SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
Current Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): May 25, 2001
EMERGISOFT HOLDING, INC.
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(Exact name of registrant as specified in its charter)
NEVADA
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(State or other jurisdiction of incorporation)
33-30743 84-1121360
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(Commission File Number) (IRS Employer Identification No.)
2225 Avenue J
Arlington, Texas 76006
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(Address of principal executive offices) (Zip code)
(Registrant's telephone number, including area code): (817) 633-6665
N/A
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(Former name or former address, if changed since last report)
ITEM 1. Changes in Control of Registrant
On May 25, 2001, Emergisoft Holding, Inc., a Nevada corporation
formerly known as Pierce International Discovery, Inc. ("Emergisoft Nevada"),
acquired Emergisoft Holding, Inc., a Delaware corporation ("Emergisoft
Delaware"), a leader in the design and implementation of clinical patient
management systems for hospital emergency department automation across the
United States. The acquisition was effectuated pursuant to an Agreement and Plan
of Merger, dated March 28, 2001 (the "Merger Agreement"), by and among
Emergisoft Nevada, EMS Acquisition Corp. ("EMS"), a wholly-owned subsidiary of
Emergisoft Nevada, and Emergisoft Delaware. In the merger, EMS was merged with
and into Emergisoft Delaware with Emergisoft Delaware surviving the merger as a
wholly-owned subsidiary of Emergisoft Nevada.
Pursuant to the Merger Agreement, Emergisoft Nevada issued one share of
Emergisoft Nevada common stock for each one share of Emergisoft Delaware common
stock outstanding immediately prior to the close of the transaction, or a total
of 46,235,085 shares. In addition, Emergisoft Nevada assumed all Emergisoft
Delaware stock options, notes and warrants outstanding at the effective time of
the merger. The transaction is intended to be treated as a tax-free
reorganization within the meaning of Section 368(a) of the Internal Revenue Code
of 1986, as amended. The transaction will be accounted for as a recapitalization
of Emergisoft Delaware and the historical financial statements of Emergisoft
Delaware will become the financial statements of the registrant.
Emergisoft Nevada changed its name to Emergisoft Holding, Inc. in
connection with the merger and 23,364,275 shares of Emergisoft Nevada common
stock, held by a single individual, were canceled, leaving a total of 48,873,818
shares issued and outstanding. The former stockholders of Emergisoft Delaware
currently own approximately 94.60% of the outstanding equity interests and
voting rights of Emergisoft Nevada.
The terms of the Merger Agreement were determined on the basis of
arms-length negotiations. Prior to the execution of the Merger Agreement,
neither Emergisoft Nevada nor any of its affiliates had any material
relationship with Emergisoft Delaware or its stockholders.
As a result of the merger, Richard Manley was appointed the new
President, CEO and a director of Emergisoft Nevada. Lionel L. Drage resigned
from these positions with the parent company upon Mr. Manley's appointment.
Mr. Manley has appointed Dan Witte, James L. Williams, Ron Hellstern, Kenna
Bridgmon, and Joe Eppes as officers and Dan Witte, Ron Hellstern, Kenna
Bridgmon, Ash Huzenlaub, Jason Sear, and Cameron Ware as additional directors.
Messrs. Manley, Witte, Williams, Hellstern, Eppes, Ware, Sear and Huzenlaub and
Ms. Bridgmon will serve until their respective successors are elected and
qualified.
ITEM 2. Acquisition or Disposition of Assets
See Item 1. above.
ITEM 4. Changes in Registrant's Certifying Accountant
Prior to the merger referred to in Item 1. above, Crouch, Bierwolf and
Associates was the principal accountant for Emergisoft Nevada. Immediately
following the effective time of the merger, the Board of Directors approved the
engagement of the firm of Ernst and Young LLP to replace Crouch, Bierwolf and
Associates.
In connection with the audits of Emergisoft Nevada's financial
statements for the previous fiscal years ended June 30, 2000 and 1999, and
during the subsequent interim period from June 30, 2000 through May 25, 2001,
there were no disagreements with Crouch, Bierwolf and Associates on any matter
of accounting principles or practices, financial statement disclosure, or
auditing scope or procedures, which disagreements if not resolved to their
satisfaction would have caused them to make reference in connection with their
opinion to the subject matter of the disagreement, and said firm has not advised
the registrant of any reportable events.
The accountant's reports of Crouch, Bierwolf and Associates on the
financial statements of Emergisoft Nevada as of June 30, 2000 and 1999 did not
contain any adverse opinion or disclaimer of opinion, nor were they qualified as
to audit scope, or accounting principles; however, such reports were qualified
as to the uncertainty that Emergisoft Nevada would continue as a going concern.
ITEM 7. Financial Statements, Pro Forma Financial Information and Exhibits
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(a) Report of Independent Auditors of Emergisoft Delaware
Consolidated Balance Sheet of Emergisoft Delaware for the Year
Ended December 31, 2000.
Consolidated Statements of Operations of Emergisoft Delaware
for the Years Ended December 31, 2000 and 1999.
Consolidated Statements of Stockholders' Equity (Deficit) of
Emergisoft Delaware for the Years Ended December 31, 2000 and
1999.
Consolidated Statements of Cash Flows of Emergisoft Delaware
for the Years Ended December 31, 2000 and 1999.
Notes to Consolidated Financial Statements of Emergisoft
Delaware for the Years Ended December 31, 2000 and 1999.
As of the date of the filing of this Current Report on Form
8-K, it is impracticable for the Registrant to provide all of
the financial statements required by this Item 7(a). In
accordance with Item 7(a)(4) of Form 8-K, such financial
statements shall be filed by amendment to this Form 8-K no
later than sixty (60) days after June 4, 2001.
(b) Pro Forma Financial Information.
Pro Forma Financial Information will not be required as the
historical financial statements of Emergisoft Delaware will
become the financial statements of the registrant. The
historical financial statements included herein provide
adequate disclosure regarding the capital structure of the
merged company.
(c) Exhibits
Exhibit
Number Description
2.1* Agreement and Plan of Merger, dated as of March 28,
2001, among Pierce International Discovery, Inc., EMS
Acquisition Corp. and Emergisoft Holding, Inc.
16.1 Letter on Change in Accountants
99 Press Release dated May 25, 2001 issued by the
registrant.
* The exhibits and schedules to this agreement were omitted from the
agreement by registrant. Registrant agrees to furnish any exhibit or
schedule to this agreement supplementally to the Securities and
Exchange Commission upon written request.
ITEM 8. Change in Fiscal Year
Immediately following the effective time of the merger referred to in
Item 1. above, the Board of Directors of Emergisoft Nevada determined to change
the fiscal year of Emergisoft Nevada to the calendar year, to correspond with
the fiscal year of Emergisoft Delaware. No transition report will be filed as
the historical financial statements of Emergisoft Delaware will become the
financial statements of the registrant.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: June 4, 2001 EMERGISOFT HOLDING, INC.
(Registrant)
By: /s/ Richard Manley
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Richard Manley, Chairman of the Board,
Chief Executive Officer and President
CONSOLIDATED FINANCIAL STATEMENTS
Emergisoft Holding, Inc. and Subsidiary
Years ended December 31, 2000 and 1999
Emergisoft Holding, Inc. and Subsidiary
Consolidated Financial Statements
Years ended December 31, 2000 and 1999
Contents
Report of Independent Auditors............................................. 1
Audited Consolidated Financial Statements
Consolidated Balance Sheet................................................. 2
Consolidated Statements of Operations...................................... 3
Consolidated Statements of Stockholders' Equity (Deficit).................. 4
Consolidated Statements of Cash Flows...................................... 5
Notes to Consolidated Financial Statements................................. 6
Report of Independent Auditors
The Board of Directors
Emergisoft Holding, Inc.
We have audited the accompanying consolidated balance sheet of Emergisoft
Holding, Inc. and subsidiary as of December 31, 2000, and the related
consolidated statements of operations, stockholders' equity (deficit), 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. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Emergisoft
Holding, Inc. and subsidiary at December 31, 2000, and the consolidated results
of their operations and their 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.
/s/ ERNST AND YOUNG LLP
Dallas, Texas
April 30, 2001
Emergisoft Holding, Inc. and Subsidiary
Consolidated Balance Sheet
December 31, 2000
Assets
Current assets:
Cash and cash equivalents $ 3,415,040
Trade accounts receivable, net of allowance for doubtful
accounts of $11,290 100,839
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Total current assets 3,515,879
Equipment and fixtures, net 24,640
Other assets 32,127
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Total assets $ 3,572,646
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Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 832,843
Deferred revenue 111,717
Notes payable - current 367,088
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Total current liabilities 1,311,648
Notes payable - long-term 35,560
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Total liabilities 1,347,208
Commitments and contingencies
Stockholders' equity:
Common Stock, $0.001 par value, 100,000,000 shares authorized, 45,386,405
shares issued and outstanding 45,386
Additional capital 16,736,609
Deferred compensation (1,106,344)
Accumulated deficit (13,450,213)
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Total stockholders' equity 2,225,438
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Total liabilities and stockholders' equity $ 3,572,646
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See accompanying notes.
Emergisoft Holding, Inc. and Subsidiary
Consolidated Statements of Operations
Year ended December 31
2000 1999
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Revenue $ 920,428 $ 1,416,402
Operating expenses:
Cost of revenue 184,268 565,262
General and administrative 6,390,406 3,379,935
Product development 2,500,311 405,075
Legal settlements - 302,686
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Total operating expenses 9,074,985 4,652,958
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Loss from operations (8,154,557) (3,236,556)
Interest expense, net 250,988 61,803
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Net loss $ (8,405,545) $ (3,298,359)
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See accompanying notes.
Emergisoft Holding, Inc. and Subsidiary
Consolidated Statements of Stockholders' Equity (Deficit)
Common Stock Additional Deferred Accumulated
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Shares Par Value Capital Compensation Deficit Total
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Balance at January 1, 1999 1,711,570 $1,712 $1,785,129 $(1,042,736) $(1,746,309) $(1,002,204)
Common stock issued in private placement 1,975,147 1,975 817,622 - - 819,597
Common stock issued to employee at below fair
value 1,609,725 1,610 635,697 - - 637,307
Common stock issued to related party at below
fair value 1,609,725 1,610 635,697 - - 637,307
Common stock issued to vendor for services 45,000 45 17,955 - - 18,000
Common stock issued upon exercise of employee
options 187,500 187 11,063 - - 11,250
Common stock issued upon exercise of
vendor options 75,812 76 37,420 - - 37,496
Common stock issued upon exercise of preemptive
rights 30,550 30 1,189 - 1,219
Stock options issued to vendors for services - - 31,536 - - 31,536
Value of warrants granted with convertible note - - 130,000 - - 130,000
Deferred compensation related to stock options - - (475,954) 475,954 - -
Amortization of deferred compensation - - - 112,929 - 112,929
Net loss - - - - (3,298,359) (3,298,359)
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Balance at December 31, 1999 7,245,029 7,245 3,627,354 (453,853) (5,044,668) (1,863,922)
Common stock issued in private placements 20,437,237 20,437 6,900,095 - - 6,920,532
Common stock issued to vendors for goods and
services 9,292,692 9,293 4,173,218 - - 4,182,511
Common stock issued to related party pursuant to
antidilution protection 6,880,479 6,880 (6,880) - - -
Common stock issued upon conversion of
convertible notes and advances from
stockholders 1,314,376 1,314 340,548 - - 341,862
Value of warrants granted with convertible note - - 54,942 - - 54,942
Stock options issued to vendors for services - - 42,294 - - 42,294
Common stock issued for exercise of preemptive
rights 216,592 217 142,767 - - 142,984
Deferred compensation related to stock options - - 1,462,271 (1,462,271) - -
Amortization of deferred compensation - - - 809,780 - 809,780
Net loss - - - - (8,405,545) (8,405,545)
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Balance at December 31, 2000 45,386,405 $45,386 $ 16,736,609 $(1,106,344) $ (13,450,213) $2,225,438
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See accompanying notes.
Emergisoft Holding, Inc. and Subsidiary
Consolidated Statements of Cash Flows
Year ended December 31
2000 1999
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Operating Activities
Net loss $ (8,405,545) $ (3,298,359)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 331,495 234,374
Amortization of deferred compensation 809,780 112,929
Stock-based expenses for equity issued to vendors for
services 4,087,266 65,457
Stock-based expenses for common stock issued to
employees and related parties at below fair value - 1,094,614
Legal settlements - 302,686
Changes in assets and liabilities:
Accounts receivable 82,406 99,909
Other assets (9,846) (14,100)
Deferred revenue (644,108) 69,749
Accounts payable and accrued expenses 333,254 322,967
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Net cash used in operating activities (3,415,298) (1,009,774)
Investing Activity
Purchase of equipment and fixtures (44,201) (36,568)
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Cash used in investing activity (44,201) (36,568)
Financing Activities
Proceeds from notes payable 100,000 100,000
Repayment of notes payable and line of credit (295,848) (113,499)
Advances from stockholders - 156,920
Proceeds from issuance of common stock and exercise of options 7,063,516 908,642
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Net cash provided by financing activities 6,867,668 1,052,063
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Net increase in cash and cash equivalents 3,408,169 5,721
Cash and cash equivalents, beginning of year 6,871 1,150
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Cash and cash equivalents, end of year $ 3,415,040 $ 6,871
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Supplemental cash flow information:
Cash paid for interest $ 22,730 $ 56,690
Non-cash activities:
Exchange of note payable for legal settlement - 302,686
Exchange of common stock for advances from stockholders 156,920 125,000
Deferred stock-based compensation 1,462,271 (475,954)
Additional capital recorded for fair value of warrants issued
to convertible noteholders 54,942 130,000
Exchange of common stock for account payable to officer 137,539 -
Stock-based expenses for equity issued to vendors for services 4,087,266 65,457
Exchange of common stock for note payable 184,942 -
See accompanying notes.
Emergisoft Holding, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Years ended December 31, 2000 and 1999
1. Organization, Operations, and Liquidity
Emergisoft Holding, Inc. (Holding) was incorporated in the State of Delaware in
May 1998 as Array Systems Holding, Inc. and, in March 2000, changed its name to
Emergisoft Holding, Inc. Also in May 1998, Holding acquired all of the common
stock of its wholly owned operating subsidiary, Emergisoft Corporation
(Emergisoft, formerly Array Systems Corporation). Emergisoft has been in
operation since 1992. Unless otherwise noted, Holding and Emergisoft are
collectively referred to as the Company. The accompanying consolidated financial
statements include the accounts of Holding and its wholly owned subsidiary. All
significant intercompany transactions and accounts have been eliminated. The
Company's software products have been used to replace handwritten charts in a
hospital emergency room environment. The Company's new product, CareLync ED, is
scheduled for general release in the second quarter of 2001.
The Company has sustained losses for each of the two years in the period ended
December 31, 2000, and has an accumulated deficit of approximately $13.5 million
at December 31, 2000. In addition, the Company is in default on certain of its
notes payable. The Company faces a number of risks and uncertainties regarding
its business, including, among other factors, pending litigation affecting its
right to sell its current product and service offering, market demand and
acceptance of its new product and service offerings, the effects of
technological changes, and the development of new products. The Company
anticipates that it will continue to experience negative cash flow as it
continues to incur significant operating costs in connection with the continued
development of product and service offerings and efforts to expand its market.
In March 2000, the Company began its efforts to raise additional capital through
private offerings of its common stock. During 2000, the Company issued
approximately 20.4 million shares of its common stock and raised approximately
$6.9 million in private offerings. In April 2001, the Company obtained from two
related parties financial commitments totaling $1,500,000. Under the terms of
these commitments, the financing can be obtained through the execution of
promissory notes or through the sale of shares of common stock of the Company at
$0.253 per share. The financial commitments from these two related parties
expire on April 30, 2002, unless the commitments are extended by the related
parties.
There is no assurance that adequate financing will be available to or sufficient
revenues will be generated by the Company. Insufficient funds from operations or
the inability to obtain adequate financing would have a material adverse effect
on the Company.
Emergisoft Holding, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
2. Summary of Significant Accounting Policies
Cash Equivalents
The Company considers all highly liquid investments and time deposits with
original maturities of three months or less when purchased to be cash
equivalents.
Equipment and Fixtures
Equipment and fixtures are recorded at cost with depreciation and amortization
provided on a straight-line basis over the estimated useful lives of the assets.
Expenditures for maintenance and repairs, as well as minor renewals, are charged
to operations as incurred. Upon retirement or sale of the asset, the cost of the
asset and the related accumulated depreciation are removed from the respective
accounts and any resulting gain or loss is included in operations.
Revenue Recognition
Revenues since the Company's inception have been derived from the sale of
software licenses, maintenance fees, and sales of computer hardware.
Revenue for software sales is recognized in accordance with the provisions of
American Institute of Certified Public Accountants' Statement of Position (SOP)
97-2, Software Revenue Recognition. Under SOP 97-2, software sales are
recognized upon execution of a contract and delivery of software, provided that
the license fee is fixed and determinable, no significant production
modification or customization of the software is required, and collection is
considered probable by management. In the event that the Company has been
contracted to install a combination of hardware and software, revenue for
hardware and software sales is deferred until installation is complete. The
costs of the hardware installed are also deferred until installation is
complete. The Company provides maintenance services in the form of telephone
customer and technical support and software upgrades on its software products as
an accommodation to purchasers of these products and as a means of fostering
customer satisfaction. Maintenance revenue is recognized over the term of the
maintenance contract, generally four years.
2. Summary of Significant Accounting Policies (continued)
Deferred Revenue
Deferred revenue represents amounts billed to customers under terms specified in
software licensing, hardware, and maintenance contracts for which completion of
contractual terms or delivery of the software has not occurred.
Product Development Costs
Product development costs are expensed as incurred and relate primarily to the
development of new products and the ongoing maintenance of existing products.
Software development costs are expensed as incurred until technological
feasibility has been established, at which time such costs are capitalized until
the point at which the product is available for general release to customers.
Since the Company's inception, the establishment of technological feasibility of
the products and the general release of such software have substantially
coincided. As a result, software development costs qualifying for capitalization
have been insignificant and, therefore, the Company has historically expensed
all software development costs as the costs are incurred.
General and Administrative Expenses
General and administrative expenses represent all corporate and general support
costs, including personnel, outside vendor services, and other overhead costs.
Advertising
Advertising expense is comprised of media, agency, and production expenses.
Advertising costs are expensed as incurred and totaled approximately $61,000 and
$10,000 in 2000 and 1999, respectively.
Federal Income Taxes
The Company records deferred taxes for the tax effect of differences between the
financial reporting bases and the income tax bases of the Company's assets and
liabilities. A valuation allowance is provided for a portion or all of the
deferred tax assets when realization is not reasonably assured.
2. Summary of Significant Accounting Policies (continued)
Stock-Based Compensation
The Company accounts for employee stock options in accordance with Accounting
Principles Board Opinion No. 25 (APB 25), Accounting for Stock Issued to
Employees. Under APB 25, the Company recognizes no compensation expense related
to employee stock options unless such options have been granted with exercise
prices at less than the fair market value of the stock on the date of grant, as
determined by the Board of Directors. The Company provides the supplemental
disclosures required by Financial Accounting Standard No. 123 (FAS 123),
Accounting for Stock-Based Compensation, which assumes the recognition of
compensation expense based on the fair value of options on the grant date. The
Company follows the provisions of FAS 123 and Emerging Issues Task Force No.
96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees
for Acquiring or in Connection with Selling Goods or Services, for equity
instruments granted to non-employees. The Company recorded charges of $4,897,046
and $1,273,000 in 2000 and 1999, respectively, relating to equity issued to
vendors for services, equity issued to employees below fair market value, and
the amortization of deferred compensation for options granted to employees. For
the 2000 charges, $4,502,220 is included in general and administrative expense
and $394,826 is included in product development expense. All 1999 charges are
included in general and administrative expense.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and footnotes thereto.
Actual results may differ from those estimates.
3. Equipment and Fixtures
Equipment and fixtures consisted of the following at December 31, 2000:
Depreciable Life
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Office computer equipment 5 years $ 804,489
Furniture, fixtures, and other office equipment 5 - 7 years 65,077
Vehicles 5 years 32,911
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902,477
Less accumulated depreciation and amortization
(877,837)
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Equipment and fixtures, net $ 24,640
=====================
4. Advances from Stockholders and Convertible Debt
During 1999, stockholders advanced $156,920 to the Company for working capital
purposes. The advances were non-interest-bearing and were to be paid when cash
was available or could be converted to common stock at the stockholders' option.
In 2000, the advances were converted to common stock at a conversion rate of
$0.40 per share.
5. Notes Payable
The Company's notes payable consist of the following at December 31, 2000:
Term note payable for legal settlement, bearing interest at 6% annually;
interest imputed at 9% per annum, payments of $4,000 due monthly through
December 2003 when a balloon payment of approximately $119,000 is due in full.
The note is currently in default and is classified as a current liability.
$ 283,312
Term note payable to Wells Fargo, bearing interest at prime plus 3% (11.5% at
December 31, 2000) and requiring payments of $10,000 until maturity at
December 31, 2000; collateralized by virtually all assets of the Company. The
note was refinanced in May 2000 and is due in June 2001. The note contains
cross-default provisions and the lender could accelerate the maturity date at
any time as a result of the default described above.
60,946
Term note payable for legal settlement, interest imputed at 9% per annum,
payments of $36,556 due annually on August 31 through 2002.
81,734
Note payable to stockholders, bearing interest at 10% per annum and due December
2002, convertible to common stock at a conversion price of $0.20 per share
(see Note 6).
15,058
Note payable bearing interest of 9.5% and requiring monthly payments of $313 through
2002; collateralized by equipment. 5,740
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446,790
Less:
Discounts on notes payable (44,142)
Current portion (367,088)
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$ 35,560
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6. Stockholders' Equity
Common Stock
In March 2000, the Company began circulating a private placement memorandum.
During 2000, the Company issued 20.4 million shares of its common stock
(exclusive of stock options) for net cash proceeds of approximately $6.9
million.
In 2000, the Company issued 8,948,844 shares of common stock and options to
purchase 243,500 shares of common stock to certain vendors and consultants. The
shares were primarily issued to a related party (see Note 9), the Company's
landlord in settlement of rent and to a related party for development of its
CareLync ED product offering. In connection with these issuances of common stock
and options, the Company recorded charges of $4,087,266 in 2000.
In December 1999, the Company received an advance of $100,000 against a $200,000
convertible note bearing interest of 10% per annum. The note was convertible to
common stock at a conversion rate of $0.40 per share; in certain circumstances,
the conversion price was to be reduced to $0.20 per share. In January 2000, the
Company received an additional $84,942 pursuant to the convertible note and the
conversion price was reduced to $0.20 per share for the entire indebtedness. In
connection with the transaction, the Company issued a ten-year warrant to
acquire 462,355 shares of common stock at an exercise price of $0.40 per share.
In 1999, the Company recorded a discount of approximately $130,000 against the
convertible note based on the fair value of the warrant, which is being
amortized over the two-year term of the note. In 2000, the Company recorded an
additional discount of $54,942 to reflect the reduction of the note's conversion
price in January 2000. In December 2000, the note was converted to 924,710
shares of common stock. In addition to the equity granted in the transaction,
the Company granted the stockholder antidilution protection. As a result of the
antidilution protection, additional equity was to be granted to the stockholder
in the event of any future issuance of equity. The additional equity was to be
issued at no cost to the stockholder. The Company issued 6,880,479 shares of
common stock in 2000 as a result of the antidilution provisions granted to the
stockholder. The Company also entered into a consulting agreement with its
stockholder (see Note 9).
During 1999 the Company recorded goods and services acquired for the Company by
an officer of the Company. The Company recorded fixed assets of $37,786 for
equipment purchased by the officer, product development costs of $80,560 for
fees paid by the officer to an independent third-party contractor, and general
and administrative expenses
6. Stockholders' Equity (continued)
of $21,684 for various administrative items paid for by the officer. At December
31, 1999, the Company had an accrued liability of $137,539 to the officer. In
January 2000, the Company issued 343,848 shares of its common stock to the
officer in settlement of its obligation.
From March through December 1999, the Company issued 1,975,147 shares of common
stock for net proceeds of approximately $820,000 pursuant to a private placement
of its common stock.
In February 1999, the Company issued 3,250,000 shares of common stock to
officers and stockholders of the Company for net proceeds of approximately
$182,000. The Company recorded stock-based compensation of approximately
$1,094,000 based on the fair market value of the common stock issued. Fair
market value was determined based on the price per share realized by the Company
in its most recent private stock offering.
In 1999, the Company issued 45,000 shares of common stock to a vendor. The
Company recorded stock-based compensation of $18,000 based on the fair market
value of the common stock issued. Fair market value was determined based on the
price per share realized by the Company in its most recent private stock
offering.
The Company declared a 1-for-4 reverse stock split effective March 6, 2000. The
effect of this reverse stock split has been retroactively reflected throughout
the financial statements.
6. Stockholders' Equity (continued)
Stock Option Plan
During 2000 and 1999, the Company granted stock options to employees pursuant to
its 1998 Incentive Stock Option Plan (the Plan). The Plan, as amended, permits
the Company to grant a maximum of 10,000,000 shares of common stock to employees
and directors under various stock awards, including options, at exercise prices
not less than the fair market value of the stock at the date of grant as
determined by the Company's Board of Directors.
Stock options may be exercised over a period not to exceed ten years and
generally vest ratably for five years from the date of grant. The changes in all
outstanding options are as follows:
Weighted
Shares Average
Under Exercise Price
Option Per Share
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--------------------- --------------------
Balance at January 1, 1999 185,764 0.40
Granted 1,986,337 0.11
Exercised (295,726) 0.18
Canceled (52,500) 0.12
---------------------
---------------------
Balance at December 31, 1999 1,823,875 0.10
Granted 5,617,375 0.37
Exercised (105,000) 0.21
Canceled (293,125) 0.17
---------------------
---------------------
Balance at December 31, 2000 7,043,125 0.31
=====================
Options to purchase 2,561,617 shares were exercisable as of December 31, 2000,
with a weighted average exercise price of $0.19. There were 197,417 options
exercisable at December 31, 1999.
6. Stockholders' Equity (continued)
The following table summarizes the number of options, the exercise prices, and
the weighted average remaining life of all options outstanding at December 31,
2000:
Number of Options Weighted Average
Exercise Price Outstanding Remaining Life
- ------------------------------ ---------------------------- ------------------------------
- ------------------------------ ---------------------------- ------------------------------
$ 0.01 1,000,000 9.7 years
0.06 1,378,500 8.0 years
0.10 1,550,000 9.9 years
0.40 188,875 8.5 years
0.64 2,863,250 9.5 years
0.80 62,500 9.1 years
----------------------------
----------------------------
7,043,125
============================
Certain employees and consultants of the Company have been granted options under
the Plan to purchase shares of the Company's common stock at less than fair
value. Options to acquire 2,636,000 and 1,680,486 shares were issued in 2000 and
1999, respectively, with exercise prices less than the fair market value at the
date of grant. In February 1999, the exercise price for all previously issued
options was reduced from $0.40 to $0.06. Options to acquire 187,500 shares of
stock were exercised immediately. Options to acquire 38,764 shares of common
stock remain outstanding and are subject to variable accounting as a result of
the repricing activity. The Company recorded deferred stock compensation related
to options issued to employees of $1,462,271 and $(475,954) for the years ended
December 31, 2000 and 1999, respectively, for the difference between the
exercise price and the fair market value of the Company's common stock
underlying certain options granted. The deferred stock compensation recorded in
2000 and 1999 includes the effects of adjusting the repriced options to fair
market value as of the earlier of the date of exercise or the respective
year-end. Deferred stock compensation is being amortized over the vesting period
for the individual options, which range from immediate to five years. The
amortization of deferred compensation for options issued to employees totaled
$809,780 and $112,929 for the years ended December 31, 2000 and 1999,
respectively. The Company also recorded charges of $42,294 and $31,536 for the
years ended December 31, 2000 and 1999, respectively, relating to options issued
to non-employees for goods and services. The options issued to non-employees
were fully vested at the date of grant.
6. Stockholders' Equity (continued)
Pro forma information regarding net loss and net loss per share is required by
Statement of Financial Accounting Standards (SFAS) No. 123 and has been
determined as if the Company had accounted for its employee stock options under
the fair value method of that Statement. The fair value for these options was
estimated at the date of grant using a minimum value pricing model with the
following weighted average assumptions for 2000 and 1999: risk-free interest
rates of 6%, dividend yields of 0%, and a weighted average expected life of the
options of approximately five years. The weighted average fair value of the
options granted in 2000 and 1999 was not significant.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting periods. Because the options
do not have a significant value using the minimum value method, there is no
material difference between the Company's net loss as reported and the pro forma
net loss considering the effect of SFAS 123.
7. Commitments and Contingencies
Leases
The Company rents and leases its facilities and certain automobiles. Certain
leases include options for renewal or purchase and contain clauses for payment
of real estate taxes and insurance. In most cases, management believes that, in
the normal course of business, leases will be renewed or replaced by other
leases. Rental expense was approximately $196,000 and $213,000 in 2000 and 1999,
respectively.
The following are the minimum lease payments under noncancelable operating
leases as of December 31, 2000:
2001 $ 166,403
2002 163,985
2003 163,985
------------------
------------------
$ 494,373
==================
7. Commitments and Contingencies (continued)
Legal Proceedings
In December 1999, a stockholder and former officer of the Company filed suit in
federal court alleging that the Company was infringing on a copyright for the
ICUS database and tool set (ICUS) that was allegedly owned personally by the
stockholder. The Company's current service offering uses ICUS at all current
customer sites. The Company believes it has an existing license to use and
sublicense ICUS.
In January 2000, the court issued a preliminary injunction allowing the Company
to keep one copy of the ICUS source code for purposes of providing support to
its current customers, but prohibiting the Company from selling and/or marketing
the Company's current ICUS-based product.
On January 8, 2001, the federal court granted the Company's motion for summary
judgment, dismissing all of the former officer's claims and dissolving the
preliminary injunction. The court is now reviewing the plaintiff's motion to set
aside that summary judgment and the Company's motion for attorneys' fees.
The former officer has also made the Company a party in his divorce action,
which is pending in a Tarrant County District Court. Many of the claims asserted
in this action are the same or essentially the same as the claims which were
dismissed by the federal court. The Company will seek dismissal of those claims
at the appropriate time and contest the remainder of the plaintiff's claims
vigorously.
In February 1999, a settlement agreement was entered into with a customer
involving a claim for refund of license fees paid to the Company whereby the
Company is required to pay the customer a total of $342,000 plus interest of 6%
on a portion of the outstanding balance and is required to assist the customer
in re-selling the hardware component sold by the Company to the customer. The
lesser of the proceeds, or $60,000, was to be applied directly to the
outstanding settlement balance due to the customer by May 31, 1999. The balance
of the settlement was to be repaid at a rate of $4,000 monthly, to be applied to
interest first, at a rate of 6%, then to the outstanding principal balance. A
balloon payment for the remaining outstanding balance is due December 1, 2003.
7. Commitments and Contingencies (continued)
The Company failed to remit the required $60,000 payment by its due date and has
not made the payment to date. In addition, certain of the monthly payments have
not been made as required by the agreement. The agreement provides in the event
of default for the reinstatement of the customer's claims or an acceleration of
the amounts due under the agreement, at the option of the customer. To date, the
former customer has not exercised its rights under the settlement agreement (see
Note 6).
In August 1998, the Company entered into a settlement agreement with a separate
customer involving a claim for refund of license fees received. The settlement
provided for an initial payment of $20,000 and payments of $36,556 annually,
beginning on August 31, 1999, until the obligation is paid in full on or before
August 31, 2002. The Company made its initial payment and the payment due in
August 1999 (see Note 6).
Employment Contracts
In 2000, the Company entered into employment agreements with certain key
executives. Under each of these agreements, in the event employment is
terminated (other than voluntarily by the employee or by the Company for cause)
the Company is committed to pay certain benefits, including specified monthly
severance of not more than $48,300 per month in the aggregate. The employment
agreements expire at various times between September 2002 and December 2003.
These agreements also provide for minimum salary levels throughout the term of
the contracts. At December 31, 2000, the aggregate commitment for future
salaries, excluding bonuses, through December 2003 is approximately $1.1
million.
The Company has also entered into an agreement with an executive to pay
commissions on new license fees. These commissions are not to exceed $500,000 in
each of 2001, 2002, and 2003 and $300,000 in each of 2004 and 2005.
8. Income Taxes
The differences between the actual income tax benefit and the amount computed by
applying the statutory federal tax rate to the loss before income taxes are as
follows:
Year ended December 31
2000 1999
-------------------- -----------------
-------------------- -----------------
Benefit computed at federal statutory rate
$ (2,857,885) $(1,121,000)
Permanent differences 5,248 10,000
Increase in valuation reserve 2,852,637 1,111,000
-------------------- -----------------
-------------------- -----------------
Total $ - $ -
==================== =================
The Company's deferred tax assets and liabilities as of December 31, 2000, are
as follows:
Deferred tax assets:
Accrual to cash conversion $ 1,026,266
NOL carryforward 3,529,371
-----------------
-----------------
Total deferred tax assets 4,555,637
Valuation allowance for deferred tax assets (4,555,637)
-----------------
-----------------
Deferred income tax assets, net of deferred tax liabilities $ -
=================
At December 31, 2000, the Company has approximately $10.4 million of federal net
operating loss carryforwards that begin to expire in 2018.
At December 31, 2000, the Company has recorded a valuation allowance against its
net deferred tax assets because management believes that, after considering all
the available objective evidence, the realization of the assets is not
reasonably assured. To the extent that net operating loss carryforwards, when
realized, relate to stock option deductions, the resulting benefits will be
credited to stockholders' equity. In addition, in connection with the equity
transactions that have taken place since January 1, 1998, the Company has
experienced a change in control pursuant to Internal Revenue Code Section 382.
As such, the net operating loss carryforward will be limited as to its possible
use in future periods.
9. Related Party Transactions
In February 2000, a consulting agreement was entered into with a stockholder to
provide, among other things, assistance with the development and implementation
of a business plan and strategy, determination of management organizational
structure and staffing needs, identification of and recruitment of qualified
personnel for the Company's management, engagement and supervision of
professional advisors, and assessment of working capital needs and assistance in
arranging to finance those needs. The stockholder received 6,875,000 shares of
common stock as consideration for the consulting agreement. The Company recorded
a charge of $2.8 million in 2000 for the fair value of the equity issued, which
was to be amortized over the two-year term of the consulting agreement. The
consulting agreement was terminated in December 2000 and, as a result, the
Company recorded the full charge in 2000.
10. Subsequent Event
In January 2001, the Company signed a definitive agreement to merge with Pierce
International Discovery, Inc. (Pierce) in a reverse merger (the Merger). Pierce
is a publicly traded company with no assets, liabilities, or operations that is
controlled primarily by one individual. Under the terms of the Merger, the
primary stockholder of Pierce has agreed to cancel approximately 23.3 million of
the outstanding shares of the common stock of Pierce owned by the individual.
Once these shares are canceled, the number of outstanding shares of common stock
of Pierce will total approximately 2.6 million shares. Under the terms of the
Merger, Emergisoft stockholders will receive shares of Pierce common stock on a
one-for-one basis. Upon consummation of the merger, 48,873,818 shares of common
stock will be outstanding. Pierce will change its name to Emergisoft Holding,
Inc., a Nevada corporation, concurrent with the Merger. The Company expects the
Merger to close in May 2001. The Merger will be accounted for as a
recapitalization of the Company and the Company's historical financial
statements will become the financial statements of the registrant.