Exhibit 99.2
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Scriptics Corporation:
We have audited the accompanying balance sheet of Scriptics Corporation (a
California corporation) as of December 31, 1999, and the related statements of
operations, shareholders' equity and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit 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 audit provides 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 Scriptics Corporation as of
December 31, 1999, and the results of its operations and its cash flows for the
year then ended in conformity with accounting principles generally accepted in
the United States.
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 suffered recurring losses from operations
and has an accumulated deficit of approximately $4,300,000 which raises
substantial doubt about its ability to continue as a going concern. Management's
plans in regards to these matters are also described in Note 1. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
/s/ ARTHUR ANDERSEN LLP
San Jose, California
March 21, 2000
Scriptics Corporation
Balance Sheet
-----------------
December 31,
Assets 1999
------ -----------------
Current Assets:
Cash and cash equivalents $ 3,286,661
Accounts receivable, net of allowance
for doubtful accounts of $36,321 337,168
Prepaid expenses and other current assets 146,562
-----------------
Total current assets 3,770,391
-----------------
Property and Equipment, at cost:
Furniture and equipment 526,688
Software and computers 103,447
-----------------
630,135
Less: Accumulated depreciation and amortization (157,931)
-----------------
472,204
Other Assets 108,798
-----------------
Total assets $ 4,351,393
=================
Liabilities and Shareholders' Equity
------------------------------------
Current Liabilities:
Long-term debt, current portion $ 967,556
Accounts payable 146,422
Accrued liabilities 497,115
Deferred revenue 262,394
-----------------
Total current liabilities 1,873,487
Long-term debt, net of current portion 2,108,108
-----------------
Total liabilities 3,981,595
-----------------
Commitments (Note 5)
Shareholders' Equity:
Series A convertible preferred stock, no par value; aggregate liquidation
preference of $1,060,000:
Authorized--2,120,000 shares; Outstanding--2,120,000 shares 1,048,571
Series B convertible preferred stock, no par value; aggregate liquidation
preference of $3,510,620:
Authorized--3,000,000 share; Outstanding--2,854,163 shares 3,464,902
Common stock, no par value:
Authorized--15,120,000 share; Outstanding--5,607,934 shares 194,484
Notes receivable from shareholders (56,000)
Accumulated deficit (4,282,159)
-----------------
Total shareholders' equity 369,798
-----------------
Total liabilities and shareholders' equity $ 4,351,393
=================
The accompanying notes are an integral part of these financial statements.
Scriptics Corporation
Statement of Operations
------------
Year Ended
December 31, 1999
-----------------
Revenue $ 2,586,133
Cost of Revenue 851,193
------------
Gross profit 1,734,940
Operating Expenses:
General and administrative 1,061,963
Sales and marketing 2,376,758
Research and development 2,038,197
------------
Loss from operations (3,741,978)
------------
Other Income (Expense):
Interest expense (9,865)
Interest income 102,764
Other expense (3,906)
------------
Total other income, net 88,993
------------
Net Loss $ (3,652,985)
============
The accompanying notes are an integral part of these financial statements.
SCRIPTICS CORPORATION
Statement of Shareholders' Equity
Year Ended December 31, 1999
Notes
Series A Series B Receiv-
Convertible Convertible able Total
Preferred Stock Preferred Stock Common Stock From Accumu- Share-
------------------- ------------------- ------------------- Share- lated holders'
Shares Amount Shares Amount Shares Amount holders Deficit Equity
--------- ---------- --------- ---------- --------- --------- -------- ----------- -----------
Balance at December 31, 1998 2,120,000 $1,048,571 2,854,163 $3,472,566 4,868,726 $ 72,993 $(61,000) $ (629,174) $ 3,903,956
Issuance costs related
to Series B convertible
preferred stock issued
in 1998 .................. -- -- -- (7,664) -- -- -- -- (7,664)
Issuance of common stock
for cash and notes
receivable upon exercise
of stock options ......... -- -- -- -- 1,455,208 203,891 (15,000) -- 188,891
Issuance of common stock
for services or product
at $0.15 per share ....... -- -- -- -- 37,500 5,625 -- -- 5,625
Issuance of common stock
for cash in connection
with loan agreement ...... -- -- -- -- 163,000 24,450 -- -- 24,450
Repurchase of common stock -- -- -- -- (916,500) (112,475) 12,500 -- (99,975)
Payment of note receivable
from shareholder ......... -- -- -- -- -- -- 7,500 -- 7,500
Net loss .................. -- -- -- -- -- -- -- (3,652,985) (3,652,985)
--------- ---------- --------- ---------- --------- --------- -------- ----------- -----------
Balance at December 31, 1999 2,120,000 $1,048,571 2,854,163 $3,464,902 5,607,934 $ 194,484 $(56,000) $(4,282,159) $ 369,798
========= ========== ========= ========== ========= ========= ======== =========== ===========
The accompanying notes are an integral part of these financial statements.
Scriptics Corporation
Statement of Cash Flows
-----------------
Year Ended
December 31, 1999
Cash Flows from Operating Activities: -----------------
Net loss $ (3,652,985)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 121,464
Provision for doubtful accounts 31,321
Noncash stock compensation for services rendered 5,625
Changes in assets and liabilities:
Accounts receivable (183,448)
Prepaid expenses and other current assets (119,555)
Other assets (86,518)
Accounts payable 113,277
Accrued liabilities 420,822
Deferred revenue (2,270)
---------------
Net cash used in operating activities (3,352,267)
---------------
Cash Flows from Investing Activities:
Purchase of property and equipment (430,541)
---------------
Cash Flows from Financing Activities:
Proceeds from long-term debt 3,075,664
Repayment of long-term debt (189,492)
Issuance costs related to Series B convertible preferred stock issued in 1998 (7,664)
Proceeds from issuance of common stock 213,341
Repurchase of common stock (99,975)
Payment of shareholder receivable 7,500
---------------
Net cash provided by financing activities 2,999,374
---------------
Net Decrease in Cash and Cash Equivalents (783,434)
Cash and Cash Equivalents at Beginning of Year 4,070,095
---------------
Cash and Cash Equivalents at End of Year $ 3,286,661
===============
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest $ 9,865
===============
Issuance of notes receivable in exchange for common stock $ 15,000
===============
The accompanying notes are in integral part of these financial statements.
- --------------------------------------------------------------------------------
Ajuba Solutions, Inc.
Notes to Financial Statements
December 31, 1999
1. Organization
------------
Scriptics Corporation (the "Company") was incorporated in the state of
California on January 8, 1998 and is a leading supplier of solutions for
automating, managing and customizing high-value business-to-business
relationships over the Internet. Their flagship product, Scriptics Connect,
leverages the Internet and XML to connect an organization's applications
directly to trading communities and to the business systems of partners. The
Company also offers a full range of professional services to create complete
business-to-business integration solutions.
The Company is subject to the risks and challenges associated with companies in
a comparable stage of development, including: dependence on key individuals,
competition from substitute products and from larger companies, successful
marketing of its products and acceptance of its technology, successful
development of product enhancements on a continuing basis and the need for
adequate financing to support future growth.
As of December 31, 1999, the Company has suffered recurring losses from
operations, has an accumulated deficit of approximately $4,300,000, net
shareholders' equity of approximately $370,000, and working capital of
approximately $1,900,000. However, management's current projections indicate
that there will not be sufficient cash flow from operations to satisfy cash
requirements throughout 2000. This factor raises substantial doubt about the
Company's ability to continue as a going concern. Management is in the process
of attempting to raise additional funding. However, there can be no assurance
that they will be successful with such efforts or that any financing will be
sufficient to meet the Company's working capital requirements. These financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
2. Significant Accounting Policies
-------------------------------
Use of Estimates in the Preparation of Financial Statements
- -----------------------------------------------------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash and Cash Equivalents
- -------------------------
For financial reporting purposes, the Company considers investments with
original maturities of three months or less to be cash equivalents. Cash
equivalents consist principally of money market accounts.
Concentration of Credit Risk
- ----------------------------
Financial instruments that potentially subject the Company to concentration
of credit risk consist principally of accounts receivable. The Company
performs periodic credit evaluations of its customers' financial condition
and generally does not require collateral. Seven customers comprised
approximately 62% of the accounts receivable balance at December 31, 1999.
Property and Equipment
- ----------------------
Property and equipment are stated at cost. Depreciation and amortization is
computed using the straight-line method over the estimated useful lives of
the assets of three to five years or the life of the lease, whichever is
shorter.
Stock-Based Compensation
- ------------------------
In accordance with the provisions of Statement of Financial Accounting
Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation," the
Company has elected to measure compensation cost for its plans using the
intrinsic value method of accounting for stock issued to employees, in
accordance with Accounting Principles Board Opinion 25. However, as
required by SFAS No. 123, pro forma disclosure of net loss is reflected in
the Notes to the Financial Statements (see Note 7) as if the fair value
based method of accounting was adopted.
Comprehensive Income
- --------------------
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income". SFAS No. 130 was adopted by the Company
upon inception, January 8, 1998. This standard defines comprehensive income
as the changes in equity of an enterprise except those resulting from
shareholder transactions. Comprehensive loss for the year ended December
31, 1999, approximated net loss.
Revenue Recognition
- -------------------
The Company generates the following types of revenue:
License revenue. License revenue is earned under software license
- ---------------
agreements to end-users. Revenues from licenses to end users are recognized
upon shipment of the software, provided collectability of the resulting
receivable is probable, the fee is fixed or determinable and contract
execution, if applicable, has occurred. If an acceptance period is
required, revenues are recognized upon the earlier of customer acceptance
or the expiration of the acceptance period.
Service revenue. Services consist of support arrangements and consulting
- ---------------
and training services. Support agreements generally call for the Company to
provide technical support services and provide the customer with rights to
updates to software. Revenue on support agreements is recognized ratably
over the term of the support agreement. The Company provides consulting and
training services to its customers; revenue from such services is
recognized as the services are performed.
Software Development Costs
- --------------------------
Capitalization of software development costs begins upon the establishment
of technological feasibility of the product, which the Company defines as
the development of a working model and further defines as the development
of a beta version of the software. The establishment of technological
feasibility and the ongoing assessment of the recoverability of these costs
requires considerable judgment by management with respect to certain
external factors, including, but not limited to, anticipated future gross
product revenue, estimated economic life and changes in technology. Such
costs are reported at the lower of unamortized cost or net realizable
value. To date, internal software development costs that were eligible for
capitalization have not been significant and the Company has charged all
software development costs to research and development as incurred.
- --------------------------------------------------------------------------------
Page 2
3. Long-term Debt
--------------
In November 1999, the Company entered into a $3,000,000 loan and security
agreement (the "Agreement") with a lender. Borrowings under the Agreement are
collateralized by the Company's assets. The Company had $3,000,000 outstanding
under the Agreement as of December 31, 1999. Borrowings bear a per annum rate of
interest of 12.01%. Principal and interest payments are due monthly commencing
on February 1, 2000 for 36 months. In connection with the Agreement, the lender
purchased 156,000 shares of common stock at their current fair market value of
$0.15 per share.
In November 1999, the Company entered into a $500,000 equipment revolving line
of credit (the "Equipment Agreement") with the same lender as above. Borrowings
under the Equipment Agreement are collateralized by the purchased equipment. The
Company had $75,664 outstanding under the Equipment Agreement as of December 31,
1999. Borrowings bear interest at 5.00%. Principal and interest payments are due
monthly commencing on January 1, 2000 for 36 months. The Company paid an initial
loan fee of $15,000 that has been recorded as other assets on the accompanying
balance sheet as the full amount may be refunded back to the Company contingent
upon the level of borrowings against the line. In connection with the Equipment
Agreement, the lender purchased 7,000 shares of common stock at their current
fair market value of $0.15 per share.
4. Income Taxes
------------
The net deferred income tax asset consists of the following as of December 31,
1999:
Deferred income tax assets:
Net operating loss carryforwards $ 1,692,617
Tax credit carryforwards 208,000
Temporary differences 21,263
-------------
1,921,880
Deferred income tax liability:
Temporary difference (9,489)
-------------
1,912,391
Valuation allowance (1,912,391)
-------------
Net deferred income tax asset $ --
=============
Temporary differences consist of items currently deductible for financial
reporting purposes, but not for tax purposes. These items are primarily reserves
and accruals. As of December 31, 1999, the Company had net operating loss
carryforwards for Federal and state income tax purposes of approximately
$4,245,000 and $4,155,000, respectively, and tax credit carryforwards of
approximately $114,000 and $94,000, respectively. The net operating loss and tax
credit carryforwards expire on various dates through 2019. The Internal Revenue
Service Code contains provisions which may limit the net operating loss and tax
credit carryforwards to be used in any given year upon the occurrence of certain
events, including a significant changes in ownership interest. A valuation
allowance has been recorded for the entire deferred income tax asset as a result
of uncertainties regarding the realization of the asset including the Company's
short operating history and lack of taxable income.
- --------------------------------------------------------------------------------
5. Commitments
-----------
The Company leases its facility under noncancellable operating lease agreements
that expire in 2002 and 2004. Rent expense for the year ended December 31,
1999, under all operating leases was approximately $455,000, which is net of
sublease income of approximately $89,000. Total minimum future lease payments
under operating leases are as follows:
2000 $ 1,115,297
2001 1,123,016
2002 1,050,105
2003 493,411
2004 41,171
-------------
$ 3,823,000
=============
6. Convertible Preferred Stock
---------------------------
The Company is authorized to issue 2,120,000 shares of Series A convertible
preferred stock ("Series A"), and 3,000,000 shares of Series B convertible
preferred stock ("Series B"). Significant rights, restrictions and preferences
of the Series A and Series B are as follows:
. The holders of each outstanding share of Series A and Series B are
entitled to receive annual, non-cumulative dividends of $0.05 and $0.12
per share, respectively, when and as declared by the Board of Directors.
The holders of Series A and Series B will also be entitled to participate
in dividends on common stock, when and if declared by the Board of
Directors, based on the number of shares of common stock held on an as-if
converted basis. No dividends on Series A, Series B, or common stock have
been declared by the Board as of December 31, 1999.
. In the event of a liquidation, dissolution or winding-up of the affairs
of the Company, including a change in control, the holders of each share
of Series A and Series B shall be entitled to receive $0.50, and $1.23
per share, respectively, adjusted for any combinations, consolidations,
or stock distributions or dividends with respect to such shares and, in
addition, an amount equal to all declared but unpaid dividends in
preference to any distribution to the holders of the common stock. All
remaining proceeds will be shared equally by the holders of the preferred
and common stock on an as converted basis.
. Each holder of Series A and Series B shares shall have voting rights
equivalent to the number of common stock shares into which they are
convertible.
. Each share of Series A and Series B is convertible, at the option of the
shareholder, into such number of shares of common stock as determined by
dividing $0.50 and $1.23, respectively, by the conversion price at the
time in effect for each share of preferred stock. The initial conversion
price shall be $0.50 and $1.23 per share for Series A and Series B
preferred stock, respectively. Each share shall automatically convert
upon the closing date of a public offering of the Company's common stock
for which the price per share is not less than $5.00 per share and the
aggregate offering price is not less than $10,000,000.
7. Common Stock
------------
As of December 31, 1999, the Company has issued an aggregate of 5,607,934 shares
of common stock to employees, lenders, investors and consultants of the Company
of which 1,629,209 are subject to repurchase rights at the option of the Company
at $0.01 - $0.15 per share. The shares are repurchasable in the event of
termination of employment, for any or no reason. Such repurchase rights lapse
25% on the first year anniversary of the vesting commencement date and 1/48th
per month thereafter. These rights of
repurchase will terminate on the effective date of an initial public offering or
the closing date of a sale of assets or merger of the Company in which the
shareholders receive securities of a buyer whose shares are publicly traded.
Common Stock Reserved for Future Issuance
-----------------------------------------
As of December 31, 1999, the Company has reserved the following shares of
common stock for issuance in connection with:
Conversion of Series A preferred stock 2,120,000
Conversion of Series B preferred stock 2,854,163
1998 Stock Option Plan 2,258,267
---------
Total 7,232,430
=========
1998 Stock Option Plan
----------------------
In 1998, the Company established the 1998 Stock Option Plan (the "Plan")
and authorized a total of 4,676,975 shares of common stock for issuance
thereunder. Under the Plan, the Board of Directors may grant incentive and
nonqualified stock options to purchase shares of the Company's common stock
to employees and consultants of the Company. The exercise price per share
for an option granted to employees and consultants owning stock
representing more than 10% of the Company at the time of the grant cannot
be less than 110% of the fair market value per share as determined by the
Board of Directors on the date of the grant. Incentive and nonqualified
stock options granted to all other persons shall be granted at a price no
less than 100% and 85%, respectively, of the fair market value per share as
determined by the Board of Directors on the date of grant. Options
generally expire ten years after the date of grant and vest over a four
year period. However, options may be exercisable immediately upon the
holder entering into a restricted stock purchase agreement, which gives the
Company the right to repurchase unvested shares at the original issuance
price. Option activity under the Plan was as follows:
Outstanding Options
-----------------------------
Weighted
Shares Average
Available Number of Exercise
For Grant Shares Price
----------- ----------- --------
Outstanding at December 31, 1998 2,527,975 269,000 $0.05
Granted (1,877,900) 1,877,900 $0.15
Exercised -- (1,455,208) $0.14
Cancelled 142,292 (142,292) $0.01
Repurchase of unvested shares 916,500 -- $0.12
----------- ----------- --------
Outstanding at December 31, 1999 1,708,867 549,400 $0.15
=========== =========== ========
Options Outstanding Options Exercisable
------------------------------------------------------------------------------------- -------------------------------------
Weighted-
Number Average Weighted- Number Weighted-
Range of Outstanding at Remaining Average Exercisable Average
Exercise December 31, Contractual Exercise December 31, Exercise
Prices 1999 Life Price 1999 Price
-------- -------------- ------------------ ----------------- ------------------ --------------
$0.15 517,000 9.49 $0.15 -- $0.15
$0.20 32,400 9.89 $0.20 -- $0.20
------- ---
549,400 --
======= ===
The weighted average fair value of options granted during 1999 was $0.03.
The Company applies Accounting Principles Board Opinion No. 25 in accounting for
its stock option plans. Had the Company's stock option plans been accounted for
under SFAS No. 123, net loss would have been adjusted to the following pro forma
amount for the year ended December 31, 1999:
Net loss:
As reported $ (3,652,985)
===============
Pro forma $ (3,666,725)
===============
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized over the options' vesting period. The effects of applying SFAS No.
123 on pro forma disclosures of net loss are not likely to be representative of
the pro forma effects on net loss in future years.
8. Notes Receivable from Shareholders
----------------------------------
During 1999, the Company issued 100,000 shares of common stock to an employee
upon the exercise of options at a price of $0.15 per share for promissory notes
receivable. These promissory notes are full recourse, subject to the option
exercise agreements and are due and payable in 2004. Interest income is
recognized as received.
9. 401(K) Plan
-----------
The Company maintains a 401(k) retirement plan for full-time employees and may
make discretionary contributions. No employer contributions were made during
the current period.