1
EXHIBIT 99.1
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Yazam.com, Inc. and Subsidiaries
New York, NY
We have audited the accompanying consolidated balance sheets of Yazam.com, Inc.
and Subsidiaries as of December 31, 2000 and 1999, and the related consolidated
statements of operations, changes in stockholders' equity, and cash flow for the
year ended December 31, 2000 and for the period April 15, 1999 (inception)
through 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 auditing standards generally accepted
in the United States. 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 Yazam.com, Inc. and
Subsidiaries at December 31, 2000 and 1999, and the results of their operations
and their cash flows for the year ended December 31, 2000 and for the period
April 15, 1999 (inception) through December 31, 1999, in conformity with
accounting principles generally accepted in the United States.
/s/ Radin Glass & Co., LLP
Certified Public Accountants
New York, New York
July 6, 2001
F-1
2
YAZAM.COM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 AND 1999
2000 1999
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 34,780,839 $ 3,122,568
Restricted cash 646,524 616,877
Fees and other receivables 1,263,799 187,816
Subscription receivable, preferred stock -- 10,000,000
Prepaid expenses and other current assets 441,835 135,621
------------ ------------
Total Current Assets 37,132,997 14,062,882
------------ ------------
PROPERTY AND EQUIPMENT, Net 1,918,728 90,874
------------ ------------
OTHER ASSETS:
Investments in portfolio companies 1,631,258 460,000
Security deposits 770,905 30,000
Goodwill, net 1,634,394 --
------------ ------------
Total Other Assets 4,036,557 490,000
------------ ------------
TOTAL ASSETS $ 43,088,282 $ 14,643,756
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 3,613,477 $ 1,128,520
Due to investors 466,413 616,877
------------ ------------
TOTAL LIABILITIES 4,079,890 1,745,397
------------ ------------
COMMITMENTS AND CONTINGENCIES -- --
STOCKHOLDERS' EQUITY:
Series A convertible preferred stock, $2.00 stated value, $0.0001 par value;
2,000,000 shares authorized, issued and outstanding 4,000,000 4,000,000
Series B convertible preferred stock, $2.00 stated value, $0.0001 par value;
5,000,000 shares authorized, issued and outstanding 10,000,000 10,000,000
Series C convertible preferred stock, $6.00 stated value, $0.0001 par value;
12,416,667 shares authorized, 11,858,333 shares issued and outstanding 71,150,000 --
Common stock, $0.0001 par value, 40,000,000 shares authorized, 19,881,775 and
16,716,600 shares issued, 17,490,177 and 16,200,002 shares outstanding, respectively 1,989 1,672
Additional paid-in capital 9,587,864 4,449,925
Deferred compensation (346,391) --
Foreign currency translation adjustments 77,741 --
Treasury stock, at cost, 2,391,598 and 516,598 shares, respectively (10,750,052) (52)
Accumulated deficit (44,712,759) (5,553,186)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 39,008,392 12,898,359
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 43,088,282 $ 14,643,756
============ ============
See notes to financial statements.
F-2
3
YAZAM.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Period
April 15, 1999
For the Year (Inception)
Ended Through
December 31, 2000 December 31, 1999
----------------- -----------------
REVENUES:
Fee income $ 2,157,198 $ 175,000
Interest income 2,100,309 18,123
------------ ------------
4,257,507 193,123
------------ ------------
EXPENSES:
Compensation expense 10,225,681 4,606,367
Other general and administrative 5,255,869 290,237
Professional fees 3,750,826 161,646
Marketing 3,515,627 687,382
Loss from investees 2,134,708 --
Depreciation and amortization 1,313,448 677
Write-off of uncollectible receivable 298,005 --
Asset impairment 16,922,916 --
------------ ------------
43,417,080 5,746,309
------------ ------------
NET LOSS $(39,159,573) $ (5,553,186)
============ ============
See notes to financial statements.
F-3
4
YAZAM.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
PREFERRED STOCK COMMON STOCK TREASURY STOCK
------------------------- ------------------- ---------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
---------- ------------ ---------- ------ ---------- --------------
Balance - April 15, 1999 (Inception) -- $ -- -- $ -- -- $ --
Issuance of shares to founders 2,411 24
Issuance of shares to key employee 375 4
Stock split 16,713,814 1,644
Redemption of common stock 516,598 (52)
Issuance of Series A preferred stock 2,000,000 4,000,000
Issuance of Series B preferred stock 5,000,000 10,000,000
Costs of raising capital-preferred stock
Net loss
---------- ------------ ---------- ------ ---------- --------------
Balance - December 31, 1999 7,000,000 $ 14,000,000 16,716,600 $1,672 516,598 $ (52)
Issuance of stock in connection with
First Tuesday merger 1,317,675 132
Issuance of stock in connection with
Gregory merger 350,000 35
Issuance of stock in connection with
Todo merger 700,000 70
Issuance of Series C preferred stock 9,983,333 59,900,000
Sale and exchange 1,875,000 11,250,000 1,875,000 (10,750,000)
Costs of raising capital-preferred stock
Issuance of options for compensation
Amortization of deferred compensation
Exercise of options 797,500 80
Foreign currency translation adjustment
Net loss
---------- ------------ ---------- ------ ---------- --------------
Balance - December 31, 2000 18,858,333 $ 85,150,000 19,881,775 $1,989 2,391,598 $ (10,750,052)
========== ============ ========== ====== ========== ==============
ACCUMULATED
OTHER
ADDITIONAL DEFERRED ACCUMULATED COMPREHENSIVE
PAID-IN CAPITAL COMPENSATION DEFICITS INCOME* TOTAL
--------------- ------------ ------------ ------------- ------------
Balance - April 15, 1999 (Inception) $ -- $ -- $ -- $ -- $ --
Issuance of shares to founders 24
Issuance of shares to key employee 4,499,996 4,500,000
Stock split (221) 1,423
Redemption of common stock (52)
Issuance of Series A preferred stock 4,000,000
Issuance of Series B preferred stock 10,000,000
Costs of raising capital-preferred stock (49,850) (49,850)
Net loss (5,553,186) (5,553,186)
------------ ---------- ------------ -------- ------------
Balance - December 31, 1999 $ 4,449,925 $ -- $ (5,553,186) $ -- 12,898,359
Issuance of stock in connection with
First Tuesday merger 2,108,148 2,108,280
Issuance of stock in connection with
Gregory merger 559,965 560,000
Issuance of stock in connection with
Todo merger 860,930 861,000
Issuance of Series C preferred stock 59,900,000
Sale and exchange 500,000
Costs of raising capital-preferred stock (311,716) (311,716)
Issuance of options for compensation 1,761,192 (1,761,192) --
Amortization of deferred compensation 1,414,801 1,414,801
Exercise of options 159,420 159,500
Foreign currency translation adjustment 77,741 77,741
Net loss (39,159,573) (39,159,573)
------------ ---------- ------------ -------- ------------
Balance - December 31, 2000 $ 9,587,864 $ (346,391) $(44,712,759) $ 77,741 $ 39,008,392
============ ========== ============ ======== ============
* Comprehensive income (loss) equals net loss plus other comprehensive income
which approximated $(39,082,000) in 2000.
See notes to financial statements.
F-4
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YAZAM.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Period
April 15, 1999
For the Year (Inception)
Ended Through
December 31, 2000 December 31, 1999
----------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(39,159,573) $ (5,553,186)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 1,313,448 677
Stock-based compensation 2,002,302 4,501,395
Write-off of uncollectible receivable 298,005 --
Assets impairment 16,922,916 --
Loss from investees 2,134,708 --
Changes in operating assets and liabilities:
Fees and other receivables (1,373,988) (187,816)
Prepaid expenses and others (329,141) (135,621)
Security deposits (740,905) (30,000)
Accounts payable and accrued expenses 2,484,957 1,128,520
Due to investors (150,465) 616,877
------------ ------------
CASH FLOW PROVIDED BY (USED IN) OPERATING ACTIVITIES (16,597,736) 340,846
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (2,480,143) (91,551)
Investments in portfolio companies (9,717,967) (460,000)
Payments for acquisitions (8,313,767) --
Net changes in restricted cash (29,647) (616,877)
Capitalization of website development costs (940,494) --
------------ ------------
CASH FLOW USED IN INVESTING ACTIVITIES (21,482,018) (1,168,428)
------------ ------------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Proceeds from issuance of preferred stock 70,650,000 4,000,000
Purchase of treasury stock (10,750,000) --
Costs of raising capital-preferred stock (311,716) (49,850)
Collection on subscription receivable 10,000,000 --
Proceeds from issuance of common stock 72,000 --
------------ ------------
CASH FLOW PROVIDED BY FINANCING ACTIVITIES 69,660,284 3,950,150
------------ ------------
NET EFFECT OF EXCHANGE RATE CHANGES ON CASH 77,741 --
------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 31,658,271 3,122,568
CASH AND EQUIVALENTS, Beginning 3,122,568 --
------------ ------------
CASH AND EQUIVALENTS, Ending $ 34,780,839 $ 3,122,568
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the periods for:
Interest $ -- $ --
============ ============
Taxes $ -- $ --
============ ============
Non-cash investing and financing activities:
Stock issued for acquisitions $ 3,529,280 $ --
============ ============
Issuance of preferred stock for subscription receivable $ -- $ 10,000,000
============ ============
See notes to financial statements.
F-5
6
YAZAM.COM INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND PURPOSE
Yazam.com, Inc. (the "Company") was formed pursuant to the laws of the
State of Delaware on April 15, 1999 for the purpose of investing in
privately held, early-stage, technology companies.
During the year ended December 31, 2000, the Company raised significant
financing (see Note 6) and made a number of investments (see Notes 4
and 7). During the first quarter of 2001, the Company ceased
significant operations and was sold on March 27, 2001 (see Note 11).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries: one domestic subsidiary and
four foreign subsidiaries. All significant intercompany balances have
been eliminated in consolidation.
Investments and Impairment
Investments consist of investments in privately held companies and are
valued under the equity method of accounting in accordance with
Accounting Principles Board ("APB") No. 18, The Equity Method of
Accounting for Investments in Common Stock. There are no investments
which should be covered by Statements of Financial Accounting Standards
("SFAS") No. 115, Accounting for Certain Investments in Debt and Equity
Securities. These investments are described in Note 4.
During the period from inception to December 31, 2000, the Company made
a number of investments in start-up ventures, primarily in the "new
economy" or in "dot-com's". The majority of these ventures were
unsuccessful and were discontinued by the end of the year ended
December 31, 2000. Accordingly, investments deemed to be unsuccessful
were written off as impaired under SFAS No. 121, Accounting for
Long-Lived Assets and Long-Lived Assets to be Disposed Of. These
investments and their concomitant write off are described in Note 4.
Foreign Currency Translation
The accounts of the Company's foreign subsidiaries are translated
utilizing the methodology of SFAS No. 52, Foreign Currency Translation.
The balance sheet amounts are translated at year-end currency rates;
the income statements and cash flow amounts at average currency rates
during the periods. The net exchange gains or losses resulting from the
translation of foreign financial statements are accumulated and
reported as a separate component of shareholders' equity.
Comprehensive Income
The Company adopted SFAS No. 130, Reporting Comprehensive Income, in
1999. SFAS No. 130 requires the reporting of comprehensive income in
addition to net income from operations. Comprehensive income is a more
inclusive financial reporting methodology that includes disclosure of
certain financial information that historically has not been recognized
in the calculation of net income.
Use of Estimates
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make significant
estimates and assumptions that affect the reported amounts of assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reported period.
Actual results could differ from those estimates. The evaluations of
the investments were a result of estimates.
F-6
7
YAZAM.COM INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
Organization Costs
Organization costs have been charged to expense as incurred as required
by Statement of Position ("SOP") 98-5, Reporting on the Costs of
Start-Up Activities.
Revenue Recognition
Revenues primarily represent fees paid to Gregory FCA (see Note 7).
Fees paid by investees in the form of shares were not recorded as
revenue as there is no objective means of valuing such shares.
Property and Equipment
Property and equipment are stated at cost and depreciated using the
straight-line method over the estimated useful lives of the assets.
Leasehold improvements are amortized over the term of the lease or the
estimated life of the improvement, whichever is shorter. Whenever
assets are sold or retired, their cost and related accumulated
depreciation are removed from the appropriate accounts. Any gains and
losses on dispositions are recorded in current operations. The carrying
values of these assets are tested for impairment as required by SFAS
No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed (see Note 3 for further information).
Fair Value of Financial Instruments
The carrying amounts reported in the balance sheets for cash,
receivables, accounts payable and accrued expenses approximate fair
value based on the short-term maturity of these instruments.
Income Taxes
The Company utilizes the liability method of accounting for income
taxes as set forth in SFAS No. 109, Accounting for Income Taxes. Under
the liability method, deferred taxes are determined based on the
difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect in the years for which
the differences are expected to reverse.
Employee Stock Options and Shares Issued for Services
The Company accounts for employee stock transactions in accordance with
APB Opinion No. 25, Accounting for Stock Issued to Employees. The
Company has adopted the proforma disclosure requirements of SFAS 123,
Accounting for Stock-Based Compensation. Accordingly, any excess of
fair market value of stock issued to employees over exercise prices has
been recorded as compensation expense and additional paid in capital.
Software and Website Development Costs
Software development costs and web site development costs have been
capitalized after design and technological feasibility have been
established as required under SOP 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use and Emerging
Task Consensus ("ETIF") 00-2, Accounting for Web Site Development
Costs. The carrying values of these assets are tested for impairment as
required by SFAS No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed. As of December 31,
2000, the Company wrote off these costs, as impairment, amounted to
$852,951.
Fees and Other Receivables
Fees and other receivables have been adjusted for all known
uncollectible amounts. All accounts recorded on the Company's books at
December 31, 2000 and 1999 are deemed collectible.
F-7
8
YAZAM.COM INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
Operating Segments
SFAS No. 131, Disclosure about Segments of an Enterprise and Related
Information, establishes annual and interim reporting standards for an
enterprise's operating segments and related disclosures about its
products, services, geographic areas and major customers. Under SFAS
No. 131, the Company had three segments of operations: Yazam, Gregory
FCA and FT (see Notes 1 and 7 for description of business) at December
31, 2000 and one segment at December 31, 1999.
A summary of the Company's business activities reported by its three
business segments was as follows:
Yazam Gregory FCA FT Total
------------ ----------- ------------ ------------
2000
Fee income $ 469,750 $1,353,974 $ 333,474 $ 2,157,198
Pretax Profit (Loss) $(35,100,247) $ 272,966 $ (4,332,292) $(39,159,573)
Total Assets $ 41,637,387 $ 812,101 $ 638,794 $ 43,088,282
Depreciation and
amortization $ 1,210,699 $ 7,765 $ 94,984 $ 1,313,448
Expenditures for
property and equipment $ 2,224,570 $ 171,442 $ 84,131 $ 2,480,143
Operations by geographic areas were as follows:
2000 1999
----------- -----------
FEE INCOME
United States $ 1,567,181 $ 160,000
United Kingdom 343,725 --
Israel 154,116 15,000
Japan 92,176 --
----------- -----------
$ 2,157,198 $ 175,000
=========== ===========
TOTAL ASSETS
United States $40,461,933 $13,684,505
United Kingdom 1,033,031 --
Israel 1,196,620 959,251
Japan 396,698 --
----------- -----------
$43,088,282 $14,643,756
=========== ===========
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all
short-term investments with an original maturity of three months or
less to be cash equivalents. The Company had cash balances in the bank
in excess of the maximum amount insured by the FDIC throughout the
period.
F-8
9
YAZAM.COM INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
3. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 2000 and 1999 consist of the
following:
Estimated
2000 1999 Useful Lives
---------- -------- ------------
Computer and office equipment $1,041,764 $ 44,859 3 years
Furniture and fixtures 37,786 42,839 7 years
Leasehold improvements 1,003,535 3,853 5 - 10 years
---------- --------
2,083,085 91,551
Less: Accumulated depreciation 164,357 677
---------- --------
Property and Equipment, Net $1,918,728 $ 90,874
========== ========
Depreciation expense for the year ended December 31, 2000 and for the
period April 15, 1999 (inception) through December 31, 1999 was
$247,616 and $677, respectively. In addition, during the year ended
December 31, 2000, the Company wrote off property and equipment, as
impairment, amounted to $404,673.
4. INVESTMENTS AND RELATED IMPAIRMENT
Investments consist of investments in privately held internet services
companies' warrants, preferred and/or common stock as follows at
December 31, 2000:
Company's Company's
share of share of
Income (Loss) Income
from (Loss)
Date of Recorded
% of Investment to as of
Date of Initial Owner December 31, December 31,
Name Investment Country -ship Cost 2000 2000
------------------------ ------------------- ------- ----- ------------ ------------- ------------
3G Vision February 2000 Israel 5% $ 65,000 $ (2,888) $ (2,888)
Baobob November 2000 Israel 7% 180,000 (29,030) (29,030)
CommerceTone* August 2000 U.S. 11% 180,000 (228,063) (228,063)
Coremarkets August 2000 U.S. 12% 1,173,578 (775,473) (775,473)
GammaSite March 2000 Israel 7% 195,000 (118,973) (118,973)
Incepto September 1999 U.K. 7% 182,792 (138,923) (138,923)
Phlair November 2000 U.S. 5% 180,000 (14,027) (14,027)
Ezface, Inc. February 2000 U.S. 6% 180,000 (150,000) (150,000)
Quintessence December 2000 U.S. 1% 180,000 -- --
Selis April 2000 Israel 9% 185,000 (160,952) (160,952)
Soneta February 2000 U.S. 7% 540,096 (108,041) (108,041)
Travel Bond May 2000 Israel 25% 210,000 (168,838) (168,838)
Vship/GC Zone December 1999 U.S. 4% 239,500 (382,928) (239,500)
------------ ------------ ------------
3,690,966 $ (2,278,136) $ (2,134,708)
============ ============
Square.com - Liquidation Value 75,000
Loss from investees (2,134,708)
------------
Net Investments $ 1,631,258
============
* The Company invested an additional $220,000 in this investee in the
first quarter of 2001.
F-9
10
YAZAM.COM INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
As of December 31, 2000, the Company had commitments to invest an
additional $1,000,000, which amount was invested by March 9, 2001.
During the year ended December 31, 2000, the following investments were
written off as impairment in accordance with SFAS No. 121, Accounting
for Long-Lived Assets and Long-Lived Assets to be Disposed Of:
Date of Initial
Name Investment Function Country Cost
---- --------------- -------- ------- ----------
Ankura September 2000 Internet Services Israel $ 225,020
Envelopes June 2000 Internet Services U.S. 255,040
Impressia May 2000 Internet Services Israel 1,710,015
The Law.com April 2000 Internet Services U.S. 215,000
Configman April 2000 Internet Services U.S. 360,000
VC Village March 2000 Internet Services U.S. 175,000
EMT International March 2000 Internet Services Israel 1,564,808
PrimeShot February 2000 Internet Services U.S. 182,080
Ezsize, Inc. November 2000 Internet Services U.S. 400,020
Square.com, Inc. March 2000 Business Development U.S 174,998
Money Hunt June 2000 Business Development U.S 250,000
iPace Inc. December 1999 Internet Services U.S. 360,020
Gold Names, Inc. December 1999 Internet Services Israel 180,000
Infocharms January 2000 Internet Services U.S. 180,000
Onna.com, Inc. December 1999 Internet Services U.S. 180,000
----------
$6,412,001
==========
5. GOODWILL AND RELATED IMPAIRMENT
The carrying value of intangibles, as required by SFAS No. 121, is
reviewed if the facts and circumstances, such as significant declines
in sales, earnings or cash flows, or a material adverse change in the
business environment indicate that an impairment may have occurred. If
there is an indication of such impairment, an evaluation of the
estimated cash flows of the related entity is made, and, if impairment
is determined, a write down is made.
The Company reviews long-lived assets, certain identifiable assets and
any goodwill related to those assets for impairment whenever the
conditions indicated in SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of, require:
a decrease in the market value of an asset, a change in the use of the
asset, a change in legal factors or business climate, accumulation of
costs significantly in excess of original expectations or a current
period loss combined with a history of losses.
As of December 31, 2000, the Company wrote down its goodwill to the
expected liquidation value. As a result, the Company recorded an
impairment of its goodwill of $9,230,364. The remaining goodwill
consists of $1,000,000 of FT and $634,394 of Gregory FCA (see Note 7).
Goodwill at December 31, 2000 consists of the following:
Estimated
Amount Useful Lives
------------ ------------
Goodwill $ 11,843,047 5 Years
Less: accumulated amortization 978,289
------------
10,864,758
Impairment 9,230,364
------------
Goodwill, net $ 1,634,394
============
Amortization expense for the year ended December 31, 2000 was $978,289.
F-10
11
YAZAM.COM INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
6. STOCKHOLDERS' EQUITY
Authorized Shares
The Company's authorized shares consists of 60,000,000 shares, divided
into 40,000,000 shares of common stock, par value $.0001 per share, and
20,000,000 shares of preferred stock, par value $.0001 per share.
Shares Issued to Key Employee
During 1999, in connection with an employment contract with a key
employee, the Company issued shares of its common stock to a designated
limited liability company equal to 12.5% of the Company's issued and
outstanding common stock. Such shares were valued at fair value of the
stock at the time of issuance, amounting to $4,500,000 and were
reflected as compensation expense.
Stock Split
During 1999, the Company had a stock split of 6,000 to 1 of its common
stock, thus increasing the number of shares issued and outstanding to
16,716,600 shares and decreasing the par value per share to $0.0001 per
share.
Treasury Stock
During 1999, certain founding stockholders redeemed 516,598 (post stock
split) of their shares of common stock which the Company recorded as
treasury stock at par value.
Preferred Series A Stock
During 1999, the Company issued 2,000,000 shares of its Preferred
Series A Stock at $2.00 per share resulting in total proceeds of
$4,000,000. Preferred Series A stockholders are entitled to dividends
and distributions equal to those issued to the common shareholders and
have a liquidation preference of $2.00 per share. The Company incurred
costs of approximately $50,000 in connection with the issuance of
Preferred Series A Stock. Preferred Series A Stock is convertible at
the option of the holder, at any time, into shares of common stock at a
conversion rate of 1 to 1.
Preferred Series B Stock
On December 31, 1999, an investor subscribed for 5,000,000 shares of
the Preferred Series B Stock at $2.00 per share, which was paid on
January 18, 2000. Proceeds totaled $10,000,000. Preferred Series B
stockholders are entitled to dividends and distributions equal to those
issued to the common shareholders and have a liquidation preference of
$2.00 per share. Preferred Series B Stock is convertible at the option
of the holder, at any time, into shares of common stock at a conversion
rate of 1 to 1.
Preferred Series C Stock
During 2000, a number of investors purchased 11,858,333 shares of the
Preferred Series C Stock at $6.00 per share. Proceeds totaled
$71,150,000. Preferred Series C stockholders are entitled to dividends
and distributions equal to those issued to the common shareholders and
have a liquidation preference of $6.00 per share. Preferred Series C
Stock is convertible at the option of the holder, at any time, into
shares of common stock at a conversion rate of 1 to 1.
F-11
12
YAZAM.COM INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
Sale and Exchange
At the time of the sale of the Preferred Series C Stock, as part of an
agreement with the new investors, a portion of the proceeds was used to
repurchase 1,875,000 shares of common stock for $10,750,000. The cost
of the repurchase of common shares is recorded as treasury stock.
Options
During the year ended December 31, 2000, the Company granted to its
employees three-year options to purchase 901,423 shares of its common
stock with an exercise price less than market value. As a result, the
Company recorded deferred compensation of $346,391 and recognized
$1,414,801 in compensation expenses for these options. The deferred
compensation will be amortized over the vesting period.
Furthermore, the Company granted 2,722,749 and 589,500 options to its
employees with exercise prices equal to or greater than the market
value of the stock at the grant dates during the year ended December
31, 2000 and the period April 15, 1999 (inception) through December 31,
1999, respectively.
Weighted average exercise prices for options outstanding at December
31, 2000 and 1999 were $2.11 and $0.20 per share, respectively. In
light of the Acquisition (see Note 11), the Company accelerated all
outstanding unvested options immediately prior to the effective time of
the Acquisition. In order to be eligible for the exercise of the
accelerated options, notice of exercise and applicable payment must
have been delivered to the Company no later than March 23, 2001, with
any unexercised options to be voided. Accordingly, as of March 27,
2001, options to purchase 187,946 shares of common stock were exercised
and the unexercised options were voided.
The following table summarizes the changes in options outstanding and
the related price ranges for shares of the Company's common stock:
Weighted
Average
SHARES Exercise Price
---------- --------------
Outstanding at December 31, 1998 --
Granted 589,500 $ 0.20
Exercised --
Expired or cancelled --
----------
Outstanding at December 31, 1999 589,500 $ 0.20
Granted 3,624,172 $ 2.00
Exercised (797,500) $ 0.20
Expired or cancelled --
----------
Outstanding at December 31, 2000 3,416,172 $ 2.11
==========
For disclosure purposes in accordance with SFAS No. 123, the fair value
of each stock option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for stock options granted during the year ended
December 31, 2000 and the period April 15, 1999 (inception) through
December 31, 1999: annual dividends of $0.00, expected volatility of
0%, risk-free interest rate of 6% and expected life of three years for
both periods. The weighted-average fair value of the stock options
granted during the year ended December 31, 2000 and the period April
15, 1999 (inception) through December 31, 1999 was $0.53 and $0.03,
respectively.
If the Company recognized compensation cost for the employee stock
option plan in accordance with SFAS No. 123, the Company's pro forma
net loss would have been approximately $39,206,000 and $5,553,000
respectively, in the year ended December 31, 2000 and the period April
15, 1999 (inception) through December 31, 1999.
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13
YAZAM.COM INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
7. BUSINESS ACQUISITIONS
On July 20, 2000, the Company acquired First Tuesday, Inc. ("FT")
through a merger transaction. As consideration for the merger, the
Company issued 1,317,675 shares of its common stock, valued at $1.60
per share, and paid $4,559,000 in cash. In addition, the Company
incurred acquisition costs of approximately $232,000 in connection with
the merger. The total purchase price of approximately $6,900,000 was
allocated principally to goodwill, which is being amortized over 5
years. On March 30, 2001, the Company entered into a Stock Purchase
Agreement to sell FT for $500,000 in cash and a promissory note in the
amount of $500,000, bearing interest at a rate of 5% per annum.
FT was the umbrella organization for operations in a number of cities
which ran get-togethers for entrepreneurs and service providers in the
"dot.com" industries. FT ran the London operation; the other operations
were run by entrepreneurs in other cities with a loose affiliation to
the umbrella organization.
On July 31, 2000, the Company acquired Gregory Communications, Inc.
("Gregory") and Financial Communications Associates, Inc. ("FCA")
(collectively referred to as "Gregory FCA") through a merger
transaction. As consideration for the merger, the Company issued
350,000 shares of its common stock, valued at $1.60 per share, and
$450,000 in cash. The Company also incurred acquisition costs of
approximately $107,000 in connection with the merger. The purchase
price of approximately $1,100,000 was allocated principally to
goodwill, which is being amortized over 5 years.
Gregory FCA operates a full service investor and media relations agency
in the Philadelphia metropolitan area providing direct marketing to
institutional investors, security analysts, retail stock brokers and
the financial media.
On September 1, 2000, the Company acquired Todo Technologies, Inc.
("Todo") through a merger transaction. As consideration for the merger,
the Company issued 700,000 shares of its common stock, valued at $1.23
per share, and $550,000 in cash. The Company also incurred acquisition
costs of approximately $63,000 in connection with the merger. The
purchase price of approximately $1,500,000 was allocated principally to
goodwill, which is being amortized over 5 years. In March 2001, the
Company entered into an agreement to sell Todo for $100 in cash. As of
December 31, 2000, the unamortized goodwill was written off (see Note
10).
Todo was acquired for the purpose of investing in privately held,
early-stage, technology companies in Japan.
The above acquisitions were accounted for using the purchase method.
The operations of FT, Gregory FCA and Todo have been included in the
accompanying statements of operations since July 20, 2000, July 31,
2000 and September 1, 2000, respectively. The unaudited results of
operations, as if FT, Gregory FCA and Todo had been acquired at the
beginning of periods ended December 31, 2000 and 1999, are as follows:
2000 1999
------------ ------------
Net revenues $ 5,504,809 $ 2,038,530
Net loss $(43,845,266) $ (7,662,018)
8. COMMITMENTS AND CONTINGENCIES
Leases
The Company has certain lease agreements expiring on various dates
through September 2010 for its office space in United States, Israel,
Japan, and United Kingdom. Rent expense was approximately $355,000 and
$37,000 for the year ended December 31, 2000 and for the period April
15, 1999 (inception) through December 31, 1999, respectively. Most of
these leases were terminated in connection with the reduction of
operations (see Note 1) and the Acquisition (see Note 11).
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14
YAZAM.COM INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
The future minimum rental payments to be made under remaining operating
leases as of December 31, 2000 are as follows:
For the Year Ending December 31, Amount
-------------------------------- -----------
2001 $ 426,000
2002 371,000
2003 232,000
2004 211,000
2005 211,000
Thereafter 1,002,000
Litigation
The Company is subject to litigation from time to time arising in the
ordinary course of its business. The Company does not believe that any
such litigation is likely, individually or in the aggregate, to have a
material adverse effect on the financial condition of the Company.
Employment Agreements
The Company entered into various employment agreements with its
officers and employees. Most of these employment agreements were
terminated in connection with the reduction of operations (see Note 1)
and the Acquisition (see Note 11). As of December 31, 2000, total
future commitments under the active employment agreements approximated
$441,000, payable through March 1, 2002.
9. INCOME TAXES
The Company accounts for its income taxes under SFAS No. 109,
Accounting for Income Taxes, which requires the recognition of deferred
tax assets and liabilities for both the expected impact of differences
between the financial statements and tax basis of assets and
liabilities, and for the expected future tax benefit to be derived from
tax losses and tax credit carryforwards. At December 31, 2000 and 1999,
the Company had net operating loss carryforwards of approximately
$34,505,000 and $5,553,000, respectively expiring through 2020. SFAS
No. 109 additionally requires the establishment of a valuation
allowance to reflect the likelihood of realization of deferred tax
assets. At December 31, 2000 and 1999, a valuation allowance for the
full amount of the deferred tax asset was recorded because of operating
losses incurred and the uncertainties as to the amount of taxable
income that would be generated in the future years. The utilization of
the Company's net operating loss carryforwards is subject to certain
limitations under the provisions of Internal Revenue Code Section 382.
As a result of the Acquisition (see Note 11), the Company had a Section
382 "change of ownership" and therefore a limitation on the
availability of the net operating loss carryforward.
The components of the net deferred tax asset at December 31, 2000 and
1999 consist of the following:
2000 1999
------------ ----------
Net operating loss carryforwards $ 12,077,000 $1,944,000
Valuation allowance 12,077,000 1,944,000
------------ ----------
$ -- $ --
============ ==========
The provision for income taxes differs from the amount computed
applying the statutory federal income tax rate to income before income
taxes at December 31, 2000 and 1999 as follows:
2000 1999
------------ ------------
Income tax benefit computed at statutory rate at 35% $(13,706,000) $ (1,943,000)
Goodwill amortization and impairment 3,573,000 --
Tax benefit not recognized 10,133,000 1,943,000
------------ ------------
Provision for income taxes $ -- $ --
============ ============
F-14
15
YAZAM.COM INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
10. ASSET IMPAIRMENT/WRITE-OFF
The asset impairment/write-off for the year ended December 31, 2000
comprised the following:
Write down of FT goodwill $ 7,802,231
Write down of Todo goodwill 1,428,133
Write down of software and website development costs 852,951
Write down of property and equipment 404,673
Write down of investments 6,412,001
Write down of FT investment in a German subsidiary 22,927
-----------
$16,922,916
===========
11. SUBSEQUENT EVENTS
On March 27, 2001, U.S. Technologies Inc. ("UST") acquired the Company
through a merger. The purchase price was $22 million in cash plus
27,374 shares of UST's Series F Convertible Preferred Stock, which may
be converted into 27,374,000 shares of common stock, and warrants to
purchase an aggregate of 8,000,000 shares of UST's common stock at
$0.34 per share (the "Acquisition"). UST obtained approximately $28
million of cash held by the Company and certain other assets.
12. ACCOUNTING DEVELOPMENTS
In June 2000, the FASB issued SFAS No. 138, Accounting for Certain
Derivative Instruments and Certain Hedging Activities, which amends the
accounting and reporting standards of SFAS No. 133. SFAS No. 133 was
previously amended by SFAS No. 137, which deferred the effective date
of SFAS No. 133 to fiscal years commencing after June 15, 2000. The
Company does not believe that the adoptions of SFAS No. 138 and SFAS
No. 133 have a material impact on the Company's results of operations.
In March 2000, the FASB issued Interpretation (FIN) No. 44, Accounting
for Certain Transactions Involving Stock Compensation - an
Interpretation of APB Opinion No. 25, which was effective on July 1,
2000. The Company adopted the provisions of FIN No. 44 as of July 1,
2000.
F-15