Exhibit 99.2
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
ISPSoft, Inc.
We have audited the accompanying balance sheets of ISPSoft Inc. (a
Development Stage Company) as of December 31, 2000 and 1999, and the related
statements of operations, stockholders' equity (deficiency) and cash flows, for
the year ended December 31, 2000 and for the period March 30, 1999 (date of
inception) to December 31, 1999 and for the period from March 30, 1999 (date of
inception) to 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 audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of ISPSoft Inc. (a
Development Stage Company) as of December 31, 2000 and 1999, and the results of
its operations and its cash flows for the year ended December 31, 2000 and for
the period March 30, 1999 (date of inception) to December 31, 1999 and for the
period from March 30, 1999 (date of inception) to December 31, 2000, in
conformity with accounting principles generally accepted in the United States of
America.
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has losses from operations and has an
accumulated deficit, which raise substantial doubt about its ability to continue
as a going concern. Management's plans regarding those matters also are
described in Note 1. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
/s/ AMPER, POLITZINER MATTIA P.A.
June 28, 2001
Edison, New Jersey
ISPSoft Inc.
(A Development Stage Company)
BALANCE SHEETS
December 31,
--------------------------------
2000 1999
---------------- --------------
ASSETS
Current assets
Cash and cash equivalents .............................................. $ 394,236 $ 23,259
Prepaid expenses and other current assets .............................. 70,109 55,200
----------- -----------
464,345 78,459
Property and equipment, net ................................................. 270,780 5,165
Other assets ................................................................ 50,556 --
----------- -----------
$ 785,681 $ 83,624
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities
Accounts payable ....................................................... $ 130,593 $ --
Accrued expenses and other current liabilities ......................... 59,418 5,165
Dividend payable ....................................................... 226,545 --
Due to affiliate ....................................................... 40,000 --
Current portion of capital lease obligations ........................... 6,096 --
----------- -----------
462,652 5,165
Long-term portion of capital lease obligations .............................. 10,854 --
----------- -----------
Total liabilities .................................................... 473,506 5,165
Series B Redeemable Convertible Preferred Stock, no par value, 8,000,000
shares authorized, issued and outstanding as of December 31, 2000,
$4,226,545 liquidation preference as of December 31, 2000 ................ 4,000,000 --
Stockholder's equity (deficiency)
Common stock, no par value, 40,000,000 shares authorized; 6,850,000 and
100,000 shares issued and outstanding as of December 31, 2000 and
1999 ,respectively ................................................... 680,000 5,000
Series A Convertible Preferred Stock, no par value, 12,000,000 shares
authorized and issued, 9,000,000 and 12,000,000 shares outstanding as
of December 31, 2000 and 1999, respectively, $900,000 and $1,200,000
liquidation preference as of December 31, 2000 and 1999, respectively 1,200,000 1,200,000
Note receivable ............................................................. (135,000) (70,000)
Deferred compensation ....................................................... (237,569) --
Deficit accumulated during the development stage ............................ (4,195,256) (1,056,541)
----------- -----------
(2,687,825) 78,459
Less treasury stock, Series A Convertible Preferred, at cost, 3,000,000
shares ................................................................... (1,000,000) --
----------- -----------
Total stockholder's equity (deficiency) ..................................... $(3,687,825) $ 78,459
----------- -----------
$ 785,681 $ 83,624
=========== ===========
See accompanying notes to financial statements.
2
ISPSoft Inc.
(A Development Stage Company)
STATEMENTS OF OPERATIONS
Period From Period From
Inception Inception
(March 30, 1999) (March 30, 1999)
For the Year Ended through through
December 31, December 31, December 31,
2000 1999 2000
------------------ ---------------- ----------------
Revenues ................................................ $ -- $ -- $ --
----------- ----------- -----------
Operating expenses
Software development costs ......................... 1,677,719 1,056,541 2,734,260
General and administrative ......................... 1,294,543 -- 1,294,543
Depreciation expense ............................... 26,912 -- 26,912
----------- ----------- -----------
2,999,174 1,056,541 4,055,715
Investment income ....................................... 87,004 -- 87,004
----------- ----------- -----------
Net loss ................................................ (2,912,170) (1,056,541) (3,968,711)
Dividends on Series B Preferred Stock ................... (226,545) -- (226,545)
----------- ----------- -----------
Net loss applicable to common stockholders'.............. $(3,138,715) $(1,056,541) $(4,195,256)
=========== =========== ===========
See accompanying notes to financial statements.
3
ISPSoft Inc.
(A Development Stage Company)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
Period from March 30, 1999 (Date of Inception) to December 31, 2000
Preferred Stock-- Treasury Stock--
Common Stock Series A Series A
-------------------- --------------------- ------------------------ Note Deferred
Shares Amount Shares Amount Shares Amount Receivable Compensation
--------- --------- --------- --------- --------- ---------- ----------- ------------
Original issuance of
common stock for
cash.............. 100,000 $ 5,000 -- $ -- -- $ -- $ -- $ --
Issuance of Series A
Convertible
Preferred Stock for
cash, note
receivable,
software modules
and consulting
services.......... -- -- 12,000,000 1,200,000 -- -- (70,000) --
Net loss............. -- -- -- -- -- -- -- --
--------- -------- ---------- ---------- --------- ---------- --------- ---------
Balance at December
31, 1999.......... 100,000 5,000 12,000,000 1,200,000 -- -- (70,000) --
Issuance of restricted
common stock for
cash and note
receivable........ 1,400,000 140,000 -- -- -- -- (135,000) --
Issuance of common
stock for
intellectual
property.......... 2,000,000 200,000 -- -- -- -- -- --
Redemption........... -- -- -- -- (3,000,000) (1,000,000) -- --
Payment on note
receivable........ -- -- -- -- -- -- 70,000 --
Issuance of restricted
common stock for
stock based
compensation...... 3,350,000 335,000 -- -- -- -- -- (335,000)
Earned portion of
restricted stock
compensation...... -- -- -- -- -- -- -- 97,431
Net loss............. -- -- -- -- -- -- -- --
Preferred stock
dividends--Series B -- -- -- -- -- -- -- --
--------- -------- ---------- ---------- --------- ---------- --------- ---------
Balance at December
31, 2000.......... 6,850,000 $680,000 12,000,000 $1,200,000 (3,000,000) $(1,000,000) $(135,000) $(237,569)
========= ======== ========== ========== ========= ========== ========= =========
Deficit
Accumulated Total
During the Stockholder's
Developmental Equity
Stage (Deficiency)
------------- -------------
Original issuance of
common stock for
cash................ $ -- $ 5,000
Issuance of Series A
Convertible
Preferred Stock for
cash, note
receivable,
software modules
and consulting
services............ -- $ 1,130,000
Net loss............... (1,056,541) (1,056,541)
-------------- --------------
Balance at December
31, 1999............ (1,056,541) 78,459
Issuance of restricted
common stock for
cash and note
receivable.......... -- 5,000
Issuance of common
stock for
intellectual
property............ -- 200,000
Redemption............. -- (1,000,000)
Payment on note
receivable.......... -- 70,000
Issuance of restricted
common stock for
stock based
compensation........ -- --
Earned portion of
restricted stock
compensation........ -- 97,431
Net loss............... (2,912,170) (2,912,170)
Preferred stock
dividends--Series B (226,545) (226,545)
----------- -----------
Balance at December
31, 2000............ $(4,195,256) $(3,687,825)
============ ===========
See accompanying notes to financial statements.
4
ISPSoft Inc.
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
Period From Period From
Inception Inception
For the Year (March 30, 1999) (March 30, 1999)
Ended through through
December 31, December 31, December 31,
2000 1999 2000
----------- ----------- -----------
Cash flows used from operating activities
Net loss ............................................... $(2,912,170) $(1,056,541) $(3,968,711)
Adjustments to reconcile net income to net cash
provided by operations
Depreciation ......................................... 26,912 -- 26,912
Amortization of deferred compensation ................ 97,431 -- 97,431
Stock issued for intellectual property ............... 200,000 -- 200,000
Stock issued for consulting services ................. -- 304,800 304,800
Stock issued for software modules .................... -- 750,000 750,000
(Increase) in
Prepaid expenses and other assets .................... (65,465) -- (65,465)
Increase in
Accounts payable ..................................... 130,593 -- 130,593
Accrued expenses ..................................... 54,253 5,165 59,418
Due to affiliate ..................................... 40,000 -- 40,000
----------- ----------- -----------
Total adjustments .................................. 483,724 1,059,965 1,543,689
----------- ----------- -----------
(2,428,446) 3,424 (2,425,022)
----------- ----------- -----------
Cash flows used for investing activities
Purchase of property and equipment ..................... (275,577) (5,165) (280,742)
----------- ----------- -----------
Cash flows from financing activities
Proceeds from issuance of Series A preferred stock ..... -- 20,000 20,000
Proceeds from issuance of Series B preferred stock ..... 4,000,000 -- 4,000,000
Proceeds from issuance of common stock ................. 5,000 5,000 10,000
Redemption of Series A preferred stock ................. (1,000,000) -- (1,000,000)
Proceeds received from notes receivable--common stock .. 70,000 -- 70,000
----------- ----------- -----------
3,075,000 25,000 3,100,000
----------- ----------- -----------
Net change in cash and cash equivalents ................... 370,977 23,259 394,236
Cash and cash equivalents--beginning ...................... 23,259 -- --
----------- ----------- -----------
Cash and cash equivalents--ending ......................... $ 394,236 $ 23,259 $ 394,236
=========== =========== ===========
Supplemental disclosure of cash paid
Interest ............................................... $ -- $ -- $ --
Income taxes ........................................... -- -- --
Noncash investing and financing activities
Acquisition of equipment under a capital lease ......... 16,950 -- 16,950
Issuance of common stock for a note receivable ......... 135,000 70,000 205,000
Issuance of common stock to employees for services ..... 335,000 -- 335,000
Dividend payable on Series B preferred stock ........... 226,545 -- 226,545
See accompanying notes to financial statements.
5
ISPSoft Inc.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
Note 1 -- Business and Liquidity
ISPSoft Inc. (the "Company") was incorporated on March 30, 1999, in the
State of New Jersey. The Company was formed to develop advanced provisioning and
management applications for the carrier-grade IP service providers and medium to
large scale enterprises. To date, the Company has devoted the majority of its
efforts in raising capital and developing technology. The Company is in the
development stage and, accordingly, the financial statements are presented in a
format prescribed for a development stage company.
The Company has incurred losses in the current period and has an
accumulated deficit at December 31, 2000. The Company's primary source of funds
to date has been through the issuance of securities. Management intends to
continue to pursue additional financing through the issuance of securities and
devoting resources to research and development of its technology. Management
believes that additional capital will be raised through the issuance of
securities, however, there can be no assurance that this will be completed.
Without additional capital, there may be a material adverse effect on the
Company's ability to continue as a going concern. Alternatively, management may
elect to complete a merger or sell the Company if additional capital cannot be
raised.
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern and do not include any adjustments
that might result from the outcome of this uncertainty.
Note 2 -- Summary of Significant Accounting Policies
Development Stage Enterprise
Since inception, the Company has not commenced any formal business
operations. The Company is considered to be in the development stage and
therefore has adopted the accounting and reporting standards of Statement of
Financial Accounting Standards ("SFAS") No. 7, "Accounting and Reporting by
Development Stage Enterprises."
Use of Estimates
The preparation of financial statements, in accordance 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 period.
Actual results may differ from those estimates.
Concentrations of Credit Risk
The Company maintains cash balances at financial institutions, which at
times are in excess of federally insured limits. The Company has not experienced
any losses in such accounts.
Cash Equivalents
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation.
Property and equipment are depreciated on a straight-line basis over the
estimated useful lives of the assets, which range from five to seven years.
Leasehold improvements are amortized over the shorter of the estimated useful
life or the life of the lease, which is ten years.
6
ISPSoft Inc.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS -- (Continued)
Stock-based Compensation
SFAS No. 123, "Accounting for Stock-based Compensation," allows the
Company to account for its employee stock-based compensation plans under APB
Opinion No. 25, "Accounting for Stock Issued to Employees," and the related
interpretations. The Company accounts for stock-based compensation in accordance
with APB Opinion No. 25, and records deferred compensation for stock-based
compensation grants based on the excess of the market value of the common stock
on the measurement date over the exercise price. The deferred compensation is
amortized to expense, on a straight line basis, over the vesting period of each
unit of stock-based compensation granted. If the exercise price of the
stock-based compensation is equal to or exceeds the market price of the
Company's stock on the date of grant, no compensation expense is recorded.
Software Development Costs
Research and development, which includes purchased research and
development and internal costs incurred on the technology are expensed as
incurred, in accordance with the provisions of SFAS No. 86, "Accounting for the
Costs of Computer Software to be Sold, Leased or Otherwise Marketed." Pursuant
to SFAS No. 86, costs are capitalized when technological feasibility of the
product is established and costs incurred prior to the establishment of
technological feasibility are expensed as incurred as research and development
costs. As of December 31, 2000, the Company has not reached technological
feasibility with any of its products.
Income Taxes
The Company uses the liability method of accounting for income taxes. The
liability method measures deferred income taxes by applying enacted statutory
rates in effect at the balance sheet date to the differences between the tax
basis of assets and liabilities and their reported amounts in the financial
statements. The resulting deferred tax asset or liability is adjusted to reflect
changes in tax laws as they occur.
Note 3 -- Property and Equipment
December 31,
------------------
2000 1999
-------- ------
Equipment..................................... $250,914 $5,165
Furniture and fixtures........................ 40,318 --
Leasehold improvements........................ 6,460 --
-------- ------
297,692 5,165
Less accumulated depreciation................. 26,912 --
-------- ------
$270,780 $5,165
======== ======
Depreciation amounted to $26,912 and $0 for the periods ended December
31, 2000 and 1999, respectively.
Equipment recorded under capital leases of $19,905 is included in
property and equipment at December 31, 2000 ($17,914, net of accumulated
depreciation). Depreciation expense for the period ended December 31, 2000,
related to the equipment recorded under capital leases amounted to $1,991.
7
ISPSoft Inc.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS -- (Continued)
Note 4 -- Income Taxes
Deferred tax attributes resulting from differences between financial
accounting amounts and tax basis of assets and liabilities at December 31,
follow:
2000 1999
----------- ---------
Net operating loss carryforward.......................... $ 1,296,000 $ 148,000
Deferred compensation.................................... 39,000 --
Fixed assets, primarily software development cost........ 222,000 275,000
Research and development credits......................... 160,000 23,000
Other.................................................... 20,000 --
Valuation allowance...................................... (1,737,000) (446,000)
----------- ---------
Net deferred tax asset................................... $ -- $ --
=========== =========
The Company's income tax expense differs from income tax (benefit)
computed at the United States federal statutory rate due to the valuation
allowance on deferred tax assets.
Based on management's estimates, the Company has provided a valuation
allowance against its deferred tax assets. The Company believes uncertainty
exists in generating sufficient taxable income in the future to realize these
items, and accordingly, has established a valuation allowance.
At December 31, 2000, the Company has net operating loss carryforwards
for both federal and state income tax purposes of approximately $3,239,000. The
net operating loss carryforwards will expire beginning in 2006, if not utilized.
The Company's net operating loss carryforwards could be limited in circumstances
involving a significant change in equity ownership.
Note 5 -- Capital Lease Obligations
During 2000 the Company entered into a capital lease obligation for
computer equipment. Minimum payments are $752 per month, including imputed
interest of 21.2% per annum. The lease matures in April 2003, and is
collateralized by the related equipment, which had a net book value of $17,914
at December 31, 2000.
The following is a schedule of future minimum lease payments for the
years ending:
2001...................................................... $9,024
2002...................................................... 9,024
2003...................................................... 3,008
-------
21,056
Less interest............................................. 4,106
-------
16,950
Less current portion...................................... 6,096
-------
$10,854
=======
Note 6 -- Common and Preferred Stock
The Company's Articles of Incorporation, as amended, authorize three
classes of stock: common, Series A Convertible Preferred and Series B
Convertible Redeemable Preferred, and designate the number of authorized shares
to be 40,000,000 for common stock, 12,000,000 for Series A Convertible Preferred
Stock and 8,000,000 for Series B Convertible, Redeemable Preferred Stock.
8
ISPSoft Inc.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS -- (Continued)
Rights, preferences, and privileges of the various categories of stock
are as follows:
Dividends. Holders of Series B Preferred Stock are entitled to receive,
when, and if declared by the Board of Directors out of funds legally available
for the purpose, cumulative dividends which shall accrue daily at a base rate of
8% per annum on the Liquidation Preference of such shares, $0.50 per share.
Liquidation Rights. In the event of a liquidation, dissolution or winding
up of the affairs of the Corporation, whether voluntary or involuntary, the
order of liquidation is as follows:
o holders of Series B Preferred Stock are first entitled to receive the
Liquidation Preference of such shares, $0.50 per share, plus any
accrued but unpaid dividends;
o holders of Series A Preferred Stock are then entitled to receive the
Liquidation Preference of such shares, $0.10 per share, plus accrued
but unpaid dividends;
o any remainder is then to be distributed ratably amount holders of the
Company's common stock.
Preferred Stock Conversion/Redemption Rights.
Conversion
Both the Series A and Series B Preferred Stock ("Preferred Stock") are
convertible at any time and from time to time, at the option of any holder of
shares of Preferred Stock, into such number of shares of Common Stock as is
determined by multiplying the number of shares to be converted by the
Liquidation Preference of each share to be converted ($0.10 per share for the
Series A Preferred Stock and $0.50 per share, plus accrued dividends (8% per
annum accruing daily) for the Series B Preferred Stock), and dividing by the
result by the Conversion Price then in effect (currently the same as the
Liquidation Preference, with weighted average anti-dilution adjustments). All
shares of Preferred Stock will be automatically converted at the closing of a
qualifying IPO or upon the written election of the holders of at least 80% of
the shares of outstanding Series B Preferred Stock.
Redemption
On or after April 19, 2004, the Company must redeem, at the written
election of the holders of at least a majority of the then outstanding shares of
Series B Preferred Stock, (i) on the date specified by the holders, 1/3 of all
Series B Preferred Stock outstanding on the date of such election, and (ii) on
the first anniversary of such date 1/2 of the shares of Series B Preferred Stock
outstanding on such date, and (iii) on the second anniversary of such date, all
of the remaining shares of Series B Preferred Stock. The redemption price for
each share to be redeemed shall be the Liquidation Preference for such shares
($0.50 per share, plus accrued dividends, 8% per annum accruing daily). Due to
the redemption feature, which is at the election of the holder, the Series B
Preferred Stock has been classified as temporary equity, which is a section
between liabilities and equity.
Voting
The holders of the shares of Series A Preferred Stock and Series B
Preferred Stock shall be entitled to vote on all matters submitted to the
stockholders for a vote together with the holders of the Common Stock voting
together as a single class, with each holder of Preferred Stock entitled to one
vote for each shares of Conversion Stock issuable upon conversion of the
Preferred Stock held by such holder at the time the vote is taken.
9
ISPSoft Inc.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS -- (Continued)
Note 7 -- Stockholders' Equity
On April 15, 1999, ISPSoft as part of its initial capitalization issued
12,000,000 shares of Series A Preferred Stock to an investor, Agrawal Naresh for
a total of $1,200,000, comprised of software modules valued at $750,000,
consulting services valued at $360,000 and cash of $90,000. As part of the stock
purchase agreement, Mr. Naresh agreed to provide ISPSoft with certain software
modules, which were being developed by Computer Consultants, Inc., an unrelated
independent third party. Mr. Naresh acquired the modules from Computer
Consultants, Inc. on behalf of ISPSoft for $750,000 and all rights to the source
codes of these modules were transferred to ISPSoft effective May 1, 1999. Mr.
Naresh also agreed to contract and reimburse Danucom, Inc. ("Danucom") $360,000
for software development and consultancy services to be performed during the
period April 1999 through February 2000. Danucom provided invoices for the time
incurred at rates, which ranged from $60 to $100 per hour. The sole shareholder
of ISPSoft common at this time was a principal shareholder in Danucom. On March
1, 2000, Mr. Naresh transferred his shares of ISPSoft to SGM Capital Limited.
Mr. Naresh is a principal in SGM Capital Limited. Accordingly, the value
assigned is based upon the cost incurred by Mr. Naresh. These amounts were
charged to operations in accordance with the provisions of SFAS 86.
On January 10, 2000, the Company issued 2,200,000 shares of restricted
common stock, valued at $0.10 per share, to various employees for no
consideration. As a result, the Company recorded deferred compensation of
$220,000, which is amortized over the three-year forfeiture period. Related
amortization expense amounted to approximately $70,000 for the year ended
December 31, 2000. The shares were fully vested upon issuance but are subject to
forfeiture during the following three-year period in the event of termination of
employment from the Company, for any reason, with or without cause. If the
termination occurs on or before the first anniversary from the grant date, 100%
of the shares are subject to forfeiture for no consideration. If the termination
occurs after the first anniversary from the grant date, the shares are subject
to forfeiture on a pro-rata basis, based on a 36-month vesting period. The
shares are held in escrow and released as they are no longer subject to
forfeiture. As of December 31, 2000 there have been no shares earned for
forfeited.
On April 19, 2000, the following transactions took place:
o The Company's board of directors approved a 10-for-1 stock split for
all stockholders of record as of that date. All share and per share
information included in these financial statements have been restated
to include the effects of the stock split for all periods presented.
o Lucent Technologies, an unrelated party at the time, invested
$3,000,000 to acquire 6,000,000 shares of Series B Redeemable
Convertible Preferred Stock and contributed intellectual property in
exchange for 2,000,000 shares of common stock (see Note 6). In
addition Signal Lake Venture Fund, LP, an unrelated party at the
time, invested $1,000,000 to acquire 2,000,000 shares of Series B
Redeemable Convertible Preferred Stock. ISPSoft and Lucent mutually
agreed to the value assigned to the intellectual property of $200,000
prior to the consummation of Lucent's investment, which results in a
value of $.10 per common share. This amount was charged to operations
in accordance with the provisions of SFAS 86. All common stock
transactions on this date were also valued at $.10 per common share.
Simultaneously, the Company bought back 3,000,000 shares of Series A
Preferred Stock from an investor for $1,000,000. These shares are
currently held in treasury.
o The Company acquired intellectual property, valued at $200,000, in
exchange for 2,000,000 shares of common stock valued at $0.10 per
share.
10
ISPSoft Inc.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS -- (Continued)
o The Company issued 1,400,000 shares of restricted common stock at
$0.10 per share for $5,000 in cash and a note receivable in the
amount of $135,000. The note bears interest at 7% per annum and
payments of principal and interest are due annually through April
2005. The shares were fully vested upon issuance but are subject to
forfeiture during the following three-year period in the event of
termination of employment from the Company, for any reason, with or
without cause. If the termination occurs on or before the first
anniversary from the grant date, 100% of the shares are subject to
forfeiture for no consideration. If the termination occurs after the
first anniversary from the grant date, the shares are subject to
forfeiture on a pro-rata basis, based on a 36-month vesting period.
The shares are held in escrow and released as they are no long
subject to forfeiture. As of December 31, 2000, there have been no
shares earned or forfeited.
o The Company issued 150,000 shares of restricted common stock, value
at $0.10 per share, in exchange for advisory services. As a result,
the Company recorded deferred compensation of $15,000, which is
amortized over the three-year forfeiture period. Related amortization
expense amounted to approximately $4,000 for the year ended December
31, 2000. These shares were fully vested upon issuance but are
subject to forfeiture during the following three-year period in the
event of termination as an advisor of the Company, for any reason,
with or without cause. If the termination occurs on or before the
first anniversary from the grant date, 100% of the shares are subject
to forfeiture for no consideration. If the termination occurs after
the first anniversary from the grant date, the shares are subject to
forfeiture on a pro-rata basis, based on a 36-month vesting period.
The shares are held in escrow and released as they are no long
subject to forfeiture. As of December 31, 2000, there have been no
shares earned or forfeited. Under the provisions of EITF 96-18, the
measurement date of the shares of restricted stock is the date the
risk of forfeiture lapses. The common shares are initially valued at
$.10 per share, the fair value at date of issuance and the Company
recorded deferred compensation of $15,000, which is being amortized
over the service period of three years. These shares will be
subsequently remeasured each reporting period using the then
applicable valuation assumptions until the measurement date occurs.
Changes in the fair value of the shares will be recognized using
guidance in SFAS Interpretation 28.
o The Company issued 1,000,000 shares of restricted common stock,
valued at $0.10 per share, to various employees for no consideration.
As a result, the Company recorded deferred compensation of $100,000,
which is amortized over the three-year forfeiture period. Related
amortization expense amounted to approximately $24,000 for the year
ended December 31, 2000. The shares were fully vested upon issuance
but are subject to forfeiture during the following three-year period
in the event of termination of employment from the Company, for any
reason, with or without cause. If the termination occurs on or before
the first anniversary from the grant date, 100% of the shares are
subject to forfeiture for no consideration. If the termination occurs
after the first anniversary from the grant date, the shares are
subject to forfeiture on a pro-rata basis, based on a 36-month
vesting period. The shares are held in escrow and released as they
are no longer subject to forfeiture. As of December 31, 2000, there
have been no shares earned or forfeited.
Warrants
On August 11, 2000, the Company issued warrants, to an employee, to
purchase 200,000 shares of the Company's common stock at an exercise price of
$2.50. These warrants will expire on August 11, 2004, however, in the event of
an initial public offering ("IPO"), the warrants will become null and void and
no longer exercisable as of the IPO date. The Company must notify the holder of
the warrant at least 15 days prior to the consumption of such an event. As of
December 31, 2000, there were no warrants exercised. The pro forma effect of
applying the fair value method in accordance with SFAS No. 123, "Accounting for
Stock Based Compensation," is immaterial to the Company's net loss.
11
ISPSoft Inc.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS -- (Continued)
Stock Option Plan
In April 2000, the Company adopted a stock option plan providing for the
granting of stock options ("Options") to key employees to purchase shares of the
Company's common stock. Within certain limitations provided by the Stock Option
Plan, such options may include provisions regarding vesting, exercise price, the
amount of each grant and other terms as shall be approved by the board of
directors or by a committee designated by the board of directors. Such options
granted under the plan may included non-statutory options as well as incentive
stock options ("ISOs"), within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended. The maximum number of shares with respect to
which options may be granted during any 12 month period to a participant is
100,000 shares. The Stock Option Plan, which permits up to 3,150,000 shares of
the Company's common stock to be issued, terminates on April 19, 2010. Under the
terms of the Stock Option Plan, each stock option shall have an exercise price
at least equal to 100% of the fair market value of a share on the date of grant,
or 110% of the fair market value of a share on the date of grant to an
individual who owns more than ten percent of the combined voting power of all
classes of outstanding stock of the Company. Each stock option shall expire on
the tenth anniversary of the date of grant, or five years in the case of an ISO
granted to a holder of more than ten percent of the combined voting power of all
classes of outstanding stock of the Company. Shares acquired under the Stock
Option Plan are subject to certain vesting and repurchase requirements.
No options have been granted under the Stock Option Plan.
Note 8 -- Purchased Research and Development
On April 15, 1999, the Company acquired from an investor, the right,
title, and interest to certain Software Modules, including copyrights,
trademarks, patents, object codes, source codes, enhancements and updates or
other modifications and user manuals. As consideration for this acquisition of
the Software Modules, the Company issued 7,500,000 shares of its Series A
Preferred Stock. The acquisition of the Software Modules is reflected in the
accompanying financial statements as research and development because
technological feasibility was not established and the Software Modules have no
alternative future use.
Note 9 -- Operating Leases
The Company leases office space under a five-year lease expiring August
2005 with a renewal option for a five-year period. Monthly payments under the
current lease are approximately $22,000.
The following is a schedule by years of approximate future minimum rental
payments required under operating leases that have initial or remaining
noncancelable lease terms in excess of one year as of December 31, 2000:
2001......................................... $ 264,000
2002......................................... 264,000
2003......................................... 264,000
2004......................................... 264,000
2005......................................... 175,000
----------
Total minimum payments required.............. $1,231,000
==========
Rent expense amounted to approximately $142,000 and $0 for the periods
ended December 31, 2000 and 1999, respectively.
12
ISPSoft Inc.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS -- (Continued)
Note 10 -- Employment Agreement
The Company has entered into employment agreements with various key
management personnel. Each agreement can be terminated with 30 days written
notice. However, key personnel have received stock grants which are subject to
forfeiture if employment is terminated prior to the completion of three years of
service with the Company from the date of grant (see Note 7).
Note 11 -- Related Parties
The Company leased consultants from a consulting services company, which
is owned by one of the stockholders. The amount due to affiliates represents
unpaid billings for the consulting services, which are non-interest bearing and
are due on demand.
For the years ended December 31, 2000 and 1999, the Company incurred
consulting fees from this affiliate of approximately $132,000 and $305,000,
respectively.
Note 12 -- Subsequent Events
Bridge Financing
In January through May 2001, the Company received unsecured temporary
financing of approximately $1,150,000 from various stockholders and
approximately $175,000 from other investors. The loans bear interest at the
Prime Rate plus 3%, and mature on July 31, 2001. In the event that the Company
consummates an equity financing on or prior to the maturity date, the balance
shall automatically convert into the securities of the Company of the class
issued in the equity financing by dividing the balance on the date of the
conversion by 80% of the price per share at which the subsequent securities are
sold in the offering.
Stock Plan
In April 2001, the Company adopted a stock plan providing for the direct
award or sale of the Company's common stock or for the granting of stock options
("Options") to purchase shares of the Company's common stock. Such options
granted under the plan may include Non-statutory Options as well as Incentive
Stock Options ("ISOs"), within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended. Only employees, outside directors and
consultants shall be eligible for the grant of options or the direct award or
sale of shares. Only employees are eligible for the grant of ISOs. The aggregate
number of shares that may be issued under the Plan (upon exercise of options or
rights to acquire shares) shall not exceed 5,000,000 shares. Under the terms of
the Plan, the exercise price per share of ISOs shall not be less than one
hundred percent (100%) of the fair market value of a share on the date of grant,
or one hundred ten percent (110%) of the fair market value of a share on the
date of grant to an individual who owns more than ten percent of the combined
voting power of all classes of outstanding stock of the Company. The exercise
price of a Nonstatutory Option to purchase newly issued shares shall not be less
than the par value, if any, of such shares. The Board of Directors determines
the term for all Options granted, although the term cannot exceed ten years from
the date of grant, or five years in the case of an ISO granted to a holder of
more than ten percent of the combined voting power of all classes of outstanding
stock of the Company. Shares acquired under the plan are subject to certain
vesting and repurchase requirements.
Any right to acquire Shares under the Plan (other than an option) shall
automatically expire if not exercised by the purchaser within 30 days after the
Company communicated the grant of such right to the purchaser.
Subsequent to the adoption of the plan the Company granted approximately
1,181,000 options to various employees and consultants under this plan. Through
the date of this report none of these options have been exercised.
13
ISPSoft Inc.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS -- (Continued)
Option Grants
Fair Value
of Underlying
Type of Number of Per Share Shares of Deferred Amortization
Grant Option Option Exercise Common Comp. Period
Date Optionee Relationship Grant Shares Price Stock Expense (Straight Line)
- ------- --------------- ------------ ---------- --------- --------- ------------- -------- ---------------------------------
8/11/00 Desai, Anand Employee Bonus 200,000 $2.50 $0.10 -- --
4/30/01 Sugla, Binay Employee Incentive 600,000 $0.10 $0.10 -- 1/2 vested immediately; and
remaining options upon earlier of
(i) April 30, 2009, or (ii) the
achievement the following
milestones: (a) 1/4 upon hire of
VP of Marketing, VP of
Engineering and CFO; and (b) 1/4
upon achievement of one million
dollars ($1,000,000) in gross
revenues during a fiscal year
05/15/01 Arni, Employee In Lieu 9,120 $0.10 $0.54 4,013 2 months
Ramakrishna of Salary
05/15/01 Krishnamoorthy, Employee In Lieu 9,120 $0.10 $0.54 4,013 2 months
Venkatesan of Salary
05/15/01 DiCuollo, Employee In Lieu 15,170 $0.10 $0.54 6,675 2 months
Patricia of Salary
05/15/01 Park, Edwin Employee In Lieu 12,090 $0.10 $0.54 5,320 2 months
of Salary
05/15/01 Cohen, Malcolm Employee In Lieu 18,150 $0.10 $0.54 7,986 2 months
of Salary
05/15/01 Krishnaswamy, Employee In Lieu 21,320 $0.10 $0.54 9,381 2 months
Sangeetha of Salary
05/15/01 John, Ajita Employee In Lieu 28,700 $0.10 $0.54 12,628 2 months
of Salary
05/15/01 Balakrishnan, Employee In Lieu 29,010 $0.10 $0.54 12,764 2 months
Ramesh of Salary
05/15/01 Krishnan, Employee In Lieu 29,010 $0.10 $0.54 12,764 2 months
Hariharan of Salary
05/15/01 Nuthi, Ramesh Employee In Lieu 30,550 $0.10 $0.54 13,442 2 months
of Salary
05/15/01 Srinivasan, Employee In Lieu 30,550 $0.10 $0.54 13,442 2 months
Kumar of Salary
05/15/01 Krishnan, P. Employee In Lieu 39,170 $0.10 $0.54 17,235 2 months
of Salary
05/15/01 Desai, Anand Employee In Lieu 45,230 $0.10 $0.54 19,901 2 months
of Salary
05/15/01 Sugla, Binay Employee In Lieu 52,090 $0.10 $0.54 22,920 2 months
of Salary
------- -------
369,280 162,483
======= =======
(table continued on next page)
14
ISPSoft Inc.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS -- (Continued)
(table continued from previous page)
Fair Value
of Underlying
Type of Number of Per Share Shares of Deferred Amortization
Grant Option Option Exercise Common Comp. Period
Date Optionee Relationship Grant Shares Price Stock Expense (Straight Line)
- ------- ----------------- ------------ --------- --------- --------- ------------- --------- -------------
05/15/01 Arni, Ramakrishna Employee Incentive 6,000 $0.10 $0.54 2,640 4 years
05/15/01 Asher, Damayanthi Employee Incentive 2,000 $0.10 $0.54 880 4 years
05/15/01 Cao, Guoliang Employee Incentive 2,000 $0.10 $0.54 880 4 years
05/15/01 Cohen, Malcolm Employee Incentive 13,200 $0.10 $0.54 5,808 4 years
05/15/01 Desai, Anand Employee Incentive 550,000 $0.10 $0.54 242,000 4 years
05/15/01 DiCuollo, Employee Incentive 5,000 $0.10 $0.54 2,200 4 years
Patricia
05/15/01 Garg, Sukesh Employee Incentive 50,000 $0.10 $0.54 22,000 4 years
05/15/01 Komarov, Employee Incentive 5,000 $0.10 $0.54 2,200 4 years
Alexander
05/15/01 Krishnaswamy, Employee Incentive 5,000 $0.10 $0.54 2,200 4 years
Sangeetha
05/15/01 Krishnamoorthy, Employee Incentive 6,000 $0.10 $0.54 2,640 4 years
Venkatesan
05/15/01 Lewis, Steve Employee Incentive 5,000 $0.10 $0.54 2,200 4 years
05/15/01 Park, Brian Employee Incentive 5,000 $0.10 $0.54 2,200 4 years
05/15/01 Park, Edwin Employee Incentive 10,000 $0.10 $0.54 4,400 4 years
05/15/01 Pericherla, Employee Incentive 10,000 $0.10 $0.54 4,400 4 years
Krishnam
05/15/01 Rajasekharan, Employee Incentive 20,000 $0.10 $0.54 8,800 4 years
Senthilkumar
05/15/01 Srinivasan, Kumar Employee Incentive 25,000 $0.10 $0.54 11,000 4 years
05/15/01 Wanchoo, Ajay Employee Incentive 15,000 $0.10 $0.54 6,600 4 years
05/15/01 Wang, Steven S. Employee Incentive 15,000 $0.10 $0.54 6,600 4 years
05/15/01 Zafrulla, Employee Incentive 3,000 $0.10 $0.54 1,320 4 years
Mohamed R.
--------- -------
752,200 330,968
========= =======
05/15/01 Kryla, Stan Consultant Consulting Services 35,200 $0.10 $0.54 17,600 2 months
05/15/01 Mehra,Vivek Consultant Advisory Services 25,000 $0.10 $0.54 11,000 4 years
--------- -------
60,200 28,600
========= =======
Total Warrants 200,000
Total 4/31/01 Options 600,000
Total 5/15/01 Options 1,181,680
15
ISPSoft Inc.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS -- (Continued)
Stock Options
In April 2001, the Company granted an additional 600,000 options to an
employee with an exercise price equal to the fair market value at that date.
Through the date of this report none of these options were exercised.
Letter of Intent
In May 2001 the Company received $500,000 from an unrelated entity
contemplating a merger. The Company subsequently received another $500,000 from
the same entity in June 2001 and entered into a letter of intent to merge with
this entity.
16
ISPSoft Inc.
(A Development Stage Company)
BALANCE SHEETS
(Unaudited)
September 30,
-----------------------------------
2001 2000
----------- -----------
ASSETS
Current assets
Cash and cash equivalents ............................................... $ 133,365 $ 1,665,163
Prepaid expenses and other current assets ............................... 22,548 27,577
----------- -----------
155,913 1,692,740
Property and equipment, net .................................................. 348,902 214,046
Other assets ................................................................. 50,262 50,557
----------- -----------
$ 555,077 $ 1,957,343
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities
Notes payable ........................................................... $ 3,575,000 $ --
Accounts payable ........................................................ 210,251 160,155
Accrued expenses and other current liabilities .......................... 301,388 3,517
Dividend payable ........................................................ 482,955 144,768
Due to affiliate ........................................................ -- 40,000
Current portion of capital lease obligations ............................ 6,483 5,783
----------- -----------
4,576,077 354,823
Long-term portion of capital lease obligations ............................... 5,565 10,544
----------- -----------
Total liabilities ..................................................... 4,581,642 364,767
Series B Redeemable Convertible Preferred Stock, no par value, 8,000,000
shares authorized, issued and outstanding as of September 30, 2001 and
2000, $4,482,955 and $4,144,768 liquidation preference as of September
30, 2001 and 2000, respectively ........................................... 4,000,000 4,000,000
Stockholders' equity (deficiency)
Common stock, no par value, 40,000,000 shares authorized; 6,636,667 and
6,850,000 shares issued and outstanding as of September 30, 2001 and
2000, respectively .................................................... 658,667 680,000
Series A Convertible Preferred Stock, no par value,12,000,000 shares
authorized and issued, 9,000,000 shares outstanding as of September
30, 2001 and 2000, $900,000 liquidation preference as of September
30, 2001 and 2000 ..................................................... 1,200,000 1,200,000
Additional paid-in capital .............................................. 598,050 --
Note receivable ......................................................... (135,000) (135,000)
Deferred compensation ........................................................ (458,095) (265,486)
Deficit accumulated during the development stage ............................. (8,890,187) (2,886,938)
----------- -----------
(7,026,565) (1,407,424)
Less treasury stock, Series A Convertible Preferred, at cost, 3,000,000
shares .................................................................... (1,000,000) (1,000,000)
----------- -----------
Total stockholders' equity (deficiency) ............................... (8,026,565) (2,407,424)
----------- -----------
$ 555,077 $ 1,957,343
=========== ===========
See accompanying notes to financial statements.
17
ISPSoft Inc.
(A Development Stage Company)
STATEMENTS OF OPERATIONS
(Unaudited)
Period from
Inception
For the Nine For the Nine (March 30,1999)
Months Ended Months Ended through
September 30, September 30, September 30,
2001 2000 2001
------------- ------------- -------------
Revenues .................................. $ -- $ -- $ --
----------- ----------- -----------
Operating expenses
Software development costs ........... 2,267,185 1,019,222 5,001,445
General and administrative ........... 2,017,068 710,648 3,311,611
Depreciation expense ................. 51,991 18,087 78,903
----------- ----------- -----------
4,336,244 1,747,957 8,391,959
Other (expense) income
Interest expense ..................... (116,924) -- (116,924)
Investment income .................... 14,647 62,327 101,651
----------- ----------- -----------
Net loss .................................. (4,438,521) (1,685,630) (8,407,232)
Dividends on Series B Preferred Stock ..... (256,410) (144,767) (482,955)
----------- ----------- -----------
Net loss applicable to common Stockholders' $(4,694,931) $(1,830,397) $(8,890,187)
=========== =========== ===========
See accompanying notes to financial statements.
18
ISPSoft Inc.
(A Development Stage Company)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
Period from March 30, 1999 (Date of Inception) to September 30, 2001
(Unaudited)
Preferred Stock Treasury Stock
Common Stock Series A Series A
--------------------- ------------------- -------------------
Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ ------
Original issuance of common stock
for cash ..................... 100,000 $ 5,000 -- $ -- $ -- $ --
Issuance of Series A Convertible
Preferred Stock for cash, note
receivable, software modules
and consulting services ...... -- -- 12,000,000 1,200,000 -- --
Net loss ........................ -- -- -- -- -- --
--------- -------- ---------- ---------- ----------- -----------
Balance at December 31, 1999 .... 100,000 5,000 12,000,000 1,200,000 -- --
Issuance of restricted common
stock for stock based
compensation ................. 3,350,000 335,000 -- -- -- --
Issuance of restricted common
stock for cash and note
receivable ................... 1,400,000 140,000 -- -- -- --
Issuance of common stock for
intellectual property ........ 2,000,000 200,000 -- -- -- --
Redemption ...................... -- -- -- -- (3,000,000) (1,000,000)
Earned portion of restricted
stock compensation ........... -- -- -- -- -- --
Payment on note receivable ...... -- -- -- -- -- --
Net loss ........................ -- -- -- -- -- --
Preferred stock dividends--
Series B ..................... -- -- -- -- -- --
--------- -------- ---------- ---------- ----------- -----------
Balance at September 30, 2000 ... 6,850,000 680,000 12,000,000 1,200,000 (3,000,000) (1,000,000)
Earned portion of restricted
stock compensation ........... -- -- -- -- -- --
Net loss ........................ -- -- -- -- -- --
Preferred stock dividends--
Series B ..................... -- -- -- -- -- --
--------- -------- ---------- ---------- ----------- -----------
Balance at December 31, 2000 .... 6,850,000 680,000 12,000,000 1,200,000 (3,000,000) (1,000,000)
Earned portion of restricted
stock compensation ........... -- -- -- -- -- --
Issuance of options for
consulting and advisory
services ..................... -- -- -- -- -- --
Issuance of options ............. -- -- -- -- -- --
Earned portion of options ....... -- -- -- -- -- --
Forfeiture of restricted stock .. (233,333) (23,333) -- -- -- --
Forfeiture of stock options ..... -- -- -- -- -- --
Options exercised ............... 20,000 2,000 -- -- -- --
Net loss ........................ -- -- -- -- -- --
Preferred stock dividends--
Series B ..................... -- -- -- -- -- --
--------- -------- ---------- ---------- ----------- -----------
Balance at September 30, 2001 ... 6,636,667 $658,667 12,000,000 $1,200,000 (3,000,000) $(1,000,000)
========= ======== ========== ========== =========== ===========
Deficit
Accumulated Total
Additional during the Stockholders'
Paid-in Note Deferred Developmental Equity
Capital Receivable Compensation Stage (Deficiency)
------- ---------- ------------ ----- ------------
Original issuance of common stock
for cash ..................... $ -- $ -- $ -- $ -- $ 5,000
Issuance of Series A Convertible
Preferred Stock for cash, note
receivable, software modules
and consulting services ...... -- (70,000) -- -- 1,130,000
Net loss ........................ -- -- -- (1,056,541) (1,056,541)
-------- --------- --------- ----------- -----------
Balance at December 31, 1999 .... -- (70,000) -- (1,056,541) 78,459
Issuance of restricted common
stock for stock based
compensation ................. -- -- (335,000) -- --
Issuance of restricted common
stock for cash and note
receivable ................... -- (135,000) -- -- 5,000
Issuance of common stock for
intellectual property ........ -- -- -- -- 200,000
Redemption ...................... -- -- -- -- (1,000,000)
Earned portion of restricted
stock compensation ........... -- -- 69,514 -- 69,514
Payment on note receivable ...... -- 70,000 -- -- 70,000
Net loss ........................ -- -- -- (1,685,630) (1,685,630)
Preferred stock dividends--
Series B ..................... -- -- -- (144,767) (144,767)
-------- --------- --------- ----------- -----------
Balance at September 30, 2000 ... -- (135,000) (265,486) (2,886,938) (2,407,424)
Earned portion of restricted
stock compensation ........... -- -- 27,917 -- 27,917
Net loss ........................ -- -- -- (1,226,540) (1,226,540)
Preferred stock dividends--
Series B ..................... -- -- -- (81,778) (81,778)
-------- --------- --------- ----------- -----------
Balance at December 31, 2000 .... -- (135,000) (237,569) (4,195,256) (3,687,825)
Earned portion of restricted
stock compensation ........... -- -- 80,972 -- 80,972
Issuance of options for
consulting and advisory
services ..................... 28,600 -- (28,600) -- --
Issuance of options ............. 571,100 -- (571,100) -- --
Earned portion of options ....... -- -- 273,219 -- 273,219
Forfeiture of restricted stock .. -- -- 23,333 -- --
Forfeiture of stock options ..... (1,650) -- 1,650 -- --
Options exercised ............... -- -- -- -- 2,000
Net loss ........................ -- -- -- (4,438,521) (4,438,521)
Preferred stock dividends--
Series B ..................... -- -- -- (256,410) (256,410)
-------- --------- --------- ----------- -----------
Balance at September 30, 2001 ... $598,050 $(135,000) $(458,095) $(8,890,187) $(8,026,565)
======== ========= ========= =========== ===========
See accompanying notes to financial statements.
19
ISPSoft Inc.
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
(Unaudited)
Period from
Inception
For the Nine For the Nine (March 30, 1999)
Months Ended Months Ended through
September 30, September 30, September 30,
2001 2000 2001
------------- ------------- -------------
Cash flows used from operating activities
Net loss ......................................... $(4,438,521) $(1,685,630) $(8,407,232)
----------- ----------- -----------
Adjustments to reconcile net income to
net cash provided by operations
Depreciation ................................... 51,991 18,087 78,902
Amortization of deferred
compensation .............................. 354,192 69,514 451,623
Stock issued for intellectual
property .................................. -- 200,000 200,000
Stock issued for consulting
services .................................. -- -- 304,800
Stock issued for software
modules ................................... -- -- 750,000
Decrease (increase) in
prepaid expenses and other assets ...... 47,855 (22,935) (17,610)
Increase in
Accounts payable ........................... 79,658 160,155 210,251
Accrued expenses ........................... 241,970 (1,648) 301,389
Due to affiliate ........................... (40,000) 40,000 --
----------- ----------- -----------
Total adjustments .................. 735,666 463,173 2,279,355
----------- ----------- -----------
(3,702,855) (1,222,456) (6,127,877)
----------- ----------- -----------
Cash flows used for investing activities
Purchase of property and equipment ............. (130,113) (210,640) (410,855)
----------- ----------- -----------
Cash flows from financing activities
Proceeds from notes payable .................... 3,575,000 -- 3,575,000
Proceeds from issuance of Series A
Preferred stock ........................... -- -- 20,000
Proceeds from the sale of Series B
Preferred stock ........................... -- 4,000,000 4,000,000
Capital lease payments ......................... (4,903) -- (4,903)
Proceeds from issuance of common stock ......... 2,000 5,000 12,000
Redemption of Series A Preferred stock ......... -- (1,000,000) (1,000,000)
Proceeds received from notes receivable--
common stock .............................. -- 70,000 70,000
----------- ----------- -----------
3,572,097 3,075,000 6,672,097
----------- ----------- -----------
Net change in cash and cash equivalents ............. (260,871) 1,641,904 133,365
Cash and cash equivalents -- beginning .............. 394,236 23,259 --
----------- ----------- -----------
Cash and cash equivalents -- ending ................. $ 133,365 $ 1,665,163 $ 133,365
=========== =========== ===========
Supplemental disclosure of cash paid
Interest ....................................... $ -- $ -- $ --
Income taxes ................................... -- -- --
Noncash investing and financing activities
Acquisition of equipment under a capital
lease ..................................... -- 16,950 16,950
Issuance of common stock for a note receivable -- 135,000 205,000
Issuance of common stock to employees for
services .................................. -- 335,000 335,000
Dividend payable on Series B Preferred stock ... 256,410 144,767 482,955
See accompanying notes to financial statements.
20
ISPSoft Inc.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
Note 1 -- Business and Liquidity
ISPSoft Inc. (the "Company") was incorporated on March 30, 1999, in the
State of New Jersey. The Company was formed to develop advanced provisioning and
management applications for carrier-grade IP service providers and medium to
large scale enterprises. To date, the Company has devoted the majority of its
efforts in raising capital and developing technology. The Company is in the
development stage and, accordingly, the financial statements are presented in a
format prescribed for a development stage company.
On June 26, 2001, the Company entered into an Agreement and Plan of
Merger with an unrelated entity. If the merger is not consummated, due to the
Company not fulfilling its commitments according to the agreement, the Company
will be assessed a termination fee of $2,000,000 plus certain documentable
expenses of the non-breaching party.
The Company has incurred losses in the current period and has an
accumulated deficit at September 30, 2001. The Company's primary source of funds
to date has been through the issuance of securities and borrowed funds.
Management intends to consummate the above mentioned merger and continue
devoting resources to research and development of its technology. Management
believes that the merger will be consummated, however, there can be no assurance
that this will be completed. Without additional capital, or the consummation of
the above mentioned merger, there may be a material adverse effect on the
Company's ability to continue as a going concern.
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern and do not include any adjustments
that might result from the outcome of this uncertainty.
Note 2 -- Summary of Significant Accounting Policies
Development Stage Enterprise
Since inception, the Company has not commenced any formal business
operations. The Company is considered to be in the development stage and
therefore has adopted the accounting and reporting standards of Statement of
Financial Accounting Standards ("SFAS") No. 7, "Accounting and Reporting by
Development Stage Enterprises."
Use of Estimates
The preparation of financial statements, in accordance 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 period.
Actual results may differ from those estimates.
Concentrations of Credit Risk
The Company maintains cash balances at financial institutions, which at
times are in excess of federally insured limits. The Company has not experienced
any losses in such accounts.
Cash Equivalents
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation.
Property and equipment are depreciated on a straight-line basis over the
estimated useful lives of the assets, which range from five to seven
21
ISPSoft Inc.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS -- (Continued)
(Unaudited)
years. Leasehold improvements are amortized over the shorter of the estimated
useful life or the life of the lease, which is ten years.
Stock-based Compensation
SFAS No. 123, "Accounting for Stock-based Compensation," allows the
Company to account for its employee stock-based compensation plans under APB
Opinion No. 25 "Accounting for Stock Issued to Employees" and the related
interpretations. The Company accounts for stock-based compensation in accordance
with APB Opinion No. 25, and records deferred compensation for stock-based
compensation grants based on the excess of the market value of the common stock
on the measurement date over the exercise price. The deferred compensation is
amortized to expense, on a straight line basis, over the vesting period of each
unit of stock-based compensation granted. If the exercise price of the
stock-based compensation is equal to or exceeds the market price of the
Company's stock on the date of grant, no compensation expense is recorded.
Software Development Costs
Research and development, which includes purchased research and
development and internal costs incurred on the technology are expensed as
incurred, in accordance with the provisions of SFAS No. 86, "Accounting for the
Costs of Computer Software to be Sold, Leased or Otherwise Marketed." Pursuant
to SFAS No. 86, costs are capitalized when technological feasibility of the
product is established and costs incurred prior to the establishment of
technological feasibility are expensed as incurred as research and development
costs. On September 30, 2001, the Company reached technological feasibility with
one of its products and accordingly commenced capitalization of related costs.
Income Taxes
The Company uses the liability method of accounting for income taxes. The
liability method measures deferred income taxes by applying enacted statutory
rates in effect at the balance sheet date to the differences between the tax
basis of assets and liabilities and their reported amounts in the financial
statements. The resulting deferred tax asset or liability is adjusted to reflect
changes in tax laws as they occur.
Note 3 -- Property and Equipment
September 30,
------------------------
2001 2000
------------ -----------
Equipment............................ $371,242 $199,315
Furniture and fixtures............... 50,103 26,357
Leasehold improvements............... 6,461 6,461
-------- --------
427,806 232,133
Less accumulated depreciation........ 78,904 18,087
-------- --------
$348,902 $214,046
======== ========
Depreciation amounted to $51,991 and $18,087 for the nine months ended
September 30, 2001 and 2000, respectively.
Equipment recorded under capital leases of $19,905 is included in
property and equipment at September 30, 2001 ($14,930 net of accumulated
depreciation). Depreciation expense for the nine months ended September 30,
2001, related to the equipment recorded under capital leases amounted to $2,985.
22
ISPSoft Inc.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS -- (Continued)
(Unaudited)
Note 4 -- Income Taxes
Deferred tax attributes resulting from differences between financial
accounting amounts and tax basis of assets and liabilities at September 30,
follow:
2001 2000
Net operating loss carryforward........................ $ 3,064,000 $ 807,000
Deferred compensation.................................. 109,000 28,000
Fixed assets, primarily software development costs..... 132,000 264,000
Research and development credits....................... 160,000 23,000
Other.................................................. 52,000 --
Valuation allowance.................................... (3,517,000) (1,122,000)
----------- -----------
Net deferred tax asset................................. $ -- $ --
=========== ===========
The Company's income tax expense differs from income tax (benefit)
computed at the U.S. federal statutory rate due to the valuation allowance on
deferred tax assets.
Based on management's estimates, the Company has provided a valuation
allowance against its deferred tax assets. The Company believes uncertainty
exists in generating sufficient taxable income in the future to realize these
items, and accordingly, has established a valuation allowance.
At September 30, 2001, the Company has net operating loss carryforwards
for both federal and state income tax purposes of approximately $7,660,332. The
net operating loss carryforwards will expire beginning in 2006, if not utilized.
The Company's net operating loss carryforwards could be limited in circumstances
involving a significant change in equity ownership.
Note 5 -- Notes Payables
In January through June 2001, the Company received unsecured temporary
financing of approximately $1,150,000 from various stockholders and
approximately $175,000 from other investors. The loans bear interest at the
prime rate plus 3%, and mature on November 30, 2001. In the event that the
Company consummates an equity financing on or prior to the maturity date, the
balance shall automatically convert into the securities of the Company of the
class issued in the equity financing by dividing the balance on the date of the
conversion by 80% of the price per share at which the subsequent securities are
sold in the offering.
On June 26, 2001, simultaneously with the execution of the Merger
Agreement (see Note 1), the Company signed a $2,000,000 promissory note, to the
acquiring entity, which replaced a $500,000 note issued on May 9, 2001. The
Company received $1,000,000 in June 2001 and $500,000 in both July, 2001 and
August, 2001. The note bears interest at 8% and matures on the earlier of (i)
October 31, 2001, unless the failure to close the transactions contemplated by
the Agreement and Plan of Merger is caused by the failure of the holder to
obtain shareholder approval, in which case the note shall be due and payable on
January 31, 2002, (ii) the date the Company determines not to enter into the
acquisition by the investing entity and the Company consummates an equity
financing that results in aggregate gross proceeds of at least $2,000,000. The
note is secured by all the assets of the Company.
On September 26, 2001, the Company signed a $750,000 promissory note, to
the acquiring entity. As of September 30, 2001, the Company had received
$250,000. The remaining balance of $500,000 is to be received in increments of
$250,000 on both October 10, 2001 and October 24, 2001. The note bears interest
at 8% and matures the earlier of (i) November 30, 2001, unless the failure to
close the transactions contemplated by the Agreement and the Plan of Merger is
caused by the failure of the holder to obtain proper shareholder approval, in
which case the note shall be due and payable on January 31, 2002, (ii) the date
the Company determines not to enter into the acquisition by the investing entity
and the Company consummates an equity financing that results in aggregate gross
proceeds of at least $2,000,000. The note is secured by all the assets of the
Company.
23
ISPSoft Inc.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS -- (Continued)
(Unaudited)
Note 6 -- Capital Lease Obligations
During 2000, the Company entered into a capital lease obligation for
computer equipment. Minimum payments are $752 per month, including imputed
interest of 21.2% per annum. The lease matures in April 2003, and is
collateralized by the related equipment, which had a net book value of $14,930
at September 30, 2001.
The following is a schedule of future minimum lease payments for the 12
months ending September 30,:
2002............................................ $ 8,273
2003............................................ 6,017
-------
14,290
Less interest................................... 2,242
-------
12,048
Less current portion............................ 6,483
-------
$ 5,565
=======
Note 7 -- Common and Preferred Stock
The Company's Articles of Incorporation, as amended, authorize three
classes of stock: common, Series A Convertible Preferred and Series B
Convertible, Redeemable Preferred, and designate the number of authorized shares
to be 40,000,000 for common stock, 12,000,000 for Series A Convertible Preferred
and 9,000,000 for Series B Convertible, Redeemable Preferred.
Rights, preferences, and privileges of the various categories of stock
are as follows:
Dividends. Holders of Series B Preferred Stock are entitled to
receive, when, and if declared by the Board of Directors out of funds
legally available for the purpose, cumulative dividends which shall
accrue daily at a base rate of 8% per annum on the Liquidation Preference
of such shares, $0.50 per share.
Liquidation Rights. In the event of a liquidation, dissolution or
winding up of the affairs of the Corporation, whether voluntary or
involuntary, the order of liquidation is as follows:
o holders of Series B Preferred Stock are first entitled to
receive the Liquidation Preference of such shares, $0.50
per share, plus any accrued but unpaid dividends,
o holders of Series A Preferred Stock are then entitled to
receive the Liquidation Preference of such shares, $0.10
per share, plus accrued but unpaid dividends,
o any remainder is then to be distributed ratably among
holders of the Company's common stock.
Preferred Stock Conversion/Redemption Rights:
Conversion
Both the Series A and Series B Preferred Stock ("Preferred Stock") are
convertible at any time and from time to time, at the option of any holder of
shares of Preferred Stock, into such number of shares of Common Stock as is
determined by multiplying the number of shares to be converted by the
Liquidation Preference of each share to be converted ($0.10 per share for the
Series A Preferred and $0.50 per share, plus accrued dividends (8% per annum
accruing daily) for the Series B Preferred), and dividing by the result by the
Conversion Price then in effect (currently the same as the Liquidation
Preference, with weighted average anti-dilution adjustments). All shares of
Preferred Stock will be automatically converted at the closing of a qualifying
IPO or upon the written election of the holders of at least 80% of the shares of
outstanding Series B Stock.
24
ISPSoft Inc.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS -- (Continued)
(Unaudited)
Redemption
On or after April 19, 2004, the Company must redeem, at the written
election of the holders of at least a majority of the then outstanding shares of
Series B Preferred Stock, (i) on the date specified by the holders, 1/3rd of all
Series B Preferred outstanding on the date of such election, and (ii) on the
first anniversary of such date 1/2 of the shares of Series B Preferred
outstanding on such date, and (iii) on the second anniversary of such date, all
of the remaining shares of Series B Preferred Stock. The redemption price for
each share to be redeemed shall be the Liquidation Preference for such shares
($0.50 per share, plus accrued dividends, 8% per annum accruing daily). Due to
the redemption feature, which is at the election of the holder, the Series B
Preferred Stock has been classified as temporary equity, which is a section
between liabilities and equity.
Voting
The holders of the shares of Series A Preferred Stock and Series B
Preferred Stock shall be entitled to vote on all matters submitted to the
stockholders for a vote together with the holders of the Common Stock voting
together as a single class, with each holder of Preferred Stock entitled to one
vote for each share of Conversion Stock issuable upon conversion of the
Preferred Stock held by such holder at the time the vote is taken.
Note 8 -- Stockholders' Equity
On April 15, 1999, ISPSoft as part of its initial capitalization issued
12,000,000 shares of Series A Preferred Stock to an investor, Agrawal Naresh for
a total of $1,200,000, comprised of software modules valued at $750,000,
consulting services valued at $360,000 and cash of $90,000. As part of the stock
purchase agreement, Mr. Naresh agreed to provide ISPSoft with certain software
modules, which were being developed by Computer Consultants, Inc., an unrelated
independent third party. Mr. Naresh acquired the modules from Computer
Consultants, Inc. on behalf of ISPSoft for $750,000 and all rights to the source
codes of these modules were transferred to ISPSoft effective May 1, 1999. Mr.
Naresh also agreed to contract and reimburse Danucom, Inc. ("Danucom") $360,000
for software development and consultancy services to be performed during the
period April 1999 through February 2000. Danucom provided invoices for the time
incurred at rates, which ranged from $60 to $100 per hour. The sole shareholder
of ISPSoft common at this time was a principal shareholder in Danucom. On March
1, 2000, Mr. Naresh transferred his shares of ISPSoft to SGM Capital Limited.
Mr. Naresh is a principal in this entity. Accordingly, the value assigned is
based upon the cost incurred by Mr. Naresh. These amounts were charged to
operations in accordance with the provisions of SFAS 86.
On January 10, 2000, the Company issued 2,200,000 shares of restricted
common stock, valued at $0.10 per share, to various employees for no
consideration. As a result the Company recorded deferred compensation of
$220,000, which is amortized over the three-year forfeiture period. Related
amortization expense amounted to approximately $55,000 and $52,000 for the nine
months ended September 30, 2001 and 2000, respectively. The shares were fully
vested upon issuance but are subject to forfeiture during the following
three-year period in the event of termination of employment from the Company,
for any reason, with or without cause. If the termination occurs on or before
the first anniversary from the grant date 100% of the shares are subject to
forfeiture for no consideration. If the termination occurs after the first
anniversary from the grant date the shares are subject to forfeiture on a
pro-rata basis, based on a 36-month vesting period. The shares are held in
escrow and released as they are no longer subject to forfeiture. As of September
30, 2001 and 2000 there have been approximately 1,253,000 and -0- shares earned,
respectively, and no shares were forfeited.
On April 19, 2000, the following transaction took place:
o The Company's Board of Directors approved a 10 for 1 stock split for
all stockholders of record as of that date. All share and per share
information included in these financial statements have been restated
to include the effects of the stock split for all periods presented.
o Lucent Technologies, an unrelated party at the time, invested
$3,000,000 to acquire 6,000,000 shares of Series B Redeemable
Convertible Preferred Stock and contributed intellectual property
in exchange for
25
ISPSoft Inc.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS -- (Continued)
(Unaudited)
2,000,000 shares of common stock (see Note 9). In addition Signal
Lake Venture Fund, LP, an unrelated party at the time, invested
$1,000,000 to acquire 2,000,000 shares of Series B Redeemable
Convertible Preferred Stock. ISPSoft and Lucent mutually agreed to
the value assigned to the intellectual property of $200,000 prior to
the consummation of Lucent's investment, which results in a value of
$.10 per common share. This amount was charged to operations in
accordance with the provisions of SFAS 86. All common stock
transactions on this date were also valued at $.10 per common share.
Simultaneously, the Company bought back 3,000,000 shares of Series A
Preferred Stock from an investor for $1,000,000. These shares are
currently held in treasury.
o The Company issued 1,400,000 shares of restricted common stock at
$0.10 per share for $5,000 in cash and a note receivable in the
amount of $135,000. The note bears interest at 7% per annum and
payments of principal and interest are due annually through April
2005. The shares were fully vested upon issuance but are subject
to forfeiture during the following three-year period in the event
of termination of employment from the Company, for any reason,
with or without cause. If the termination occurs on or before the
first anniversary from the grant date 100% of the shares are
subject to forfeiture for no consideration. If the termination
occurs after the first anniversary from the grant date the shares
are subject to forfeiture on a pro-rata basis, based on a 36-month
vesting period. The shares are held in escrow and released as they
are no longer subject to forfeiture. As of September 30, 2001and
2000 there have been approximately 681,000 and -0- shares earned,
respectively, and no shares were forfeited.
o The Company issued 150,000 shares of restricted common stock,
valued at $0.10 per share, in exchange for advisory services. As a
result the Company recorded deferred compensation of $15,000,
which is amortized over the three-year forfeiture period. Related
amortization expense amounted to approximately $3,800 and $2,200
for the nine months ended September 30, 2001 and 2000. The shares
were fully vested upon issuance but are subject to forfeiture
during the following three-year period in the event of termination
as an advisor for the Company, for any reason, with or without
cause. If the termination occurs on or before the first
anniversary from the grant date 100% of the shares are subject to
forfeiture for no consideration. If the termination occurs after
the first anniversary from the grant date the shares are subject
to forfeiture on a pro-rata basis, based on a 36-month vesting
period. The shares are held in escrow and released as they are no
longer subject to forfeiture. As of September 30, 2001 and 2000
there have been approximately 73,000 and -0- shares earned,
respectively, and no shares were forfeited. Under the provisions
of EITF 96-18, the measurement date of the shares of restricted
stock is the date the risk of forfeiture lapses. The common shares
are initially valued at $.10 per share, the fair value at date of
issuance and the Company recorded deferred compensation of
$15,000, which is being amortized over the service period of three
years. These shares will be subsequently remeasured each reporting
period using the then applicable valuation assumptions until the
measurement date occurs. Changes in the fair value of the shares
will be recognized using guidance in SFAS Interpretation 28.
o The Company issued 1,000,000 shares of restricted common stock,
valued at $0.10 per share, to various employees for no
consideration. As a result the Company recorded deferred
compensation of $100,000, which is amortized over the three-year
forfeiture period. Related amortization expense amounted to
approximately $22,000 and $15,000 for the nine months ended
September 30, 2001 and 2000. The shares were fully vested upon
issuance but are subject to forfeiture during the following
three-year period in the event of termination of employment from
the Company, for any reason, with or without cause. If the
termination occurs on or before the first anniversary from the
grant date 100% of the shares are subject to forfeiture for no
consideration. If the termination occurs after the first
anniversary from the grant date the shares are subject to
forfeiture on a pro-rata basis, based on a 36-month vesting
period. The shares are held in escrow and released as they are no
longer subject to forfeiture. As of September 30, 2001 and 2000
there have been approximately 487,000 and -0- shares earned and
233,000 and -0- shares were forfeited, respectively.
26
ISPSoft Inc.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS -- (Continued)
(Unaudited)
Warrants
On August 11, 2000, the Company issued warrants, to an employee, to
purchase 200,000 shares of the Company's common stock at an exercise price of
$2.50. These warrants will expire on August 11, 2004, however, in the event of
an initial public offering ("IPO") the warrants will become null and void and no
longer exercisable as of the IPO date. The Company must notify the holder of the
warrant at least 15 days prior to the consumption of such an event. As of
September 30, 2001, there were no warrants exercised.
The pro forma effect of applying the fair value method in accordance with
SFAS No. 123 "Accounting for Stock Based Compensation" is immaterial to the
Company's net loss.
Stock Option Plan
In April 2000, the Company adopted a stock option plan providing for the
granting of stock options ("Options") to key employees to purchase shares of the
Company's common stock. Within certain limitations provided by the Stock Option
Plan, such options may include provisions regarding vesting, exercise price, the
amount of each grant and other terms as shall be approved by the Board of
Directors or by a committee designated by the Board of Directors. Such options
granted under the Plan may include Non-statutory Options as well as Incentive
Stock Options ("ISOs"), within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended. The maximum number of shares with respect to
which options may be granted during any 12 month period to a participant is one
hundred thousand shares (100,000). The Stock Option Plan, which permits up to
3,150,000 shares of the Company's common stock to be issued, terminates on April
19, 2010. Under the terms of the Plan, each stock option shall have an exercise
price at least equal to one hundred percent (100%) of the fair market value of a
share on the date of grant, or one hundred ten percent (110%) of the fair market
value of a share on the date of grant to an individual who owns more than 10% of
the combined voting power of all classes of outstanding stock of the Company.
Each stock option shall expire on the tenth anniversary of the date of grant, or
five years in the case of an ISO granted to a holder of more than 10% of the
combined voting power of all classes of outstanding stock of the Company. Shares
acquired under the Plan are subject to certain vesting and repurchase
requirements.
No options have been granted under the Stock Option Plan.
Stock Plan
In April 2001, the Company adopted a stock plan providing for the direct
award or sale of the Company's common stock or for the granting of stock options
("Options") to purchase shares of the Company's common stock. Such options
granted under the Plan may include Non-statutory Options as well as Incentive
Stock Options ("ISOs"), within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended. Only employees, outside directors and
consultants shall be eligible for the grant of options or the direct award or
sale of shares. Only employees are eligible for the grant of ISOs. The aggregate
number of shares that may be issued under the Plan (upon exercise of options or
rights to acquire shares) shall not exceed 5,000,000 shares. Under the terms of
the Plan, the exercise price per share of ISOs shall not be less than one
hundred percent (100%) of the fair market value of a share on the date of grant,
or one hundred ten percent (110%) of the fair market value of a share on the
date of grant to an individual who owns more than 10% of the combined voting
power of all classes of outstanding stock of the Company. The exercise price of
a Nonstatutory Option to purchase newly issued shares shall not be less than the
par value, if any, of such shares. The Board of Directors determines the term
for all Options granted, although the term cannot exceed ten years from the date
of grant, or five years in the case of an ISO granted to a holder of more than
10% of the combined voting power of all classes of outstanding stock of the
Company. Shares acquired under the Plan are subject to certain vesting and
repurchase requirements.
Any right to acquire shares under the Plan (other than an option) shall
automatically expire if not exercised by the purchaser within 30 days after the
Company communicated the grant of such right to the purchaser.
On May 15, 2001, the following transaction took place under the Plan:
27
ISPSoft Inc.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS -- (Continued)
(Unaudited)
o The Company granted approximately 369,000 options to various
employees, to purchase shares of the Company's common stock at an
exercise price of $0.10 per share, in exchange for their services. As
a result, the Company has recorded compensation expense of $162,000
in relation to these options. These options will expire on May 14,
2011. As of September 30, 2001, all of these options were vested and
20,000 options were exercised and 19,000 were forfeited.
o The Company granted approximately 752,000 options to various
employees, to purchase shares of the Company's common stock at an
exercise price of $0.10 per share. As a result, the Company recorded
deferred compensation of $331,000 which is amortized over the four
year vesting period. Amortization for the period ended September 30,
2001 was approximately $89,000. These options will expire on May 14,
2011. As of September 30, 2001, approximately 5,500 of these options
were vested, 3,750 were forfeited and no options were exercised.
The pro forma effect of applying the fair value method in accordance with
SFAS No. 123 "Accounting for Stock Based Compensation" is immaterial to the
Company's net loss.
o The Company granted approximately 60,000 options to an advisor and
consultant, to purchase shares of the Company's common stock at an
exercise price of $0.10 per share. As a result the Company recorded
consulting fees of $17,600 and deferred compensation of $11,000,
which is amortized over the four year vesting period. These options
will expire on May 14, 2011. As of September 30, 2001, approximately
35,000 of these options were vested and no options were exercised or
forfeited.
Stock Options
On April 30, 2001, the Company granted 600,000 options to an employee
with an exercise price equal to the fair market value at that date. These
options will expire on April 30, 2011. As of September 30, 2001, 300,000 of
these options were vested and none of these options were exercised.
The pro forma effect of applying the fair value method in accordance with
SFAS No. 123 "Accounting for Stock Based Compensation" is immaterial to the
Company's net loss.
On July 20, 2001 the company granted approximately 370,000 options to
various employees, to purchase shares of the Company's common stock at an
exercise price of $.10 per share. As a result, the company recorded deferred
compensation of 48,100 which is amortized over the four year vesting period.
Amortization for the period ended September 30, 2001 was approximately $2,000.
These options will expire on July 19, 2011. As of September 30, 2001, none of
these options were vested, exercised or forfeited.
The pro forma effect of applying the fair value method in accordance with
SFAS No. 123 "Accounting for Stock Based Compensation" is immaterial to the
Company's net loss.
On September 20, 2001 the company granted approximately 600,000 options
to various employees, to purchase shares of the Company's common stock at an
exercise of $.10 per share. As a result, the company recorded deferred
compensation of 30,000 which is amortized over the four year vesting period.
Amortization for the period ended September 30, 2001 was approximately $300.
These options will expire on September 19, 2011. As of September 30, 2001, none
of these options were vested, exercised or forfeited.
The pro forma effect of applying the fair value method in accordance with
SFAS No. 123 "Accounting for Stock Based Compensation" is immaterial to the
Company's net loss.
28
ISPSoft Inc.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS -- (Continued)
(Unaudited)
Option Grants
Fair Value of
Underlying
Type of Number of Per Share Shares of Deferred Amortization
Grant Option Option Exercise Common Comp. Period
Date Optionee Relationship Grant Shares Price Stock Expense (Straight Line)
------- ------------- ------------ -------- --------- ------- ---------- -------- ------------------------
08/11/00 A. Desai Employee Bonus $200,000 $2.50 $0.10 -- --
04/30/01 B. Sugla Employee Incentive 600,000 $0.10 $0.10 -- 1/2 vested immediately,
and remaining options
upon earlier of (i)
April 30, 2009, or (ii)
the achievement the
following milestones:
(a) 1/4 upon hire of VP
of Marketing, VP of
Engineering and CFO;
and (b) 1/4 upon
achievement of one
million dollars
($1,000,000) in gross
revenues during a
fiscal year
05/15/01 R.Arni Employee In Lieu of 9,120 $0.10 $0.54 4,013 2 months
Salary
05/15/01 V. Krishnamoorthy Employee In Lieu of 9,120 $0.10 $0.54 4,013 2 months
Salary
05/15/01 P. DiCuollo Employee In Lieu of 15,170 $0.10 $0.54 6,675 2 months
Salary
05/15/01 E. Park Employee In Lieu of 12,090 $0.10 $0.54 5,320 2 months
Salary
05/15/01 M. Cohen Employee In Lieu of 18,150 $0.10 $0.54 7,986 2 months
Salary
05/15/01 S. Krishnaswamy Employee In Lieu of 21,320 $0.10 $0.54 9,381 2 months
Salary
05/15/01 A. John Employee In Lieu of 28,700 $0.10 $0.54 12,628 2 months
Salary
05/15/01 R. Balakrishnan Employee In Lieu of 29,010 $0.10 $0.54 12,764 2 months
Salary
05/15/01 H. Krishnan Employee In Lieu of 29,010 $0.10 $0.54 12,764 2 months
Salary
05/15/01 R. Nuthi Employee In Lieu of 30,550 $0.10 $0.54 13,442 2 months
Salary
05/15/01 K. Srinivasan Employee In Lieu of 30,550 $0.10 $0.54 13,442 2 months
Salary
05/15/01 P. Krishnan Employee In Lieu of 39,170 $0.10 $0.54 17,235 2 months
Salary
05/15/01 A. Desai Employee In Lieu of 45,230 $0.10 $0.54 19,901 2 months
Salary
05/15/01 B. Sugla Employee In Lieu of 52,090 $0.10 $0.54 22,920 2 months
Salary
--------- --------
369,280 162,483
========= ========
05/15/01 R. Arni Employee Incentive 6,000 $0.10 $0.54 2,640 4 years
05/15/01 D. Asher Employee Incentive 2,000 $0.10 $0.54 880 4 years
05/15/01 G. Cao Employee Incentive 2,000 $0.10 $0.54 880 4 years
05/15/01 M. Cohen Employee Incentive 13,200 $0.10 $0.54 5,808 4 years
05/15/01 A. Desai Employee Incentive 550,000 $0.10 $0.54 242,000 4 years
05/15/01 P. DiCuollo Employee Incentive 5,000 $0.10 $0.54 2,200 4 years
05/15/01 S. Garg Employee Incentive 50,000 $0.10 $0.54 22,000 4 years
05/15/01 A. Komarov Employee Incentive 5,000 $0.10 $0.54 2,200 4 years
05/15/01 S. Krishnaswamy Employee Incentive 5,000 $0.10 $0.54 2,200 4 years
05/15/01 V. Krishnamoorthy Employee Incentive 6,000 $0.10 $0.54 2,640 4 years
05/15/01 S. Lewis Employee Incentive 5,000 $0.10 $0.54 2,200 4 years
05/15/01 B. Park Employee Incentive 5,000 $0.10 $0.54 2,200 4 years
05/15/01 E. Park Employee Incentive 10,000 $0.10 $0.54 4,400 4 years
29
ISPSoft Inc.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS -- (Continued)
(Unaudited)
Fair Value of
Underlying
Type of Number of Per Share Shares of Deferred Amortization
Grant Option Option Exercise Common Comp. Period
Date Optionee Relationship Grant Shares Price Stock Expense (Straight Line)
------- ------------- ------------ -------- --------- ------- ---------- -------- ------------------------
05/15/01 K. Pericherla Employee Incentive 10,000 $0.10 $0.54 4,400 4 years
05/15/01 S. Rajasekharan Employee Incentive 20,000 $0.10 $0.54 8,800 4 years
05/15/01 K. Srinivasan Employee Incentive 25,000 $0.10 $0.54 11,000 4 years
05/15/01 A. Wanchoo Employee Incentive 15,000 $0.10 $0.54 6,600 4 years
05/15/01 S. Wang Employee Incentive 15,000 $0.10 $0.54 6,600 4 years
05/15/01 M. Zafrulla Employee Incentive 3,000 $0.10 $0.54 1,320 4 years
-------- ---------
752,200 330,968
======== =========
05/15/01 S. Kryla Consultant Consulting Svs. 35,200 $0.10 $0.54 17,600 2 months
05/15/01 V. Mehra Consultant Advisory Svs. 25,000 $0.10 $0.54 11,000 4 years
-------- ---------
60,200 28,600
======== =========
7/20/2001 R. Arni Employee Incentive 18,000 $0.10 $0.23 2,340 4 years
7/20/2001 D. Asher Employee Incentive 7,000 $0.10 $0.23 910 4 years
7/20/2001 D. Bencher Employee Incentive 30,000 $0.10 $0.23 3,900 4 years
7/20/2001 G. Cao Employee Incentive 18,000 $0.10 $0.23 2,340 4 years
7/20/2001 B. Das Employee Incentive 15,000 $0.10 $0.23 1,950 4 years
7/20/2001 P. Dicuollo Employee Incentive 5,000 $0.10 $0.23 650 4 years
7/20/2001 S. Garg Employee Incentive 25,000 $0.10 $0.23 3,250 4 years
7/20/2001 A. John Employee Incentive 25,000 $0.10 $0.23 3,250 4 years
7/20/2001 A. Komarov Employee Incentive 7,000 $0.10 $0.23 910 4 years
7/20/2001 V. Krishnmoorthy Employee Incentive 18,000 $0.10 $0.23 2,340 4 years
7/20/2001 S. Krishnaswamy Employee Incentive 7,000 $0.10 $0.23 910 4 years
7/20/2001 M. Kumar Employee Incentive 5,000 $0.10 $0.23 650 4 years
7/20/2001 S. Lewis Employee Incentive 7,000 $0.10 $0.23 910 4 years
7/20/2001 P. Narayanan Employee Incentive 5,000 $0.10 $0.23 650 4 years
7/20/2001 R. Nuthi Employee Incentive 25,000 $0.10 $0.23 3,250 4 years
7/20/2001 E. Park Employee Incentive 20,000 $0.10 $0.23 2,600 4 years
7/20/2001 K. Pericherla Employee Incentive 10,000 $0.10 $0.23 1,300 4 years
7/20/2001 S. Rajasekharan Employee Incentive 10,000 $0.10 $0.23 1,300 4 years
7/20/2001 V. Ravula Employee Incentive 6,000 $0.10 $0.23 780 4 years
7/20/2001 R. Sequeria Employee Incentive 10,000 $0.10 $0.23 1,300 4 years
7/20/2001 M. Singh Employee Incentive 10,000 $0.10 $0.23 1,300 4 years
7/20/2001 K. Srinivasan Employee Incentive 50,000 $0.10 $0.23 6,500 4 years
7/20/2001 A. Wanchoo Employee Incentive 20,000 $0.10 $0.23 2,600 4 years
7/20/2001 S. Wang Employee Incentive 10,000 $0.10 $0.23 1,300 4 years
7/20/2001 M. Zafrulla Employee Incentive 7,000 $0.10 $0.23 910 4 years
--------- --------
370,000 48,100
========= ========
9/20/2001 T. Warren Employee Incentive 300,000 $0.10 $0.15 15,000 4 years
9/20/2001 M. Davis Employee Incentive 300,000 $0.10 $0.15 15,000 4 years
--------- --------
600,000 30,000
========== ========
Total Warrants 200,000
---------
Total 4/31/01 Options 600,000
Total 5/15/01 Options 1,181,680
Total 7/20/01 Options 370,000
Total 9/20/01 600,000
---------
Total Options 2,751,680
=========
30
ISPSoft Inc.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS -- (Continued)
(Unaudited)
Note 9 -- Purchased Research and Development
On April 15, 1999, the Company acquired from an investor, the right,
title, and interest to certain Software Modules, including copyrights,
trademarks, patents, object codes, source codes, enhancements and updates or
other modifications and user manuals. As consideration for this acquisition of
the Software Modules, the Company issued 7,500,000 shares of its Series A
Preferred Stock. The acquisition of the Software Modules is reflected in the
accompanying financial statements as research and development because
technological feasibility was not established and the Software Modules have no
alternative future use.
Note 10 -- Operating Leases
The Company leases office space under a five-year lease expiring August
2005, with a renewal option for a five-year period. Monthly payments under the
current lease are approximately $22,000.
The following is a schedule by years of approximate future minimum rental
payments required under operating leases that have initial or remaining
noncancelable lease terms in excess of one year as of September 30, 2001:
For the Periods Ending September 30,
------------------------------------
2002............................................. $ 264,000
2003............................................. 264,000
2004............................................. 264,000
2005............................................. 220,000
----------
Total minimum payments required.................. $1,012,000
==========
Rent expense amounted to approximately $220,478 and $63,382 for the nine
months ended September 30, 2001 and 2000, respectively.
Note 11 -- Employment Agreement
The Company has entered into employment agreements with various key
management personnel. Each agreement can be terminated with 30 days written
notice. However, key personnel have received stock grants which are subject to
forfeiture if employment is terminated prior to the completion of three years of
service with the Company from the date of grant (see Note 8).
Note 12 -- Related Parties
The Company leased consultants from a consulting services Company which
is owned by one of the stockholder's. The amount due to affiliates represents
unpaid billings for the consulting services, which are non-interest bearing and
are due on demand.
For the nine months ended September 30, 2001 and 2000, the Company
incurred consulting fees from this affiliate of approximately $0 and $132,000,
respectively.
Note 13 -- Subsequent Event
On November 5, 2001, the Company issued to the acquiring entity an
additional promissory note in the amount of $850,000. The Company received
$275,000 upon signing of the note with the remaining balance to be received in
increments of $275,000 and $300,000 on November 21, 2001 and December 6, 2001,
respectively. The note bears interest at 8% and matures the earlier of (i)
December 31, 2001, unless the failure to close the transactions
31
ISPSoft Inc.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS -- (Continued)
(Unaudited)
contemplated by the Agreement and the Plan of Merger is caused by the failure of
the holder to obtain proper shareholder approval, in which case the note shall
be due and payable on January 31, 2002, (ii) the date the Company determines not
to enter into the acquisition by the investing entity and the Company
consummates an equity financing that results in aggregate gross proceeds of at
least $2,000,000. The note is secured by all the assets of the Company.
In addition on November 5, 2001, the Company amended the due dates under
paragraph (a) of the promissory notes dated June 26, 2001 and September 26, 2001
from October 31, 2001 and November 30, 2001, respectively to December 31, 2001.
32