EXHIBIT 99-1
YOUCENTRIC, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES FOR THE YEAR ENDED
DECEMBER 31, 1999 AND 2000
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
YOUcentric, Inc.
Charlotte, North Carolina
We have audited the accompanying consolidated balance sheets of YOUcentric, Inc.
and subsidiaries (the "Company") as of December 31, 1999 and 2000, and the
related consolidated statements of operations, shareholders' deficiency, and
cash flows for each of the two years in the period ended December 31, 2000.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the 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, such financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 1999 and
2000, and the results of its operations and its cash flows for each of the two
years in the period ended December 31, 2000 in conformity with accounting
principles generally accepted in the United States of America.
/s/ DELOITTE & TOUCHE LLP
Charlotte, North Carolina
May 3, 2001
YOUCENTRIC, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
<Table>
<Caption>
DECEMBER 31,
1999 2000
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents................................................................. $ 2,471 $ 1,629
Marketable securities..................................................................... -- 2,326
Accounts receivable (net of allowance of $500 at December 31, 2000)....................... 5,663 3,324
Prepaid expense and other current assets.................................................. 766 3,032
Short-term investments (restricted)....................................................... -- 4,800
Deferred contract costs................................................................... 90 203
----------- -----------
Total current assets................................................................. 8,990 15,314
Certificate of deposit (restricted)......................................................... -- 1,317
Property and equipment, net................................................................. 830 4,646
----------- -----------
Total assets................................................................................ $ 9,820 $ 21,277
=========== ===========
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
Current liabilities:
Current maturities of capital lease obligations........................................... $ 106 $ 248
Accounts payable and other accrued liabilities............................................ 4,174 5,851
Deferred revenues......................................................................... 1,865 1,888
Billings in excess of earned revenues..................................................... 6,139 7,391
Income taxes payable...................................................................... 110 --
----------- -----------
Total current liabilities............................................................ 12,394 15,378
----------- -----------
Capital lease obligations................................................................... 81 293
----------- -----------
Deferred lease liability.................................................................... -- 133
----------- -----------
Deferred tax liability...................................................................... 28 --
----------- -----------
Redeemable convertible preferred stock:
Series A, no par value, liquidation preference $1.92 per share, 4,159,446 shares
authorized, issued, and outstanding at December 31, 1999 and 2000........................ 18,963 25,439
----------- -----------
Series B, no par value, liquidation preference $12.02 per share, 2,911,900 shares
authorized, 2,572,376 shares issued and outstanding at December 31, 2000................ -- 28,953
----------- -----------
Shareholders' deficiency:
Common stock, no par value, 50,000,000 shares authorized, 16,003,980 and 16,103,826 shares
issued and outstanding at December 31, 1999 and 2000, respectively...................... 381 20,875
Accumulated deficit....................................................................... (22,027) (69,793)
Accumulated other comprehensive loss...................................................... -- (1)
----------- -----------
Total shareholders' deficiency....................................................... (21,646) (48,919)
----------- -----------
Total liabilities and shareholders' deficiency.............................................. $ 9,820 $ 21,277
=========== ===========
</Table>
See notes to consolidated financial statements.
YOUCENTRIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE DATA)
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
---------------------------
1999 2000
--------- ---------
Revenues:
Software license, customization and implementation revenues................ $ 3,085 $ 13,980
Professional services and maintenance revenues............................. 1,028 3,473
--------- ---------
Total revenues......................................................... 4,113 17,453
--------- ---------
Operating expenses:
Cost of revenues........................................................... 946 6,058
Sales and marketing........................................................ 3,027 15,013
Research and development................................................... 3,246 5,621
General and administrative................................................. 3,433 10,431
Special charges............................................................ -- 2,160
Stock based compensation*.................................................. 565 20,153
--------- ---------
Total operating expenses............................................... 11,217 59,436
--------- ---------
Operating loss............................................................... (7,104) (41,983)
Other income, net............................................................ 105 1,001
--------- ---------
Loss before income taxes..................................................... (6,999) (40,982)
Income tax benefit (expense)................................................. (23) 49
--------- ---------
Net loss..................................................................... (7,022) (40,933)
Accretion for preferred stock redemption feature, preferred stock dividends
and offering costs........................................................ (11,398) (6,833)
--------- ---------
Net loss attributable to common shareholders................................. $ (18,420) $ (47,766)
========= =========
Basic and diluted net loss per share attributable to common shareholders..... $ (1.15) $ (2.98)
========= =========
Basic and diluted weighted average shares outstanding........................ 16,004 16,050
========= =========
*Stock-based compensation:
Cost of revenues.......................................................... $ -- $ 2,271
Sales and marketing....................................................... 494 5,649
Research and development.................................................. 71 6,474
General and administrative................................................ -- 5,759
--------- ---------
Total.................................................................. $ 565 $ 20,153
========= =========
</Table>
See notes to consolidated financial statements.
YOUCENTRIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS DEFICIENCY
(IN THOUSANDS)
<Table>
<Caption>
ACCUMULATED
OTHER
COMMON STOCK ACCUMULATED COMPREHENSIVE
SHARES AMOUNT DEFICIT LOSS TOTAL
Balance (deficiency),
December 31, 1998................. 16,304 $ 120 $(1,019) $-- $(899)
Net loss............................ -- -- (7,022) -- (7,022)
Contribution of shares by shareholders (300) -- -- -- --
Issuance of common stock options at
less than fair value............... -- 181 -- -- 181
Equity restructuring................ -- -- (2,588) -- (2,588)
Issuance of stock warrant........... -- 80 -- -- 80
Accretion of Series A convertible
preferred stock redemption feature
and dividends...................... -- -- (11,398) -- (11,398)
------ ------- -------- --- --------
Balance (deficiency),
December 31, 1999................. 16,004 381 (22,027) -- (21,646)
Comprehensive loss:
Net loss.......................... -- -- (40,933) -- (40,933)
Unrealized loss on securities
available for sale, net of tax.. -- -- -- (1) (1)
------ ------- -------- --- --------
Total comprehensive loss............ -- -- (40,933) (1) (40,934)
Exercise of stock options........... 68 82 -- -- 82
Issuance of common stock options at
less than fair value............... -- 20,153 -- -- 20,153
Accretion of Series A convertible
preferred stock redemption feature
and dividends...................... -- -- (6,476) -- (6,476)
Accretion of Series B convertible
preferred stock offering costs..... -- -- (357) -- (357)
Issuance of common stock............ 32 259 -- -- 259
------ ------- -------- --- --------
Balance (deficiency),
December 31, 2000................. 16,104 $20,875 $(69,793) $(1) $(48,919)
====== ======= ======== === ========
</Table>
See notes to consolidated financial statements.
YOUCENTRIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
1999 2000
------------- ---------
Cash flows from operating activities:
Net loss................................................................. $ (7,022) $ (40,933)
Adjustments to reconcile net loss to net cash used in operating activities:
Provision for credit losses........................................... -- 500
Depreciation and amortization......................................... 225 872
Deferred income taxes................................................. 23 (28)
Stock based compensation.............................................. 565 20,153
Non-cash special charges.............................................. -- 139
Tax provision from exercise of stock options.......................... -- 70
Changes in assets and liabilities which provided (used) cash:
Accounts receivable................................................... (3,844) 1,839
Prepaids and other current assets..................................... (761) (2,266)
Earned revenue in excess of billings.................................. 278 --
Deferred contract costs............................................... (90) (113)
Deferred lease liability.............................................. -- 133
Accounts payable and other accrued liabilities........................ 3,171 2,941
Billings in excess of earned revenues................................. 4,326 1,252
Deferred revenues..................................................... 1,180 23
Income taxes payable.................................................. (16) (110)
--------- ---------
Net cash used in operating activities................................. (1,965) (15,528)
-------- ---------
Cash flows from investing activities:
Purchase of property and equipment....................................... (595) (4,244)
Purchase of short-term investments (restricted).......................... -- (4,800)
Purchase of certificate of deposits (restricted)......................... -- (1,317)
Net purchase of marketable securities.................................... -- (2,327)
--------- ----------
Net cash used in investing activities................................. (595) (12,688)
-------- ---------
Cash flow from financing activities:
Principal payments on capital leases..................................... (98) (229)
Net proceeds from sale of preferred stock................................ 4,673 28,855
Proceeds from exercise of stock options.................................. -- 12
Costs associated with withdrawn IPO...................................... -- (1,264)
--------- ---------
Net cash provided by financing activities............................. 4,575 27,374
-------- ---------
Net increase (decrease) in cash and cash equivalents....................... 2,015 (842)
Cash and cash equivalents:
Beginning of period...................................................... 456 2,471
--------- ---------
End of period............................................................ $ 2,471 $ 1,629
========= =========
Supplemental disclosure of cash flow information:
Cash paid for interest................................................... $ 17 $ 39
========= =========
Cash paid for income taxes............................................... $ 16 $ 26
========= =========
Supplemental disclosure of non-cash investing and financing
activities:
Leased asset additions and related obligations........................... $ 194 $ 583
========= =========
Equity restructuring..................................................... $ 2,588 $ --
========= =========
Issuance of stock warrants............................................... $ 80 $ --
========= =========
Accretion of preferred stock redemption feature, dividends and offering
costs ................................................................ $ 11,398 $ 6,833
========= =========
Issuance of common stock................................................. $ -- $ 259
========= =========
</Table>
See notes to consolidated financial statements.
YOUCENTRIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF THE BUSINESS AND ACCOUNTING POLICIES
ACCOUNTING PRINCIPLES. The financial statements and accompanying notes are
prepared in accordance with generally accepted accounting principles in the
United States of America.
DESCRIPTION OF BUSINESS. YOUcentric, Inc. and its subsidiaries (the "Company")
develop, market and support e-business relationship management software
products. The Company operates in the United States and Europe. The Company's
customers principally consist of large, domestic companies who are end users of
its software products and services. The Company's products are based in large
part upon the Java programming language. Sales of the Company's product depend
on the continued acceptance of Java-based applications and continued development
support for Java.
PRINCIPLES OF CONSOLIDATION. The financial statements include the accounts of
YOUcentric, Inc. and its subsidiaries including YOUcentric, Ltd, which is
located in the United Kingdom and YOUcentric, GmbH, which is located in Germany.
Subsequent to December 31, 2000 YOUcentric, SARL, which is located in France,
was formed. All subsidiaries are owned 100% by YOUcentric, Inc. Significant
intercompany transactions and balances have been eliminated.
REVENUE RECOGNITION. The Company generates revenues from licensing the rights to
use its software products directly to end-users and indirectly through
sublicense fees from resellers. The Company also generates revenues from sales
of professional consulting services, maintenance and support services performed
for customers that license its products. The Company recognizes revenue based on
the provisions of Statement of Position ("SOP") No. 97-2, Software Revenue
Recognition (as amended by SOP No. 98-4 and SOP No. 98-9) and SOP No. 81-1,
Accounting for Performance of Construction-Type and Certain Production-Type
Contracts.
Software license fee revenue is recognized upon persuasive evidence of an
arrangement, delivery of software to the customer, determination that there are
no significant post-delivery obligations and when collection of a fixed or
determinable license fee is considered probable. Implementation and
customization services are essential to the customer's use of the software and
are bundled with the sale of the software license. The entire arrangement is
recognized under the percentage-of-completion method and reflected in software
license, customization and implementation revenues in the consolidated
statements of operations. Percentage of completion is measured by the percentage
of implementation and customization hours incurred to date to estimated total
customization and implementation hours. This method is used because management
has determined that past experience has shown expended hours to be the best
measure of progress on these engagements.
Revisions in customization and implementation hour estimates are reflected in
the accounting period in which the required revisions become known. Anticipated
losses on contracts are charged to income in their entirety when such losses
become evident. Revenues recognized in excess of amounts billed are classified
under current assets as "earned revenues in excess of billings." Amounts billed
in excess of revenue recognized are classified under current liabilities as
"billings in excess of earned revenues."
For contracts that contain cancellation provisions, or have significant customer
acceptance criteria, revenues are deferred and recognized upon the expiration of
the cancellation period or upon customer acceptance. At December 31, 1999 and
2000, the Company had deferred license, customization and implementation
revenues of $2,081,000 and $1,326,000, respectively, due to significant customer
acceptance or cancellation clauses, which are included in "billings in excess of
earned revenues" in the accompanying consolidated balance sheets. In addition,
at December 31, 1999 and 2000, the Company had deferred maintenance revenues of
$794,000 and $231,000, respectively, for maintenance services related to
these contracts which are included in "deferred revenues" in the accompanying
consolidated balance sheets. The Company does not offer return rights to its
resellers or end users.
Commissions paid on contracts for which customer acceptance has not been
received or for which cancellation provisions have not expired are recorded as
prepaid expenses and are expensed upon the earlier of customer acceptance or the
expiration of the cancellation provision. Commissions paid on contracts
recognized under the percentage-of-completion method without such acceptance or
cancellation provisions are charged to expense ratably based on the percentage
of revenue earned on the respective contract.
Revenues from professional services not essential to the customers' use of the
software under time-and-materials contracts are recognized as services are
performed. Maintenance services are recognized ratably over the term of the
related agreements.
During the year ended December 31, 2000, the Company recognized sub-license fees
for software and authorization services to an end customer through a
sub-licensee. Because the Company's total arrangement with the sub-licensee
included the sale of the software and customization services to be provided to
the ultimate customer by the Company, the arrangement is being accounted for
using the percentage of completion method of accounting as required by SOP 97-2.
CASH AND CASH EQUIVALENTS. The Company invests its excess cash in deposits,
money market accounts, and high quality marketable debt securities. The Company
considers all highly liquid investments with a maximum original maturity of 90
days or less at the time of purchase to be cash equivalents.
MARKETABLE SECURITIES. Management determines the appropriate classification of
marketable securities at the time of purchase and reevaluates such designation
as of each balance sheet date. The Company has classified its marketable debt
securities as "available for sale." Such investments are recorded at fair value
with unrealized gains and losses, net of related tax effects, reported within
accumulated other comprehensive loss. Realized gains and losses on available for
sale securities are computed using the specific identification method.
DEFERRED CONTRACT COSTS. The Company defers contract costs, principally
salaries, related to contracts where revenues have been deferred because there
are significant acceptance or cancellation provisions.
RESTRICTED ASSETS. Restricted assets include a certificate of deposit
collateralizing certain improvements at the Company corporate headquarters and
short-term investments collateralizing the Company's line of credit.
PROPERTY AND DEPRECIATION. Expenditures for property and equipment are
capitalized at cost. Capital leases are recorded at the present value of the
future minimum lease payments at the date of acquisition. Depreciation is
provided on the straight-line basis over the estimated useful lives of the
assets, which range from three to seven years. Capital leases are amortized over
the lesser of their estimated useful life or the lease term.
The Company reviews long-lived assets to be held and used by the Company for
impairment whenever events or changes in circumstances indicate that the
carrying amount of the asset may not be recoverable. The Company estimates the
future cash flows expected to result from the use of the asset and its eventual
disposition, and recognizes an impairment loss if the expected future cash flows
are less than the carrying amount of the asset. Long-lived assets to be disposed
of are reported at the lower of carrying amount or fair value less cost to sell.
No impairment of long-lived assets existed at December 31, 1999 and 2000.
Maintenance and repairs that do not improve or extend the life of assets are
expensed as incurred.
DEFERRED REVENUES. Deferred revenues generally relate to customer prepayments
for maintenance services that will be recognized over the maintenance period.
INCOME TAXES. The consolidated balance sheets include federal and state taxes
currently payable and deferred taxes. Deferred taxes were determined utilizing
the asset/liability approach which gives consideration to the future tax
consequences associated with differences between the financial accounting and
tax basis of assets and liabilities. This method gives immediate effect to
changes in income tax laws upon enactment. Valuation allowances are established
when necessary to reduce deferred tax assets to the amount more likely than not
to be realized.
ACCUMULATED OTHER COMPREHENSIVE LOSS. Accumulated other comprehensive loss is
presented net of income taxes and is comprised of unrealized gains and losses on
marketable securities classified as available for sale.
COST OF REVENUES. Cost of revenues includes the total costs of software
licenses, customization, implementation, professional services and maintenance
and consists primarily of salaries, consulting, training and customer support
personnel, cost of services provided by third-party consultants and cost of
product documentation and other production costs. The Company maintains a
dedicated department, which provides these implementation, customization,
customer support and other services to customers.
The Company has not historically maintained separate records for the costs of
providing software licenses, customization, implementation, professional
services and maintenance. Therefore, amounts are not presented for the cost of
software licenses, customization and implementation, separately from the cost of
providing professional services and maintenance in the accompanying consolidated
statements of operations. The Company began capturing this information
separately as of July 1, 2000 as disclosed in Note 13.
COMPUTER SOFTWARE DEVELOPMENT COSTS AND RESEARCH AND DEVELOPMENT EXPENSES. The
Company incurs software development costs associated with its licensed products
and accounts for software development costs based on the guidance in Statement
of Financial Accounting Standard ("SFAS") No. 86, Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise Marketed.
The Company has determined that technological feasibility occurs upon the
successful development of a working model, which happens late in the development
cycle and close to general release of the products. The development costs
incurred between the time technological feasibility is established and general
release of the product are not material.
ADVERTISING COSTS. The Company expenses all advertising costs as incurred.
Advertising costs totaled $239,000 and $1,570,000 in 1999 and 2000,
respectively, and are included in sales and marketing expenses in the
accompanying financial statements.
LIQUIDITY. The Company continues to incur losses from operations and had an
accumulated deficit of $22,027,000 and $69,793,000 at December 31, 1999 and
2000, respectively. The Company had working capital deficits of $3,404,000 and
$63,000 at December 31, 1999 and 2000, respectively. In addition the Company's
net use of cash from operating activities totaled $15.5 million in 2000. As a
result of its significant research and development, customer support, and
selling and marketing efforts, the Company has required substantial working
capital to fund its operations. To date, the Company has financed its operations
principally through cash generated by operations and private equity offerings.
During the first quarter of 2001, the Company instituted certain cost reduction
measurements, the most significant of which was the reduction of the Company's
match on the 401(k) plan from 150% to 50%. Employee headcount (including
contractors) decreased from approximately 250 at January 1, 2001 to
approximately 235 at April 1, 2001. The Company then instituted a planned
headcount reduction in April 2001 whereby approximately 40 employees and
contractors were terminated. The Company estimates the total cost of such
terminations will be approximately $150,000 to $200,000.
In May 2001, the Company sold shares of its Series C Preferred Stock and
received estimated net proceeds of approximately $15.5 million as well as
commitments to purchase an additional $7 million of the Series C Preferred Stock
(see Note 12). Management believes that these proceeds, together with
anticipated cash generated by operations, will be sufficient to meet its
anticipated cash needs for working capital and capital expenditure requirements
for at least the next 12 months. However, the Company may need to raise
additional funds in the future to support its operations, expand its business,
respond to
competitive pressures or respond to unanticipated requirements. If the Company
seeks to raise additional funds, it may not be able to obtain funds on favorable
or acceptable terms.
CONCENTRATION OF CREDIT RISK. Financial instruments that potentially subject the
Company to a concentration of credit risk principally consist of cash
equivalents, marketable securities and accounts receivable. The Company places
its cash equivalents with high credit qualified financial institutions and, by
practice, limits the amount of credit exposure to any one financial institution.
Concentrations of credit risk with respect to accounts receivable are limited
due to the dispersion across different industries and geographies of the
Company's customer base.
Revenues from one customer accounted for 38% of total revenues in 1999. Revenues
from three customers accounted for 24%, 14% and 10% of total revenues in 2000.
These revenue concentrations were from different customers in each of the two
years. The customer representing 24% of total revenues in 2000 accounted for 63%
of total accounts receivable as of December 31, 1999. Another customer accounted
for 21% of total accounts receivable as of December 31, 1999. In addition, the
customer representing 14% of total revenues in 2000 accounted for 26% of total
accounts receivable as of December 31, 2000. Two other customers accounted for
23% and 13% of total accounts receivable as of December 31, 2000. The Company
performs ongoing credit evaluations of its customers' financial condition and
the risk of loss with respect to its trade receivables is further mitigated by
the fact that the Company's customer base consists of well-established
companies.
FAIR VALUE OF FINANCIAL INSTRUMENTS. The carrying values of cash and cash
equivalents, marketable securities, accounts receivable, accounts payable, and
other accrued liabilities approximate their fair values for all periods
presented.
USE OF ESTIMATES. The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
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. Significant estimates relate to the calculation of revenue
earned on contracts accounted for under the percentage-of-completion method,
since this calculation is based on the percentage of actual labor hours incurred
to total estimated labor hours required to complete the contract.
STOCK-BASED COMPENSATION. SFAS No. 123, Accounting for Stock-Based Compensation,
requires the measurement of the fair value of employee and director stock
options or warrants to be included in the consolidated statements of operations
or disclosed in the notes to consolidated financial statements. The Company has
determined that it will continue to account for stock-based compensation for
employees and directors under Accounting Principles Board ("APB") Opinion No.
25, Accounting for Stock Issued to Employees, and elect the disclosure-only
alternative under SFAS No. 123 (see Note 9). The Company accounts for options
and warrants granted to individuals other than employees and directors using the
fair-value method prescribed by SFAS No. 123.
SEGMENT REPORTING. The Company views its operations and manages its business as
one segment, providing customized software licenses and professional support and
maintenance services.
NET LOSS PER SHARE ATTRIBUTABLE TO COMMON SHAREHOLDERS. Net loss per share
attributable to common shareholders is based on net loss attributable to common
shareholders divided by the weighted average shares outstanding during the
period. At December 31, 1999 and 2000, outstanding options and warrants,
representing 2,564,793 and 8,399,243 shares of common stock, respectively, are
not included in the calculation of diluted net loss per share attributable to
common shareholders since they are anti-dilutive.
During 1999 and 2000, the Company recorded a dividend accretion equal to the
greater of the conversion or redemption feature of the Series A Preferred Stock
(See Note 9). During 2000, the Company recorded accretion related to the
offering costs associated with the Series B Preferred Stock (See Note 9). The
accretion of dividends and offering costs increases the net loss attributable to
common shareholders.
RECENT PRONOUNCEMENTS. In June 1998 the Financial Accounting Standards Board
(the "Board") issued Statement of Financial Accounting Standards No. 133,
Accounting for Derivative Instruments and Hedging Activities ("FAS 133"), which
establishes accounting and reporting standards for derivative instruments and
hedging activities. In June 2000 the Board issued Statement of Financial
Accounting Standards No. 138, Accounting for Certain Derivative Instruments and
Certain Hedging Activities ("FAS 138"), which amends FAS 133 and addresses a
limited number of implementation issues related to FAS 133. FAS 133, as amended
by FAS 138, is effective for the Company as of January 1, 2001. Although the
Company is currently analyzing FAS 133, as amended by FAS 138, including any
possible effects on its international operations, it is not expected to have a
material impact on the Company's financial condition or results of operations.
In December 1999 the Securities and Exchange Commission (the "SEC") issued Staff
Accounting Bulletin No. 101, Revenue Recognition in Financial Statements ("SAB
101"), which summarizes the SEC's views in applying generally accepted
accounting principles to selected revenue recognition issues. The Company has
elected to adopt the provisions of SAB 101 in 2000, and this new standard did
not have a material impact on the Company's financial condition and results of
operations.
RECLASSIFICATIONS. Certain amounts previously reported for 1999 have been
reclassified to conform to classifications used in 2000.
2. MARKETABLE SECURITIES
Marketable securities at December 31, 2000 consist of the following (dollars in
thousands):
<Table>
<Caption>
COST FAIR
BASIS VALUE
Corporate commercial paper............................................. $ 508 $ 507
Medium and short term notes........................................... 400 400
Euro dollars bonds..................................................... 920 920
Asset backed securities................................................ 499 499
--------- -----------
Total............................................................. $ 2,327 $ 2,326
========= =======
</Table>
The following table sets forth certain data at December 31, 2000 with respect to
marketable securities (dollars in thousands):
<Table>
Cost basis........................................................... $ 2,327
Fair value........................................................... 2,326
---------
Accumulated other comprehensive loss, net of tax..................... $ (1)
=========
</Table>
At December 31, 1999 the Company had no investments in marketable securities. At
December 31, 2000, the average maturity of the investments was approximately 2.9
months.
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following amounts (dollars in thousands):
<Table>
<Caption>
DECEMBER 31,
1999 2000
Computer equipment and software, including assets under capital lease
of $308 and $542 at December 31, 1999 and 2000, respectively $ 891 $ 2,862
Office furniture and equipment.............................. 199 1,936
Leasehold improvements, including assets under capital lease of $322
at December 31, 2000...................................... 36 955
--------- ---------
1,126 5,753
Less:
Accumulated depreciation.................................. (192) (795)
Accumulated depreciation of property and equipment under capital
lease.................................................. (104) (312)
--------- ---------
Property and equipment, net $ 830 $ 4,646
========= =========
</Table>
Depreciation and amortization expense relating to property and equipment totaled
$225,000 and $872,000 for the years ended December 31, 1999 and 2000,
respectively, and is included in general and administrative expense in the
accompanying consolidated statements of operations.
4. LEASES
The Company leases certain property and equipment, automobiles and office space
under capital and operating lease arrangements. The following is a schedule by
years of future minimum lease payments under capital leases through their
expiration dates, together with the present value of the net minimum lease
payments as of December 31, 2000 (dollars in thousands):
<Table>
<Caption>
Fiscal Year
2001................................................. $ 284
2002................................................. 121
2003................................................. 86
2004................................................. 84
2005................................................. 63
---------
Total minimum lease payments......................... 638
Less imputed interest................................ (97)
---------
Present value of minimum lease payments.............. 541
Less current maturities.............................. (248)
---------
Long-term portion of capital lease obligations....... $ 293
=========
</Table>
Interest expense attributable to these leases totaled $17,000 and $39,000 for
the years ended December 31, 1999 and 2000, respectively, and is included in
other income (expense), net in the accompanying consolidated statements of
operations.
OPERATING LEASES. Future minimum annual lease payments under operating leases
with non-cancelable terms in excess of one year as of December 31, 2000 were as
follows (dollars in thousands):
<Table>
<Caption>
Fiscal Year
2001....................................... $ 1,796
2002....................................... 1,848
2003....................................... 1,813
2004....................................... 1,533
2005....................................... 1,136
---------
Total minimum lease payments............... $ 8,126
=========
</Table>
Rent expense under operating leases totaled approximately $336,000 and
$1,392,000 in 1999 and 2000, respectively.
5. SHORT-TERM CREDIT FACILITY
The Company has a $6.0 million revolving line of credit, borrowings under which
bear interest at the Eurodollar Daily Floating Rate plus 1.75%. The revolving
line of credit is collateralized by $4.8 million in cash investments and a
blanket first priority lien on all accounts receivable, furniture, fixtures and
equipment. At December 31, 2000 $6.0 million was available to borrow under the
facility and no amounts were outstanding. The line of credit expires May 31,
2001.
6. SPECIAL CHARGES
During 2000, the Company recorded special charges of $1,471,000 relating to a
withdrawn IPO and $689,000 relating to the relocation of their corporate
headquarters. The charges relating to the withdrawn IPO primarily include
registration, filing and listing fees, printing expenses and legal and
accounting expenses. The charges relating to the relocation of the Company's
corporate headquarters include estimated future lease obligations in excess of
estimated future sublease income of $550,000 as well as the write-off of
leasehold improvements of $139,000.
The components of the special charges recorded in 2000 and utilized through
December 31, 2000 are as follows (dollars in thousands):
<Table>
<Caption>
WITHDRAWN CORPORATE
IPO RELOCATION TOTAL
Amount expensed....................................... $ 1,471 $ 689 $ 2,160
Payments and write-off of property and equipment in 2000
(1,264) (139) (1,403)
---------- ---------- ----------
Balance at December 31, 2000.......................... $ 207 $ 550 $ 757
========== =========== ===========
</Table>
The remaining balance at December 31, 2000 of $757,000 is included in accounts
payable and other accrued liabilities in the consolidated balance sheets.
7. INCOME TAXES
Income tax expense (benefit) for the years ended December 31 is summarized as
follows (dollars in thousands):
<Table>
<Caption>
1999 2000
---- ----
Current tax expense:
Federal........................................... $ -- $ (18)
State............................................. -- (2)
---------- ----------
Total current................................... $ -- $ (20)
========== ===========
Deferred tax expense:
Federal........................................... $ 19 $ (25)
State............................................. 4 (4)
---------- ----------
Total deferred.................................. 23 (29)
---------- ----------
Total........................................ $ 23 $ (49)
========== ==========
</Table>
For the years ended December 31, 1999 and 2000, the provision for income taxes
differs from the amount of income tax determined by applying the applicable U.S.
statutory federal income tax rate to loss before income taxes as a result of the
following differences (dollars in thousands):
<Table>
<Caption>
1999 2000
------------------------ -------------------
Amount Percent Amount Percent
---------- ---------- ----------- ---------
Statutory U.S. tax rates.............................. $ (2,379) (34.00)% $ (13,751) (34.00)%
Statutory Foreign tax rates........................... -- -- (161) (0.40)
State tax, net of federal tax......................... (358) (5.12) 9 0.02
Meals and entertainment............................... 20 0.29 47 0.12
Key man life insurance................................ 4 0.06 5 0.01
Common stock expense.................................. 39 0.56 73 0.18
Valuation allowances.................................. 2,687 38.40 13,847 34.24
Other................................................. 10 0.14 (118) (0.29)
----------- ------ ------------ ------
Total.............................................. $ 23 0.33% $ (49) (0.12)%
=========== ====== ===== ======
</Table>
Deferred income tax assets and liabilities result from differences in the timing
of the recognition of revenue and expense for tax and financial statement
purposes. The realization of deferred tax assets is dependent upon generating
sufficient taxable income during future years when deductible temporary
differences reverse and net operating loss carryforwards are available to reduce
taxable income. At December 31, 2000, the Company has both federal and state net
operating losses of approximately $19.5 million. The federal and state net
operating losses will expire at various dates beginning in 2020 and 2015,
respectively. The Company has recorded a valuation allowance for all deferred
taxes generated.
The approximate tax effect of temporary differences and net operating loss
carryforwards that give rise to the Company's deferred income tax assets and
liabilities at December 31, 1999 and 2000 is as follows (dollars in thousands):
<Table>
<Caption>
1999 2000
---- ----
Cash to accrual adjustment (primary revenues recognized for tax
purposes but deferred for financial statements).............. $ 2,131 $ --
Deferred revenue................................................. -- 3,874
Stock options.................................................... -- 8,130
Other timing differences......................................... -- 816
Charitable contributions carryforward............................ -- 7
Foreign net operating losses..................................... -- 161
U.S. net operating loss carryforwards............................ 1,057 6,626
---------- ----------
Gross deferred tax assets.................................... 3,188 19,614
---------- ----------
Fixed assets..................................................... (21) (88)
Prepaid expenses................................................. -- (789)
Other timing differences......................................... -- (92)
Capital lease asset.............................................. (7) --
--------- ----------
Gross deferred tax liability................................. (28) (969)
---------
Less valuation allowances........................................ (3,188) (18,645)
--------- ---------
Net deferred tax (liability)..................................... $ (28) $ --
========= ==========
</Table>
8. EMPLOYEE BENEFIT PLAN
The Company has a Simplified Employee Pension Plan ("SEP") covering
substantially all full-time employees. The Company could make discretionary
contributions to each participant's account based upon a uniform percentage of
the participant's compensation at the lesser of 15% or $30,000. Participants
were immediately vested in the amount of the employer contributions and such
contributions were invested based on employee specified options. Company
contributions after fiscal 1999 are being made to the 401(k) plan discussed
below and all employee balances in the SEP will remain in this
plan and are not transferable to the 401(k) plan. Total expense under the SEP
was $400,000 and $914,000 in 1999 and 2000, respectively.
Effective January 1, 2000, the Company established a 401(k) plan in which all
employees who have met certain age and service requirements may participate.
Employees may participate in the 401(k) plan on the first day of the month
following their date of hire. Employee contributions are limited to a percentage
of their compensation and are matched 150% by the Company. Employer
contributions are quarterly and the participants vest immediately in such
contributions. In addition, the Company may make additional discretionary
contributions. Total expense under the 401(k) plan was $493,000 in 2000.
Effective January 1, 2001, the Company revised its 401(k) plan by reducing the
Company's match to 50% of the first 6% of base compensation contributed by
employees.
9. SHAREHOLDERS DEFICIENCY
EQUITY RESTRUCTURING. In May 1999, the Company's Board of Directors authorized
an equity restructuring whereby each share of its common stock was converted
into 56 shares of newly created cumulative Series A Redeemable Convertible
Preferred Stock ("Series A Preferred Stock") and 444 shares of common stock for
shareholders of record on May 13, 1999. The issuance of the Series A Preferred
Stock has been treated in the accompanying financial statements as a dividend to
the existing common shareholders at its fair value of $1.28 per share
($2,588,000). All common share and per share information in the accompanying
financial statements has been restated to give retroactive recognition to the
equity restructuring for all periods presented.
STOCK SPLITS. On December 23, 1999 the Company's Board of Directors authorized a
stock split payable in the form of a dividend of three shares of the Company's
common stock for each share of common stock owned by shareholders of record on
December 23, 1999. On February 22, 2000, the Company's Board of Directors
authorized a stock split payable in the form of a dividend of three shares of
the Company's Series A Preferred Stock for each share of Series A Preferred
Stock owned by shareholders of record on February 22, 2000. On August 9, 2000,
the Company's Board of Directors authorized a stock split payable in the form of
a dividend of three shares of the Company's common stock for every two shares of
common stock owned by shareholders of record on August 9, 2000. All share and
per share information in the accompanying financial statements has been restated
to give retroactive recognition to the stock splits for all periods presented.
REDEEMABLE CONVERTIBLE PREFERRED STOCK - SERIES A. Subsequent to the May 1999
equity restructuring, the Company sold 2,613,846 shares and its shareholders
sold 1,545,600 shares of the Series A Preferred Stock to a private investor for
aggregate cash consideration of $8,000,000 ($1.92 per share). The Company's net
proceeds from the sale totaled $4,673,000 (net of offering costs of $434,000).
Dividends on the Series A Preferred Stock accrue annually and are cumulative at
a rate of $0.13463 per share. Such dividends must be paid before any other
dividends can be declared or paid on any other class of preferred stock or on
any class of common stock. In the event of liquidation, each share of Series A
Preferred Stock shall be entitled to an amount equal to the original issue price
and all accrued but unpaid cumulative dividends.
The Series A Preferred Stock has voting rights equal to one and a half shares of
common stock, and at any time at the option of the holder, can be converted into
one and a half shares of the Company's common stock. The Series A Preferred
Stock is automatically converted in the event of a qualified initial public
offering ("IPO") that meets certain valuation requirements, or a date specified
by written consent of a majority of the holders of Series A Preferred Stock. In
addition, at the earlier of an IPO, sale of the Company or May 2004, the holders
of Series A Preferred Stock also have the right to all accrued but unpaid
cumulative dividends and an amount equal to the original Series A Preferred
Stock issue price ($8,000,000) as adjusted for any stock splits.
If the Company has not closed a qualified IPO by May 2004, the Series A
Preferred Stock is redeemable at the option of the holder. At the time of
redemption, the Company must pay to the holders of Series A Preferred Stock an
amount equal to the
original Series A Preferred Stock issue price, all accrued but unpaid cumulative
dividends, plus an amount equal to the fair market value of the common stock
into which the Series A Preferred Stock is convertible. The fair market value is
estimated to be $6.84 per share and $5.25 per share at December 31, 1999 and
2000, or $42.7 million and $32.8 million, respectively.
Using the interest method, the Company will ratably accrete dividends to holders
of Series A Preferred Stock over the five-year period to May 2004, based on the
most favorable potential outcome to the holders of Series A Preferred Stock of
either the redemption or conversion feature. At December 31, 1999 and 2000,
$11,398,000 and $17,874,000, respectively, has been accreted on a cumulative
basis as preferred stock dividends in the accompanying consolidated balance
sheet. These dividends increase the net loss attributable to common shareholders
in 1999 and 2000.
Following is a summary of the activity for Series A Preferred Stock during 1999
and 2000 (in thousands):
<Table>
<Caption>
SHARES AMOUNT
Equity restructuring............................................. 1,345 $ 2,588
Preferred stock awards........................................... 200 384
Sale of Series A Preferred Stock (net of $434 of costs and $80
warrants): 2,614 4,593
Accretion of Series A Preferred Stock redemption feature......... -- 11,398
----- --------
Balance December 31, 1999........................................ 4,159 18,963
Accretion of Series A Preferred Stock redemption feature......... -- 6,476
----- --------
Balance at December 31, 2000..................................... 4,159 $ 25,439
======== ========
</Table>
See Note 12 for discussion of Series C Preferred Stock issuance in May 2001 and
the effects of such issuance on the Series A Preferred Stock.
REDEEMABLE CONVERTIBLE PREFERRED STOCK -- SERIES B. On April 7, 2000, the
Company completed the sale of 2,572,376 shares of Series B Preferred Stock to a
group of financial investors for cash consideration of $30,920,000 ($12.02 per
share). The Company's net proceeds from the sale totaled $28,855,000 (net of
offering costs of $2,065,000). The offering costs are being accreted against
accumulated deficit in the accompanying consolidated balance sheets over the
period to redemption. For the period ended December 31, 2000, the Company
recorded accretion totaling $357,000 related to the Series B Preferred Stock
offering costs.
Each share of Series B Preferred Stock is convertible into one and a half shares
of common stock (subject to certain adjustments in the event of certain future
share issuances). Other rights and preferences of the shares of Series B
Preferred Stock include a liquidation preference and a right to participate in
future equity offerings. The holders of the Series B Preferred Stock are
entitled to receive noncumulative dividends in preference to any dividends on
the common stock at the rate of $.8414 per share per annum, when and as declared
by the Board of Directors. The Series B Preferred Stock shall be redeemed upon
45 days prior notice from the holders of a majority of the Series B Preferred
Stock to the Company, at any time after May 13, 2004. The redemption price shall
equal the original purchase price per share paid, plus any declared but unpaid
dividends. The Series B Preferred Stockholders have voting rights equal to one
and a half shares of common stock. The Series B Preferred Stockholders shall
also have the right to appoint one director to the Company's Board of Directors.
The Series B Preferred Stock agreements provide that if the offering price of an
IPO does not exceed a specified price per share, the price on which the
conversion of the outstanding Preferred Stock into common stock is based will
decrease and, as a result, the holders of Series B Preferred Stock will be
entitled to additional shares of common stock.
See Note 12 for discussion of Series C Preferred Stock issuance in May 2001 and
the effects of such issuance on the Series B Preferred Stock.
STOCK CONTRIBUTION. During 1999, three shareholders returned 299,700 shares of
common stock to the Company that were then granted as stock awards to certain
employees.
STOCK OPTIONS. In December 1999, the Company granted 2,377,620 stock options to
certain employees. These options have an exercise price of $0.0022 per share,
cliff vest and become exercisable 60 months from the date of grant, and expire
10 years from the date of grant. The common stock had a fair market value at the
date of grant of $6.84 per share. These options vest immediately upon the
occurrence of an IPO, and the entire unvested portion (approximately $11,683,000
at December 31, 2000) would be expensed at the effective date of an IPO. No
other options were granted in 1999.
1999 EQUITY COMPENSATION PLAN. In December 1999, the 1999 Equity Compensation
Plan (the "1999 Equity Plan") was adopted by the Board of Directors and received
stockholder approval. A total of 5,325,000 shares of common stock have been
reserved for issuance under the 1999 Equity Plan. Under the terms of the 1999
Equity Plan, the Company is authorized to grant incentive stock options as
defined under the Internal Revenue Code, non-qualified stock options and
restricted stock awards to employees, officers, directors, and consultants of
the Company. The 1999 Equity Plan is administered by a Board of Directors
committee. The committee selects the individuals to whom awards will be granted
and determines the award exercise price and other terms of each award, subject
to the provisions of the 1999 Equity Plan. Options granted under the 1999 Equity
Plan will expire on a date determined by the committee, not to exceed 10 years.
During 2000, the Company granted nonqualified stock options under the 1999
Equity Plan to substantially all employees to purchase an aggregate of 5,390,750
shares of the Company's common stock at a weighted average price of $2.36 per
share. These options generally vest from three to four years from each
respective employee's initial employment date; however, certain of the options
have acceleration clauses triggered by a liquidity event (e.g. an initial public
offering) or attainment of certain performance measures.
During 2000, the Company granted 212,850 stock options under the 1999 Equity
Plan to non-employee contractors. These options vest ratably over three to four
years and have a weighted average exercise price of $1.53 per share. Such
options have been accounted for under the provisions of SFAS 123 and EITF 96-18
by applying the Black-Scholes method using the assumptions as of December 31,
2000 described below, and will be periodically remeasured over the vesting
period. In 2000, $1,117,000 was recorded as compensation expense related to
these options.
2000 EQUITY COMPENSATION PLAN. In August 2000, the 2000 Equity Compensation Plan
(the "2000 Equity Plan") was adopted by the Board of Directors and received
shareholder approval. A total of 3,750,000 shares of common stock have been
reserved for issuance under the 2000 Equity Plan. Under the terms of the 2000
Equity Plan, the Company is authorized to grant both incentive stock options
that qualify under the Internal Revenue Code and nonqualified stock options.
Incentive stock options can only be granted to the Company's employees and
nonqualified stock options to employees, officers, directors, consultants and
advisors. The committee selects the individuals to whom awards will be granted
and determines the award exercise price and other terms of each award, subject
to the provisions of the 2000 Equity Plan. Options granted under the 2000 Equity
Plan will expire on a date determined by the committee, not to exceed 10 years.
See Note 12 for discussion of the increase in the authorized number of shares
reserved for issuance under the 2000 Equity Plan.
During 2000, the Company granted nonqualified stock options under the 2000
Equity Plan to employees to purchase an aggregate of 870,800 shares of the
Company's common stock at a weighted average price of $6.99 per share. These
options vest over four years from each respective employee's initial employment
date.
During 2000, the Company granted 41,100 stock options under the 2000 Equity Plan
to non-employee contractors. These options vest ratably over four years and have
a weighted average exercise price of $7.00 per share. Such options have been
accounted for under the provisions of SFAS 123 and EITF 96-18 by applying the
Black-Scholes method using the assumptions as of December 31, 2000 described
below, and will be periodically re-measured over the vesting period. In 2000,
$30,000 was recorded as compensation expense related to these options.
2000 NON-EMPLOYEE DIRECTORS PLAN. In June 2000, the 2000 Non-Employee Directors
Stock Option Plan (the "2000 Non-Employee Directors Plan") was adopted by the
Board of Directors and received shareholder approval. A total of 180,000 shares
of common stock have been authorized for issuance under this plan. Of the shares
reserved for issuance, 60,000 remain available for future issuance as of
December 31, 2000.
The 2000 Non-Employee Directors Plan is administered by the compensation
committee of the Board of Directors. Each member of the Board of Directors who
is not an employee of the Company and who is not affiliated with an entity that
has invested in the Company will receive stock options under the 2000
Non-Employee Directors Plan. Each person who was or became a non-employee
director on the effective date of the 2000 Non-Employee Directors Plan was
automatically granted on the effective date one option to purchase 45,000 shares
of common stock and a second option to purchase 15,000 shares of common stock.
Each person who becomes a non-employee director after the effective date of the
2000 Non-Employee Directors Plan will be automatically granted on the date he
first becomes a non-employee director one option to purchase 45,000 shares of
common stock and a second option to purchase 15,000 shares of common stock. In
addition, on the date of each annual shareholders meeting, each person who is
re-elected as a non-employee director on that date will be automatically granted
an option to purchase 15,000 shares of common stock. All stock options granted
under the 2000 Non-Employee Directors Plan will be nonqualified stock options.
During 2000, the Company granted options to directors to purchase 120,000 shares
at a weighted average price of $5.83 per share. These options vest over a period
from one to three years from the grant date and have acceleration clauses
triggered by a liquidity event (e.g. an initial public offering) or change in
control. Options granted under the 2000 Non-Employee Directors Plan shall expire
upon the ten-year anniversary of the grant date of the option.
The Company applies Accounting Principles Board Opinion 25 in accounting for its
stock option plans. Accordingly, compensation expense has been computed for
stock-based compensation for the difference between fair market value of the
stock at the date of grant and the exercise price of the option. Total expense
relating to the stock option grants under this plan for the year ended December
31, 2000 was $76,000.
A summary of the Company's stock options as of December 31, 1999 and 2000, and
changes during the years then ended, are presented below:
<Table>
<Caption>
WEIGHTED-AVERAGE
NUMBER OF EXERCISE PRICE
OPTIONS
Balance December 31, 1998............................. -- $ --
Options granted at less than fair value........... 2,377,620 0.0022
Options exercised................................. -- --
Options forfeited................................. -- --
-----------
Balance December 31, 1999............................. 2,377,620 0.0022
Options granted at less than fair value........... 5,622,550 2.31
Options granted at fair value..................... 1,012,950 7.05
Options exercised................................. (67,500) 0.19
Options forfeited................................. (733,550) 4.08
--------
Balance December 31, 2000............................. 8,212,070 2.05
=========
</Table>
The Company had no exercisable options outstanding at December 31, 1999.
The following table summarizes information about the stock options outstanding
at December 31, 2000:
<Table>
<Caption>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
WEIGHTED-AVERAGE
REMAINING WEIGHTED-AVERAGE WEIGHTED-AVERAGE
CONTRACUTAL EXERCISE EXERCISE
EXERCISE NUMBER OF LIFE (YEARS) PRICE NUMBER OF PRICE
----------------- -------------- -----------
PRICE OPTIONS OPTIONS
$ 0.002 2,377,620 8.98 $ 0.002 -- N/A
0.007 405,000 9.24 0.007 337,500 0.007
0.140-0.260 442,500 9.24 0.224 355,000 0.216
0.327-0.500 511,500 9.24 0.428 248,750 0.411
0.647-0.793 82,500 9.24 0.687 15,000 0.702
0.933-1.227 1,311,750 9.24 1.015 397,313 0.996
3.000-3.333 465,500 9.52 3.072 14,250 3.309
4.000 691,650 9.24 4.000 304,352 4.000
4.667-4.670 885,800 9.60 4.667 565 4.667
5.333 127,500 9.61 5.333 -- N/A
7.000 910,750 9.81 7.000 250 7.000
----------- ---
8,212,070 1,672,980
========= =========
</Table>
The Company has computed the pro forma disclosures required under SFAS No. 123
for stock and option grants during the years ended December 31, 1999 and 2000
using the Black-Scholes option pricing model prescribed by SFAS No. 123, using
the following assumptions:
<Table>
<Caption>
1999 2000
------------ ----------
Expected option lives............................... 5 years 1 - 5 years
Risk-free interest rate............................. 6.25% 5.06%
Fair value of options granted....................... $ 10.26 $2.94 -9.26
Expected volatility................................. 0.00% 140.00%
Assumed dividend rate............................... 0.00% 0.00%
</Table>
If compensation cost had been determined for stock and option grants to
employees based on the provisions of SFAS No. 123, the Company's net loss and
net loss per share for the years ended December 31, 1999 and 2000 would have
changed to the pro forma net loss amounts indicated below (dollars in thousands,
except per share data):
<Table>
<Caption>
1999 2000
------------ ----------
Net loss attributable to common shareholders:
As reported......................................................... $ (18,420) $ (47,766)
Pro forma........................................................... $ (18,566) $ (50,038)
Basic and diluted net loss per share attributable to common shareholders:
As reported......................................................... $(1.15) $(2.98)
Pro forma........................................................... $(1.16) $(3.12)
</Table>
STOCK AWARDS. In 1999, the Company awarded common and Series A preferred stock
to certain employees of the Company. Total compensation expense related to these
awards for the years ended December 31, 1999 and 2000 was approximately $501,000
and $215,000, respectively.
COMMON STOCK WARRANT. In connection with the issuance of the Series A preferred
stock in May 1999, the Company issued to a financial broker for services
rendered, warrants to purchase 187,173 shares of common stock at $0.80 per
share. The warrants vested immediately and expire in May 2004. The estimated
fair value of the warrants at the time of issuance, based on the fair value of
the services received, was $80,000, and has been reflected as a deduction from
the
preferred stock offering proceeds in the accompanying consolidated balance
sheet. As of December 31, 2000, these warrants were outstanding and exercisable
in full.
10. CONTINGENCIES
The Company is subject to legal proceedings and claims that have arisen in the
ordinary course of its business and have not been finally adjudicated. In
management's opinion, the ultimate resolution of these matters will have no
material effect on the Company's results of operations or financial condition.
11. RELATED PARTY TRANSACTIONS
During 1999, the Company paid withholding taxes relating to preferred stock
awards on behalf of two shareholders, and recorded employee receivables of
$127,000 in the accompanying financial statements at December 31, 1999. These
amounts were repaid to the Company in March 2000. The Company has a formal
agreement to indemnify these shareholders against certain potential liabilities
relating to these stock awards up to $1,000,000.
The investor that purchased all of the Company's Series A Preferred Stock in May
1999, also purchased 415,974 shares of the Series B Preferred Stock. This
investor committed to purchase $2 million of the Company's Series C Preferred
Stock (see Note 12) within 270 days of May 3, 2001. One of the Company's
directors is a general partner with this investor.
Another investor purchased 831,946 shares of the Series B Preferred Stock. This
investor purchased $2 million of the Company's Series C Preferred Stock on May
3, 2001 (see Note 12). One of the Company's directors is a principal with this
investor.
Another investor purchased $15 million of the Company's Series C Preferred Stock
on May 3, 2001, as well as committed to purchase an additional $5 million of the
Company's Series C Preferred Stock within 45 days of May 3, 2001 (see Note 12).
A partner with this investor became a director of the Company in May 2001.
During 2000, the Company entered into a consulting agreement with a corporation
to provide various services. Under the terms of the agreement, the Company will
pay $7,500 per quarter to the corporation. The term of the agreement is one year
and is renewable at the option of the Company. One of the Company's directors is
the President and owner of this Corporation.
12. SUBSEQUENT EVENTS
REDEEMABLE CONVERTIBLE PREFERRED STOCK - SERIES C. On May 3, 2001, the Company
completed the sale of 58,584,328 shares of its Series C Preferred Stock to two
investors for cash consideration of $17 million. In addition, the Company
received a commitment from one of the investors to fund an additional $5 million
within 45 days of May 3, 2001, as well as a commitment from a different investor
to fund an additional $2 million within 270 days of May 3, 2001. These
commitments are on terms identical to the initial funding of $17 million and are
reduced to the extent the Company raises such amounts from other investors prior
to the dates noted above.
The Series C Preferred Stock has voting rights equal to one share of common
stock and is currently convertible into one share of common stock, subject to
certain adjustments in the event of certain future stock issuances. Other rights
and preferences of the shares of Series C Preferred Stock include liquidation
and redemption preferences. The holders of the Series C Preferred Stock are
entitled to participate on an as converted basis in any dividend declared on
Common Stock. The Series C Preferred Stock is redeemable upon 45 days prior
notice to the Company from the holders of a majority of the Series C Preferred
Stock, at any time after May 13, 2005. The redemption price shall equal the
original purchase price per share paid, all accrued but unpaid cumulative
dividends, plus an amount that when taken together with the above payments shall
equal 8% per annum, compounded annually, and prorated for any partial year, of
the original purchase price, for the period from May 3, 2001 to the date the
redemption payment is made.
In connection with the Series C Preferred Stock issuance, the Board of Directors
was increased from seven to nine. The holders of Common stock, Series A
Preferred Stock, Series B Preferred Stock and Series C Preferred Stock have the
right to designate three, one, one and two directors, respectively. In addition,
all stockholders voting as a single class will elect two directors.
In addition, the terms of the Series A Preferred Stock and Series B Preferred
Stock were amended and the conversion ratios were adjusted so that each share of
Series A Preferred Stock converts into 4.831767 shares of common stock and each
share of Series B Preferred Stock converts into 21.521934 shares of common
stock. Also, the redemption date for the Series A Preferred Stock and Series B
Preferred Stock changed to May 13, 2005 from May 13, 2004.
2000 EQUITY COMPENSATION PLAN. On May 3, 2001, the Board of Directors amended
the 2000 Equity Compensation Plan to increase the number of shares of Common
Stock available for issuance thereunder to 35,544,744. This amendment was
approved by the Company's stockholders on May 3, 2001.
13. COST OF REVENUES (unaudited)
The Company has not historically maintained separate records for the costs of
providing software licenses, customization, implementation, professional
services and maintenance. Therefore, amounts are not presented for the cost of
software licenses, customization and implementation, separately from the cost of
providing professional services and maintenance in the accompanying consolidated
statements of operations. The Company began capturing this information
separately as of July 1, 2000
Cost of revenues for the six months ended December 31, 2000 is summarized as
follows (dollars in thousands):
<Table>
<Caption>
SIX MONTHS ENDED
DECEMBER 31,
2000
Cost of software licenses, customization and implementation
revenues................................................. $ 2,647
Cost of professional services and maintenance revenues....... 1,341
---------------
$ 3,988
===============
</Table>