Presentation - The consolidated financial statements
include the accounts of WITI Corporation and its wholly-owned subsidiaries,
Weather Information Technologies, Inc. and WITI Pacific Limited. All
significant intercompany transactions are eliminated in consolidation.
The accompanying financial statements have been prepared on a
going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. As shown in
the financial statements, during the year ended September 30, 1999, WITI
incurred a net loss of $545,671. As of September 30, 1999, WITI
Corporation has a stockholders' deficiency of $723,680. The
recurring losses from operations, negative working capital, stockholders'
deficiency and noncompliance with a note payable covenant (see Note 3)
raise substantial doubt about its ability to continue as a going concern.
The financial statements do not include any adjustments relating
to the recoverability and classification of recorded assets amounts or the
amounts and classification of liabilities that might be necessary should
WITI Corporation be unable to continue as a going concern. WITI
Corporation's continuation as a going concern is dependent upon its ability
to generate sufficient cash flow to meet its obligations on a timely basis,
to obtain additional financing as may be required, and ultimately to attain
successful operations. During 1999 WITI Corporation entered into two
contracts to provide weather related products to a customer. These
contracts will be completed during fiscal year 2000. Management is
continuing its efforts to obtain financing for the development and
introduction of new interactive broadcast products.
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 as of the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
these estimates.
Cash Equivalents - WITI Corporation considers investments with a
maturity of three months or less at the time of purchase to be cash
equivalents.
Depreciation - Depreciation is computed using the straight-line
method over the estimated useful lives of the equipment, which range from
three to five years.
Research and Development - Research and development costs are
expensed as incurred. WITI Corporation incurred $255,834 of research and
development costs in 1999.
Revenue Recognition - The Company's contracts generally call for
the delivery of a software system which requires significant production,
modification, or customization of software. Consequently, WITI Corporation
recognizes revenues and profits from consulting contracts under the
percentage-of-completion method of accounting. These contracts relate to
the development of weather related products and generally extend for a
period in excess of one year. The amounts of revenues and profits
recognized each year are based on the ratio of costs incurred to total
estimated costs. Costs included in the contracts include direct material,
direct labor, and project-related overhead. General and administrative
expenses are charged to expense during the periods incurred and are not
allocated to consulting contracts. Costs and estimated earnings in excess
of billings on uncompleted contracts are recognized as current assets as of
the balance sheet date. These unbilled receivables are billable upon the
completion of contract milestones and are expected to be billed and
collected within one year. Billings in excess of costs and estimated
earnings on uncompleted contracts are recorded
as current liabilities as of the balance sheet date. An estimated liability
for losses on uncompleted contracts is provided in the period in which such
losses are identified.
Income Taxes - Deferred tax assets and liabilities are recognized
based on differences between financial statement and income tax bases of
assets and liabilities using presently enacted tax rates.
2. RELATED PARTY TRANSACTIONS
WITI Corporation incurred $159,915 in administrative expenses
during 1999 under various agreements with UCAR whereby UCAR provides
employees, management and facilities to WITI Corporation on an as-required
basis.
WITI Corporation has entered into subcontractor agreements with
UCAR whereby UCAR provides consulting services in connection with their
consulting contracts. During 1999, WITI incurred consulting costs of
$319,719 related to such subcontractor agreements.
As of September 30, 1999, WITI Corporation's and Weather
Information Technologies, Inc.'s accounts payable to UCAR and the
Foundation were $504,632 and $26,233, respectively.
See also related party borrowings in footnote 3.
3. RELATED PARTY BORROWINGS
In October 1998, WITI Corporation entered into a Memorandum of
Understanding with UCAR in which UCAR agreed to forego repayment of the
trade accounts payable balance at September 30, 1998 owing from WITI
Corporation to UCAR for an indeterminate length of time. Under the terms
of the memorandum, interest is to be paid by WITI Corporation to UCAR on a
quarterly basis at an annual rate of 9% until such time as the trade
accounts payable balance at September 30, 1998 has been repaid to UCAR.
WITI Corporation incurred interest expense of $51,591 during 1999 under the
memorandum. The balance outstanding and accrued interest under the
memorandum at September 30, 1999 were $573,233 and $12,898, respectively.
UCAR has represented to management of WITI that it will not call the
balance due before October 1, 2000; therefore, the amount has been
classified as noncurrent.
In June 1999, WITI Corporation entered into an agreement with
UCAR under which UCAR has agreed to loan to WITI Corporation, in the form
of an unsecured note payable, an amount up to $250,000. Any amounts
borrowed under the agreement bear interest at an annual interest rate of
12% with principal and interest due on May 30, 2001. The amount that can
be borrowed under the agreement is dependent upon certain terms as
indicated in the agreement. The agreement imposes certain financial and
non financial covenants upon WITI Corporation. If these covenants are not
met, UCAR may terminate the agreement and the principal and interest
outstanding under the agreement
become due immediately. At September 30, 1999, under the terms of this
agreement, WITI Corporation has borrowed $100,000 under an unsecured note
payable to UCAR, and the related accrued interest thereon, all of which was
payable as of September 30, 1999, was $3,000. As of September 30, 1999,
WITI Corporation failed to meet a certain covenant as indicated in the
agreement and, as such, WITI Corporation is considered to be in default
under the agreement and the entire balance has been classified as current.
In July 1999 and August 1999, WITI Corporation issued convertible notes
totaling $60,000 and $85,000, respectively. The notes bear interest at an
annual rate of 12% with principal and interest due on May 31, 2001 and August
9, 2001 respectively. The notes are payable to the Foundation and directors
and officers of WITI Corporation. If, prior to the first anniversary of the
notes, WITI Corporation receives proceeds from the sale of Series C Preferred
stock of a least $250,000, the notes will be converted into Series C
Preferred stock at a per share price equal to that paid by the purchasers of
the Series C Preferred shares. If the equity offering has not occurred by
the first anniversary of the notes, the notes are convertible, at the
holder's option, into Series D Preferred stock based on a predetermined
formula. Upon conversion of the notes to either Series C Preferred shares or
Series D preferred shares the holder will be issued a warrant to purchase a
number of shares of WITI Corporation's $.001 par value common stock equal to
the number of Series C Preferred shares or Series D Preferred shares issued
upon conversion of the note. As of September 30, 1999, the Series C
Preferred stock equity offering had not taken place and no amount under the
notes had been converted to Series C Preferred shares. Interest expense
incurred under these notes during 1999 totaled $3,003. The unpaid principal
and accrued interest balance at September 30, 1999 were $145,000 and $3,003,
respectively.
The maturities of long-term debt are as follows:
2000 $100,000
2001 718,233
--------
Total $818,233
========
4. STOCKHOLDERS' DEFICIENCY
The Series A Preferred stock has a preference in liquidation of
$.10 per share, subordinate to payments to the Series B Preferred
stockholders, and has voting rights on an as-if converted basis. The
Series B Preferred stock receives dividends of $.10 per share per year and
has a preference in liquidation of $1.00 per share. Individually, the
shares of Series B Preferred stock do not have voting rights; however, the
majority holders of this series may exercise, at any time, the right to
elect one representative to the Board of Directors of WITI Corporation.
The Series A Preferred shares are convertible at any time at the
option of the holder into common stock. The conversion ratio for Series A
Preferred shares is initially one for one, subject to adjustment as a
result of stock splits, dividends, and
certain other events. Should WITI Corporation complete a public offering
registered under the Securities Act of 1933 at a public offering price
equal to or exceeding $5.00 per common share with aggregate proceeds in
excess of $5,000,000, both Series A and Series B Preferred shares will be
automatically converted to common shares. Series B Preferred shares convert
into shares of common stock at a ratio of ten for one upon an automatic
conversion.
Stock Options - During November 1996, WITI Corporation adopted a
stock option plan (the Plan) for employees and consultants. Options
granted pursuant to the Plan may be either incentive options or
nonqualified options.
The following table summarizes stock option activity for the year
ended September 30, 1999:
Options Outstanding
Weighted
Average
Number Exercise
of Shares Price
Balances, October 1, 1998 $ 0
Granted (weighted average fair
value of $0.02 per share) 10,000 0.05
Exercised
Canceled
---------- ----------
Balances, September 30, 1999 10,000 $ 0.05
========== ==========
At September 30, 1999, options for 623,000 shares were available
under the Plan for future grant.
Additional information regarding options outstanding as of
September 30, 1999 is as follows:
Options Outstanding Options Exercisable
Weighted
Average Weighted
Range of Remaining Exercisable at Average
Exercise Number Contractual September 30, Exercise
Prices Outstanding Life (Years) 1999 Price
$0.05 10,000 7.0 2,500 $0.05
Additional Stock Plan Information - Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation,
(SFAS No. 123) requires the disclosure of pro forma net income had WITI
Corporation adopted the fair value method of accounting for stock-based
awards. Under SFAS No. 123, the fair value of the stock-based awards to
employees is calculated through the use of option pricing models,
even though such models were developed to estimate the fair value of freely
tradable, fully transferable options without vesting restrictions, which
significantly differ from WITI Corporation's stock option awards. These
models also require subjective assumptions, including expected time to
exercise, which greatly affect the calculated values. WITI Corporation's
calculations were made using the Black-Scholes option pricing model under
the minimum value method with the following weighted average assumptions
for the period ended September 30, 1999; expected life, 7.0 years; risk
free interest rates of 6.0%; and no dividends during the expected term. The
Company's calculations are based on a single option valuation approach and
forfeitures are recognized as they occur.
The pro forma impact on WITI Corporation's net loss had
compensation expense been recorded at the date of the grant based on the
minimum value prescribed by SFAS 123 is insignificant.
5. INCOME TAXES
The Company's income tax benefit/provision for the year ended
September 30, 1999 differs from the amount expected from applying the
federal statutory rate to loss before income taxes principally due to the
valuation allowance.
Deferred income taxes have been provided for temporary
differences that exist between the financial reporting and income tax bases
of assets and liabilities and have been classified as either current or
noncurrent based upon the related assets or liabilities. These differences
arise primarily from differences in revenue recognition, prepaid insurance
and depreciation of equipment.
As of September 30, 1999, the deferred tax asset consists of
deferred tax asset of $301,000 offset by a deferred tax liability of
$42,000. A valuation allowance of $259,000 has been established against the
net deferred tax asset due to uncertainty related to the eventual
realization of the deferred tax asset (see Note 1). Net operating loss
carryforwards for Federal income tax purposes total $769,000 and begin
expiring in 2018. The Internal Revenue Code places certain limitations on
the annual amount of net operating loss carryforwards which can be utilized
if certain changes in the Company's ownership occur.
6. SUBSEQUENT EVENTS
On January 16, 2000, WITI Corporation signed a $1,000,000
promissory note to a third party. Pursuant to the terms of the note, WITI
Corporation borrowed $500,000 on January 16, 2000 and borrowed an
additional $500,000 on March 1, 2000. The note is unsecured and bears
interest at a rate of 10% with principal and interest due on January 16,
2001. On February 2, 2000, WITI Corporation's Board of Directors granted
options to employees and directors to acquire 533,000 shares of common
stock at a strike price of $2.00 per share under the Plan. Of the options
that were granted, 447,000 vested immediately, and 86,000 vest on January
1, 2001.
On March 29, 2000, the Company was merged into a wholly owned
subsidiary of LifeMinders.com (LifeMinders). In consideration for the
merger, LifeMinders delivered to the stockholders of WITI Corporation
$2,500,000 in cash, 345,796 shares of LifeMinders' common stock, and
options to acquire a total of 38,266 shares of LifeMinders' common stock.