EXHIBIT 99.2
EVOKE SOFTWARE CORPORATION
REPORT ON AUDITS OF FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2003
AND NINE MONTHS ENDED DECEMBER 31, 2002
TABLE OF CONTENTS
Page
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Report of Independent Registered Public Accounting Firm F-2
Consolidated Balance Sheets F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Redeemable Convertible Preferred
Stock and Shareholders' Deficiency and Other Comprehensive Loss F-5
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-7
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Evoke Software Corporation:
We have audited the accompanying consolidated balance sheets of Evoke Software
Corporation (a California Corporation) and Subsidiaries (together the "Company")
as of December 31, 2003 and 2002, and the related consolidated statements of
operations, consolidated statements of redeemable convertible preferred stock
and shareholders' deficiency and other comprehensive loss and cash flows for the
year ended December 31, 2003 and the nine months ended December 31, 2002. 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 the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform an audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Evoke Software Corporation and
Subsidiaries as of December 31, 2003 and 2002 and the results of their
operations and their cash flows for the year ended December 31, 2003 and the
nine months ended December 31, 2002 in conformity with accounting principles
generally accepted in the United States of America.
/s/ Friedman LLP
- ------------------
Livingston, New Jersey
September 3, 2004
F-2
EVOKE SOFTWARE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
December 31,
----------------------------
2003 2002
------------ ------------
ASSETS
Current assets:
Cash $ 586 $ 1,862
Accounts receivable, net of allowance for
doubtful accounts of $0 in 2003 and $25 in 2002 999 2,784
Prepaid expenses and other current assets 161 293
------------ ------------
Total current assets 1,746 4,939
Furniture and equipment, net of accumulated depreciation of $1,086
in 2003 and $1,042 in 2002 350 852
Other assets 102 111
------------ ------------
Total assets $ 2,198 $ 5,902
============ ============
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND SHAREHOLDERS' DEFICIENCY
Current liabilities:
Accounts payable and accrued liabilities $ 1,337 $ 1,224
Notes payable -- 92
Deferred revenue 1,970 2,450
------------ ------------
Total current liabilities 3,307 3,766
Deferred revenue, long term portion -- 336
------------ ------------
Total liabilities 3,307 4,102
------------ ------------
Commitments -- --
Redeemable convertible preferred stock:
Series AA, no par value, authorized, issued and outstanding, 44,265,578
shares at December 31, 2003 and 2002; aggregate liquidation preference of
$24,420 in 2003 and $22,660 in 2002 13,648 7,718
Shareholders' deficiency:
Common stock, no par value, 60,000,000 shares authorized; 3,703,723 shares issued
and outstanding in 2003 and 3,649,819 shares issued and outstanding in 2002 80,618 80,615
Accumulated deficit (95,073) (86,317)
Cumulative translation adjustment (302) (216)
------------ ------------
Total shareholders' deficiency (14,757) (5,918)
Total liabilities, redeemable convertible preferred stock ------------ ------------
and shareholders' deficiency $ 2,198 $ 5,902
============ ============
See Notes to Consolidated Financial Statements.
F-3
EVOKE SOFTWARE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
Nine Months
Year Ended Ended
December 31, December 31,
2003 2002
------- -------
Revenues:
License fees $ 2,014 $ 1,675
Maintenance, product support and other
services 3,891 3,658
------- -------
Total revenues 5,905 5,333
Operating expenses:
Cost of license fees 41 12
Cost of maintenance, product support
and other services 340 337
Sales and marketing 4,661 2,471
Product development 2,000 1,792
General and administrative 1,648 2,366
Restructuring charge 40 1,451
------- -------
Total operating expenses 8,730 8,429
------- -------
Loss from operations (2,825) (3,096)
Other income (expense), net (1) 15
------- -------
Net loss $(2,826) $(3,081)
======= =======
See Notes to Consolidated Financial Statements
F-4
EVOKE SOFTWARE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
SHAREHOLDERS' DEFICIENCY AND OTHER COMPREHENSIVE LOSS FOR THE NINE
MONTHS ENDED DECEMBER 31, 2002 AND THE YEAR ENDED DECEMBER 31, 2003
(In thousands, except share amounts)
Shareholders' Deficiency
------------------------------
Redeemable
Convertible
Preferred Stock Common Stock
-----------------------------
Shares Amount Shares Amount
------------- ------------ ------------- ---------------
Balance at March 31, 2002 3,823,709 $ 74,534 744,253 $ 948
Issuance of Series AA preferred stock, less
issuance costs of $180 44,265,578 5,320
Accretion of Series D&E preferred stock -- 5,133 -- --
Preferred stock conversion to common stock (3,823,709) (79,667) 2,905,566 79,667
Accretion of Series AA preferred stock -- 2,398 -- --
Net loss
Foreign currency translation adjustment -- -- -- --
Comprehensive loss -- -- -- --
------------- ------------ ------------- ---------------
Balance at December 31, 2002 44,265,578 7,718 3,649,819 80,615
Exercise of stock options 53,904 3
Accretion of Series AA preferred stock -- 5,930 -- --
Net loss
Foreign currency translation adjustment
Comprehensive loss -- -- -- --
------------- ------------ ------------- ---------------
Balance at December 31, 2003 44,265,578 $13,648 3,703,723 $ 80,618
============= ============ ============= ===============
Shareholders' Deficiency
----------------------------------------------------
Other
Accumulated Comprehensive
Deficit Income Total
----------------- ---------------- ----------------
Balance at March 31, 2002 $ (75,705) $ (197) $ (74,954)
Issuance of Series AA preferred stock, less
issuance costs of $180
Accretion of Series D&E preferred stock (5,133) -- (5,133)
Preferred stock conversion to common stock -- -- 79,667
Accretion of Series AA preferred stock (2,398) -- (2,398)
Net loss (3,081) (3,081)
Foreign currency translation adjustment -- (19) (19)
----------------
Comprehensive loss -- -- (3,100)
----------------- ---------------- ----------------
Balance at December 31, 2002 (86,317) (216) (5,918)
Exercise of stock options 3
Accretion of Series AA preferred stock (5,930) -- (5,930)
Net loss (2,826) (2,826)
Foreign currency translation adjustment (86) (86)
----------------
Comprehensive loss -- -- (2,912)
----------------- ---------------- ----------------
Balance at December 31, 2003 $ (95,073) $ (302) $ (14,757)
================= ================ ================
See Notes to Consolidated Financial Statements
F-5
EVOKE SOFTWARE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Nine Months
Ended Ended
December 31, December 31,
2003 2002
------- -------
OPERATING ACTIVITIES
Net loss $(2,826) $(3,081)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 457 457
Impairment of furniture and equipment -- 837
(Gain) loss on disposals of furniture and equipment 32 (29)
Changes in operating assets and liabilities:
Restricted cash -- 426
Accounts receivable 1,785 (2,081)
Prepaid expenses and other current assets 132 (79)
Accounts payable and accrued liabilities 113 (916)
Deferred revenue (816) (462)
Other Assets 9 130
------- -------
Net cash used in operating activities (1,114) (4,798)
------- -------
INVESTING ACTIVITIES
Proceeds from dispositions of furniture and equipment 13 159
------- -------
FINANCING ACTIVITIES
Repayments of notes payable (92) (76)
Proceeds of preferred stock sale net of issuance costs -- 5,320
Proceeds from exercise of stock options 3 --
------- -------
Net cash provided by (used in) financing activities (89) 5,244
Effect of exchange rate differences on cash (86) (19)
------- -------
Increase (decrease) in cash (1,276) 586
CASH, at beginning of period 1,862 1,276
------- -------
CASH, at end of year $ 586 $ 1,862
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for interest $ 3 $ 2
======= =======
SUPPLEMENTAL DISCLOSURE OF NON-CASH ITEMS
Accretion of Series D&E preferred stock $ 5,133 $ --
Preferred stock conversion to common stock 79,667 --
Accretion of Series AA preferred stock 2,398 5,930
See Notes to Consolidated Financial Statements
F-6
EVOKE SOFTWARE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share amounts)
Note 1: THE COMPANY
Evoke Software Corporation (the "Company") designs, develops,
markets and supports technology that assists organizations in
managing large quantities of data. The Company's software products
allow its customers to better understand the content, quality and
structure of their data. In 2002, the Company changed its year end
from March 31 to Decmeber 31. The Company derives revenues from
sales to companies principally in North America and Europe.
Year Ended Nine Months Ended
December 31, 2003 December 31, 2002
--------------------------------------
North America $ 4,069 $ 4,017
Europe 1,836 1,316
--------------------------------------
$ 5,905 $ 5,333
======================================
Note 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its foreign subsidiaries. All significant intercompany
accounts and transactions have been eliminated. The asset and
liability accounts of the Company's foreign subsidiaries are
translated from their local currency at the rates in effect at the
balance sheet date. Revenue and expense items are translated at
average rates of exchange prevailing during the period. Translation
adjustments are accumulated and reported as a component of
shareholders' deficiency. Foreign currency transaction gains and
losses, which have not been material, are recorded in other income
and expense in the consolidated statement of operations.
USE OF ESTIMATES
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
requires management to make certain 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 results of operations during
the reporting period. Actual results could differ from those
estimates.
CONCENTRATIONS OF CREDIT RISK AND CREDIT EVALUATIONS
Financial instruments that potentially subject the Company to
concentrations of risk include cash accounts receivable. Cash
consists principally of demand deposit and money market accounts
primarily held with financial institutions with high credit
standings. The Company has not experienced any significant losses
on its cash.
The Company performs ongoing credit evaluations of customers and
generally does not require collateral. Revenues from one customer
accounted for 15% and 21% of total revenues in the year ended
December 31, 2003 and the nine months ended December 31, 2002,
respectively.
At December 31, 2003, the Company was owed $457 from three
customers which represented approximately 45.9% of the outstanding
accounts receivable. At December 31, 2002, the Company was owed
$2,029 from two customers which represented approximately 70.2% of
the outstanding accounts receivable.
ACCOUNTS RECEIVABLE
The Company carries its accounts receivable at cost less an
allowance for doubtful accounts. On a periodic basis, the Company
evaluates its accounts receivable and changes the allowance for
doubtful accounts, when deemed necessary, based on its history of
past write-offs and collection, contractual terms and current
credit conditions.
F-7
FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash, accounts receivable, accounts payable and accrued liabilities
are carried at cost, which approximates fair value due to the short
maturity of these instruments.
FURNITURE AND EQUIPMENT
Furniture and equipment are stated at cost, less accumulated
depreciation. Depreciation is computed using the straight-line
method over the estimated useful lives of the assets, which range
from two to five years.
SOFTWARE DEVELOPMENT COSTS
Software development costs have been accounted for in accordance
with Statement of Financial Accounting Standards No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased
or Otherwise Marketed." Capitalization of software development
costs begins upon the establishment of technological feasibility,
subject to net realizable value considerations. To date, such
capitalizable costs have not been material. Accordingly, the
Company has charged all such costs to research and development
expense. Future capitalized costs, if any, will be amortized based
on the greater of the expense, as determined on a straight-line
basis over the estimated life of the products, or the ratio of
current revenue to the total of current and anticipated future
revenue.
REVENUE RECOGNITION
The Company licenses software under noncancellable license
agreements and provides services including maintenance, training,
installation, consulting and support services. License fee revenues
are generally recognized when a noncancellable license agreement
has been signed, the product has been shipped, there are no
uncertainties surrounding product acceptance, the fees are fixed or
determinable and collection is considered probable. The Company
allocates a portion of contractual license fees to post-contract
support activities covered under the contract, including first year
maintenance and product support services based on vendor specific
objective evidence of fair value. The Company's agreements with its
customers and resellers do not contain product return rights. For
license arrangements with resellers, the Company recognizes revenue
when the licenses are resold to the end user. Revenues from
maintenance agreements for maintaining, supporting and providing
periodic upgrades are recognized ratably over the maintenance
period, which in most instances is one year. Revenues for training,
installation, and consulting services are recognized as services
are performed.
INCOME TAXES
The Company accounts for income taxes in accordance with Statement
of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" ("SFAS 109"), which requires the use of the liability method
in accounting for income taxes. Under this method, deferred tax
assets and liabilities are measured using enacted tax rates and
laws that will be in effect when the differences are expected to
reverse.
F-8
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company accounts for employee stock options in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" ("APB 25") and has adopted the "disclosure
only" alternative described in SFAS No. 123, "Accounting for
Stock-Based Compensation" ("FAS 123"). Equity instruments issued to
non-employees are accounted for in accordance with the provisions
of FAS 123 and related interpretations.
PRO FORMA DISCLOSURES OF THE EFFECT OF STOCK-BASED COMPENSATION
The Company has elected to use the intrinsic value method in
accounting for its employee stock options because, the alternative
fair value accounting requires the use of option valuation models
that were not developed for use in valuing employee stock options.
Under the intrinsic value method, when the exercise price of the
Company's employee stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is
recognized.
The fair value of each option granted is estimated on the date of
grant using the Minimum value option-pricing valuation model, with
the following assumptions for options granted during the year ended
December 31, 2003 and nine months ended December 31, 2002:
2003 2002
----------------- --------------
Expected dividend yield -- --
Risk-free interest rate 3.3% 2.8%
Expected life 3 years 3 years
The Minimum Value option valuation model used was developed for use
in estimating the fair value of traded options that have no vesting
restrictions and are fully transferable. In addition, option
valuation models require the input of highly subjective
assumptions, including the expected life of the option. Because the
Company's employee stock options have characteristics significantly
different from those of traded options and because changes in the
subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of
its employee stock options.
For purposes of pro forma disclosure, the estimated fair value of
options is amortized to pro forma expense over the options' vesting
period. Pro forma information is as follows:
Nine months
Year Ended Ended
December 31 December 31
2003 2002
------------ ------------
Net loss:
As reported $ (2,826) $ (3,081)
------------ ------------
Pro forma $ (2,833) $ (3,087)
============ ============
The weighted-average fair value at grant date of options granted
during 2003 and 2002 was $ .05 and $.04.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets", effective for fiscal
periods beginning after December 15, 2001 and interim periods
within those fiscal years. SFAS 144 establishes an accounting model
for impairment or disposal of long-lived assts to be disposed of by
sale. The Company adopted SFAS 144 on March 31, 2002.
F-9
In November 2001, the FASB issued an announcement on the topic of
"Income Statement Characterization of Reimbursements received for
Out-of-Pocket Expenses Incurred" (the "Announcement"). The
Announcement required companies to characterize reimbursements
billed for out-of-pocket expenses as revenue in the income
statement. The Announcement was applied in financial reporting
periods beginning after December 15, 2001. There were no netted
reimbursements received for 2003 and 2002 for out-of-pocket
expenses against the related expenses in the accompanying
consolidated statement of operations, respectively. Adoption of the
Announcement has no impact on gross profit or net loss but would
increase both services revenues and the cost of services revenues.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". The standard requires
companies to recognize costs associated with exit or disposal
activities when they are incurred rather than at the date of a
commitment to an exit or disposal plan. Examples of costs covered
by the standard include lease termination costs and certain
employee severance costs that are associated with a restructuring,
discontinued operation, plant closing or other exit or disposal
activity. Previous accounting guidance was provided by EITF 94-3,
"Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs
Incurred in a Restructuring)". SFAS No. 146 replaces EITF 94-3.
SFAS 146 is to be applied prospectively to exit or disposal
activities initiated after December 31, 2002. The Company adopted
SFAS No. 146 as of January 1, 2003 and this adoption had no
material impact on the Company's financial position or results of
operations.
In November 2002, the FASB issued FASB Interpretation, or FIN No.
45,"Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of
Others". FIN No. 45 elaborates on the disclosures to be made by a
guarantor in its interim and annual financial statements about its
obligations under certain guarantees that it has issued. It also
clarifies that a guarantor is required to recognize, at the
inception of a guarantee, a liability for the fair value of the
obligation undertaken in issuing the guarantee. However, a
liability does not have to be recognized for a parent's guarantee
of its subsidiary's debt to a third party or a subsidiary's
guarantee of the debt owed to a third party by either its parent or
another subsidiary of that parent. The initial recognition and
measurement provisions of FIN No. 45 are applicable on a
prospective basis to guarantees issued or modified after December
31, 2002 irrespective of the guarantor's fiscal year end. The
disclosure requirements of FIN No. 45 are effective for financial
statements with annual periods ending after December 15, 2002. The
Company does not have any guarantees that would require disclosure
under FIN No. 45.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-based Compensation - Transition and Disclosure - an Amendment
to SFAS No. 123". SFAS No. 148 provides alternative methods of
transition for a voluntary change to the fair value-based method of
accounting for stock-based employee compensation. In addition, this
statement amends the disclosure requirements of SFAS No. 123 for
public companies. This statement is effective for fiscal years
beginning after December 15, 2002. The Company adopted the
disclosure requirements of SFAS No.148 as of January 1, 2003 and
plans to follow the provisions of APB Opinion No. 25 for accounting
for stock based compensation.
In January 2003, the FASB issued FIN No. 46, "Consolidation of
Variable Interest Entities -- An Interpretation of ARB No. 51",
which clarifies the application of Accounting Research Bulletin No.
51, "Consolidated Financial Statements," to certain entities in
which equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity at
risk for the entity to finance its activities without additional
subordinated financial support from other parties. FIN No. 46
provides guidance related to identifying variable interest entities
(previously known generally as special purpose entities, or SPEs)
and determining whether such entities should be consolidated. FIN
No. 46 must be applied immediately to variable interest entities
created or interests in variable interest entities obtained, after
January 31, 2003. For those variable interest entities created or
interests in variable interest entities obtained on or before
January 31, 2003, the guidance in FIN No. 46 must be applied in the
first fiscal year or interim period beginning after June 15, 2003.
The Company adopted FIN No. 46 as of January 1, 2003 and this
adoption had no impact on the Company's consolidated financial
statements.
F-10
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and
Equity". This statement establishes standards for how an issuer
classifies and measures in its statement of financial position
certain financial instruments with characteristics of both
liabilities and equity. It requires that an issuer classify a
financial instrument that is within its scope as a liability (or an
asset in some circumstances) because that financial instrument
embodies the characteristics of an obligation of the issuer. This
standard is effective for financial instruments entered into or
modified after May 31, 2003, and otherwise is effective at the
beginning of the first interim period beginning after June 15,
2003. The Company has adopted SFAS No. 150 in the applicable
reporting period and does not expect it will have a material impact
on the Company's Consolidated Financial Statements.
Note 3: FURNITURE AND EQUIPMENT
Furniture and equipment consist of the following:
December 31,
-------------------------------
2003 2002
-------------- --------------
Furniture $ 267 $ 434
Leasehold improvements 372 --
Equipment and related software 797 927
-------------- --------------
1,436 1,361
Less accumulated depreciation 1,086 1,042
-------------- --------------
$ 350 $ 852
============== ==============
Note 4: RESTRUCTURING AND ASSET IMPAIRMENT WRITE-DOWNS
For the nine months ended December 31, 2002, the Company continued
implementation of a plan approved by management to restructure
operations to better align its deployment of operating resources
with lower revenue and activity levels. In so doing, the Company
recorded asset impairment charges representing $837 for the
write-down of furniture and equipment related to excess office
space. Work force reductions mainly in the U.S. and the Company's
U.K. subsidiary were recorded with a total charge to operations for
severance and associated costs of $456. All affected employees had
been terminated as of December 31, 2002 and all termination
benefits had been paid to former employees. In addition, the
Company recorded $158 as a charge to operations principally in
conjunction with the closing of its offices in London and Paris.
Note 5: NOTES PAYABLE
Obligations due to an equipment vendor were fully paid in 2003.
Note 6: COMMITMENTS
The Company has entered into operating leases for certain office
space and equipment with original terms ranging from 12 to 60
months expiring through August 2006. The facility leases generally
contain renewal options and provisions adjusting the lease payments
based upon changes in operating costs of the facilities.
The Company had a twenty-three month lease with a server equipment
vendor under a capitalized lease obligation which required monthly
payments totaling $2. The obligation was fully paid in April 2003.
Future minimum lease payments under all operating leases as of
December 31, 2003 (in thousands) are as follows:
Year Ending December 31 Amount
----------------------- -----------------
2004 $ 492
2005 364
2006 215
-----------------
Total $ 1,071
=================
Rent expense from operating leases for the year ended December 31,
2003 and the nine months ended December 31, 2002 was $1,058 and
$883.
F-11
Note 7: SHAREHOLDERS' DEFICIENCY
PREFERRED STOCK FINANCING
In August 2002, the Company issued 44,265,578 shares of Series AA
preferred stock at $0.12425 per share, and received approximately
$5,500 in cash for the offering (before deducting issuing expenses
totaling $180). In connection with and effective upon the closing
of the financing, all shares of the Company's prior Series A, B, C,
D and E preferred stock automatically converted into Common Stock
on a one-for-one share basis, except that 1,948,569 shares of the
prior preferred stock converted into the Series AA preferred stock
upon participation in the financing. Accordingly, following the
closing of the financing, only common stock and Series AA preferred
stock remained issued and outstanding.
REVERSE STOCK SPLIT
Contemporaneous with and subject to the closing of the
aforementioned preferred stock financing, the Company completed a
ten-for-one reverse stock split of issued and outstanding preferred
and common stock. All preferred and common share prices and amounts
associated with rights, preferences, dividends, and privileges in
the accompanying financial statements were adjusted to reflect such
reverse split.
REDEEMABLE CONVERTIBLE PREFERRED STOCK
At December 31, 2003 and 2002, redeemable convertible preferred
stock consisted of 44,265,578 shares of Series AA shares
authorized, issued and outstanding. Aggregate liquidation
preference totaled $24,420 and $22,660 at December 31, 2003 and
2002.
DIVIDENDS
The holders of Series AA convertible preferred stock are entitled
to receive dividends when, as and if, declared by the Board of
Directors but only out of funds that are legally available at the
rate of $0.03976 per share per annum. These dividends are in
preference to any declaration or payment of any dividend on common
stock of the Company.
CONVERSION
Each share of Series AA convertible preferred stock, at the option
of the holder, is convertible into the number of fully paid and
non-assessable shares of common stock at the conversion rate of one
to one, subject to anti-dilution adjustments and the accrual of
dividends. Each share of Series AA convertible preferred stock will
automatically be converted into shares of common stock, based on
the then-effective conversion price, immediately upon the closing
of a firmly underwritten qualified public offering pursuant to an
effective registration statement under the Securities Act of 1933
for a total offering of not less than $30,000,000 prior to the
deduction of underwriting commissions and expenses and a per share
price (subject to adjustment for stock splits, stock dividends and
similar events) which is not less than $2.982; or the date
specified by written consent or agreement of the holders of 75% of
the then outstanding shares of said stock.
LIQUIDATION
In the event of any liquidation, dissolution or winding up of the
Company, including a merger, consolidation or other transaction in
which more than 50% voting control is transferred, whether
voluntary or involuntary, the holders of Series AA convertible
preferred stock are entitled to receive, prior and in preference to
any distribution of any of the assets of the Company to the holders
of common stock, an amount equal to the original purchase price
plus accrued but unpaid dividends, or $0.55245 and $0.51269 for
each share at December 31, 2003 and 2002, respectively. If the
assets of the Company legally available for distribution shall be
insufficient to permit the payment in full to the holders of the
Series AA convertible preferred stock the Series AA liquidation
preference, then the entire assets of the Company shall be
distributed ratably among the holders of Series AA convertible
stock in proportion to their ownership thereof.
F-12
VOTING
The holders of Series AA convertible preferred stock are entitled
to the number of votes equal to the number of shares of common
stock into which each share of convertible preferred stock could be
converted, and have voting rights and powers equal to the voting
rights and powers of the common stock.
REDEMPTION
At any time after August 9, 2006, the holders of greater than 50%
of the outstanding shares of Series AA preferred stock shall have
the right to request that the Company purchase all or any portion
of the shares of Series AA preferred stock held by such holders,
paying to such holders an amount in cash equal to the repurchase
price, defined as the Series AA liquidation preference, or the
original per share price plus all accrued but unpaid dividends.
COMMON STOCK
At December 31, 2003 the Company has reserved shares of common
stock for future issuance as follows:
Series AA redeemable convertible preferred stock 44,265,578
Common stock warrants 46,533
Options available for grant 2,121,636
Stock options outstanding 6,520,636
--------------
52,954,383
==============
COMMON STOCK WARRANTS
In connection with certain notes issued in 1999, and converted into
shares of series D redeemable convertible preferred stock, the
Company issued warrants for the purchase of 33,866 shares of Series
C redeemable convertible preferred shares. The warrants are
exercisable at $12.90 per share and expire in April 2004. The
Company valued these warrants using the Black-Scholes method with
an interest rate of 6%, a five year life, a volatility factor of
1.0 and no expected dividend yield. The Company deemed the fair
value of these warrants to be immaterial.
Throughout 2001 and 2000, the Company issued warrants to purchase
9,167 shares of common stock to a service provider. The Company
determined the fair value of these options using the Black-Scholes
method with a volatility factor of 1, an interest rate of 6%, a
dividend rate of 0% and a life of five years. The value recorded
for these warrants was approximately $59. The warrants expire
through October 2006.
F-13
In August of 2000, the Company issued warrants exercisable into
3,500 shares of common stock to a lender in connection with an
equipment loan, in which the Company made an early repayment of the
remaining outstanding balance during 2002. The Company determined
the fair value of these options using the Black-Scholes method with
a volatility factor of 1.0, an interest rate of 6.0%, a dividend
rate of 0% and a life of ten years. The value of these warrants,
approximately $24 was recorded by the Company as prepaid financing
costs and was being amortized to interest expense over 36 months.
The remaining prepaid financing balance was amortized in full at
the time of repayment. The warrants expire in August 2010.
STOCK OPTIONS
On September 4, 2002, the Board of Directors of the Company
approved the amendment of the 2000 stock option plan under which
incentive stock options may be granted to employees, directors and
consultants of the Company to purchase up to 8,892,321 shares of
common stock.
The exercise price of stock options granted under the 2000 Plan is
equal to the then-current fair market value of the Company's common
stock at time of grant. In January of 2002, the Company, in
believing that the 2000 Plan exercise price was considerably higher
than what was considered to be the then current fair market value
of the Company's common stock, introduced an Exchange Program
allowing employees and directors, with options having an exercise
price of $0.75 per share or greater, the opportunity to cancel
existing stock options in exchange for new ones. This program was
intended to allow the exchange of existing options for the same
number of new options to be granted at least six months and one day
after the cancellation date of the old options, January 16, 2002,
at an exercise price equal to the fair market value of the
Company's stock on September 4, 2002, the grant date of the new
options.
Options granted under terms of both the existing 1997 plan and the
2000 plan generally have a maximum term of 10 years from the grant
date, are immediately exercisable and generally vest over a 4 year
period. The plan provides that the unvested shares are subject to
repurchase by the Company upon termination of employment at the
original price paid for the shares. The shares generally vest at
the rate of 25% after one year and ratably on a monthly basis for
three years thereafter. The number of shares that were subject to
repurchase totaled 4,772 and 4,835 as of December 31, 2003 and
2002, respectively.
F-14
A summary of the Company's stock option activity during 2003 and
2002 is as follows:
WEIGHTED-AVERAGE
EXERCISE PRICE PER
NUMBER OF SHARES SHARE
------------------ ---------------------
Outstanding at March 31, 2002 116,774 $ 6.40
Granted 6,449,821 0.05
Exercised -- --
Canceled (27,347) 7.50
-----------------
Outstanding at December 31, 2002 6,539,248 0.06
Granted 481,257 0.05
Exercised (53,904) 0.05
Canceled (445,965) 0.06
-----------------
Outstanding at December 31, 2003 6,520,636 0.06
==================
The following table summarizes the outstanding and exercisable
stock options at December 31, 2003:
OPTIONS OUTSTANDING & EXERCISABLE
----------------------------------------------------------------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE EXERCISE
EXERCISE REMAINING CONTRACTUAL PRICE
PRICE PER LIFE (YEARS)
SHARE NUMBER OF SHARES
-------------------- -------------------------- --------------------------- ---------------------------
$0.05 6,431,451 8.70 $ 0.05
1.00 5,960 4.25 $ 1.00
1.10 3,250 3.59 $ 1.10
1.30 4,000 5.77 $ 1.30
7.50 75,975 6.79 $ 7.50
------------
6,520,636 8.67 $ 0.06
============
Options to purchase 2,121,636 shares of common stock were available
for future grant at December 31, 2003.
OPTIONS ISSUED TO NON-EMPLOYEES
During 2003 and 2002, there were no options or stock granted to
non-employees.
Note 8: INCOME TAXES
The Company had deferred tax assets of approximately $5,124 and
$3,954 as of December 31, 2003 and 2002, respectively. Realization
of the deferred tax assets is dependent upon future taxable income,
if any, the amount and timing of which are uncertain. Accordingly,
the net deferred tax assets have been fully offset by a valuation
allowance. The net valuation allowance increased by approximately $
1,170 during the year ended December 31, 2003 primarily relating to
net operating losses and tax credit carryforwards. In 2002, the
valuation allowance decreased by approximately $14,293 primarily as
a result of an August 2002 event which was triggered by a change in
control when the preferred shareholders converted their shares into
common shares. The difference between the statutory tax rates and
the Company's effective tax rate of zero percent is due to the 100
percent valuation allowance against net deferred tax assets. o The
Company had Federal and state operating loss carryforwards of
approximately $ 8,200 and $4,994 as of December 31, 2003 and 2002,
respectively. The net operating loss carryforwards will expire at
various dates through 2023.
Note 9: EMPLOYEE RETIREMENT AND BENEFIT PLAN
The Company has a deferred compensation plan for all eligible U.S.
employees, which qualifies under Section 401(k) of the Internal
Revenue Code. Under the terms of the 401(k) Plan, member employees
may contribute varying amounts of their annual compensation. The
Plan provides for discretionary employer contributions to the Plan.
There have been no employer contributions to the Plan in 2003 and
2002.
F-15
Note 10: SUBSEQUENT EVENT
On June 28, 2004, the Company sold substantially all of its net
assets to Conversion Services International, Inc. a public company
(CSI). The acquisition was completed pursuant to an Asset Purchase
agreement between CSI, Evoke Asset Purchase Corp., a subsidiary of
CSI, and the Company. In connection with the acquisition, CSI (i)
issued 72,543,956 shares of its common stock to the Company,
7,150,000 shares of which have been deposited into an escrow
account for a period of one-year and may be reduced based upon
claims for indemnification that may be made pursuant to the
agreement; (ii) issued 5% of the outstanding shares of the Evoke
Asset Purchase Corp. to the Company; (iii) issued 3,919,093 shares
of its common stock to certain executives of the Company as a
severance payment and to certain employees as retention shares; and
(iv) agreed to pay $448 in deferred compensation to certain
employees of the Company. For accounting purposes, this transaction
was deemed to have occurred on June 30, 2004.
F-16