EXHIBIT 7.1
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
EMAX Solution Partners, Inc.:
We have audited the accompanying consolidated balance sheets of EMAX
Solution Partners, Inc. and subsidiaries as of December 31, 1998 and 1999, and
the related consolidated statements of operations, stockholders' equity
(deficit), and cash flows for the years then ended. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of EMAX
Solution Partners, Inc. and subsidiaries as of December 31, 1998 and 1999, and
the results of their operations and their cash flows for the years then ended,
in conformity with generally accepted accounting principles.
/s/ KPMG LLP
Philadelphia, Pennsylvania
March 6, 2000, except for note 11, which is as of March 13, 2000
1
EMAX Solution Partners, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1999
Assets
1998 1999
Current assets:
Cash and cash equivalents.......................... $ 10,725 $ 2,066,284
Accounts receivable................................ 586,771 1,644,126
Unbilled revenue................................... 30,305 122,966
Prepaid expenses and other current assets.......... 31,006 120,508
----------- -----------
Total current assets............................. 658,807 3,953,884
----------- -----------
Property and equipment:
Furniture and office equipment..................... 177,908 514,876
Computer hardware.................................. 647,834 678,524
Purchased software................................. 158,361 276,198
Leasehold improvements............................. 50,620 65,188
----------- -----------
1,034,723 1,534,786
Less: accumulated depreciation and amortization.... (616,602) (837,534)
----------- -----------
Net property and equipment....................... 418,121 697,252
----------- -----------
Other assets......................................... 46,576 115,958
----------- -----------
Total assets......................................... $ 1,123,504 $ 4,767,094
=========== ===========
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Accounts payable................................... $ 3,681 $ 6,923
Accrued expenses................................... 414,553 810,738
Note payable, line of credit (note 2).............. 385,000 --
Current installments of obligations under capital
leases (note 8)................................... 110,943 176,625
Deferred maintenance revenue....................... 249,376 447,169
Billings in excess of recognized revenue........... 1,720,580 1,121,911
----------- -----------
Total current liabilities........................ 2,884,133 2,563,366
----------- -----------
Deferred stock issuance (note 5)..................... 1,000,000 1,000,000
----------- -----------
Obligations under capital leases, excluding current
installments (note 8)............................... 197,818 283,057
----------- -----------
Commitments (note 8)
Stockholders' equity (deficit):
Preferred stock, $.01 par value; authorized
20,000,000 shares; issued and outstanding
14,983,249 and 16,079,931 shares in 1998 and 1999,
respectively (note 7)............................. 149,832 160,799
Common stock, $.01 par value; authorized 2,500,000
shares in 1998 and 4,500,000 shares in 1999;
issued and outstanding 186,850 and 230,850 shares
in 1998 and 1999, respectively.................... 1,869 2,308
Additional paid-in capital......................... 3,920,021 10,240,358
Accumulated deficit................................ (7,008,206) (9,458,433)
Accumulated other comprehensive loss............... -- (2,398)
Less:
Officer stock loans............................... (16,667) (16,667)
Treasury stock, at cost: 52,961 common shares and
100,000 Series A convertible preferred shares.... (5,296) (5,296)
----------- -----------
Total stockholders' equity (deficit)............. (2,958,447) 920,671
----------- -----------
Total liabilities and stockholders' equity (deficit). $ 1,123,504 $ 4,767,094
=========== ===========
See accompanying notes to consolidated financial statements.
2
EMAX Solution Partners, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
December 31,
------------------------
1998 1999
----------- -----------
Revenue:
License fees....................................... $ 790,958 $ 1,284,987
Services........................................... 3,317,756 5,006,259
Software maintenance............................... 298,291 448,653
Hardware sales..................................... 166,808 253,565
----------- -----------
Total revenues.................................... 4,573,813 6,993,464
----------- -----------
Expenses:
Direct operating costs and expenses................ 3,237,657 5,243,969
Selling, general and administrative................ 3,228,116 4,411,863
----------- -----------
Total expenses.................................... 6,465,773 9,655,832
----------- -----------
Net operating loss................................ (1,891,960) (2,662,368)
----------- -----------
Other income (expense):
Interest income.................................... 10,751 27,515
Interest expense................................... (44,161) (65,374)
Gain on sale of EHS division (note 10)............. -- 250,000
----------- -----------
Total other income (expense)...................... (33,410) 212,141
----------- -----------
Net loss............................................. $(1,925,370) $(2,450,227)
=========== ===========
See accompanying notes to consolidated financial statements.
3
EMAX Solution Partners, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Years ended December 31, 1998 and 1999
Preferred Stock
Common ----------------------------------------------------------------------------------
Stock Series A Series B Series C Series D Series E
-------------- ----------------- -------------- ------------- ----------------- -----------------
Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount
------- ------ --------- ------- ------- ------ ------ ------ --------- ------- --------- -------
Balance at December 31,
1997............ 183,663 $1,837 9,150,000 $91,500 833,249 $8,332 -- $-- 5,000,000 $50,000 -- $ --
Exercise of
options......... 3,187 32 -- -- -- -- -- -- -- -- -- --
Net loss........ -- -- -- -- -- -- -- -- -- -- -- --
------- ------ --------- ------- ------- ------ --- --- --------- ------- --------- -------
Balance at
December 31,
1998............ 186,850 1,869 9,150,000 91,500 833,249 8,332 -- -- 5,000,000 50,000 -- --
Issuance of
common stock ... 41,000 410 -- -- -- -- -- -- -- -- -- --
Exercise of
options......... 3,000 29 -- -- -- -- -- -- -- -- -- --
Cash paid for
fractional
shares.......... -- -- -- -- -- -- -- -- -- -- -- --
Issuance of
preferred
stock........... -- -- -- -- -- -- -- -- -- -- 1,096,682 10,967
Net loss........ -- -- -- -- -- -- -- -- -- -- -- --
Foreign currency
translation
adjustment...... -- -- -- -- -- -- -- -- -- -- -- --
Comprehensive
loss............ -- -- -- -- -- -- -- -- -- -- -- --
------- ------ --------- ------- ------- ------ --- --- --------- ------- --------- -------
Balance at
December 31,
1999............ 230,850 $2,308 9,150,000 $91,500 833,249 $8,332 -- $-- 5,000,000 $50,000 1,096,682 $10,967
======= ====== ========= ======= ======= ====== === === ========= ======= ========= =======
Accumulated
Additional Treasury Stock other Total
Paid-In Officers --------------- Accumulated comprehensive stockholders'
Capital loans Shares Amount deficit loss deficit
------------ --------- ------ -------- ------------ ------------- -------------
Balance at December 31,
1997............ $ 3,914,896 $(16,667) 52,961 $(5,296) $(5,082,836) $ -- $(1,038,234)
Exercise of
options......... 5,125 -- -- -- -- -- 5,157
Net loss........ -- -- -- -- (1,925,370) -- (1,925,370)
------------ --------- ------ -------- ------------ ------------- -------------
Balance at
December 31,
1998............ 3,920,021 (16,667) 52,961 (5,296) (7,008,206) -- (2,958,447)
Issuance of
common stock ... 40,590 -- -- -- -- -- 41,000
Exercise of
options......... 6,871 -- -- -- -- -- 6,900
Cash paid for
fractional
shares.......... (9) -- -- -- -- -- (9)
Issuance of
preferred
stock........... 6,272,885 -- -- -- -- -- 6,283,852
Net loss........ -- -- -- -- (2,450,227) -- (2,450,227)
Foreign currency
translation
adjustment...... -- -- -- -- -- (2,398) (2,398)
-------------
Comprehensive
loss............ -- -- -- -- -- -- (2,452,625)
------------ --------- ------ -------- ------------ ------------- -------------
Balance at
December 31,
1999............ $10,240,358 $(16,667) 52,961 $(5,296) $(9,458,433) $(2,398) $ 920,671
============ ========= ====== ======== ============ ============= =============
See accompanying notes to consolidated financial statements.
4
EMAX Solution Partners, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
December 31,
------------------------
1998 1999
----------- -----------
Cash flows used in operating activities:
Net loss............................................ $(1,925,370) $(2,450,227)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization...................... 190,072 220,933
Gain on sale of EHS division....................... -- (250,000)
Changes in other assets and current liabilities:
Accounts receivable............................... (365,454) (1,057,355)
Unbilled revenue.................................. 263,103 (92,661)
Prepaid expenses and other current assets......... 20,851 (70,971)
Other assets...................................... (32,099) (12,914)
Accounts payable.................................. (48,589) 3,242
Accrued expenses.................................. 157,494 396,185
Deferred maintenance revenue...................... 62,399 197,793
Billings in excess of recognized revenue.......... 1,166,468 (598,669)
----------- -----------
Net cash used in operating activities............ (511,125) (3,714,644)
----------- -----------
Cash flows used in investing activities:
Proceeds from sale of EHS division.................. -- 175,000
Purchases of property and equipment................. (37,442) (215,260)
----------- -----------
Net cash used in investing activities............ (37,442) (40,260)
----------- -----------
Cash flows provided by financing activities:
Payments on notes payable........................... -- (385,000)
Proceeds from notes payable......................... 385,000 --
Payment for fractional shares--reverse split........ -- (9)
Principal payments under capital lease obligations.. (87,149) (133,883)
Foreign currency translation........................ -- (2,398)
Proceeds from issuance of preferred stock and common
stock............................................... 5,157 6,331,753
----------- -----------
Net cash provided by financing activities........ 303,008 5,810,463
----------- -----------
Net increase (decrease) in cash and cash
equivalents..................................... (245,559) 2,055,559
Cash and cash equivalents at beginning of year....... 256,284 10,725
----------- -----------
Cash and cash equivalents at end of year............. $ 10,725 $ 2,066,284
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the year for interest.............. $ 36,394 $ 53,268
=========== ===========
Noncash investing and financing activities:
Equipment acquired under capital lease obligations. $ 258,938 $ 284,803
=========== ===========
See accompanying notes to consolidated financial statements.
5
EMAX Solution Partners, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1999
1. Summary of Significant Accounting Policies
a. Description of Business
EMAX Solution Partners, Inc. (the Company) is an information technology
solution development company that specializes in integrating chemical
information systems to improve productivity and compliance for major
corporations.
b. Principles of Consolidation
The consolidated financial statements include the accounts of EMAX Solution
Partners, Inc. and its wholly owned subsidiaries, EMAX Delaware, Inc. and EMAX
Solution Partners (UK) Ltd. Appropriate eliminations have been made of all
intercompany transactions and account balances.
c. Cash Equivalents
Cash equivalents at December 31, 1998 and 1999, consist of money market
investment accounts and certificates of deposit. For purposes of the statements
of cash flows, the Company considers all money market accounts and certificates
of deposit to be cash equivalents.
d. Property and Equipment
Property and equipment are stated at cost. Depreciation on property and
equipment is provided on the straight-line method over the estimated useful
lives of the assets. Leasehold improvements are amortized on the straight-line
method over the shorter of the lease term or estimated useful life of the
asset. Useful lives for other property and equipment range from three to five
years.
e. Revenue Recognition
Revenues from software related services are recognized using one of two
methods and depend on the contract terms. Revenues from fixed fee contracts are
recognized on the percentage-of-completion method based on costs incurred to
total costs. The cumulative impact of revisions in total cost estimates during
the progress of work is reflected in the year in which these changes become
known. Revenues from time and material contracts are recognized concurrently
with the effort and material costs incurred by the Company, at billable rates
specified in the terms of the contract.
Software license fee revenue is recognized on the percentage-of-completion
method when there are significant Company obligations beyond delivery of the
related software. When significant Company obligations beyond delivery are
nonexistent and collection is probable, then license fee revenue is recognized
upon delivery of the software. Hardware sales revenue is recognized upon
delivery of the hardware unless the Company has obligations beyond delivery.
Losses expected to be incurred on contracts in process, after consideration
of estimated minimum recoveries from claims and change orders, are charged to
income as soon as such losses are known.
The Company sells maintenance contracts to provide updates and standard
enhancements to its software products. Maintenance fee revenue is recognized
ratably over the life of the arrangements, generally one year.
The Company adopted the provisions of Statement of Position (SOP) 97-2
issued by the American Institute of Certified Public Accountants for all
computer software-related transactions. SOP 97-2 does not affect transactions
entered into prior to adoption, as retroactive application to prior years is
prohibited.
6
EMAX Solution Partners, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1999
SOP 97-2 generally requires revenue earned on software arrangements involving
multiple elements to be allocated to each element based on relative fair values
of the elements and on evidence that is specific to the vendor. If a vendor
does not have evidence of the fair value of each element in a multiple element
arrangement, then all revenue is deferred until such evidence exists or until
all elements are delivered.
f. Use of Estimates
The preparation of the Company's financial statements in conformity with
generally accepted accounting principles requires the use of management's
estimates. Such estimates include percentage of completion and total costs to
complete certain fixed price contracts. Actual results could differ from those
estimates.
g. Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards (SFAS) No. 109 and utilizes the asset-and-
liability method of accounting for income taxes. Under this method, deferred
income taxes are determined based on the difference between the financial
statement and tax bases of assets and liabilities using enacted tax rates. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
h. Stock Options
The Company has elected to continue to apply Accounting Principles Board
Opinion (APB) No. 25 for stock options and stock-based awards to employees and
has disclosed a pro forma net loss as if the fair value method had been applied
(note 6).
i. Long-Lived Assets
In accordance with SFAS No. 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed of," the Company
periodically evaluates the carrying value of long-lived assets when events and
circumstances warrant such review. The carrying value of a long-lived asset is
considered impaired when the anticipated undiscounted cash flow from such asset
is separately identifiable and is less than the carrying value. In that event,
a loss is recognized based on the amount by which the carrying value exceeds
the fair market value of the long-lived asset. The Company has identified no
such impairment losses.
j. Reverse Stock Split
During 1999, the Company's Board of Directors approved a 10-for-1 reverse
stock split of the Company's common stock and the reduction in authorized
shares outstanding to 3,000,000. The effects of the reverse stock split have
been reflected in the 1998 and 1999 financial statements. Also, in August 1999,
the authorized shares of common stock were increased to 4,500,000.
2. Liquidity
The Company relies on both cash on hand and a $400,000 line of credit at
December 31, 1999. This line of credit is secured by the Company's accounts
receivable, and the amount available is determined based on the level of
accounts receivable. The balance outstanding at December 31, 1998 and 1999, was
$385,000 and $0, respectively. Interest is charged based upon the prime rate
plus 2%.
On August 17, 1999, the Company issued 1,096,682 shares of Series E
Convertible Preferred Stock for an aggregate price of $7,000,000, resulting in
net proceeds of $6,283,852. The Series E Convertible Preferred Stock contains
terms and rights described in note 7.
7
EMAX Solution Partners, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1999
The Company has been dependent on financing and financial support from the
issuance of equity interests to its shareholders since inception. The Company
anticipates its monthly operating cash flows to become positive during year
2000 and that its future cash flow needs will be met substantially through cash
remaining from the proceeds of the preferred stock issuance, operating cash
flow, and borrowings on the line of credit. If cash flows are less than
expected, management of the Company believes that other measures to reduce
costs or to raise additional equity financing could be taken to assure the
Company remains liquid.
3. 401(k) Profit Sharing Plan and Trust
The Company has a 401(k) Profit Sharing Plan and Trust (the Plan) that
qualifies for treatment under Section 401(k) of the Internal Revenue Code. All
eligible employees may participate by electing to contribute up to 15% of gross
pay to the Plan. The Company at its discretion makes a matching contribution to
the Plan. For the years ended December 31, 1998 and 1999, the Company has
matched 15% of employee contributions up to 6% of each employee's salary. The
Company's total matching contribution was $19,062 and $28,686 for 1998 and
1999, respectively.
4. Income Taxes
Due to the net losses incurred in 1998 and 1999, no current income tax
expense or benefit has been recorded. The December 31, 1998 and 1999 income tax
expense (benefit) differed from the amounts computed by applying the federal
statutory rate of 34% to pre-tax loss as a result of the following:
1998 1999
-------- --------
Computed expected tax expense (benefit)..................... (654,626) (833,077)
State taxes, net of federal benefit......................... (76,169) (220,275)
Tax effect of permanent differences......................... 88,173 88,400
Other, net.................................................. 52,566 1,472
-------- --------
(590,056) (963,481)
Change in valuation allowance............................... 590,056 963,481
-------- --------
-- --
======== ========
The tax effects of temporary differences that give rise to deferred tax
assets and deferred tax liabilities at December 31, 1998 and 1999 are detailed
below:
1998 1999
---------- ----------
Accruals and other reserves............................. 234,626 278,616
Net operating losses (federal and state)................ 1,970,319 2,889,810
Valuation allowance..................................... (2,204,945) (3,168,426)
---------- ----------
Net deferred tax asset.................................. -- --
========== ==========
The Company believes it is more likely than not that such benefits will not
be realized through future taxable income; therefore, the net deferred tax
asset as of December 31, 1998 and 1999, is fully reserved.
As of December 31, 1999, the Company has approximately $12,100,000 of net
operating loss carryforwards for federal and state tax purposes that are
available to offset future federal taxable income, if any, through 2019.
The Company's net operating losses may be subject to the provisions of
Internal Revenue Code Section 382, as established by the Tax Reform Act of
1986, related to changes in stock ownership. Presently, no
8
EMAX Solution Partners, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1999
determination has been made to evaluate what effect the application of these
regulations may have on the utilization of the net operating losses. Should
these regulations apply, the amount of the net operating losses that can be
utilized to offset taxable income in future periods may be subject to an annual
limitation and it is possible that some portion of the net operating losses may
never be utilized.
5. Software Arrangements
On December 20, 1994, the Company entered into an agreement to transfer all
of its right, title and interest in and to its OPTIMA software (formerly called
"ChemTrol") to Polar Investment Partners (Polar) for total consideration of
$4,500,000, comprised of $1,000,000 payable in quarterly installments and a
$3,500,000 promissory note (the Note). The first cash payment of $250,000 was
made upon closing, and the Note bears interest at 7%. In 1995, the Company
received from Polar the remaining quarterly installments, which totaled
$750,000. Principal and accrued interest on the Note are due December 2004.
Contemporaneously, the parties also entered into a Joint Enterprise Agreement
(the Agreement) whereby Polar granted the Company the sole and exclusive right
to distribute and sell copies of the software, in exchange for a percentage of
the revenues generated. Under certain circumstances, the Company may reacquire
the software. This agreement will remain in effect until such time as the
Company does so. Such reacquisition is triggered by the occurrence, on or after
January 1, 1997, of any one of several events, the occurrence of which requires
Polar to convey all rights it has to the software to the Company in exchange
for a number of shares of common stock to be determined in accordance with the
Agreement. The Agreement also defines the terms of payment by Polar on the
Note, which is based upon Polar's percentage of revenues earned under the
Agreement.
As the arrangements with Polar give the Company rights to exclusively sell
and distribute the software and provide under certain circumstances for the
reacquisition of the software as described above, the Company retains an
ongoing economic interest in the software. Therefore, the OPTIMA software sale
has been reflected in the financial statements as a financing arrangement and
the Note has not been established as a receivable on the Company's balance
sheet.
6. Stock Options
The Company has a qualified employee incentive stock option plan allowing
for the issuance of options for 5,000,000 shares of common stock. The options
generally expire in eight years and are exercisable in annual installments of
25%, starting one year from the date of grant.
A summary of stock option activity follows (all amounts reflect the 10 for 1
reverse stock split):
1998 1999
----------------- -----------------
Weighted Weighted
Number average Number average
of exercise of exercise
options price options price
------- -------- ------- --------
Balance as of beginning of year............. 311,326 $4.00 365,351 $2.20
Options granted............................ 94,951 3.30 339,869 4.10
Options expired............................ (37,738) 2.70 (55,163) 2.90
Options exercised.......................... (3,188) 1.60 (3,000) 2.20
------- ----- ------- -----
Balance as of end of year................... 365,351 $2.20 647,057 $3.30
======= ===== ======= =====
9
EMAX Solution Partners, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1999
At December 31, 1999, 185,626 options with a weighted-average exercise price
of $1.50 were fully vested and exercisable.
The following summarizes information about the Company's stock options
outstanding at December 31, 1999:
Options outstanding Options exercisable
-------------------------- --------------------------
Weighted Weighted
average average
Number remaining Number remaining
outstanding at contractual outstanding at contractual
December 31, life December 31, life
Range of exercise prices 1999 (years) 1999 (years)
- ------------------------ -------------- ----------- -------------- -----------
$.1 - .5................. 103,488 3.3 98,951 3.3
$1.50.................... 34,125 5.1 17,063 5.1
$3.00 - 4.79............. 509,444 7.0 69,612 6.1
------- -------
Totals................... 647,057 185,626
======= =======
Had compensation cost been recognized pursuant to SFAS No. 123, the
Company's loss would have been increased to the pro forma amount indicated
below:
1999
----------
Net loss, as reported............................................. $2,450,227
Pro Forma net loss................................................ $2,632,352
The per-share weighted-average fair value of stock options issued by the
Company during 1999 was $1.25 on the date of grant.
The following range of assumptions was used by the Company to determine the
fair value of stock options granted using a minimum value option-price model:
Dividend yield....................................................... 0%
Average expected option life......................................... 6 years
Risk-free interest rate.............................................. 5.60%
The full impact of calculating compensation cost for stock options under
SFAS No. 123 is not reflected in the pro forma loss amounts presented above
because compensation cost is reflected over an option's vesting period and
compensation cost for options granted prior to January 1, 1996, is not
considered. Compensation costs of $613,860 will be recognized in the pro forma
net loss in future years.
7. Convertible and Redeemable Preferred Stock
The Company is authorized to issue up to 20,000,000 shares of preferred
stock, including shares which can be designated by the Board of Directors as
$.01 Convertible Preferred Stock--Series A, B, C, D and E or Redeemable
preferred stock--Series F and 2,773,304 shares of undesignated preferred stock.
As of December 31, 1999, the Board of Directors issued 9,150,000, 833,249, 0,
5,000,000, and 1,096,682 shares of Series A, B, C, D, and E Convertible
Preferred Stock, respectively. All convertible shares are voting and with
respect to Series A, B, C and D, convertible at the option of the holder at any
time into the Company's common stock at a conversion rate of one share of
common stock per ten shares of preferred stock. Series E
10
EMAX Solution Partners, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1999
preferred stock is convertible into a conversion unit that includes one share
of common stock and one share of Series F preferred stock per share of Series E
preferred stock converted. Series E preferred stock is automatically converted
to conversion units upon an initial public offering or sale transaction. Series
F redeemable preferred stock is redeemable upon an initial public offering with
gross cash proceeds of at least $30,000,000 or upon a sale of the company for
$7,000,000 plus all accrued but unpaid dividends. The conversion rates are
subject to adjustment based on the occurrence of certain events.
Participating dividends on Series A, B, C and D are payable upon the
approval of the Board of Directors, and holders of preferred stock must be paid
such dividends before dividends can be paid on common stock. The Series A, B, C
and D preferred stockholders are entitled to the amount of dividends per share
as would be declared payable on the largest number of whole and fractional
shares of common stock into which each share of convertible preferred stock
could be converted as of the record date.
Series E preferred stock accrues cumulative dividends commencing July 1,
2001 at an annual rate of 8%. Series F redeemable preferred accrues cumulative
dividends at 8% from the date of issue.
In the event of liquidation, the holders of each share of preferred stock
shall be entitled to be paid first out of the assets available for
distribution, an amount equal to $.20 per share for Series A and B, $.40 per
share for Series D, $6.38 per share for Series E and F, plus total dividends in
arrears on each share. The remaining assets shall be distributed among the
holders of common and preferred stock in proportion to the shares of common
stock held and the shares of common stock that the preferred stockholders have
the right to acquire upon conversion of such shares of preferred stock held by
them.
All convertible preferred shares are subject to certain anti-dilution
provisions.
8. Leases
The Company is obligated under several noncancelable operating leases and
capital leases that expire over the next five years. During 1999, the Company
entered into capital lease arrangements for computer hardware totaling
$284,803. Rent expense for the years ended December 31, 1998 and 1999, was
$262,613 and $374,700, respectively. Future minimum lease payments under
noncancelable operating leases and the capital lease (with initial or remaining
lease terms in excess of one year) as of December 31, 1999, are:
Capital Operating
Year ending December 31, leases leases
- ------------------------ --------- ----------
2000..................................................... $ 255,735 $ 381,969
2001..................................................... 108,327 396,099
2002..................................................... 119,433 397,543
2003..................................................... 37,535 209,646
2004..................................................... 21,686 20,116
Thereafter............................................... -- --
--------- ----------
Total minimum lease payments........................... 542,716 $1,405,373
==========
Less: amount representing interest....................... (83,034)
---------
Present value of net minimum capital lease payments.... 459,682
Less: current installments of obligations under capital
leases.................................................. (176,625)
---------
Obligations under capital leases, excluding current
installments............................................ $ 283,057
=========
11
EMAX Solution Partners, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1999
9. Business and Credit Concentrations
The Company sells its services directly to or as a subcontractor to
chemical, pharmaceutical and other manufacturing companies located primarily in
the Eastern region of the United States. During 1998 and 1999, four customers
accounted for 63% and 81%, respectively, of total revenues. At December 31,
1998 and 1999, two customers accounted for 64% and 67% of the accounts and
unbilled receivable balances, respectively.
10. Sale of SAP EHS Business
In July 1998, the Company entered into an agreement to sell its SAP EHS
environmental software business unit in exchange for cash and warrants for
equity in the newly formed company. The SAP EHS business provided consulting
services to customers who used the Company's SAP R/3 EHS software. The Company
sold the rights, title and interests to the contracts related to the SAP EHS
business and any related permits and customer certifications.
Proceeds from the sale were contingent upon the formation and success of the
new entity which would continue the SAP EHS business. The new entity was
formed, however, the business did not materialize to the extent anticipated.
Although EMAX had the rights to exercise warrants and was entitled to $310,000
in 1998, the gain on the sale was not recorded due to the uncertainty of
collection of the amounts due under the agreement and the dependency of the
consideration on the future results of the business sold by EMAX. EMAX
management decided to recognize a gain on the sale only to the extent cash
consideration was collected or probable of collection. $250,000 has been
collected and recognized as a gain.
11. Subsequent Event
On March 13, 2000 the Company entered into an Agreement and Plan of Merger
and Reorganization with SciQuest.com, Inc. and its subsidiary SciQuest
Acquisition, Inc. whereby all shares of capital stock of the Company, including
common and preferred stock, would be converted to shares of SciQuest.com, Inc.
Additionally, all Company options would become exercisable for SciQuest.com,
Inc. common stock.
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