1
EXHIBIT 99.3
FIRSTSENSE SOFTWARE, INC.
Financial Statements
December 31, 1999 and 1998
(With Independent Auditors' Report Thereon)
2
INDEPENDENT AUDITORS' REPORT
The Board of Directors
FirstSense Software, Inc.:
We have audited the accompanying balance sheets of FirstSense Software, Inc. as
of December 31, 1999 and 1998, and the related statements of operations,
stockholders' (deficit) equity, and cash flows for each of the years in the
three-year period ended December 31, 1999. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of FirstSense Software, Inc. as of
December 31, 1999 and 1998, and the results of its operations and its cash flows
for each of the years in the three-year period ended December 31, 1999, in
conformity with generally accepted accounting principles.
/S/ KPMG LLP
KPMG LLP
April 5, 2000
Boston, Massachusetts
3
FIRSTSENSE SOFTWARE, INC.
Balance Sheets
December 31, 1999 and 1998
ASSETS 1999 1998
------------ ------------
Current assets:
Cash and cash equivalents $ 1,525,060 5,370,004
Accounts receivable, less allowance for doubtful accounts of
$41,490 and $13,060 at December 31, 1999 and 1998, respectively 510,930 204,068
Prepaid expenses and other current assets 63,372 114,242
------------ ------------
Total current assets 2,099,362 5,688,314
Fixed assets, net (note 4) 440,505 673,022
Other assets 2,513 2,513
------------ ------------
$ 2,542,380 6,363,849
============ ============
LIABILITIES, REDEEMABLE PREFERRED STOCK, AND STOCKHOLDERS' DEFICIT
Current liabilities:
Current portion of long-term debt (notes 5 and 10) $ 898,462 110,783
Current portion of capital leases -- 6,589
Accounts payable 397,776 220,640
Accrued expenses 538,080 262,457
Deferred revenue (note 15) 425,354 135,545
------------ ------------
Total current liabilities 2,259,672 736,014
Long-term debt, less current portion (notes 5 and 10) 2,064,004 221,368
Capital leases, less current portion -- 20,739
Deferred revenue 29,434 18,900
------------ ------------
Total liabilities 4,353,110 997,021
------------ ------------
Redeemable preferred stock:
Series A Redeemable Convertible Preferred Stock, $0.01 par value; 5,500,000
shares authorized; 5,471,465 shares issued and outstanding
at December 31, 1999 and 1998 (aggregate liquidation value of $5,471,465) 4,744,115 4,622,659
Series B Redeemable Convertible Preferred Stock, $0.01 par value;
2,920,000 and 2,800,000 shares authorized at December 31, 1999 and 1998,
respectively; 2,800,000 shares issued and outstanding at
December 31, 1999 and 1998 (aggregate liquidation value of $7,000,000) 6,978,902 6,975,073
------------ ------------
Total redeemable preferred stock 11,723,017 11,597,732
------------ ------------
Commitments and contingencies (note 14)
Stockholders' deficit:
Common stock, $0.01 par value; 20,000,000 shares authorized; 2,683,834
shares issued and outstanding at December 31, 1999; 3,207,669 shares
issued and outstanding at December 31, 1998 26,838 32,077
Additional paid-in capital 4,099,608 503,356
Deferred compensation (note 9) (3,504,573) (586,750)
Accumulated deficit (14,155,620) (6,179,587)
------------ ------------
Total stockholders' deficit (13,533,747) (6,230,904)
------------ ------------
$ 2,542,380 6,363,849
============ ============
See accompanying notes to financial statements.
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4
FIRSTSENSE SOFTWARE, INC.
Statements of Operations
Years ended December 31, 1999, 1998 and 1997
1999 1998 1997
----------- ----------- -----------
Revenue:
Software license fees $ 1,297,615 449,753 --
Support and maintenance services 126,932 46,329 28,375
Consulting services 137,693 15,000 167,800
----------- ----------- -----------
1,562,240 511,082 196,175
----------- ----------- -----------
Costs and expenses:
Cost of revenue 459,096 207,476 21,665
Research and development 3,022,870 2,493,106 860,442
Selling and marketing 3,755,042 2,362,099 151,656
General and administrative 1,706,336 840,997 352,921
Stock-based compensation 441,828 77,188 16,312
----------- ----------- -----------
9,385,172 5,980,866 1,402,996
----------- ----------- -----------
Loss from operations (7,822,932) (5,469,784) (1,206,821)
Interest income (expense), net (39,560) 255,473 75,481
Other expense, net (113,541) (29,960) (14,568)
----------- ----------- -----------
Net loss (7,976,033) (5,244,271) (1,145,908)
Accretion of redeemable preferred stock (125,285) (120,420) (43,597)
----------- ----------- -----------
Net loss applicable to
common stockholders $(8,101,318) (5,364,691) (1,189,505)
=========== =========== ===========
Basic and diluted net loss per common share $ (4.12) (3.56) (1.37)
=========== =========== ===========
Weighted average basic and diluted common
shares outstanding 1,966,745 1,508,137 870,971
=========== =========== ===========
See accompanying notes to financial statements.
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FIRSTSENSE SOFTWARE, INC.
Statement of Stockholders' (Deficit) Equity
Years ended December 31, 1999, 1998 and 1997
COMMON STOCK
--------------------- ADDITIONAL TOTAL
PAR PAID - IN DEFERRED ACCUMULATED STOCKHOLDERS'
SHARES VALUE CAPITAL COMPENSATION DEFICIT (DEFICIT) EQUITY
--------- --------- ---------- ------------ ------------ ----------------
Balance at December 31, 1996 700,900 $ 7,009 $ -- $ -- $ 210,592 $ 217,601
Shares issued under reincorporation of
Mission Systems Inc. into FirstSense
Software, Inc. (note 3) 330,207 3,302 (13,017) -- -- (9,715)
Issuance of restricted common stock 2,175,000 21,750 195,750 (195,750) -- 21,750
Amortization of deferred compensation -- -- -- 16,312 -- 16,312
Accretion of Series A redeemable
convertible preferred stock -- -- (43,597) -- -- (43,597)
Net loss -- -- -- -- (1,145,908) (1,145,908)
--------- --------- ---------- ----------- ------------ ------------
Balance at December 31, 1997 3,206,107 32,061 139,136 (179,438) (935,316) (943,557)
Deferred compensation relating to
common stock options granted -- -- 484,500 (484,500) -- --
Amortization of deferred
compensation -- -- -- 77,188 -- 77,188
Accretion of Series A and Series B redeemable
convertible preferred stock -- -- (120,420) -- -- (120,420)
Exercise of common stock options 1,562 16 140 -- -- 156
Net loss -- -- -- -- (5,244,271) (5,244,271)
--------- --------- ---------- ----------- ------------ -----------
Balance at December 31, 1998 3,207,669 32,077 503,356 (586,750) (6,179,587) (6,230,904)
Deferred compensation relating to
common stock options granted -- -- 3,417,025 (3,417,025) -- --
Amortization of deferred
compensation -- -- -- 441,828 -- 441,828
Issuance of warrants (notes 5 and 10) -- -- 357,486 -- -- 357,486
Repurchase/retirement of restricted
common stock (563,551) (5,636) (57,374) 57,374 -- (5,636)
Accretion of Series A and Series B redeemable
convertible preferred stock -- -- (125,285) -- -- (125,285)
Exercise of common stock options 39,716 397 4,400 -- -- 4,797
Net loss -- -- -- -- (7,976,033) (7,976,033)
--------- --------- ---------- ----------- ------------ ------------
Balance at December 31, 1999 2,683,834 $ 26,838 $4,099,608 $(3,504,573) $(14,155,620) $(13,533,747)
========= ========= ========== =========== ============ ============
See accompanying notes to financial statements.
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FIRSTSENSE SOFTWARE, INC.
Statements of Cash Flows
Years ended December 31, 1999, 1998 and 1997
1999 1998 1997
----------- ----------- -----------
Cash flows from operating activities:
Net loss $(7,976,033) (5,244,271) (1,145,908)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 393,348 258,522 63,633
Stock-based compensation 441,828 77,188 16,312
Amortization of warrant discount (notes 5 and 10) 59,502 -- --
Gain on the disposal of fixed assets -- (6,720) --
Provision for doubtful accounts 41,490 13,060 --
Changes in assets and liabilities:
Accounts receivable (348,352) (217,128) 41,585
Prepaid expenses and other assets 50,870 (69,739) (44,685)
Accounts payable 177,136 91,650 128,990
Accrued expenses 275,623 188,844 74,494
Deferred revenue 300,343 154,445 --
----------- ----------- -----------
Net cash used in operating activities (6,584,245) (4,754,149) (865,579)
----------- ----------- -----------
Cash flows from investing activities:
Purchases of fixed assets (160,831) (378,980) (496,136)
Proceeds from the sale of fixed assets -- 15,000 --
----------- ----------- -----------
Net cash used in investing activities (160,831) (363,980) (496,136)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from issuance of long-term debt 3,120,736 362,346 --
Proceeds from issuance of common stock 4,797 156 21,750
Proceeds from issuance of preferred stock -- 6,973,000 4,451,000
Payment for repurchase of restricted stock (5,636) -- --
Repayment of capital lease obligations (27,328) -- --
Principal payments on long-term debt (192,437) (30,195) --
----------- ----------- -----------
Net cash provided by financing activities 2,900,132 7,305,307 4,472,750
----------- ----------- -----------
Net (decrease) increase in cash and cash equivalents (3,844,944) 2,187,178 3,111,035
Cash and cash equivalents, beginning of year 5,370,004 3,182,826 71,791
----------- ----------- -----------
Cash and cash equivalents, end of year $ 1,525,060 5,370,004 3,182,826
=========== =========== ===========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 93,848 28,135 --
Supplemental disclosure of non-cash investing and financing activities:
During 1998, the Company acquired office equipment by incurring a capital
lease obligation of $27,328.
During 1999, 1998 and 1997, the Company increased the Series A redeemable
convertible preferred stock and decreased additional paid-in capital by
$121,456, $118,347 and $43,597, respectively, to record accretion on the
Series A redeemable convertible preferred stock.
During 1999 and 1998, the Company increased the Series B redeemable
convertible preferred stock and decreased additional paid-in capital by
$3,829 and $2,073, respectively, to record accretion on the Series B
redeemable convertible preferred stock.
In July 1999, the Company granted a warrant to purchase Series B redeemable
convertible preferred stock to a venture company (notes 5 and 10). The
estimated fair value of $357,486 attributed to the warrant was recorded
as a reduction in the carrying value of the related debenture and will be
amortized as additional interest expense over the term of the debenture.
See accompanying notes to financial statements.
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FIRSTSENSE SOFTWARE, INC.
Notes to Financial Statements
December 31, 1999, 1998 and 1997
(1) NATURE OF THE BUSINESS
FirstSense Software, Inc. (the "Company") develops, markets and
supports an application performance management software designed for
enterprise-wide distributed applications, including client/server,
Internet and Extranet environments. The Company currently markets its
products to middle market and larger customers primarily in the U.S.
and several foreign countries.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) CASH AND CASH EQUIVALENTS
All highly liquid investments with an initial maturity of
three months or less are considered to be cash equivalents.
(b) REVENUE RECOGNITION
Revenues from software product licenses are recognized when
(i) a signed noncancelable software license exists, (ii)
delivery has occurred, (iii) the Company's fee is fixed or
determinable, and (iv) collectibility is probable in
accordance with the provisions of Statement of Position
("SOP") 97-2, Software Revenue Recognition.
Revenue from sales to resellers is deferred until such
products are resold to a third party and provided all other
conditions of SOP 97-2 are met.
Revenue from maintenance and support agreements is deferred
and recognized ratably over the service period, generally
twelve months. Revenue from consulting services is recognized
as services are performed. All payments received in advance of
the services rendered are recorded as deferred revenue.
(c) ACCOUNTS RECEIVABLE, CONCENTRATION OF CREDIT RISK AND
SIGNIFICANT CUSTOMERS
Financial instruments which potentially expose the Company to
concentrations of credit risk include accounts receivable. The
Company does not require collateral but closely monitors
amounts receivable from customers.
Revenue of $217,978 and $149,438, 14% of 10% of total revenue,
respectively, was attributable to two separate customers for
the year ended December 31, 1999. At December 31, 1999,
accounts receivable from these two customers represented 9% of
total accounts receivable. The Company believes that the
balances related to these two customers are collectible as of
December 31, 1999.
Revenue of $235,000, $87,900 and $62,880, or 46%, 17% and 12%
of total revenues, respectively, was attributable to three
separate customers for the year ended December 31, 1998.
6 (Continued)
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FIRSTSENSE SOFTWARE, INC.
Notes to Financial Statements
December 31, 1999, 1998 and 1997
Revenue of $96,634, $55,594 and $23,481, or 49%, 28% and 12%
of total revenues, respectively, was attributable to three
separate customers for the year ended December 31, 1997.
(d) FIXED ASSETS
Fixed assets are recorded at cost and depreciated using the
straight-line method over their estimated useful lives.
Leasehold improvements are amortized using the straight-line
method over the shorter of the lease term or estimated useful
life of the asset. Expenditures for maintenance and repairs
are charged to expense as incurred.
The Company records impairment losses on long-lived assets
used in operations when indicators of impairment are present
and the undiscounted cash flows estimated to be generated by
those assets are less than the assets' carrying amount.
(e) RESEARCH AND DEVELOPMENT, AND SOFTWARE DEVELOPMENT COSTS
Costs incurred on the research and development of the
Company's products are expensed as incurred, except certain
software development costs. Costs associated with the
development of computer software are expensed as incurred
prior to the establishment of technological feasibility (as
defined by SFAS No. 86, Accounting for the Costs of Computer
Software to Be Sold, Leased, or Otherwise Marketed). Costs
incurred subsequent to the establishment of technological
feasibility and prior to the general release of the products
are capitalized. No software development costs were
capitalized during the years ended December 31, 1999, 1998 and
1997 since costs incurred subsequent to establishment of
technological feasibility were not material.
(f) ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company has adopted Statement of Financial Accounting
Standards ("SFAS") No. 123, Accounting for Stock-Based
Compensation, which permits entities to recognize as expense
over the vesting period the fair value of stock-based awards
on the date of grant. For employee stock-based awards, SFAS
No. 123 allows entities to continue to apply the provisions of
Accounting Principles Board ("APB") Opinion No. 25 and provide
pro forma net earnings disclosures as if the fair-value-based
method defined in SFAS No. 123 had been applied. The Company
has elected to apply the provisions of APB No. 25 and provide
the pro forma disclosure of SFAS No. 123.
The Company accounts for non-employee stock-based awards in
which goods or services are the consideration received for the
equity instruments issued based on the fair value of the
consideration received or the grant-date fair value of the
equity instruments issued, whichever is more reliably
measurable.
(g) ADVERTISING COSTS
The Company expenses advertising costs as incurred.
Advertising expense was $17,510, $4,672 and $0 for the years
ended December 31, 1999, 1998 and 1997, respectively, and are
included in selling and marketing expenses.
7 (Continued)
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FIRSTSENSE SOFTWARE, INC.
Notes to Financial Statements
December 31, 1999, 1998 and 1997
(h) USE OF ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from
those estimates.
(i) SEGMENT REPORTING
SFAS No. 131, Disclosures About Segments of an Enterprise and
Related Information, establishes standards for the way that
public business enterprises report selected information about
operating segments in annual and interim financial statements.
It also establishes standards for related disclosures about
products and services, geographic areas and major customers.
SFAS No. 131 requires the use of the "management approach" in
disclosing segment information, based largely on how senior
management generally analyzes the business operations. The
Company currently operates in only one segment and, as such,
no additional disclosures are required.
(j) BASIC AND DILUTED NET LOSS PER COMMON SHARE
SFAS No. 128, Earnings per Share, requires the presentation of
basic earnings per share and diluted earnings per share for
all periods presented. As the Company has been in a net loss
position for all periods presented, common stock equivalents
of 11,125,806, 10,814,745 and 8,015,501 for the years ended
December 31, 1999, 1998 and 1997, respectively, were excluded
from the diluted net loss per share calculation as they would
be antidilutive. As a result, diluted net loss per share is
the same as basic net loss per share, and has not been
presented separately.
(k) RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, the Accounting Standards Executive Committee of
the American Institute of Certified Public Accountants issued
SOP No. 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use. SOP No. 98-1 requires
the capitalization of certain internal costs related to the
implementation of computer software obtained for internal use.
This standard, which the Company adopted in the first quarter
of 1999, did not have any impact on its financial position or
its results of operations.
In April 1998, SOP No. 98-5, Reporting on the Costs of
Start-Up Activities, was issued. Under SOP No. 98-5, the costs
of start-up activities should be expensed as incurred.
Start-up activities are broadly defined as those one-time
activities related to opening a new facility, introducing a
new product or service, conducting business in a new
territory, conducting business with a new class of customer,
commencing some new operation or organizing a new entity. This
standard, which the Company adopted in the first quarter of
1999, did not have any impact on its financial condition or
its results of operations.
8 (Continued)
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FIRSTSENSE SOFTWARE, INC.
Notes to Financial Statements
December 31, 1999, 1998 and 1997
(3) REINCORPORATION AND RECAPITALIZATION
Mission Systems, Incorporated ("MSI"), a New Hampshire company,
established a wholly-owned subsidiary incorporated in Delaware under
the name FirstSense Software, Inc. (the "Company"). Pursuant to an
Agreement and Plan of Merger dated August 8, 1997, MSI was merged into
the Company (the "Merger"). By virtue of the Merger, each share of
Class A common stock and Class B common stock of MSI was converted into
1.471119 shares of common stock and 1.386024 shares of preferred stock
(designated the Series A Preferred Stock) of the Company. The single
share of common stock of the Company held by MSI immediately prior to
the Merger was canceled.
In August 1997, the Company amended its Articles of Incorporation to
increase the number of authorized shares to 25,500,000, of which
20,000,000 shares were designated as common stock and 5,500,000 shares
were designated as preferred stock, both with $0.01 par value.
In June 1998, the Company amended its Articles of Incorporation to
increase the number of authorized shares to 28,300,000, of which
20,000,000 shares were designated as common stock and 8,300,000 shares
were designated as preferred stock, both with $0.01 par value.
In July 1999, the Company amended its Articles of Incorporation to
increase the number of authorized shares to 28,420,000, of which
20,000,000 shares were designated as common stock and 8,420,000 shares
were designated as preferred stock, both with $0.01 par value.
(4) FIXED ASSETS
Fixed assets consist of the following at December 31, 1999 and 1998:
ESTIMATED
USEFUL LIFE
(YEARS) 1999 1998
----------- ------------ ------------
Computer equipment 3 $ 929,325 762,861
Furniture and fixtures 3 198,125 212,888
Leasehold improvements 3 104,454 95,324
------------ ------------
1,231,904 1,071,073
Less accumulated depreciation and
amortization (791,399) (398,051)
------------ ------------
$ 440,505 673,022
============ ============
9 (Continued)
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FIRSTSENSE SOFTWARE, INC.
Notes to Financial Statements
December 31, 1999, 1998 and 1997
(5) LINE OF CREDIT, TERM LOAN AND SUBORDINATED DEBENTURE
In February 1999, the Company amended a credit agreement (the
"Agreement") with a bank which provided for a revolving loan (the
"Revolving Loan") of up to $1.0 million through March 31, 1999 in
addition to a term loan (the "Term Loan") of up to $750,000, which was
used for the financing of equipment purchases through September 30,
1998. Borrowings under the Revolving Loan and Term Loan were limited in
the aggregate to $1.75 million, as defined in the Agreement.
Revolving Loan borrowings bore interest, payable monthly, at the prime
rate plus 3/4% (9.25% at December 31, 1999). At December 31, 1999, no
borrowings were outstanding against the Revolving Loan and borrowings
were no longer available to the Company. Term Loan borrowings are
payable in 36 monthly installments of principal plus interest
commencing on October 1, 1998 and bear interest at the prime rate plus
3/4% (9.25% and 8.50% at December 31, 1999 and 1998, respectively),
and are due in full on September 1, 2001. Under the Term Loan
Agreement, additional borrowings were no longer available to the
Company at December 31, 1999. The outstanding balance under the Term
Loan was $298,567 and $332,151 at December 31, 1999 and 1998,
respectively. Borrowings under the Term Loan are collateralized by
substantially all assets of the Company. On January 24, 2000, the
Company paid off two equipment loans totaling $286,760.
In July 1999, the Company closed on a subordinated debt financing
allowing the Company to borrow up to $3.0 million from a major venture
capital company. The terms provide the Company with a loan (the
"Subordinated Debenture") in aggregate principal amount of $3.0
million, of which $1.5 million (Phase I) was available immediately and
$1.5 million (Phase II) was to be available upon the general release of
the Company's Version 2.0 Enterprise product (June 1999). The Phase I
installment of $1.5 million was taken down in total and Phase II in
minimum installments of $500,000, each evidenced by Subordinated
Promissory Note(s) executed by the Company. In consideration for the
financing arrangement, the Company granted to the venture company a
warrant to purchase Series B Preferred Stock (note 10). The Company
recorded the fair value of the warrant of $357,486 as a reduction in
the carrying value of the Subordinated Debenture which will be
amortized to interest expense on a straight-line basis over the term of
the Subordinated Debenture. The unamortized balance was $297,984 at
December 31, 1999.
The outstanding principal amount of the Subordinated Debenture,
together with interest thereon precomputed at the rate of 12% annually,
is due and payable in 3 equal monthly installments of interest only,
payable on the first day of each month, followed by 33 equal monthly
installments of principal and interest, payable on the first day of
each month, including the maturity date. The balance due under this
agreement at December 31, 1999 was $2,961,883.
10 (Continued)
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FIRSTSENSE SOFTWARE, INC.
Notes to Financial Statements
December 31, 1999, 1998 and 1997
At December 31, 1999, future aggregate principal payments on the Term
Loan and the Subordinated Debenture are as follows:
Year ending December 31,
2000 $ 1,017,466
2001 1,213,736
2002 993,400
2003 35,848
(6) REDEEMABLE CONVERTIBLE PREFERRED STOCK
A summary of the Company's redeemable convertible preferred stock as of
December 31, 1999, 1998 and 1997, and changes during each of the years
then ended, is presented below:
TOTAL
SERIES A REDEEMABLE SERIES B REDEEMABLE REDEEMABLE
CONVERTIBLE CONVERTIBLE PREFERRED
PREFERRED STOCK PREFERRED STOCK STOCK
---------------------- ----------------------- -----------
SHARES AMOUNT SHARES AMOUNT AMOUNT
--------- ---------- ---------- ---------- -----------
Balance at December 31, 1996 -- $ -- -- $ -- $ --
Shares issued under reincorporation
of Mission Systems Inc. into
FirstSense Software, Inc. (note 3) 971,465 9,715 -- -- 9,715
Issuance of Series A redeemable
convertible preferred stock, net 4,500,000 4,451,000 -- -- 4,451,000
of issuance costs of $49,000
Accretion of Series A redeemable
convertible preferred stock -- 43,597 -- -- 43,597
--------- ---------- ---------- ---------- -----------
Balance at December 31, 1997 5,471,465 4,504,312 -- -- 4,504,312
Issuance of Series B redeemable
convertible preferred stock, net -- -- 2,800,00 6,973,000 6,973,000
of issuance costs of $27,000
Accretion of Series A and Series B
redeemable convertible preferred -- 118,347 -- 2,073 120,420
stock
--------- ---------- ---------- ---------- -----------
Balance at December 31, 1998 5,471,465 4,622,659 2,800,000 6,975,073 11,597,732
Accretion of Series A and Series B
redeemable convertible preferred -- 121,456 -- 3,829 125,285
stock
--------- ---------- ---------- ---------- -----------
Balance at December 31, 1999 5,471,465 $4,744,115 2,800,000 $6,978,902 $11,723,017
========= ========== ========== ========== ===========
11 (Continued)
13
FIRSTSENSE SOFTWARE, INC.
Notes to Financial Statements
December 31, 1999, 1998 and 1997
In August 1997, the Company issued 4,500,000 shares of Series A
Redeemable Convertible Preferred Stock (the "Series A Preferred Stock")
at a price of $1.00 per share and received net proceeds of $4,451,000.
In June 1998, the Company issued 2,800,000 shares of Series B
Redeemable Convertible Preferred Stock (the "Series B Preferred Stock")
at a price of $2.50 per share and received net proceeds of $6,973,000.
The Series A Preferred Stock and the Series B Preferred Stock are
hereinafter referred to collectively as the "Redeemable Preferred
Stock." On December 31, 1999, Redeemable Preferred Stock consisted of
8,420,000 shares authorized, of which 5,500,000 was designated as
Series A Preferred Stock and 2,920,000 as Series B Preferred Stock. At
December 31, 1999, the Redeemable Preferred Stock has the following
characteristics.
(a) VOTING RIGHTS
The holders of Redeemable Preferred Stock generally vote
together with the holders of common stock on all matters and
are entitled to one vote for each share of common stock into
which the Redeemable Preferred Stock is convertible.
(b) DIVIDEND RIGHTS
The holders of Redeemable Preferred Stock are not entitled to
receive dividends unless declared by the Company's Board of
Directors. Redeemable Preferred Stock shall at first, or
simultaneously, receive a like dividend or distribution as
those paid or set aside for common stock. Through December 31,
1999, no dividends have been declared or paid by the Company.
(c) LIQUIDATION PREFERENCE
In the event of any liquidation, dissolution, merger, sale or
winding-up of the Company, the holders of Redeemable Preferred
Stock are entitled to receive, prior and in preference to
holders of common stock, $1.00 and $2.50 per share (subject to
certain anti-dilutive adjustments) plus any accrued but unpaid
dividends on Series A Preferred Stock and Series B Preferred
Stock, respectively.
Any net assets remaining after the payment of all preferential
amounts to the holders of the Redeemable Preferred Stock shall
be shared ratably by the redeemable preferred stockholders and
common stockholders not to exceed $3.00 and $5.00 per share
(subject to certain anti-dilutive adjustments) of Series A
Preferred Stock and Series B Preferred Stock, respectively.
12 (Continued)
14
FIRSTSENSE SOFTWARE, INC.
Notes to Financial Statements
December 31, 1999, 1998 and 1997
(d) CONVERSION
Each share of Redeemable Preferred Stock is convertible, at
the option of the holder, into one share of common stock of
the Company, subject to certain anti-dilution adjustments. The
Redeemable Preferred Stock will automatically convert into
common stock upon the closing of a qualified initial public
offering under which net proceeds equal or exceed $20,000,000
at a per share price of at least $7.50 per share or by the
election of the holders of more than 50% and 66 2/3% of the
outstanding shares of Series A Preferred Stock and Series B
Preferred Stock, respectively.
(e) REDEMPTION
At any time on or after June 22, 2003, subject to approval by
a two-thirds vote as a single class, holders of the Redeemable
Preferred Stock shall have the right to cause the Company to
redeem the then outstanding shares at the respective original
per share purchase price (subject to certain anti-dilutive
adjustments) plus any accrued but unpaid dividends as follows:
PORTION OF OUTSTANDING
SHARES OF REDEEMABLE
PREFERRED STOCK
TO BE REDEEMED
----------------------
June 22, 2003 33 1/3%
June 22, 2004 50%
June 22, 2005 All shares then held
(7) COMMON STOCK
Each share of common stock entitles the holder to one vote on all
matters submitted to a vote of the Company's stockholders. Common
stockholders are entitled to receive dividends, if any, as may be
declared by the Board of Directors, subject to the preferential
dividend rights of the holders of Redeemable Preferred Stock.
(8) STOCK OPTION PLANS
During 1997, the Company adopted the FirstSense Software, Inc. 1997
Stock Incentive Plan (the "1997 Plan"). The 1997 Plan provides for the
issuance of incentive stock options to officers and other employees of
the Company and non-qualified stock options, awards of stock and direct
stock purchase opportunities to directors, officers, employees and
consultants of the Company. The total number of shares which may be
issued under the 1997 Plan is 1,869,712. The Board of Directors is
responsible for administration of the 1997 Plan. The Board determines
the term of each option, the option exercise price, the number of
shares for which each option is granted, and the rate at which each
option is exercisable. To date, options awarded generally vest ratably
over four years and expire ten years from the date of grant.
13 (Continued)
15
FIRSTSENSE SOFTWARE, INC.
Notes to Financial Statements
December 31, 1999, 1998 and 1997
In 1997, upon the merger with MSI (note 3), the Company adopted the
1996 Equity Incentive Plan of Mission Systems, Incorporated (the "1996
Plan"). The terms of the 1996 Plan are substantially the same as the
1997 Plan described above. Upon its adoption, a maximum of 30,288
shares of common stock was reserved for issuance upon the exercise of
options under the 1996 Plan.
A summary of the status of the Company's stock options as of December
31, 1999, 1998 and 1997, and changes during the years then ended, is
presented below:
1999 1998 1997
----------------------- --------------------- -------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
---------- --------- -------- --------- ------- ---------
Outstanding at beginning
of year 1,147,288 $ 0.17 604,288 $ 0.13 30,288 $ 0.73
Granted 839,000 0.33 628,000 0.21 574,000 0.10
Exercised (39,716) 0.12 (1,562) 0.10 --
Canceled (109,481) 0.21 (83,438) 0.16 --
---------- -------- -------- -------- ------- --------
Outstanding at end
of year 1,837,091 $ 0.25 1,147,288 $ 0.17 604,288 $ 0.13
========== ======== ========= ======== ======= ========
Options exercisable at
end of year 483,359 $ 0.18 152,398 $ 0.14 2,575 $ 0.68
========== ======= ========= ======== ======= ========
Options available for
future grant 21,631
==========
Weighted-average grant-
date fair value of
options granted during
the year $ 4.16 $ 0.80 $ 0.02
========== ========= =======
14 (Continued)
16
FIRSTSENSE SOFTWARE, INC.
Notes to Financial Statements
December 31, 1999, 1998 and 1997
The following table summarizes information about stock options
outstanding and exercisable at December 31, 1999:
WEIGHTED-
AVERAGE
REMAINING
CONTRACTUAL
EXERCISE OPTIONS LIFE OPTIONS
PRICE OUTSTANDING (YEARS) EXERCISABLE
-------- ----------- ----------- -----------
$ .10 607,803 7.99 310,571
.25 506,000 8.85 122,036
.35 693,000 9.74 33,032
.68 10,298 6.33 7,724
.75 19,990 7.30 9,996
---------- ---------- ----------
1,837,091 8.87 483,359
========== ========== ==========
The fair value of each option grant is established on the date of grant
using the minimum-value method with the following assumptions for
grants in 1999, 1998 and 1997: no dividend yield and no volatility;
risk-free interest rates of 6.1%, 5.5% and 6.1%, respectively; and a
weighted-average expected option term of 4 years.
Had compensation expense for these awards been determined based on the
fair value at the date of grant consistent with the method prescribed
by SFAS No. 123, the Company's net loss applicable to common
stockholders, and basic and diluted net loss per share would have been
increased to the pro forma amounts indicated below for the years ended
December 31, 1999, 1998 and 1997:
1999 1998 1997
---- ---- ----
Net loss applicable to
common stockholders As reported $ (8,101,318) (5,364,691) (1,189,505)
Pro forma (8,121,035) (5,398,875) (1,189,570)
Basic and diluted net loss
per share As reported $ (4.12) (3.56) (1.37)
Pro forma (4.13) (3.58) (1.37)
(9) DEFERRED COMPENSATION
In 1999 and 1998, the Company recorded deferred compensation of
$3,417,025 and $484,500, respectively, representing the difference
between the exercise price of stock options granted and the estimated
fair market value of the underlying common stock at the date of grant.
The difference has been recorded as a reduction of stockholders'
(deficit) equity and is being amortized over the vesting period of
applicable options, typically four years. Of the total deferred
compensation amount, $430,703 has been amortized as of December 31,
1999. The amortization of deferred compensation is recorded as an
operating expense.
15 (Continued)
17
FIRSTSENSE SOFTWARE, INC.
Notes to Financial Statements
December 31, 1999, 1998 and 1997
In 1997, the Company recorded deferred compensation expense of
$195,750, representing the difference between the purchase price of
restricted common stock issued and the estimated fair market value of
common stock at the date of grant. This difference was recorded as a
reduction of stockholders' (deficit) equity and was being amortized
over the restriction period of four years. Of the total deferred
compensation amount, $104,625 was amortized and recorded as an
operating expense through December 31, 1999, and $57,374 was reversed
upon the termination of the employees who originally purchased the
restricted common stock in accordance with the original restricted
stock agreement. Subsequent to year end, upon acquisition of the
Company by Concord Communications, Inc. ("Concord") (note 15), the
remaining deferred compensation was amortized as an expense pursuant to
the acceleration of vesting provision included in the original
restricted stock agreement.
(10) WARRANTS
In July 1999, the Company, in conjunction with the Subordinated
Debenture (note 5), granted the venture capital company a warrant to
subscribe to and purchase from the Company that number of fully paid
and non-assessable shares of the Company's Series B Preferred Stock
equal to $420,000 divided by the Exercise Price. The Exercise Price
will be equal to the lesser of (i) $3.50 per share or (ii) the numeric
average of (a) $2.50 (last financing round price), and (b) the price
per share of the securities sold by the Company in the next equity
financing event (the "Next Round"). For purposes of this Agreement, the
Next Round means (i) the Company's next private round of equity
financing, (ii) a sale or merger, or (iii) the Company's initial public
offering. This Warrant Agreement will retain the right to purchase
Preferred Stock as granted beginning on the Effective Date and will be
exercisable for a period of 10 years or 5 years from the effective date
of the Company's initial public offering, whichever is shorter. The
fair value ascribed to the warrant on the date of grant was $357,486.
The fair value of the warrant on the date of grant was determined using
the Black-Scholes model with the following assumptions: 80% volatility,
risk-free interest rate of 6.1%, 10-year life and a grant price of
$3.50. Such amount has been recorded as a reduction to the carrying
value of the Subordinated Debenture and will be amortized to interest
expense on a straight-line basis over the term of the debenture. The
unamortized balance was $297,984 at December 31, 1999.
(11) COMPREHENSIVE INCOME
The Company adopted SFAS No. 130, Reporting Comprehensive Income, which
requires that all components of comprehensive income be reported in the
financial statements in the period in which they are recognized. For
each year reported, comprehensive loss under SFAS No. 130 was
equivalent to the Company's net loss reported in the accompanying
statements of operations.
16 (Continued)
18
FIRSTSENSE SOFTWARE, INC.
Notes to Financial Statements
December 31, 1999, 1998 and 1997
(12) INCOME TAXES
Deferred tax assets consisted of the following at December 31, 1999 and
1998:
1999 1998
----------- -----------
Net operating loss carryforwards $ 5,048,000 2,126,000
Research and development tax credit carryforwards 318,000 174,000
Accrual to cash adjustment 370,000 234,000
Other 40,000 44,000
----------- -----------
Deferred tax assets 5,776,000 2,578,000
Deferred tax asset valuation allowance (5,776,000) (2,578,000)
----------- -----------
$ -- --
=========== ===========
The Company has provided a valuation allowance for the full amount of
its deferred tax assets since realization of any future benefit from
deductible temporary differences and net operating loss and tax credit
carryforwards cannot be sufficiently assured at December 31, 1999.
At December 31, 1999, the Company has federal and state net operating
loss carryforwards of approximately $12,537,000 available to reduce
future taxable income which expire at various dates through 2019. The
Company also has federal and state research and development tax credit
carryforwards of approximately $323,000 available to reduce future tax
liabilities which expire at various dates through 2019.
Under the provisions of the Internal Revenue Code, certain substantial
changes in the Company's ownership may limit the amount of net
operating loss carryforwards and tax credit carryforwards which could
be utilized annually to offset future taxable income and taxes payable.
(13) 401(K) SAVINGS PLAN
The Company has established a retirement savings plan under Section
401(k) of the Internal Revenue Code (the "401(k) Plan"). The 401(k)
Plan covers substantially all employees of the Company who meet minimum
age and service requirements, and allows participants to defer a
portion of their annual compensation on a pre-tax basis. Company
contributions to the 401(k) Plan may be made at the discretion of the
Board of Directors. The Company has not made any contributions to the
401(k) Plan for the three-year period ended December 31, 1999.
(14) COMMITMENTS AND CONTINGENCIES
The Company leases its office space and certain office equipment under
noncancelable operating leases. Total rent expense under these
operating leases was $235,214, $93,433 and $15,274 for the years ended
December 31, 1999, 1998 and 1997, respectively.
Future minimum lease commitments at December 31, 1999 amount to
$152,946, which is payable during the year 2000.
17 (Continued)
19
FIRSTSENSE SOFTWARE, INC.
Notes to Financial Statements
December 31, 1999, 1998 and 1997
(15) SUBSEQUENT EVENTS
On February 4, 2000, the Company was acquired by Concord. Under the
terms of the merger, the shareholders of the Company received an
aggregate of 1,940,000 Concord shares. The transaction, which was
accounted for as a pooling of interests, is subject to certain
conditions and has received the required regulatory and shareholder
approvals of the Company and Concord. During 1999, the Company entered
into a two year OEM agreement with Concord. The Company granted Concord
a license to market the FirstSense MIB Agent software with Concord's
own software product in return for a guaranteed minimum license fee of
$325,000 to be paid in 4 installments over a 9 month period beginning
on September 28, 1999. The Company is recognizing the revenue related
to the guaranteed minimum license fee ratably over a 12 month service
period as the Company does not have vendor specific objective evidence
of the fair value of the maintenance component of the agreement.
18