Exhibit 99.1
Report of Independent Accountants
---------------------------------
To the Board of Directors and Stockholders of
Smartray Network, Inc.
(A Development Stage Enterprise)
In our opinion, the accompanying balance sheet and the related statements of
operations, changes in stockholders' equity and cash flows present fairly, in
all material respects, the financial position of Smartray Network, Inc. (a
development stage enterprise) at December 31, 1999 and the results of its
operations and its cash flows of the period from January 15, 1999 (date of
inception) to December 31, 1999, in conformity with accounting principles
generally accepted in the United States of America. 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 of these statements in accordance with auditing standards
generally accepted in the United States of America, which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
September 29, 2000
SMARTRAY NETWORK, INC.
(A Development Stage Enterprise)
BALANCE SHEET
December 31, 1999
_______
ASSETS
Current assets:
Cash and cash equivalents $ 440,327
Prepaid expenses and other current assets 19,227
------------------
Total current assets 459,554
Property and equipment, net 597,209
Other assets 7,967
------------------
Total assets $ 1,064,730
==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of obligations under capital leases $ 82,155
Accounts payable 388,834
Accrued liabilities 109,361
Accounts payable to related parties 90,417
------------------
Total current liabilities 670,767
Obligations under capital leases, net of current portion 50,886
------------------
Total liabilities 721,653
------------------
Commitments and contingencies
Stockholders' equity:
Series A convertible preferred stock, $.001 par value, 5,000,000 shares authorized,
2,630,000 shares issued and outstanding (liquidation preference of $1,315,000 at
December 31,1999) 1,212,721
Common stock, $.001; par value, 15,000,000 shares authorized, 6,000,000 shares issued and
outstanding 6,000
Less common stock subscription receivable (6,000)
Additional paid-in capital 287,772
Deferred compensation related to employee stock options (103,731)
Deficit accumulated during the development stage (1,053,685)
------------------
Total stockholders' equity 343,077
------------------
Total liabilities and stockholders' equity $ 1,064,730
==================
The accompanying notes are an integral part of these financial statements.
11
SMARTRAY NETWORK, INC.
(A Development Stage Enterprise)
STATEMENT OF OPERATIONS
for the period January 15, 1999 (date of inception) to December 31, 1999
_______
Revenue $ -
Cost of revenue 42,290
------------
Gross loss (42,290)
------------
Operating expenses:
Sales and marketing 127,736
Research and development 659,166
General and administrative 234,927
------------
Total operating expenses 1,021,829
------------
Loss from operations (1,064,119)
Interest income, net 10,434
------------
Net loss $(1,053,685)
============
The accompanying notes are an integral part of these financial statements.
12
SMARTRAY NETWORK, INC.
(A Development Stage Enterprise)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
for the period from January 15, 1999 (date of inception) to December 31, 1999
________
Deferred
Series A Compensation Deficit
Convertible Common Related to Accumulated
Preferred Stock Common Stock Stock Additional Employee During the
---------------------- ----------------- Subscription Paid-in Stock Development
Shares Amount Shares Amount Receivable Capital Options Stage Total
--------- ---------- ------ ------ ------------ ---------- ------------ ------------ -----
Issuance of common
stock to founders,
May 18, 1999 - $ - 6,000,000 $6,000 $(6,000) $ - $ - $ - $ -
Issuance of Series A
convertible
preferred stock 2,630,000 1,224,325 - - - - - - 1,224,325
Warrants to purchase
common stock in
connection with the
issuance of Series A
Convertible preferred
stock - - - - - 91,200 - - 91,200
Costs incurred in
connection with
issuance of
preferred stock - (11,604) - - - - - - (11,604)
Issuance of stock
options to
purchase common
stock in exchange
for services - - - - - 75,123 - - 75,123
Deferred stock based
compensation - - - - - 121,449 (121,449) - -
Amortization of stock
based compensation - - - - - - 17,718 - 17,718
Net loss - - - - - - - (1,053,685) (1,053,685)
-------- ---------- --------- ------ ------- -------- --------- ----------- -----------
Balance at
December 31, 1999 2,630,000 $1,212,721 6,000,000 $6,000 $(6,000) $287,772 $(103,731) $(1,053,685) $ 343,077
========= ========= ========= ====== ======= ======== ========= =========== ===========
The accompanying notes are an integral part of these financial statements.
4
SMARTRAY NETWORK, INC.
(A Development Stage Enterprise)
STATEMENT OF CASH FLOWS
for the period January 15, 1999 (date of inception) to December 31, 1999
-------
Cash flows from development stage activities:
Net loss $ (1,053,685)
Adjustments to reconcile net loss to net cash used in development stage activities:
Depreciation and amortization 137,002
Amortization of deferred compensation 17,718
Issuance of stock options in exchange for services 75,123
Changes in assets and liabilities:
Prepaid expenses and other current assets (19,227)
Other assets (7,967)
Accounts payable 388,834
Accrued expenses 109,361
Accounts payable to related parties 90,417
----------------
Net cash used in development stage activities (262,424)
----------------
Cash flows from investing activities:
Purchase of property and equipment (555,119)
----------------
Net cash used in investing activities (555,119)
----------------
Cash flows from financing activities:
Proceeds from issuance of preferred stock 1,315,525
Costs incurred in connection with issuance of preferred stock (11,604)
Payments on capital lease obligations (46,051)
----------------
Net cash provided by financing activities 1,257,870
----------------
Cash, beginning of period -
----------------
Cash, end of period $ 440,327
================
Supplemental disclosure of non-cash investing and financing activities:
Capital lease obligations in connection with the acquisition of equipment $ 179,092
Issuance of warrants to purchase common stock in connection with Series A convertible
preferred stock $ 91,200
Issuance of stock options in exchange for services $ 75,123
Supplemental cash flow disclosure:
Cash paid for interest $ 1,590
The accompanying notes are an integral part of these financial statements.
14
SMARTRAY NETWORK, INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS -- (Continued)
-----------
1. Description of Business and Financing of Start-up Operations
Smartray Network, Inc. (the Company), a development stage company, was
incorporated in the State of Delaware on January 15, 1999, for the purpose
of developing wireless message delivery systems. Since its inception, the
Company has devoted substantially all of its efforts to business planning,
research and development, recruiting management and technical staff,
acquiring operating assets and raising capital. Accordingly, the Company is
considered to be in the development stage as defined in Statement of
Financial Accounting Standard (SFAS) No. 7.
The Company has a deficit accumulated during its development stage, from
January 15, 1999 (date of inception) to December 31, 1999 of $1,053,685.
The Company expects to continue to experience losses in order to execute
its current business plan. Additionally, the Company's capital requirements
will depend on many factors including the success of the product
development efforts. The business plan contemplates continuing enhancements
of the Company's existing Internet-based business. Realization of the
business plan will require additional financing.
On February 1, 2000, the Company issued 4,077,468 shares of Series B
convertible preferred stock at $.71 per share for gross proceeds of
$2,901,000. In management's opinion, the Company has sufficient cash
resources available through its current cash on hand and proceeds from the
issuance of the Series B preferred stock to operate through the foreseeable
future.
2. Summary of Significant Accounting Policies
The significant accounting policies followed by the Company in the
preparation of these financial statements are as follows:
Cash and cash equivalents
-------------------------
Highly liquid investments having original maturities of 90 days or less at
the date of acquisition are classified as cash equivalents. The carrying
value of cash equivalents approximate fair value.
Income Taxes
------------
The Company uses the liability approach under which deferred income taxes
are calculated based on the differences between the financial and tax bases
of assets and liabilities based upon enacted tax laws and rates applicable
to the periods in which the taxes become payable. The Company provides a
valuation allowance, if necessary, to reduce deferred tax assets to their
estimated realizable value.
The provision for income taxes consists of the Company's current tax
provision (benefit) for federal and state income taxes and the changes in
its deferred tax assets and liabilities during the period.
15
SMARTRAY NETWORK, INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS -- (Continued)
-----------
Internal-use software development costs
---------------------------------------
No costs for internal use software were capitalized, as the projected life
of the internally developed software at December 31, 1999 was not adequate
to warrant capitalization under SOP 98-1.
Use of 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. Actual results could differ from those
estimates.
Fair Value of Financial Instruments
-----------------------------------
The carrying amounts of the Company's financial instruments, which include
cash and cash equivalents and capital lease obligations approximate their
fair values. Cash and cash equivalents approximate fair value due to their
short maturities. The carrying value capital lease obligations approximates
fair value. Based on borrowing rates currently available to the Company
for loans with similar terms.
Start-Up Costs
--------------
The Company expensed all costs incurred in connection with the start-up and
organization of the Company.
Property and Equipment
----------------------
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets;
three years for computer software and equipment and five years for office
furniture and equipment. Property and equipment held under capital leases
and leasehold improvements are amortized over the shorter of the lease term
or the estimated useful life of the related asset. When property and
equipment is retired or otherwise disposed of, the cost and related
accumulated depreciation are removed from the accounts and the resulting
gain or loss is included in operations.
Research and Development
------------------------
Research and development costs are expensed as incurred.
Accounting for Stock-Based Compensation
---------------------------------------
The Company measures compensation expense for its employee stock-based
compensation using the Intrinsic Value method. Under the Intrinsic Value
method of accounting for stock-based compensation, when the exercise price
of options granted to employees is less than the estimated fair
16
SMARTRAY NETWORK, INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS -- (Continued)
-----------
value of the underlying stock on the date of grant, deferred compensation
is recognized and is amortized to compensation expense over the applicable
vesting period.
The Company measures compensation expense for its non-employee stock-based
compensation awards. The fair value of the options and warrants issued is
used to measure the transaction as this is more reliable than the fair
value of the services received. The fair value is measured as the value of
the Company's common stock on the date that the commitment for performance
by the counterparty has been reached or the counterparty's performance is
complete. The fair value of the equity instrument is charged directly to
compensation expense and additional paid in capital.
Impairment of Long-Lived Assets
-------------------------------
The Company evaluates the recoverability of the carrying value of its long-
lived assets. The Company considers performance and anticipated future
results in its evaluation of potential impairment. Accordingly, when
indicators of impairment are present, the Company evaluates the carrying
value of these assets in relation to the performance of the business and
future discounted and undiscounted cash flows expected to result from the
use of these assets. Impairment losses are recognized when the sum of
expected future cash flows are less than the assets' carrying value. No
such impairment losses have been recognized to date.
Advertising Costs
-----------------
Advertising costs are charged to operations as incurred. Advertising costs
were approximately $5,000 from January 15, 1999 (date of inception) to
December 31, 1999.
Certain Risks and Uncertainties
-------------------------------
The Company is subject to all the risks inherent in an early stage business
in the technology industry. The risks include, but are not limited to,
limited operating history, limited management resources, dependence on the
Internet and related security risks and the changing nature of the Internet
industry.
Recent Accounting Pronouncements
--------------------------------
During March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation - an Interpretation of Accounting Principles Board Opinion No.
25" (FIN 44). FIN 44 is effective July 1, 2000, but certain conclusions in
FIN 44 cover specific events that occurred after either December 15, 1998
or January 12, 2000. The Company believes the adoption of FIN 44 will not
have a material effect on its financial statements.
During January, 2000 the FASB Emerging Issues Task Force issued EITF No.
00-02 "Accounting for Web Site Development Costs". The consensuses in this
issue are effective for web site development costs incurred for fiscal
quarters beginning after June 30, 2000 (including costs incurred for
projects in process as of the beginning of the quarter of adoption of these
consensuses). The Company is
17
SMARTRAY NETWORK, INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS -- (Continued)
-----------
currently evaluating the impact of EITF 00-02. Costs incurred to date have
not qualified for capitalization under EITF 00-02.
During January, 2000 the FASB Emerging Issues Task Force issued EITF No.
00-03 "Application of AICPA Statement of Position 97-2 to Arrangements That
Include the Right to Use Software Stored on Another Entity's Hardware".
The EITF addresses the effect on revenue recognition of a customer not
taking possession of the software it has licensed and the effect on revenue
recognition of a vendor's hosting obligation. The Company believes the
adoption of EITF 00-03 will not have a material effect on its financial
statements.
3. Property and equipment
Property and equipment are stated at cost and consist of the following at
December 31, 1999:
Computer software and equipment $ 538,904
Equipment under capital leases 179,092
Office furniture and equipment 4,380
Leasehold improvements 11,835
------------
734,211
Less: Accumulated depreciation
and amortization (137,002)
------------
$ 597,209
============
At December 31, 1999 property and equipment under capital leases consist of
computer equipment and software with a cost of $179,092.
Amortization of property and equipment under capital leases totaled $44,773
for the period January 15, 1999 (date of inception) to December 31, 1999.
4. Related Party Transactions
During 1999, the Company entered into a consulting agreement (the
Agreement) with certain stockholders prior to their employment with the
Company. The consulting agreement requires payments totaling $90,417. The
consulting fees will be paid in accordance with the agreement commencing
January 1, 2000. As of December 31, 1999, the liability was recorded as an
accounts payable due to related parties. Subsequent to December 31, 1999,
all payments have been made under the agreement.
As of December 31, 1999, $6,000 remains as a stock subscription receivable
which is related to the issuance of common stock to the founders. The stock
subscription receivable has been recorded as a reduction to stockholders'
equity. Subsequent to December 31, 1999, the stock subscription was paid by
the stockholder.
18
SMARTRAY NETWORK, INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS -- (Continued)
----------
5. Obligations Under Capital Leases
The Company is the lessee of computer software and equipment under capital
leases expiring during the year 2001.
Minimum future lease payments under capital leases at December 31, 1999
are as follows:
2000 $ 100,179
2001 54,108
------------
Total minimum lease payments 154,287
Less amount representing interest (21,266)
------------
Net present value of minimum lease payments 133,021
Less current portion (82,155)
------------
Long term portion $ 50,866
============
6. Commitments
During August 1999, the Company entered into a lease for office space
commencing September 1, 1999 through August 31, 2002. As of December 31,
1999 the minimum future annual rentals are as follows:
2000 $ 64,670
2001 67,237
2002 46,000
------------
$ 177,907
============
7. Stockholders Equity
Series A Convertible Preferred Stock and Warrants
-------------------------------------------------
During 1999 the Company authorized 5,000,000 shares of preferred stock
and designated 2,630,000 shares as Series A convertible preferred stock (the
Series A Preferred Stock).
The Series A Preferred Stock has the following characteristics:
Voting
------
The holders of the preferred stock are entitled to vote, together with the
holders of common stock, on all matters submitted to stockholders for a
vote. Each preferred stockholder is entitled to the number of votes equal
to the number of shares of common stock into which each preferred share is
convertible at the time of such vote.
Dividends
---------
The holders of the Series A Preferred Stock are entitled to participate in,
when and as declared by the Board of Directors and out of funds legally
available any and all dividend payments on common stock, payable in
preference and priority to any payment of any dividend on common stock. No
dividends or other distributions shall be made with respect to the common
stock, until all dividends on the Series A Preferred Stock have been paid.
Through December 31, 1999, no dividends have been declared or paid by the
Company.
19
SMARTRAY NETWORK, INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS -- (Continued)
----------
Liquidation Preference
----------------------
In the event of any liquidation, dissolution or winding up of the affairs
of the Company, the holders of the then outstanding Series A Preferred
Stock shall receive for each share an amount equal to the sum of $ .50 per
share of Series A Preferred Stock, respectively, plus all declared but
unpaid dividends, whether payable in cash, property or stock or any
combination of the two, payable in preference and priority to any payments
made to the holders of the then outstanding common stock. If upon the
liquidation, the assets to be distributed among Series A Preferred Stock
shall be insufficient to permit payment in full to the holders of Series A
Preferred Stock, then the entire assets of the Corporation to be
distributed shall be distributed ratably among the holders of Series A
Preferred Stock.
Conversion
----------
Each share of preferred stock, at the option of the holder, is convertible
into a number of fully paid shares of common stock as determined by
multiplying the respective preferred stock shares to be converted by $.50,
then dividing the result by the conversion price of $.50. Upon an
underwritten public offering of shares of common stock conversion is
automatic immediately upon the closing of the sale of such shares. The
Company is required to reserve and keep available out of its authorized
Common Stock, solely for the purpose of issuance upon the conversion of
Series A Preferred Stock. At December 31, 1999 2,630,000 shares of common
stock are reserved for conversion of preferred stock.
Warrants
--------
In connection with the issuance of Series A Preferred Stock, the Company
issued warrants to purchase 380,000 shares of its common stock at a price
of $.50 per share, subject to certain anti-dilution adjustments. These
warrants are fully vested, exercisable at the option of the holders, in
whole or in part, and expire in 2004. The Company has the option to redeem
and repurchase the warrants, at $.01 per warrant share the holder would
have been entitled to receive upon exercise of the then-unexercised
warrant, immediately prior to the occurrence of a redemption event; defined
as, (a)(i) a consolidation or merger of the corporation in which the
stockholders of the Company do not continue to hold at least 50% interest
in the successor entity, or (ii) transaction or series of transactions that
results in the transfer of greater than 50% of the voting power of the
corporation; (b) the sale, lease abandonment of the corporations; or (c)
and underwritten initial public offering of equity securities of the
Company. The value of the warrants was estimated based on the Black
Scholes valuation model and recorded as additional paid in capital in the
accompanying financial statements.
Common Stock
------------
Each share of common stock is entitled to one vote. The holders of common
stock are also entitled to receive dividends whenever funds are legally
available and when declared by the Board of Directors, subject to the prior
rights of holders of all classes of stock outstanding.
8. Stock Option Plan
During 1999, the Company adopted the Stock Option and Restricted Stock
Purchase Plan (the Plan) under which 1,000,000 shares of the Company's common
stock were reserved for issuance to employees, directors and consultants.
Options granted under the Plan may be incentive stock options or non-
statutory stock options. Stock purchase rights may also be granted under the
Plan. Incentive stock options may only be granted to employees. The Board of
Directors determines the period over which options become exercisable,
generally 3 years. Certain option agreements contain provisions for
accelerated vesting based on performance or change in control of the Company.
The term of the options is 5 years.
The Company applies APB 25 and related interpretations in accounting for
employee and director options granted under the Plan. During 1999, the
Company issued 396,000 and 130,000 options to employees and non-employees,
respectively, to purchase common stock of the Company.
20
SMARTRAY NETWORK, INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS -- (Continued)
----------
The Company has estimated the fair value of the underlying common stock on
the date of grant was in some instances, in excess of the exercise price for
the options granted from the date of inception to December 31, 1999. As a
result, the Company recorded deferred compensation of $121,449 during 1999.
This amount was recorded as a reduction to stockholders' equity and is being
amortized as a charge to operations over the vesting period of the stock
options. From January 15, 1999 (date of inception) to December 31, 1999, the
Company recognized $17,718 of compensation expense related to employee stock
options. Annual amortization of deferred stock compensation for stock options
outstanding as of December 31, 1999, is approximately $37,686, $37,686, and
$28,359 for the years ending December 31, 2000, 2001, and 2002, respectively.
On September 1, 1999 the Company issued a non-employee options to purchase
120,000 shares of common stock in connection with a consulting agreement for
services whereby when the SmartRay website and underlying applications became
operational the options would become fully vested. The application became
operational during October 1999 at which time the fair value of the non-
employee options was estimated at $69,344. This amount was recorded as
additional paid in capital and research and development expense. The
estimated fair value of the options were determined using the American Black-
Scholes Model.
On July 31, 1999 the Company issued a non-employee option to purchase 10,000
shares of common stock in connection with advisory board services rendered.
The options were fully vested upon grant at which time the fair value was
estimated at $5,779. This amount was recorded as additional paid in capital
and general and administrative expense. The estimated fair value of the
options were determined using the American Black-Scholes Model.
The following table summarizes the activity of the Company's stock option
plan:
For the period
January 15, 1999
through December 31, 1999
--------------------------------
Weighted
average
Number of exercise
Options price
------------- ----------------
Outstanding - beginning of period - $ -
Granted below estimated fair value 526,000 .25
Granted at estimated fair value - -
Exercised - -
Cancelled 95,000 .25
-------------
Outstanding - end of period 430,000 $ .25
=============
Exercisable at end of period:
Weighted average grant date fair
value 156,000 $ .52
Weighted average remaining
contractual life 5 years
For disclosure purposes, the fair value of each stock option granted is
estimated on the date of grant using the American Black-Scholes option-
pricing model with the following weighted average assumptions used for stock
options granted in 1999; no annual dividends, volatility of 200%, risk-free
interest rate of 6.06% and expected life of five years.
Under the above model, the total value of the stock options granted in 1999
was $286,958 which would be amortized on a pro forma basis over the option
vesting period. SFAS No. 123 "Accounting for Stock-Based Compensation"
encourages adoption of a fair value based method for valuing the cost of
stock-based compensation. However, it allows companies to continue to use the
intrinsic value method for options granted to employees and disclose pro
forma net loss. Had the Company determined compensation cost for this plan in
accordance with SFAS No. 123, the Company's pro forma net loss from the date
of inception through December 31, 1999, would have been $1,083,097.
21
SMARTRAY NETWORK, INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS -- (Continued)
----------
Subsequent to December 31, 1999, the Company issued 2,263,638 and 97,100
stock options to employees and non-employees, respectively, pursuant to the
Plan. These options have exercise prices ranging from $0.25 to $1.76 and vest
over a period of one to three years.
9. Income Taxes
Deferred tax assets consist of the following:
December 31,
1999
-----------------
Net operating loss carryforwards $ 402,517
Depreciation and amortization (14,146)
-----------------
Net deferred tax assets 388,371
Less: valuation allowance (388,371)
-----------------
Total deferred taxes $ -
=================
Based on the Company's limited operating history and management's estimates
of future profitability, the Company has provided a valuation allowance for
the full amount of its net deferred tax assets since realization of any
future benefit from deductible temporary differences and net operating loss
carryforwards cannot be sufficiently assured at December 31, 1999. At
December 31, 1999, the Company has total net operating loss carryforwards of
approximately 1,050,000. The operating loss begins expiring during 2020.
Under the provisions of the Internal Revenue Code, certain substantial
changes in the Company's ownership may result in a limitation on the amount
of net operating loss carryforwards and research and development credit carry
forwards which can be used in future years.
10. Subsequent Events
On February 1, 2000 the Company issued 4,077,468 shares of Series B preferred
stock at $.71 per share for gross proceeds of $2,901,000.
On August 31, 2000 the Company was acquired by LifeMinders, Inc. In
connection with the acquisition, the Company's selling stockholders received
approximately $2.3 million in cash, 1,252,198 shares of LifeMinders Common
Stock and Lifeminders assumed the Company's stock options to purchase 251,447
shares of the Company's common stock.
22