UNITED STATES
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): March 29, 2006
--------------------------
AFG ENTERPRISES USA, INC.
(Exact Name of Registrant as Specified in its Charter)
--------------------------
Nevada 000-28515 84-1249735
(State or Other Jurisdiction of (Commission File Number) (I.R.S. Employer
Incorporation or Organization) Identification No.)
181 Wells Avenue, Suite 100, Newton, Massachusetts 02459
(Address of Principal Executive Offices) (Zip Code)
(617) 928-6001
(Registrant's telephone number,
including area code)
73-595 El Paseo, Suite 2204, Palm Desert, California 92260
(Former Name or Former Address, if Changed Since Last Report)
Copies to:
Allen Z. Sussman, Esq.
Morrison & Foerster LLP
555 West Fifth Street
Los Angeles, CA 90013
Phone: (213) 892-5200
Fax: (213) 892-5454
--------------------------
Check the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of the registrant under any of the
following provisions:
|_| Written communications pursuant to Rule 425 under the Securities Act
(17 CFR 230.425)
|_| Soliciting material pursuant to Rule 14a-12 under the Exchange Act
(17 CFR 240.14a-12)
|_| Pre-commencement communications pursuant to Rule 14d-2(b) under the
Exchange Act (17 CFR 240.14d-2(b))
|_| Pre-commencement communications pursuant to Rule 13e-4(c) under the
Exchange Act (17 CFR 240.13e-4(c))
This Current Report responds to the following items on Form 8-K:
Item 1.01 Entry into a Material Definitive Agreement.
Item 2.01 Completion of Acquisition or Disposition of Assets.
Item 3.02 Unregistered Sales of Equity Securities.
Item 4.01 Changes in Registrant Certifying Accountant
Item 5.01 Changes in Control of Registrant.
Item 5.02 Departure of Directors or Principal Officers; Election of
Directors; Appointment of Principal Officers.
Item 5.03 Amendments to Articles of Incorporation or Bylaws; Change in
Fiscal Year.
Item 5.06 Change in Shell Company Status.
Item 9.01 Financial Statements and Exhibits.
Item 1.01 Entry into a Material Definitive Agreement
On March 29, 2006, AFG Enterprises USA, Inc., a Nevada corporation (the
"Company", "AFG", "we", "us" or "our"), entered into an Agreement and Plan of
Merger by and among the Company, FP Merger Sub, Inc., a Delaware corporation and
wholly-owned subsidiary of the Company, and FP Technology Holdings, Inc., a
Delaware corporation ("FP" or "FP Technology"), pursuant to which the Company
agreed to acquire all of the issued and outstanding capital stock of FP (the "FP
Acquisition"). The Company completed the acquisition of FP on the same date, and
FP became a wholly-owned subsidiary of the Company. In connection with the FP
Acquisition, the Company changed its fiscal year from December 31 to June 30.
As a result of the merger, each share of common stock of FP outstanding
immediately prior to the effective time of the merger (the "Effective Time") was
converted into the right to receive shares of common stock of the Company at an
exchange ratio of 0.4032248 share of the Company common stock for each share of
FP common stock. The Company issued an aggregate of 3,991,939 shares of its
common stock, par value $0.001 per share (the "Purchase Price") in exchange for
all issued and outstanding shares of FP common stock. The issuance of such
shares of common stock was exempt from registration requirements pursuant to
Section 4(2) of the Securities Act of 1933, as amended (the "Securities Act"),
and Rule 506 promulgated thereunder.
As a result of the acquisition of FP, we are no longer a shell company.
Item 2.01 Completion of Acquisition or Disposition of Assets
As a result of the merger described in Item 1.01, the Company acquired all of
the issued and outstanding equity securities of FP and, therefore, ceased being
a shell company as of the Effective Time. The following information is being
provided with respect to AFG after giving effect to the acquisition of FP,
pursuant to the information requirements of Form 10 of the
Securities and Exchange Commission. The information includes, among other
things, a description of the business of FP as required pursuant to Item 2.01 of
Form 8-K, which disclosure is incorporated herein by reference.
FORM 10-SB INFORMATION
Forward-Looking Statements
Except for historical information, matters discussed in this report are
forward-looking statements based on management's estimates, assumptions and
projections. In addition, from time to time, the Company may make
forward-looking statements relating to such matters as anticipated business
prospects, new products, research and development activities, plans for
expansion, acquisitions and similar matters. Words such as "expects,"
"anticipates," "targets," "goals," "projects," "intends," "plans," "believes,"
"seeks," "estimates," "continue," or the negatives thereof, or variations on
such words, and similar expressions are intended to identify such forward
looking statements. The Company notes that a variety of factors could cause the
Company's actual results and experience to differ materially from the
anticipated results or other expectations expressed in the Company's
forward-looking statements. These forward-looking statements are mere
predictions and are uncertain. These forward-looking statements speak only as of
the date of this report. The Company expressly disclaims any obligation or
undertaking to disseminate any updates or revisions to any forward-looking
statement contained herein to reflect any change in its expectations with regard
thereto or any change in events, conditions or circumstances on which any such
statement is based.
1
BUSINESS
Summary
AFG Enterprises USA, Inc. (the "Company", "AFG", "we", "us" or "our"), through
its wholly-owned subsidiary FP Technology Holdings, Inc. ("FP" or "FP
Technology"), is a leading provider of CPQ, or "Configure, Price, Quote",
software that automates and simplifies product pricing and configuration for
companies and helps these enterprises improve order accuracy and reduce their
total cost of sales. FP's predecessor, Firepond, Inc. ("Firepond"), was founded
in 1983. FP's suite of products help companies configure, price and quote
complex products during the sales process, such as machinery, high technology
products or insurance services. FP's sales solutions help companies optimize
their sales processes, whether their need is to solve complex product or pricing
configuration, create product catalogs or provide an interactive selling system,
and dramatically improves response time. FP's current clients include Fortune
1000 companies such as Freightliner, John Deere, Case New Holland, Steelcase and
Renault.
FP offers three products marketed under the Firepond brand name, the Interactive
Selling Suite (ISS), Firepond OnDemand, and Interactive Configurator Suite
(ICS):
o The Interactive Selling Suite is a solution that simplifies the
ordering and procurement process by automating tasks such as lead
management, product configuration, pricing, and quotation and
proposal generation.
o Firepond OnDemand is an application that enables a company's sales
force and supporting organizations to configure complex products,
and accurately price those products. Firepond OnDemand is offered to
customers independently or as an integrated service within the
salesforce.com product called Firepond OnDemand for
salesforce.com(TM).
o The Interactive Configurator Suite is a set of data maintenance
tools, shared libraries and application program interfaces (APIs)
that supply configuration capabilities to an application. Both ISS
and Firepond OnDemand are built on the ICS technology platform.
FP offers two delivery methods for its CPQ applications: (i) its On Premise
solution, or traditional enterprise licensed software, and (ii) its OnDemand
application service, which was recently introduced. These offerings allow
customers flexibility in pricing and deployment, including allowing a
prospective customer to purchase an on-demand subscription and then migrate to
an enterprise license at a later date. While the On Premise solution is offered
to and maintained for legacy customers, Firepond's OnDemand product is the focus
of FP's efforts since August 2005 when it launched its OnDemand solution.
FP executes its sales and marketing strategy through direct and indirect
channels, and currently has sales relationships with over eight original
equipment manufacturers, or OEMs, system integrators and resellers. The recent
increase in interest in CPQ applications, combined with the acceptance of the
on-demand business model, has opened new opportunities for FP partnerships with
salesforce.com and other enterprise applications providers, which FP is actively
pursuing.
We believe that FP's software allows customers to reduce their total cost of
sales and service. FP's software solutions provide a number of key benefits,
including:
o Lowering Total Cost of Sales: Selling complex products typically requires the
participation of many different parts of an organization without distracting
from their primary roles including sales, engineering, manufacturing, finance,
legal, and marketing. FP's solution empowers sales representatives with relevant
and timely information from each department, such as design specifications from
engineering, production constraints from manufacturing, discount authorization
from finance, terms and conditions from legal, and product collateral from
marketing.
2
o Reducing Order Errors: Using configuration technology, complex product
recommendations are more likely to result in the right products to handle the
right application. By reducing the complexity of the sales process and
eliminating the potential for "human" error, FP's CPQ solution assists companies
in ensuring that customers are asked the proper questions to reach a correct
recommendation/configuration. In addition, the rules within the FP configuration
engine verify that products requested by salespeople, channel partners or
customers can be manufactured and delivered, before an order is placed. In
addition, quotation errors can be reduced when sales representatives are armed
with correctly configured pricing information, authorized discounts, appropriate
currency conversion rates and necessary tax considerations.
o Accelerating Sales Cycles: By applying an intelligent and logical process flow
from the time a lead is received to the moment a valid order is placed, FP's
solutions are designed to optimize the sales process and increase the speed at
which a sale can be executed. Quick turnaround in product recommendations,
pricing, proposals and financing allows sales representatives to manage more
simultaneous opportunities and close them faster. Eliminating the time necessary
to contact the factory or engineering resources significantly reduces the time
it takes for a customer to reach a "buy" decision. Customer satisfaction, in
turn, increases as their questions and hesitations are immediately addressed.
Further, FP's CPQ solution helps manufacturers distribute new product and
pricing information in real-time. This high degree of responsiveness helps
foster a strong and lasting customer-supplier relationship that is a distinct
competitive advantage for us.
o Unifying the Sales Process: Many large companies today deliver their products
to market through multiple sales channels, including a field sales force,
channel distribution partners, and even via the web. FP's CPQ solution ensures
consistency of product and pricing information across multiple channels,
enhancing a company's channel management capabilities and protecting its brand
reputation. For example, a customer-facing Web interface provides a self-service
solution for selling to current customers via the Web, or can be used to
generate desired configurations that can be directed to channel partners. This
allows repeat customers to obtain the products they need without pulling sales'
attention from new relationships. The same experience can be presented to the
customer directly using FP's CPQ solution deployed in a mobile environment on a
laptop, for example, during a sales person's visit to a prospect. Or, a customer
can again receive the same experience when visiting a dealership and interacting
with a salesperson connected to the FP system over an intranet.
Our principal place of business is located at 181 Wells Avenue, Suite 100,
Newton, Massachusetts 02459. Our common stock is quoted on the Over the Counter
Bulletin Board under the symbol "AFGU.ob".
Prior Corporate History
AFG Enterprises USA, Inc. (formerly In Store Media Systems, Inc.), a Nevada
corporation, was originally organized to develop a computerized, point-of-sale
marketing platform, the Coupon Exchange Center, which incorporates proprietary
components. Until November 2002, the Company was primarily engaged in developing
its technology, securing patent protection, formulating its business strategy,
raising capital and developing necessary relationships with third parties, such
as supermarkets, packaged goods manufacturers and others in connection with the
manufacture and marketing of the systems incorporated into the Company's product
line. The Company declared bankruptcy in November 2002 and the Plan of
Reorganization was confirmed in January 2005.
3
Products and Services
FP's products are delivered through two distinct delivery methods - On Premise
and OnDemand. FP On Premise is a traditional enterprise license, with standard
maintenance and services. The OnDemand products are delivered as independent,
on-demand applications, which can either be hosted by FP or another outsourced
service provider. For example, FP OnDemand for salesforce.com(TM) is an
integrated on-demand CPQ application offered from within salesforce.com's(TM)
on-demand CRM application suite with services, maintenance and upgrades included
in the monthly subscription model. The typical term on a contract for the
OnDemand business is between one and two years. The OnDemand solution also
affords customers the flexibility for migration onto FP's On Premise
applications at any time if they decide to take the application in-house.
FP offers three products marketed under the Firepond brand name, the Interactive
Selling Suite (ISS), Firepond OnDemand, and Interactive Configurator Suite
(ICS):
Interactive Selling Suite (ISS)
Our Interactive Selling Suite (ISS) provides organizations and customers with a
powerful tool that greatly simplifies the ordering and procurement process. ISS
was created with the lead-to-order process in mind. There are modules which
accommodate each step in the sales process. Using a flexible architecture,
companies can implement the modules needed to meet their specific needs and
sales processes, including the following:
o Lead management / opportunities
o Needs analysis
o Product configuration
o Pricing
o Quotations
o Proposals and presentations
o Order submission and tracking
The ISS system can be implemented in many ways including a connected Intranet
environment, a mobile environment or for Internet use. It is multi-language and
multi-currency enabled and comes with implementation templates that work
out-of-the-box.
ISS provides import / export capability for the transfer of configuration data,
customer data and order data. This allows ISS to integrate smoothly with
existing systems and processes, rather than becoming a resource drain and
ultimately simplifying the entire sales process.
The ISS system provides the following benefits to users:
Creating Accurate Product Configurations
ISS ensures that customers provide the information needed to deliver the product
that meets their objective by reducing complexity in the process and eliminating
the potential for "human error". The system verifies that products / services
and options result in a fully compatible and deliverable configuration, reducing
errors that may be caused by bottlenecks in the manufacturing and accounting
processes.
Reduced Total Cost of Sales
Selling complex products requires the participation of many different parts of
an organization such as sales, engineering, manufacturing, finance, legal and
marketing. FP's ISS assists sales representatives with relevant and timely
information from each department - design specifications from engineering,
production constraints from manufacturing, discount authorization from finance,
terms and conditions from legal and product collateral from marketing. This
keeps the rest of the organization focused on their primary roles and eliminates
communication bottlenecks that can occur.
4
Eliminate Quotation Errors
Quotation errors are eliminated when sales representatives are armed with
correctly configured product and pricing information, authorized discounts and
appropriate currency conversion rates. This instills the customer with
confidence and speeds sales closure.
Improve Order Fulfillment Time
ISS ensures the data is correct at the point of sale, eliminating the error
bottlenecks that slow order fulfillment (incorrect customer data, incorrect
customer ship data, inaccurate specification and configuration data).
Accelerate Customer Sales Decisions
Applying an intelligent and logical process flow, from the time a lead is
received to the moment a valid order is placed, optimizes the sales process and
increases the speed at which a sale can be executed. Quick turnaround in product
recommendations, pricing, proposals and financing allows sales representatives
to manage more simultaneous opportunities and close them faster. Eliminating the
time necessary to contact the factory or to contact engineering resources,
significantly reduces the time it takes for a customer to reach a "buy"
decision. Customer satisfaction, in turn, increases as their questions and
hesitations are immediately addressed.
Reduce Reliance on Internal Resources
All product and option descriptions, images and compatibility rules are
contained within the system, which knowledgeably conducts needs analysis,
product recommendation and checks for accurate configuration to reduce reliance
on engineering and manufacturing personnel.
Enable Customer Self-Service
A customer-facing Web interface provides a self-service solution for selling to
customers via the Web or it can be used to generate desired configurations that
can be directed to channel partners. This allows repeat customers to obtain the
products they need without pulling sales' attention from new relationships. It
manages the entire sales process from initial interest to order placement by
combining sales configuration functionality, interactive product catalogs,
guided needs analysis and order submission. It interfaces with order entry and
fulfillment systems so customers benefit from excellent service without
communication overhead or duplication of work.
Optimize Product Sales Mix
Opportunities to sell complementary services such as customer warranties,
after-market parts, accessories and / or services, lead to measurable margin
improvements.
Reduce Warranty Exposure
Expert needs analysis and product recommendation ensures that salespeople sell
the right product to handle the right application and encourages customers to
purchase products or combinations of products to reduce overall warranty costs
for FP.
Improve Customer Buying Experience and Service
Providing sales representatives with the information necessary to close deals
faster allows them to spend more time with their customers on the consultative
nature of complex sales. By reducing complexity and distractions arising from
incorrect specifications and pricing errors, or searching for current product or
pricing specifications, sales can concentrate on eliminating objections and
closing the sale.
Flexibility
ISS is a highly customizable, quickly deployable application that can be run
standalone (mobile environment), client / server (using several J2EE application
servers) or over the Internet (hosted deployment). ISS is designed specifically
for activities that involve a salesperson and a customer, or a customer with
direct-access capability.
Interactive Selling Suite for Insurance (ISSi)
FP's Interactive Selling Suite for Insurance (ISSi) was built to map directly to
the process of selling insurance, adapting to each unique sales channel -
brokers / agents, direct sales or via the Internet. It features processes and
controls that allow insurance companies to ensure consistency, eliminate errors,
control brand dilution and optimize enrollment and renewals. The system also
protects sensitive customer and product data and can be a valuable component in
complying with government mandated privacy regulations.
5
Firepond OnDemand
Firepond OnDemand is a tool that enables a company's sales force and supporting
organizations to configure complex products and services, accurately price those
products and services, develop price quotes and generate high quality proposals.
The configured products are build able when the order is sent to the factory (or
the configured services are accepted when sent to the home office) because the
database contains all the rules necessary to ensure error-free configurations.
The rules represent the knowledge of a company's engineers, legal staff, product
specialists and marketing experts.
In addition to error-free configurations, Firepond OnDemand provides rules-based
pricing to handle complex multi-level pricing schemes and it produces reports
that can be printed and included in automated proposals to customers.
Firepond OnDemand provides significant cost savings over traditional
highly-customized configuration systems. There is no software distribution, no
hardware expenditures and limited support requirements. FP also offers help desk
services to decrease the customer's total cost of ownership. With Firepond
OnDemand CPQ application, smaller companies and divisions of larger companies
can afford to implement a CPQ application without having to secure a
multi-million dollar enterprise license. Firepond OnDemand application allows
its customers to eliminate any hardware purchases and allows for a quick and
easy deployment, and provides the following benefits:
o Unique CPQ solution
o Low cost of ownership
o Easy to deploy
o Easy to configure
o Easy to use
o No software or hardware
o No dedicated staff
o Deploy onto server - all users have access simultaneously
o Painless upgrades
Firepond OnDemand is deployed as a Web service and can be accessed by customers
independently or as an integrated service within the salesforce.com(TM) product.
Firepond OnDemand for salesforce.com(TM) enables a company's sales force and
supporting organizations to configure complex products and services and
accurately price those products and services all from within salesforce.com(TM).
Currently, Firepond OnDemand is tightly integrated with the Salesfrorce.com(TM)
application at both the data and process layer. Additionally, FP has created a
joint product demonstration that is used by FP's sales team as well as
salesforece.com's(TM) sales representatives and sales engineers.
Firepond's OnDemand solution has been FP's focus since its launch in August
2005. On Premise solutions will be available only for legacy customers.
Interactive Configurator Suite (ICS)
FP's Interactive Configurator Suite (ICS) is a set of data maintenance tools,
shared libraries and application programming interfaces, or APIs, that supply
configuration capabilities to an application. Specifically, the ICS includes:
Product Data Manager (PDM) - Used to create, populate and maintain the
configuration database. Data entry personnel do not need to be programmers. The
companion Product Data Tester (PDT) allows the data to be tested to ensure it
produces the desired results.
Importers - A variety of importers provide the ability to import data from a
variety of sources. The PDM also directly imports XML and ODBC data sources.
6
Configuration Engine - The engine uses many "solvers" to ensure the product and
option selections are valid, and that the correct pricing is applied.
SDK - The software development kit includes a variety of APIs to integrate the
Configuration Engine into existing applications.
Enterprise Resource Planning (ERP) Connector - An optional ERP Plug-In allows
users to import ERP data (in an XML format) and export PDM data (to an XML
format) to an ERP system such as SAP's R/3.
The Configuration Engine and the data set created with the PDM are used by FP's
front-end selling systems such as ISS, ISSi and FP OnDemand. However, several FP
customers had existing sales systems and wanted only to integrate the
Configuration Engine into their systems. The ICS Software Development Kit
provides many options for integrating FP's configuration technology into
existing systems.
Key benefits of ICS include:
Scalable - The Configuration Engine is multi-threaded and is designed to handle
hundreds of concurrent configurations. Its scalability is increased through the
optimization of the data and the use of a scalable memory manager.
Testable - Since the Configuration Engine is data driven, it is vital that the
data is correct for the engine to produce correct results. As part of processing
data, the PDM checks the data for many common errors and warns the user if any
are found. Additionally, the PDT allows the data to be exercised through a
simple user interface. The PDT contains a built in debugger that allows the
configuration state to be examined.
Deployable - The Configuration Engine runs on a variety of platforms including
many of the Windows versions, Solaris and Red Hat Linux. It may be accessed on
these platforms using the C, C++ and Java interfaces. It may be accessed from
other platforms using the Remote Method Invocation (RMI) and Enterprise
JavaBeans (EJB) interfaces. It has been implemented in client / server,
standalone and Web environments.
International Capabilities - The ICS supports multi-language and multi-currency
systems. The database is double-byte enabled.
Proven technology - FP's ICS technology has been used for over 20 years -
receiving many enhancements over that time. The result is a stable, robust
system that is applicable to nearly all types of product configuration.
Marketing Strategy
Overall, our marketing strategy is to be the leading provider of
intelligence-driven software systems that solve the most difficult aspects of
customer acquisition and retention and quantifiably improve sales and service
effectiveness. To achieve this goal, key elements of our marketing strategy
include the following:
o Market and sell FP's products and services to "sweet spot" vertical
market segments. FP currently offers its Product Suite of guided
selling solutions to targeted vertical market segments, primarily
discrete manufacturing (including high technology, transportation,
construction machinery, agricultural equipment, and others) and
service based companies selling complex combinations of services and
products. FP has targeted and will continue to target companies
within these selected vertical industries with complex products,
services or channel relationships as well as organizations with a
distributed and connected customer base or dealer/broker network. We
believe that FP's focused pursuit of these targeted markets
increases its ability to offer solutions that meet the unique needs
of FP's target customers, which may vary greatly across industry
segments.
7
o Offer packaging flexibility to strategically penetrate FP's target
markets. FP offers a variety of packaging options for its software
products to achieve flexibility in aligning its technology with
companies in different stages of executing their business
strategies. For example, customers that have already made a
significant investment in applications for enterprise resource
planning, supply chain management, customer relationship management,
or others, can extend the value of their existing infrastructure
through an investment in FP technology. As such, selected components
of each product line are available as individual packaged solutions
tailored to specific sales or service channel needs, or specific
vertical industry segments. Conversely, companies seeking an
enterprise platform for integrated sales configuration may license
FP's products. With each of these product lines, additional
functional and technology components are available as options, such
as integration capabilities with third party applications. By
offering this variety of packaging options, FP allows its customers
to make strategic investments in its technology, without necessarily
committing to a larger enterprise platform. We will continue to
package FP's product offerings in a manner designed to remove sales
barriers and create recurring revenue streams.
o Continue to develop and implement leading-edge products. We will
continue to seek to provide products that deliver the most robust
functionality and that provide the Company's customers the greatest
return on their investment. FP has assembled a world-class
engineering organization and continues to invest in research and
development activities. In addition, FP has tremendous depth in its
domain expertise from a professional services standpoint. Although
we plan to work with systems integrator partners more in fiscal
2006, we will continue to maintain our own professional services
organization and leverage the domain expertise of these individuals
to help us successfully, and more rapidly, implement our software
solutions.
o Work with partners to extend FP's footprint. FP's partner program is
focused on developing four types of relationships: (1) strategic
implementation relationships focused on co-selling; (2)
complementary software relationships focused on pre-built
integration and co-selling; (3) complementary technology
relationships focused on hardware and platform standards; and (4)
indirect distribution channels. Our goal is for these alliances to
help extend FP's market coverage from both a sales and
implementation perspective, provide us with new business leads, and
allow us to provide FP's customers with a broader solution. We will
seek to strengthen FP's relationship with partners that support its
global strategy and partners that work with FP's key clients.
FP has developed a set of advanced inference engines called "solvers." Solvers,
in effect, are pre-defined rule types that can be selected and applied to any
configuration problem. As an alternative to companies trying to solve a
configuration problem with one or two rule types (which can result in slow rule
evaluation and difficult maintenance), FP's configuration engine provides a wide
range of solver types that address the different types of representations that
can be found in a configuration problem. These solvers act upon the
customer-defined data model, creating attributes in the data structures that
help FP's solution interpret the data based on user selections. FP's solvers are
loaded dynamically based on the behavior represented in the data model. Solver
examples include the following:
Constraint Based Relationship Based Other Solvers
- ------------------ ------------------------- --------------------------
o Boolean logic o Includes o Calculations
o Requirements o Fuzzy Logic o Complex Pricing
o Effectivity o Resources o Customer values
o Categorical o Nested Configuration o Simulation
o Aggregate
Each solver addresses a different type of configuration problem. These solvers
create attributes in the data model that define how the data will be interpreted
when users make selections at run-time. In effect, this interpretation of the
data relationships and constraints is the application of the "rules" that
configure orders, make product recommendations, and generate price quotes.
Professional Services and Support
FP offers a range of professional services in major markets worldwide. These
services help companies use the packaged software functionality of the FP
product line to create deployments that are highly specific to their businesses.
FP's professional services personnel typically have extensive experience in the
deployment of enterprise-scale selling systems. When FP assists companies in the
implementation of its products, or their components, FP helps them determine how
their individual selling strategies can be reflected in FP's packaged
technology.
8
We have developed an innovative approach and rigorous methodology for
industry-specific implementations. Offered in specific vertical industries, FP's
implementation templates help customers achieve a rapid and successful
deployment of FP's applications. FP's expert professional services team helps
customers and third party integrators implement its products. In addition, FP
has made it a priority to work with partners in order to provide its customers
with greater flexibility in their implementation choices. The maturity and
stability of FP's product has enabled FP to experience strong success in working
with implementation partners.
Quality training offers the most effective way for customers to derive maximum
benefit from their investment. FP trains users in major markets worldwide and it
tailors training materials to the unique requirements of individual customers.
FP also has training programs for its implementation partners.
FP offers comprehensive support for its product lines to its customers and
partners in major markets worldwide. Support services are provided under annual
software maintenance contracts. These contracts are renewable at the customer's
option and provide for online access to product documentation and
frequently-asked-questions, support by e-mail or telephone to report problems or
request technical assistance, and notification of service pack and upgrade
availability. Phone support is available on a 24x7 basis for critical issues.
FP's technical support team also provides data maintenance, enhancement, and
end-user support services on a time and materials basis when not covered by FP's
maintenance agreement.
FP's technical support analysts are highly trained and have extensive experience
with FP's products. FP has support resources in the United States, Europe and
Japan.
Customers
FP has targeted, and will continue to target, selected vertical industries with
complex products, services or channel relationships as well as organizations
with a distributed and connected customer base or dealer/broker network. Target
vertical markets for our software are discrete manufacturing companies,
including high technology, transportation, construction machinery and
agricultural equipment, and health insurance providers. Current FP customers
include Freightliner, Cummins Power Generation, Deere & Company, Horizon Blue
Cross Blue Shield, Renault Trucks, Scania, Siemens Building Technologies,
Steelcase International, and Case New Holland.
In fiscal 2003, three customers accounted for approximately 44.2% of FP's net
revenue. In fiscal 2004, two customers accounted for approximately 55.7% of FP's
net revenue. In fiscal 2005, four customers accounted for approximately 47.9% of
FP's net revenue.
Sales and Marketing Execution
FP executes its sales and marketing strategy through direct and indirect
channels, and currently has sales partnerships with over eight OEMs, system
integrators and resellers. The recent increase in interest in CPQ applications
combined with the acceptance of the on-demand business model has opened up
opportunities for FP partnerships with salesforce.com(TM) and other enterprise
applications providers which FP is actively pursuing. Additionally, FP's partner
in Japan is Kozo Keikaku Engineering (KKE), one of the country's largest
engineering firms. KKE resells and implements FP's products, on a non-exclusive
basis, in the Japanese market only.
FP's sales team is organized geographically, with a focus for its product line
on discrete manufacturing (including high technology, transportation,
construction machinery, agricultural equipment, and others).
FP is continually driving market awareness and developing leads in its target
markets through a series of integrated sales and marketing campaigns. FP's
marketing organization utilizes a variety of programs to support its sales
efforts, including market and product research and analysis, product and
strategy updates with industry analysts, public relations activities and
speaking engagements, Internet-based and direct mail marketing programs,
seminars and trade shows, brochures, data sheets and white papers, and web site
marketing.
9
Research and Development
Our research and development team is responsible for product planning, design
and development of functionality within FP software products, general release
and quality assurance functions, third party integration and developing
templates for target vertical industries. FP expects to continue to invest in
research and development in the future.
Competition
The markets for sales configuration are intensely competitive, constantly
evolving, and subject to rapid technological change. FP encounters competition
for its product line from a number of different sources, including in-house
technical staffs, traditional customer relationship management vendors,
enterprise resource planning vendors, and other vendors of sales configuration
point solutions. Of these vendors, FP's principal competitors include SAP,
Oracle, Trilogy, Siebel Systems, Selectica, Big Machines, Webcom, QuoteWerks
among others. There are a substantial number of other companies focused on
providing Internet-based software applications for customer relationship
management that may offer competitive products in the future. However, we
believe that the market for sales configuration solutions is still in its
formative stage, and that no currently identified competitor represents a
dominant presence in this market.
We expect competition to increase as a result of software industry
consolidation. For example, a number of enterprise software companies have
acquired point solution providers to expand their product offerings. FP's
competitors may also package their products in ways that may discourage users
from purchasing its products. Current and potential competitors may establish
alliances among themselves or with third parties or adopt aggressive pricing
policies to gain market share. In addition, new competitors could emerge and
rapidly capture market share.
Although we believe we have advantages over FP's competitors in terms of the
functionality and comprehensiveness of its solution, as well as its targeted
vertical focus, there can be no assurance that we can maintain FP's competitive
position against current and potential competitors, especially those with longer
operating histories, greater name recognition or substantially greater
financial, technical, marketing, management, service, support and other
resources.
We believe that the principal competitive factors in FP's target markets
include:
o adherence to emerging Internet-based technology standards;
o comprehensiveness of applications;
o adaptability, flexibility and scalability;
o real-time, interactive capability with customers, partners, vendors
and suppliers;
o ability to support vertical industry requirements;
o ease of application use and deployment;
o speed of implementation;
o customer service and support; and
o initial price and total cost of ownership.
10
Intellectual Property
Third parties may assert claims or initiate litigation against us or FP's
technology partners alleging that FP's existing or future products infringe
their proprietary rights. We could be increasingly subject to infringement
claims as the number of products and competitors in the market for FP's
technology grows and the functionality of products overlaps. In addition, we may
in the future initiate claims or litigation against third parties for
infringement of FP's proprietary rights to determine the scope and validity of
FP's proprietary rights. Any claims, with or without merit, could be
time-consuming, result in costly litigation and diversion of technical and
management personnel, or require us to develop non-infringing technology or
enter into royalty or licensing agreements. Royalty or licensing agreements, if
required, may not be available on acceptable terms, if at all.
FP's software products are dependent, in part, on a non-exclusive worldwide
license from Orion IP, LLC to utilize certain critical patents and related
rights in connection with the conduct of its business. We expect that such
license will be transferred to the Company in connection with the merger.
Employees
At December 31, 2005, FP had a total of 46 employees, of which 19 were in
research and development, 15 were in professional services and support, 4 were
in sales and marketing, and 8 were in finance and administration. None of FP's
employees are represented by a labor union.
Facilities
FP currently leases three commercial properties. FP's business operations are
headquartered in Mankato, Minnesota. The address in Mankato is 11 Civic Center
Plaza, Suite 310, Mankato, MN 56001. This office occupies 7,491 square feet, and
rent, including on-site storage, is $10,550 per month. Common area charges are
assessed on an annual basis. The lease expires on February 28, 2011.
FP leases its principal executive offices in Newton, Massachusetts. This office
occupies 1,322 square feet. Rent is $2,120.71 per month, and common area charges
are assessed on an annual basis. The lease expires on March 31, 2007.
FP also currently leases space in Beverly Hills, California. The office occupies
1,800 square feet, and monthly rent is $3,800. The lease expires on January 1,
2007.
FP also reimburses certain employees for remote office space located in
Sausalito, California. The monthly reimbursement totals $1,556.80 per month.
Legal Proceedings
Beginning in August 2001, a number of securities class action complaints were
filed in the Southern District of New York seeking an unspecified amount of
damages on behalf of an alleged class of persons who purchased shares of
Firepond's common stock between the date of its initial public offering and
December 6, 2000. The complaints name as defendants Firepond and certain of its
directors and officers, Fleet Boston Robertson Stephens, and other parties as
underwriters of Firepond's initial public offering. This matter was settled on
or about June 8, 2004 and this settlement is subject to final approval by the
court. On August 4, 2004 the plaintiffs and issuer defendants separately filed
replies to the underwriter defendants' objectives to the settlement. The court
granted the preliminary approval motion on February 15, 2005, subject to certain
modifications. The parties are directed to report back to the court regarding
the modifications. If the parties are able to agree upon the required
modifications, and such modifications are acceptable to the court, notice will
be given to all class members of the settlement. A "fairness" hearing has been
set for April 26, 2006 and if the court determines that the settlement is fair
to the class members, the settlement will be approved. There can be no assurance
that this proposed settlement will be approved and implemented. Any direct
financial impact of the proposed settlement is expected to be borne by the
Company's insurance carriers.
The Company is not a party to any other legal or administrative proceedings,
other than routine litigation incidental to its business that the Company does
not believe, individually or in the aggregate, would be likely to have a
material adverse effect on its financial condition or results of operations.
11
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Certain statements in the "Management's Discussion and Analysis of Financial
Condition and Results of Operations" are forward-looking statements that involve
risks and uncertainties. Words such as anticipates, expects, intends, plans,
believes, seeks, estimates, and similar expressions identify such
forward-looking statements. The forward-looking statements contained herein are
based on current expectations and entail various risks and uncertainties that
could cause actual results to differ materially from these expressed in such
forward-looking statements. Factors that might cause such a difference include,
among other things, those set forth under "Risk Factors", "Overview", and
"Liquidity and Capital Resources" included in these sections and those appearing
elsewhere in this Form 8-K. Readers are cautioned not to place undue reliance on
these forward-looking statements, which reflect management's analysis only as of
the date hereof. We assume no obligation to update these forward-looking
statements to reflect actual results or changes in factors or assumptions
affecting forward-looking statements.
Overview
AFG Enterprises USA, Inc. (the "Company", "AFG", "we", "us" or "our"), through
its wholly-owned subsidiary FP Technology Holdings, Inc. ("FP" or "FP
Technology") and its predecessor Firepond, Inc. ("Firepond"), is a leading
provider of enterprise software that optimizes the process of converting leads
into accurate orders. Our SalesPerformer sales configuration system guides sales
people, channel partners and customers through the entire "lead-to-order"
business process -- delivering lead management, needs analysis, product and
pricing configuration, quote and proposal generation, and order management. We
provide interactive selling software solutions that help companies profitably
acquire and retain customers. The complementary configuration, pricing and
guided selling solutions are based on patented technology. Our solutions help
drive new revenue streams, increase profitability, and manage customer
interactions across all channels throughout the sales cycle.
From the inception of our predecessor, Firepond, in 1983 through 1997, we
generated revenue primarily through providing custom development services. These
services consisted of the development of highly customized applications
utilizing core software technology, and related software maintenance and data
maintenance services. In early fiscal 1997, Firepond undertook a plan to change
its strategic focus from a custom development services company to a software
product company providing more standardized solutions. Firepond's first packaged
software product was introduced in May 1997. Firepond released the Firepond
Application Suite in October 1999, and renamed and repackaged the Firepond
Application Suite as the SalesPerformer Suite in December 2000.
In February 2000, Firepond completed its initial public offering. Soon
thereafter, as a result of a global slowdown in information technology spending,
including in the Customer Relationship Management market, Firepond undertook
comprehensive plans to restructure its operations. Firepond incurred substantial
losses from 2000 through 2003. Throughout this period Firepond invested heavily
in research and development. On December 2, 2003, Jaguar Technology Holding, LLC
acquired Firepond in exchange for cash equal to $3.16 per share, and Firepond
became a private company.
Upon completion of the acquisition by Jaguar, the net assets of Firepond were
adjusted to reflect the new basis of the assets, in accordance with FAS 141. The
difference between the new basis of Firepond's assets and the fair market value
of its assets at the date of the acquisition was recorded as goodwill.
The difference between Firepond's new basis and the fair market value of its
assets at the date of the acquisition was recorded as goodwill. A summary of the
assets purchased in the acquisition is as follows:
Cash $ 5,109,081
Receivables 859,571
Assets to be sold 2,465,174
Other assets 641,065
Property and equipment 191,600
Intangible assets 1,731,200
Accounts Payable (481,062)
Accrued liabilities (1,920,701)
Deferred Revenue (3,207,042)
Accrued Restructuring (809,818)
Liabilities associated with assets to be sold (3,160,156)
Notes Payable (7,000,000)
-----------
Basis of net liabilities assumed (5,581,088)
-----------
Goodwill 5,581,088
-----------
12
On September 13, 2005, Firepond transferred most of its assets and liabilities
to FP as part of a restructuring and new financing transaction, pursuant to
which Trident Growth Fund, LLC provided $2.5 million in secured debt financing
in September and November 2005. Interest accrues on the debt secured promissory
notes issued to Trident at a rate of 12% per annum. Principal repayment is due
on September 30, 2006. The funds received from this financing were used for
working capital and to fund FP's transition from the legacy enterprise software
business to the OnDemand revenue model.
Technological feasibility of our software products occurs 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. As such, we expense these costs
as incurred to research and development expense. To enhance our product offering
and market position, we believe it is essential for us to continue to make
significant investment in research and development.
We have not incurred any stock-based compensation during the periods discussed.
We anticipate that some stock based compensation will be incurred in fiscal 2006
through restricted stock grants to board members and executive management.
As of December 31, 2005, we had available net operating losses of approximately
$15 million, which may be available to reduce our future federal income taxes.
These loss carry-forwards will expire beginning in fiscal 2022, and may be
subject to review and possible adjustment by the Internal Revenue Service.
Utilization of these loss carry forwards has been limited due to the ownership
change limitations provided by the Internal Revenue Service Code of 1986.
Acquisition by AFG Enterprises USA, Inc.; Recent Private Financings
Acquisition by AFG Enterprises USA, Inc.
On March 29, 2006, FP was acquired by AFG Enterprises USA, Inc. pursuant to an
Agreement and Plan of Merger. In connection with the FP Acquisition, the Company
changed its fiscal year from December 31 to June 30. AFG issued an aggregate of
3,991,939 shares of its common stock, par value $0.001 per share, to the
shareholders of FP in the transaction.
CAP Financing - Private Placement of Notes and Warrants
On March 29, 2006, the Company entered into a Securities Purchase Agreement (the
"Purchase Agreement") with each of the investors listed on the Schedule of
Buyers attached thereto (the "Buyers"), pursuant to which the Buyers agreed to
purchase (i) the Company's Senior Secured Nonconvertible Notes due 2011 (the
"Nonconvertible Notes") in an aggregate principal amount of $50,000,000, which
Nonconvertible Notes may be exchanged for Senior Secured Convertible Notes due
2011 (the "Convertible Notes", and together with the Nonconvertible Notes, the
"Notes") or redeemed under certain circumstances, and which Convertible Notes
are convertible into shares of the Company's common stock (the "Conversion
Shares"); and (ii) warrants (the "Warrants") to acquire in the aggregate up to
6,875,000 shares of the Company's common stock in such amounts set forth
opposite each Buyer's name in the Schedule of Buyers attached to the Purchase
Agreement (the "Warrant Shares"), exercisable from the earlier of six months
after issuance or the Threshold Acquisition Date (as such term is defined in the
Indenture, described below) until March 29, 2011 at an exercise price equal to
the lower of $8.00 and 125% of the per share price of the Company's common stock
to be sold in a new private placement transaction which the Company intends to
complete within six months. The purchase and sale of the Notes and Warrants was
consummated on March 29, 2006.
13
On March 29, 2006, the Company also entered into a Registration Rights Agreement
with the Buyers, whereby the Company agreed to provide certain registration
rights in respect of the Conversion Shares and the Warrant Shares under the
Securities Act of 1933 and the rules and regulations promulgated thereunder, and
applicable state securities laws.
Pursuant to the terms of an Indenture dated as of March 29, 2006 (the
"Indenture") executed by the Company, as Issuer, and The Bank of New York, as
Trustee (in such capacity, the "Trustee"), the Company issued the Nonconvertible
Notes to the Buyers. Under the terms of the Indenture and the Escrow Agreement
dated as of March 29, 2006 (the "Escrow Agreement") between the Company and the
Trustee, ninety-five percent of the proceeds of the Nonconvertible Notes were
paid into an interest-bearing account (the "Escrow Account") maintained by the
Escrow Agent for the benefit of the holders of the Nonconvertible Notes (the
"Nonconvertible Holders").
While any Nonconvertible Notes are outstanding, the Company may propose to
consummate a business combination transaction in which the Company will acquire
by merger, securities purchase, asset purchase or otherwise, a majority of the
assets or equity of another entity for a purchase price of at least $15,000,000,
and each Nonconvertible Holders may vote to approve such transaction. Approval
of a business combination transaction requires the affirmative vote of holders
of at least 75% of the principal amount of outstanding Nonconvertible Notes. The
amount funded from the Escrow Account must be (i) at least 50% of the amount
required for an approved business combination transaction (including purchase
price, fees and expenses of the transaction and additional working capital
requirements of the Company), unless the available amount from the Escrow
Account at such time is less than 50% of the amount required, in which case such
amount shall equal the available amount, and (ii) at least $15 million. A pro
rata amount of the principal amount of the Nonconvertible Notes of each
Nonconvertible Holder voting in favor of such business combination transaction
will be exchanged for Convertible Notes, and an amount equal to the total
principal amount of such exchanged Nonconvertible Notes will be released from
the Escrow Account and used to consummate such business combination transaction.
The indebtedness evidenced by the Notes is senior secured indebtedness of the
Company, and ranks superior to the Company's other indebtedness. As security for
the Company's obligations under the Indenture, the Company and FP have each
executed (i) a Security Agreement dated as of March 29, 2006 (the "Security
Agreement"), pursuant to which the Company and FP granted a security interest in
all assets of the Company and FP in favor of the Trustee, in its capacity as
collateral agent for the Nonconvertible Holders and the holders of the
Convertible Notes under the Indenture (in such capacity, the "Collateral
Agent"), and (ii) a Pledge Agreement dated as of March 29, 2006, pursuant to
which the Company pledged its interest in FP in favor of the Collateral Agent.
FP has executed a separate Guaranty dated as of March 29, 2006 in favor of the
Collateral Agent.
Private Placement of Common Stock
The Company is a party to a certain Credit Agreement between Acclaim Financial
Group Venture II, LLC ("AFGV") and the Company dated July, 15, 2003 (the "Credit
Agreement"), pursuant to which the Company was indebted to AFGV in the amount of
approximately $313,421.44 (the "Claim"). On March 29, 2006, AFGV sold its rights
to the Claim to Benchmark Equity Group, Inc. ("BMEG"), which agreed with the
Company to cancel the Claim in full in exchange for 1,008,062 shares of common
stock of the Company to be issued to BMEG or its designees, pursuant to an
Exchange Agreement between the Company and BMEG (the "Exchange Agreement"). On
March 29, 2006, the Company issued 1,008,062 shares of the Company's common
stock to BMEG and its designees pursuant to the Exchange Agreement.
Critical Accounting Policies
In December 2001, the SEC requested that all registrants list their most
"critical accounting policies" in the Management's Discussion & Analysis. The
SEC indicated that a "critical accounting policy" is one which is both important
to the portrayal of the Company's financial condition and results and requires
our most difficult, subjective or complex judgments, often as a result of the
need to make estimates about the effect of matters that are inherently
uncertain. We believe that the following accounting policies fit this
definition:
14
Revenue Recognition
The Company recognizes revenue based on the provisions of the American Institute
of Certified Pubic Accountants (AICPA) Statement of Position, No. 97-2,
"Software Revenue Recognition" ("SOP 97-2"), as amended, and Statement of
Position No. 81-1, "Accounting for Performance of Construction-Type and Certain
Production-Type Contracts" ("SOP 81-1").
The Company generates revenue from license and service revenue. License revenue
is generated from licensing the rights to the use of the Company's packaged
software products. Service revenue is generated from sales of maintenance,
consulting and training services performed for customers that license the
Company's products.
The Company has concluded that generally, where the Company is responsible for
implementation services for the SalesPerformer product suite and its components,
the implementation services are essential to the customer's use of the packaged
software products. In such arrangements, the Company recognizes revenue
following the percentage-of-completion method over the implementation period.
Percentage of completion is measured by the percentage of implementation hours
incurred to date compared to estimated total 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.
When the current estimates of total contract revenue and contract cost indicate
a loss, a provision for the entire loss on the contract is recorded.
In situations where the Company is not responsible for implementation services
for the SalesPerformer product suite, the Company recognizes revenue on delivery
of the packaged software if there is persuasive evidence of an arrangement,
collection is probable and the fee is fixed or determinable. In situations where
the Company is not responsible for implementation services for the
SalesPerformer product suite, but is obligated to provide unspecified additional
software products in the future, the Company recognizes revenue as a
subscription over the term of the commitment period.
For product sales that are recognized on delivery, the Company will execute
contracts that govern the terms and conditions of each software license, as well
as maintenance arrangements and other services arrangements. If an arrangement
includes an acceptance provision, acceptance occurs upon the earlier of receipt
of a written customer acceptance or expiration of the acceptance period.
Revenue under multiple element arrangements, which may include several different
software products and services sold together, is allocated to each element based
on the residual method in accordance with Statement of Position, No. 98-9,
"Software Revenue Recognition with Respect to Certain Arrangements" ("SOP
98-9"). The Company uses the residual method when vendor-specific objective
evidence of fair value does not exist for one of the delivered elements in the
arrangement. Under the residual method, the fair value of the undelivered
elements is deferred and subsequently recognized. The Company has established
sufficient vendor-specific objective evidence for professional services,
training and maintenance and support services based on the price charged when
these elements are sold separately. Accordingly, software license revenue is
recognized under the residual method in arrangements in which software is
licensed with professional services, training, and maintenance and support
services.
Revenue from maintenance services is recognized ratably over the term of the
contract, typically one year. Consulting revenue is primarily related to
implementation services performed on a time-and-materials basis under separate
service arrangements. Revenue from consulting and training services is
recognized as services are performed.
OnDemand Hosted Licensed Revenue
For Firepond OnDemand contracts, the Company does not actually deliver a
software product to a customer for installation on the customer's in-house
systems but rather makes the software available to the customer through a
Company hosting arrangement. In this case the Company installs and runs the
software application either on its own or a third-party's server giving
customers access to the application via the Internet or a dedicated line.
Accordingly, the Company evaluates its revenue recognition in consideration of
SOP 97-2 or whether such activity falls outside of such guidance.
15
An Emerging Issues Task Force was tasked with assessing the applicability of SOP
97-2 to such hosting arrangements and considering how a vendor's hosting
obligation would impact revenue recognition. This discussion resulted in the
issuance of EITF 00-03, Application of AICPA Statement of Position 97-2 to
Arrangements That Include the Right to Use Software Stored on Another Entity's
Hardware. Under this EITF, the Task Force reached a consensus that a hosting
arrangement is within the scope of SOP 97-2 if:
o the customer has the contractual right to take possession of the
software at any time during the hosting period without significant
penalty; and
o it is feasible for the customer to either run the software on its
own hardware or contract with another party unrelated to the vendor
to host the software without significant penalty.
This allows the Company the ability to recognize that portion of the fee
attributable to the license on delivery, while that portion of the fee related
to the hosting element would be recognized ratably as the service is provided,
assuming all other revenue recognition criteria have been met. If a hosting
arrangement fails to meet the requirements of EITF 00-03 then the arrangement is
not considered to have a software element and therefore is outside of the scope
of SOP 97-2. The hosting arrangement, which would follow a services accounting
model, would then likely be accounted for in accordance with the guidance
contained in SAB 101. SAB 101 contains the same four basic criteria for revenue
recognition as SOP 97-2:
o Persuasive evidence of an arrangement exists;
o Delivery has occurred or services have been rendered;
o The vendor's price to the buyer is fixed or determinable; and
o Collectibility is reasonably assured.
Once these conditions have been met, revenue can be recognized. SAB 101 was
amended by SAB 104 which codified current and existing revenue recognition
issues. In consideration of the above criteria, in general terms, revenue from
product-related hosted solution is recognized ratably over the term of the
contract after payment has been received. Hosted solution includes unspecified
upgrades, end user support up to two primary contacts and hosted server support.
Revenue from maintenance services is recognized ratably over the term of the
contract, typically one year. Consulting revenue is primarily related to
implementation services performed on a time-and-materials basis under separate
service arrangements. Revenue from consulting and training services is
recognized as services are performed.
Firepond recorded deferred revenue on amounts billed or collected by Firepond
before satisfying the above revenue recognition criteria. Deferred revenue at
June 30, 2005 consisted of the following:
Period Ended
June 30, 2005
-------------
Product license $ 34,023
Product-related services 46,314
Product-related maintenance 1,107,950
-------------
$ 1,188,287
=============
Cost of Revenue
Cost of licenses includes royalties, media, product packaging, documentation,
other production costs.
Cost of product-related services and maintenance and cost of custom development
services revenue consist primarily of salaries, related costs for development,
consulting, training and customer support personnel, including cost of services
provided by third-party consultants engaged by the Company.
16
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets, as follows:
Computer equipment and software 2 to 5 years
Furniture and fixtures 5 years
Leasehold improvements 5 years
The cost of assets retired or disposed of and the accumulated depreciation
thereon is removed from the accounts with any gain or loss realized upon sale or
disposal credited or charged to operations, respectively.
Goodwill
Prior to the January 1, 2002 implementation of Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets" (SFAS 142"), goodwill
was amortized on a straight-line basis over 5-20 years. Since that date,
goodwill has been subject to periodic impairment tests in accordance with SFAS
142.
The Company identifies and records impairment losses on long-lived assets,
including goodwill that is not identified with an impaired asset, when events
and circumstances indicate that an asset might be impaired. Events and
circumstances that may indicate that an asset is impaired include significant
decreases in the market value of an asset, a change in the operating model or
strategy and competitive forces.
If events and circumstances indicate that the carrying amount of an asset may
not be recoverable and the expected undiscounted future cash flow attributable
to the asset is less than the carrying amount of the asset, an impairment loss
equal to the excess of the asset's carrying value over its fair value is
recorded. Fair value is determined based on the present value of estimated
expected future cash flows using a discount rate commensurate with the risk
involved, quoted market prices or appraised values, depending on the nature of
the assets.
Computer Software Development Costs and Research and Development Expenses
The Company incurs software development costs associated with its licensed
products as well as new products. Since June 1997, the Company 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. Because the development costs incurred between the time
technological feasibility is established and general release of the product are
not material, the Company expenses these costs as incurred.
Recently Issued Accounting Pronouncements
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs". SFAS No. 151
amends the accounting for abnormal amounts of idle facility expense, freight,
handling costs, and wasted material (spoilage) under the guidance in ARB No. 43,
Chapter 4,"Inventory Pricing". Paragraph 5 of ARB No. 43, Chapter 4, previously
stated that ". . . under some circumstances, items such as idle facility
expense, excessive spoilage, double freight, and re-handling costs may be so
abnormal as to require treatment as current period charges. . . ." This
Statement requires that those items be recognized as current-period charges
regardless of whether they meet the criterion of "so abnormal." In addition,
this Statement requires that allocation of fixed production overheads to the
costs of conversion be based on the normal capacity of the production
facilities. This statement is effective for inventory costs incurred during
fiscal years beginning after June 15, 2005. Management does not expect adoption
of SFAS No. 151 to have a material impact on the Company's financial statements.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets," an amendment to Opinion No. 29, "Accounting for Nonmonetary
Transactions". Statement No. 153 eliminates certain differences in the guidance
in Opinion No. 29 as compared to the guidance contained in standards issued by
the International Accounting Standards Board. The amendment to Opinion No. 29
eliminates the fair value exception for nonmonetary exchanges of similar
productive assets and replaces it with a general exception for exchanges of
nonmonetary assets that do not have commercial substance. Such an exchange has
commercial substance if the future cash flows of the entity are expected to
change significantly as a result of the exchange. SFAS No. 153 is effective for
nonmonetary asset exchanges occurring in periods beginning after June 15, 2005.
Earlier application is permitted for nonmonetary asset exchanges occurring in
periods beginning after December 16, 2004. Management does not expect adoption
of SFAS No. 153 to have a material impact on the Company's financial statements.
17
In May, 2005 the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections - a replacement of APB Opinion No. 20 and FASB Statement No. 3."
SFAS No. 154 replaces APB Opinion ("APB") No. 20, "Accounting Changes", and SFAS
No. 3, "Reporting Accounting Changes in Interim Financial Statements," and
changes the requirements for the accounting for and reporting of a change in
accounting principle. SFAS No. 154 will apply to all voluntary changes in
accounting principle as well as to changes required by an accounting
pronouncement in the unusual instance that the pronouncement does not include
specific transition provisions. APB No. 20 previously required that most
voluntary changes in accounting principle be recognized by including in net
income of the period of the change the cumulative effect of changing to the new
accounting principle. SFAS No. 154 requires retrospective application to prior
periods' financial statements of changes in accounting principle, unless it is
impracticable to determine either the period-specific effects or the cumulative
effect of the change. When it is impracticable to determine the period-specific
effects of an accounting change on one or more individual prior periods
presented, SFAS No. 154 requires that the new accounting principle be applied to
the balances of assets and liabilities as of the beginning of the earliest
period for which retrospective application is practicable and that a
corresponding adjustment be made to the opening balance of retained earnings (or
other appropriate components of equity or net assets in the statement of
financial position) for that period rather than being reported in an income
statement. When it is impracticable to determine the cumulative effect of
applying a change in accounting principle to all prior periods, SFAS No. 154
requires that the new accounting principle be applied as if it were adopted
prospectively from the earliest date practicable. SFAS No. 154 carries forward
without change the guidance contained in APB No. 20 for reporting the correction
of an error in previously issued financial statements and a change in accounting
estimate, and also the guidance in APB No. 20 requiring justification of a
change in accounting principle on the basis of preferability.
SFAS No. 154 is effective for accounting changes and corrections of errors made
in fiscal years beginning after December 15, 2005. Early adoption is permitted
for accounting changes and corrections of errors made in fiscal years beginning
after the date SFAS No. 154 was issued. The Company presently does not believe
that the adoption of the provisions of SFAS No. 154 will have a material affect
on its financial statements.
In December 2004, the FASB issued SFAS No. 123 (Revised 2004), "Share Based
Payment," which eliminates the use of APB Opinion No. 25 and will require the
Company to measure the cost of employee services received in exchange for an
award of equity instruments based on the grant-date fair value of the award.
That cost will be recognized over the period during which an employee is
required to provide service in exchange for the reward (the requisite service
period). No compensation cost is recognized for equity instruments for which
employees do not render the requisite service. The grant-date fair value of
employee share options and similar instruments will be estimated using
option-pricing models adjusted for the unique characteristics of those
instruments. SFAS 123 (Revised) must be applied to all options granted or
modified after its effective date and also to recognize the cost associated with
the portion of any option awards made before its effective date for with the
associated service has not been rendered as of its effective date. On April 14,
2005, the U.S. Securities and Exchange Commission announced that the effective
date of SFAS 123(Revised) is deferred for calendar year companies until the
beginning of 2006.
The Company is still studying the requirements of SFAS No. 123 (Revised 2004)
and has not yet determined what impact it will have on the Company's results of
operations and financial position. However, FP issued restricted stock grants to
Bill Santo (750,000 Common shares) and Stephen Peary (500,025 Common shares) in
January 2006. In addition, FP issued a total of 3,100,008 shares of its
restricted common stock to its directors and executive officers in March of 2006
in connection with the CAP Financing, which shares were exchanged for 1,250,000
shares of the Company's restricted common stock as a result of the merger. The
impact of these restricted stock grants on Company earnings is being studied.
18
In March 2005, the FASB issued FASB Interpretation ("FIN") No. 47, "Accounting
for Conditional Asset Retirement Obligations". FIN No. 47 clarifies that the
term conditional asset retirement obligation as used in FASB Statement No. 143,
"Accounting for Asset Retirement Obligations," refers to a legal obligation to
perform an asset retirement activity in which the timing and (or) method of
settlement are conditional on a future event that may or may not be within the
control of the entity. The obligation to perform the asset retirement activity
is unconditional even though uncertainty exists about the timing and (or) method
of settlement. Uncertainty about the timing and/or method of settlement of a
conditional asset retirement obligation should be factored into the measurement
of the liability when sufficient information exists. This interpretation also
clarifies when an entity would have sufficient information to reasonably
estimate the fair value of an asset retirement obligation. FIN No. 47 is
effective no later than the end of fiscal years ending after December 15, 2005
(December 31, 2005 for calendar-year companies). Retrospective application of
interim financial information is permitted but is not required. Management does
not expect adoption of FIN No. 47 to have a material impact on the Company's
financial statements.
Results of Operations
The discussion below compares the fiscal years ended June 30, 2005 and October
31, 2004 as well as the fiscal years ended October 31, 2004 and October 31,
2003. In 2005 Firepond changed its fiscal year end to June 30 from October 31 to
coincide with the fiscal year end of FP. This change permits future analysis of
comparable operating periods for FP.
In reviewing the financial statements for these periods, the reader is reminded
of the following factors that may bear on his or her analysis of the presented
periods:
(1) On September 13, 2005, Firepond sold most of its assets and
transferred most of its liabilities to FP as part of a new financing
of FP. While this transaction created a new legal entity going
forward, for accounting purposes, the two companies are treated as
one.
(2) At the time of the acquisition, Firepond changed its fiscal year end
to coincide with the fiscal year end of FP (June 30). This change is
required so that analysis of FP's future performance can be made
over comparable twelve month periods. Thus, the audited statements
for the fiscal year ended June 30, 2005 are for only an eight month
period.
(3) The audited statements for fiscal year end October 31, 2004 are for
only an eleven month period. While Firepond did not change its
fiscal year during this reporting period, Firepond was acquired by
Jaguar Technology Holdings, LLC. in December 2003. This acquisition
required application of purchase accounting rules treating Firepond
after the acquisition as a new company for accounting purposes.
Firepond's results of operations for the twelve month period ended
October 31, 2004 are reported in Footnote 1 of these audited
financial statements.
(4) The audited statements for the fiscal year end October 31, 2003 are
for a full twelve month period.
(5) Prior to the acquisition of Firepond by Jaguar Technology Holdings
the stock of Firepond was publicly traded.
(6) None of senior management at the time of the acquisition of Firepond
remains with the Company or its subsidiaries today.
(7) Throughout the three periods provided, Firepond was undergoing
extensive restructuring due to the worldwide down turn in technology
spending and the acquisition of Firepond by a private firm
dramatically altered Firepond's operating landscape. As of the date
of this document, the restructuring of the Company is now complete.
We encourage the reader to read the pro forma performance of Firepond during the
twelve month periods ended June 30, 2005 and June 30, 2004, presented at the end
of this Results of Operations discussion.
Comparison of fiscal years ended June 30, 2005 (eight months) and October 31,
2004 (11 months)
Revenue
FP and Firepond generate revenue from license and service revenue. License
revenue is generated from licensing the rights to the use of FP's packaged
software products. Service revenue is generated from sales of maintenance,
consulting and training services performed for customers that license FP's
products.
19
In fiscal years ended October 31, 2004 and June 30, 2005, Firepond generated the
follow revenues:
Fiscal Year Ended Fiscal Year Ended
October 31, 2004 June 30, 2005
-------------------------------------------
Revenues $8,950,055 $2,841,394
The decrease in revenue in the fiscal year ended June 30, 2005 is primarily
attributable to the substantially shorter period presented and to the renewal of
a license with a legacy client at the end of the fiscal year ended October 31,
2004. This renewal changed a periodic license to a permanent license and made up
34.6% of revenues in the period.
Cost of Revenue
Total cost of revenue decreased $0.8 million, or 39.2%, to $1.3 million for the
fiscal year ended June 30, 2005 from $2.1 million in fiscal year ended October
31, 2004. Total cost of revenue as a percentage of total revenue increased to
44.7% in the fiscal year ended June 30, 2005 from 23.3% in fiscal year ended
October 31, 2004. The decrease in cost of revenue is primarily attributable to
the substantially shorter period presented offset in part by the efforts
required to launch our OnDemand product along with a large sale that was
recorded in October, 2004. This later factor is reflected in the increase in the
cost of revenue as a percentage of total revenue in the fiscal year ended June
30, 2005.
In the fiscal years ended October 31, 2004 and June 30, 2005, Firepond incurred
the following costs of revenues:
Fiscal Year Ended Fiscal Year Ended
October 31, 2004 June 30, 2005
------------------------------------------
Cost of Revenue $2,087,776 $1,269,357
Components of Operating Expenses and Other Items
Sales and General and Administrative
In the fiscal years ended October 31, 2004 and June 30, 2005, Firepond incurred
the following sales and general and administrative expenses:
Fiscal Year Ended Fiscal Year Ended
October 31, 2004 June 30, 2005
----------------------------------------
Sales, General and Administrative $1,330,110 $1,343,750
Sales expenses consist primarily of salaries, commissions and bonuses for sales
and marketing personnel and promotional expenses. General and administrative
expenses consist primarily of salaries and other personnel-related cost for
executive, financial, human resource, information services, and other
administrative functions, as well as legal and accounting costs. Sales and
general and administrative expenses increased $13,640, or 1.0% in the fiscal
year ended June 30, 2005. Sales and general and administrative expenses as a
percentage of total revenue increased to 47.3% for the fiscal year ended June
30, 2005 from 14.9% for the fiscal year ended October 31, 2004. Sales and
general and administrative expenses increased in absolute dollars and as a
percentage of total revenue primarily due to a large decrease in 2004 in the
allowance for doubtful accounts, and in 2005 a reduction in accounting fees and
decrease in sales.
Research and Development Expenses
In the fiscal years ended October 31, 2004 and June 30, 2005, Firepond incurred
the following research and development expenses:
Fiscal Year Ended Fiscal Year Ended
October 31, 2004 June 30, 2005
------------------------------------------
Research and Development $1,953,895 $1,118,141
20
Research and development expenses consist primarily of salaries and
personnel-related costs and the costs of contractors associated with the
development of new products, the enhancement of existing products, and the
performance of quality assurance and documentation activities. Research and
development expenses decreased $0.8 million, or 42.8% for the fiscal year ended
June 30, 2005. Research and development expenses as a percentage of total
revenue increased to 39.4% in the fiscal year ended June 30, 20005 from 21.8% in
fiscal year ended October 31, 2004. These expenses decreased in absolute dollars
as a result of our restructuring efforts, including the reduction in headcount
and decreased utilization of engineering and product development contractors as
well as the comparable shorter period. Research and development expenses
increased as a percentage of total revenue primarily due to a combination of
decreased revenue for the shortened period and research and development expenses
not decreasing proportionally.
Restructuring and other Special Charges Expense
In the fiscal years ended October 31, 2004 and June 30, 2005, Firepond incurred
the following restructuring charges:
Fiscal Year Ended Fiscal Year Ended
October 31, 2004 June 30, 2005
------------------------------------------
Restructuring Charges $ 3,447,293 $ 176,578
During the fiscal year ended October 31, 2003 and continuing into fiscal year
2005, Firepond undertook plans to restructure its operations as a result of a
prolonged slowdown of global information technology spending, specifically
within the enterprise software marketplace. As such, Firepond announced a
strategic realignment to better align its cost structure with projected revenue
and preserve cash. Firepond reduced its headcount and facilities as well as
wrote-off excess equipment and terminated and restructured certain contractual
relationships. During the fiscal year ended October 31, 2004 and June 30, 2005
Firepond terminated several employees. The restructuring and other special
charges for the fiscal years ended October 31, 2004 and June 30, 2005 totaled
$3,447,293 and $176,578, respectively. The majority of these costs in fiscal
year end October 31, 2004 were excess contractual commitments and termination
fees related to legal fees and consulting fees for the Jaguar Technology
Holdings acquisition of Firepond. As of the date of this filing, the Company
believes restructuring efforts are ended.
Settlement of Claim
In the fiscal years ended October 31, 2004 and June 30, 2005, Firepond recorded
a settlement of claim results as follows:
Fiscal Year Ended Fiscal Year Ended
October 31, 2004 June 30, 2005
------------------------------------------
Settlement of Claim $0 $(646,863)
On April 8, 2004 Firepond entered in an agreement with General Motors
Corporation settling all matters between the companies arising under prior
management for the sum of $7 million. Firepond executed a note payable to GM as
part of the settlement. On September 13, 2005, Firepond, FP Technology and
General Motors entered into a letter agreement whereby General Motors accepted
$1,250,000 in cash from FP Technology, received a $250,000 unsecured note from
FP Technology, cancelled the note due from Firepond and released its security
interest in Firepond assets. The settlement of claim at June 30, 2005 represents
principal reduction of $450,000 and the interest forgone by General Motors as
part of such settlement.
Other Income (Expense) Net
In the fiscal years ended October 31, 2004 and June 30, 2005 Firepond incurred
the following other income (expense), net:
Fiscal Year Ended Fiscal Year Ended
October 31, 2004 June 30, 2005
------------------------------------------
Other Income (Expense), Net $(82,179) $(100,124)
21
Other income (expense), net primarily consists of interest expense, bank fees,
certain state and local taxes and foreign currency transaction gains/losses.
Other income (expense), net increased $0.02 million in the fiscal year ended
June 30, 2005 from the fiscal year end October 31, 2004. Other Income (Expense),
Net in the fiscal year ended June 30, 2005 was due to a decrease in Firepond's
D&O insurance. Other Income in fiscal year end October 31, 2004 included accrued
interest of approximately $17,000 on a loan receivable which interest was
subsequently written off, offset by a charge resulting from the impairment of a
legacy software system.
Interest expense in the fiscal year ended October 31, 2004 and June 30, 2005 is
accrued interest on the note payable to General Motors Corporation. The amount
in the fiscal year ended June 30, 2005 decreased from the comparable period as
the period for computing interest is shorter and the principal amount of the
obligation was lower.
Income (Loss) from Continuing Operations:
The above resulted in an income from continuing operations of $48,802 in the
fiscal year ended October 31, 2004 and a loss from continuing operations of
$519,693 for the eight months ended June 30, 2005.
Income (Loss) from Discontinued Operations:
In the fiscal years ended October 31, 2004 and June 30, 2005, Firepond incurred
the following Income (loss) from discontinued operations:
Fiscal Year Ended Fiscal Year Ended
October 31, 2004 June 30, 2005
------------------------------------------
Income (Loss) Discontinued $(118,005) $0
Gain on Disposal of Discontinued Operations
In the fiscal years ended October 31, 2004 and June 30, 2005, Firepond incurred
the following gain on disposal of discontinued operations:
Fiscal Year Ended Fiscal Year Ended
October 31, 2004 June 30, 2005
------------------------------------------
Gain on Disposal of Discontinued Ops $0 $2,560,885
In August 2003 Firepond decided to terminate operations of all foreign
subsidiaries. During the fiscal year ended June 30, 2005, Firepond recorded the
elimination of the liabilities associated with its foreign discontinued
operations except for Germany and Switzerland which at the time were still in
the process of liquidation. This elimination resulted in Firepond recording
approximately $2.6 million in income gain on disposal of discontinued
operations.
Comparison of fiscal years ended October 31, 2004 (11 months) and October 31,
2003
Firepond was acquired in December 2003 by Jaguar Technology Holdings, LLC. After
the acquisition, Firepond became a private company and as such no longer had to
file annual or quarterly financial information with the Securities and Exchange
Commission. While an audit of Firepond was performed, an Annual Report on Form
10-K was not filed for the fiscal year ended October 31, 2003. None of senior
management from the period that Firepond was a pubic company remains with the
Company or its subsidiaries today. As such it is not possible to detail why
certain items noted below increased or decreased as compared to the subsequent
year. Where it is not possible to make such a determination, the numbers are
reported without comparative explanation.
22
Also, the audited statements for the fiscal year end October 31, 2003 are broken
out in different categories that those for the fiscal year ended October 31,
2004. The accounting information available to the Company for the earlier period
does not provide sufficient detail to determine the basis for some or many
reported results. Where appropriate, we have combined categories for comparative
purposes.
Revenue
In fiscal years ended October 31, 2003 and October 31, 2004, Firepond generated
the follow revenues:
Fiscal Year Ended Fiscal Year Ended
October 31, 2003 October 31, 2004
------------------------------------------
Revenues $8,721,552 $8,950,055
Cost of Revenue
Total cost of revenue decreased $1.17 million, or 35.8%, to $2.08 million for
the fiscal year ended June 30, 2004 from $3.25 million in fiscal year ended
October 31, 2004. Total cost of revenue as a percentage of total revenue
decreased to 23.3% in the fiscal year ended June 30, 2004 from 37.3% in fiscal
year ended October 31, 2003.
In the fiscal years ended October 31, 2003 and October 31, 2004, Firepond
incurred the following costs of revenues:
Fiscal Year Ended Fiscal Year Ended
October 31, 2003 October 31, 2004
------------------------------------------
Cost of Revenue $3,253,314 $2,087,776
Components of Operating Expenses and Other Items
Sales and General and Administrative
In the fiscal years ended October 31, 2003 and October 31, 2004, Firepond
incurred the following sales and general and administrative expenses:
Fiscal Year Ended Fiscal Year Ended
October 31, 2003 October 31, 2004
------------------------------------------
Sales, General and Administrative $11,691,569 $1,330,110
Sales expenses consist primarily of salaries, commissions and bonuses for sales
and marketing personnel and promotional expenses. General and administrative
expenses consist primarily of salaries and other personnel-related cost for
executive, financial, human resource, information services, and other
administrative functions, as well as legal and accounting costs. Sales and
general and administrative expenses decreased $10,361,459, or 88.6% in the
fiscal year ended October 31, 2004. Sales and general and administrative
expenses exceeded total revenue for the fiscal year ended October 31, 2003.
Sales and general and administrative expenses decreased substantially in fiscal
year end October 31, 2004 due to restructuring and cost control measures
instituted by Jaguar Technology Holdings after the acquisition of Firepond
Research and Development Expenses
In the fiscal years ended October 31, 2003 and October 31, 2004, Firepond
incurred the following research and development expenses:
Fiscal Year Ended Fiscal Year Ended
October 31, 2003 October 31, 2004
------------------------------------------
Research and Development $4,002,654 $1,953,895
23
Research and development expenses consist primarily of salaries and
personnel-related costs and the costs of contractors associated with the
development of new products, the enhancement of existing products, and the
performance of quality assurance and documentation activities. Research and
development expenses decreased $2.05 million, or 51.2% for the fiscal year ended
October 31, 2004. Research and development expenses as a percentage of total
revenue increased to 21.8% in the fiscal year ended October 31, 2004 from 45.9%
in fiscal year ended October 31, 2003. These expenses decreased in absolute
dollars as a result of our restructuring efforts, including the reduction in
headcount and decreased utilization of engineering and product development
contractors.
Legal Settlement Expense
In the fiscal years ended October 31, 2003 and October 31, 2004, Firepond
incurred the following legal settlement expense:
Fiscal Year Ended Fiscal Year Ended
October 31, 2003 October 31, 2004
------------------------------------------
Legal Settlement Expense $7,000,000 $0
In October 2001, General Motors Corporation filed a complaint against Firepond
in the Superior Court of Massachusetts, Middlesex County. The complaint alleged,
among other things, a breach of contract under agreements entered into in 1994;
anticipatory repudiation in the spring of 2000 of agreements entered into in
1994; unjust enrichment; establishment of a constructive trust; rescission and
restitution based on failure of consideration as well as violation of unfair and
deceptive trade practice laws, among other things. The matter was settled in
April 2004. Per the terms of the settlement, Firepond estimated and accrued a
liability of $7,000,000 as of October 31, 2003.
Restructuring and other Special Charges Expense
In the fiscal years ended October 31, 2003 and October 31, 2004, Firepond
incurred the following restructuring and other special charges expense:
Fiscal Year Ended Fiscal Year Ended
October 31, 2003 October 31, 2004
------------------------------------------
Restructuring Charges $1,047,060 $3,447,293
During the fiscal year ended October 31, 2003 and continuing into fiscal year
2005, Firepond undertook plans to restructure its operations as a result of a
prolonged slowdown of global information technology spending, specifically
within the enterprise software marketplace. As such, Firepond announced a
strategic realignment to better align its cost structure with projected revenue
and preserve cash. Firepond reduced its headcount and facilities as well as
wrote-off excess equipment and terminated and restructured certain contractual
relationships. During the fiscal year ended October 31, 2003 and October 31,
2004 Firepond terminated several employees. The restructuring and other special
charges for the fiscal years ended October 31, 2003 and October 31, 2004 totaled
$1,047,060 and $3,447,293, respectively. The majority of these costs in fiscal
year ended October 31, 2004 were excess contractual commitments and termination
fees related to legal fees and consulting fees for the Jaguar Technology
Holdings acquisition of Firepond. The majority of the restructuring charges for
the fiscal year ended October 31, 2003 are employee severance costs and facility
related costs. As of the date of this filing, the Company believes restructuring
efforts are ended.
Amortization of Intangible Assets
In the fiscal years ended October 31, 2003 and October 31, 2004, Firepond
incurred the following amortization of intangible assets:
Fiscal Year Ended Fiscal Year Ended
October 31, 2003 October 31, 2004
------------------------------------------
Amortization of Intangibles $103,067 $0
24
For the fiscal year ended October 31, 2003, Firepond evaluated the carrying
value of long-lived assets, including intangible assets, based on the guidance
of SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets." Firepond's evaluation considered non-financial data such as changes in
the operating environment and business strategy, competitive information, market
trends and operating performance. Based on its evaluation of these factors,
Firepond recorded an asset impairment of $103,067 in connection with a
restructuring of Company operations.
Other Income (Expense) Net
In the fiscal years ended October 31, 2003 and October 31, 2004, Firepond
incurred the following other income (expense), net:
Fiscal Year Ended Fiscal Year Ended
October 31, 2003 October 31, 2004
------------------------------------------
Other Income (Expense), Net $666,412 $(82,179)
Other income (expense), net primarily consists of interest income, interest
expense, bank fees, certain state and local taxes and foreign currency
transaction gains/losses. Other income (expense), net decreased $748,591 in the
fiscal year ended October 31, 2004 from the fiscal year end October 31, 2003.
Firepond had interest income of $305,028 in fiscal year 2003 and interest
expense of $208,787 in fiscal year 2004. Other Income in fiscal year end October
31, 2004 resulted from accrued interest on a loan receivable, offset by a charge
resulting from the impairment of a legacy software system.
Income (Loss) from Continuing Operations:
The above resulted in a loss from continuing operations of $17,709,700 in the
fiscal year ended October 31, 2003 and an income from continuing operations of
$48,802 in the fiscal year ended October 31, 2004.
Loss from Discontinued Operations:
In the fiscal years ended October 31, 2003 and October 31, 2004, Firepond
incurred the following losses from discontinued operations:
Fiscal Year Ended Fiscal Year Ended
October 31, 2003 October 31, 2004
------------------------------------------
Loss from Discontinued Operations $(714,454) $(118,005)
In August 2003 Firepond decided to terminate operations of all foreign
subsidiaries. These losses stem from the closing of those operations.
Loss on Disposal of Discontinued Operations
In the fiscal years ended October 31, 2003 and October 31, 2004, Firepond
incurred the following loss disposal of discontinued operations:
Fiscal Year Ended Fiscal Year Ended
October 31, 2003 October 31, 2004
------------------------------------------
Loss on Disposal of
Discontinued Operations $(2,127,950) $0
On May 17, 2004, Firepond entered into an Asset Purchase Agreement with edocs,
Inc. Pursuant to the Asset Purchase Agreement (1) edocs purchased certain assets
related to Firepond's Brightware business unit, and (2) edocs paid certain cash
consideration to Firepond and issued Firepond a promissory note. In conjunction
with this sale, Firepond incurred a loss from discontinued operations of
$2,127,950 for the fiscal year end October 31, 2003.
25
The Company has adopted a June 30 fiscal year end. This is a change from
predecessor entities. The change was made to (1) reflect business cycles (2)
conform to the fiscal year of FP and (3) permit engagement of auditors that may
not have been possible had another fiscal year end been adopted. Thus, the
reader is encouraged to read the Results of Operations discussion below
comparing the 12 month period ended June 30, 2005 (Pro Forma) versus the 12
month period ended June 30, 2004 (Pro Forma).
FIREPOND, INC. (Pro Forma)
Twelve Months Ended June 30,
2004 2005
----------- -----------
(unaudited)
--------------------------
Income statement data:
Revenue (net) $ 7,940,430 $ 8,875,220
Cost of Revenue 2,781,677 2,595,710
----------- -----------
Gross Profit 5,158,753 6,279,510
Selling Expenses 2,204,191 1,053,244
Research & Development 2,289,477 1,802,511
General and Administrative Expenses 2,750,977 1,198,840
Amortization of intangible assets 60,123 --
Restructuring and other special charges 1,281,737 3,803,650
Settlement of claims (1,815,000)
Impairment of develop technology and know-how -- --
----------- -----------
Operating Income (Loss) (3,427,752) 236,265
Interest (Expense)Income (96,946) (301,067)
Other (Expense)Income 944,170 1,328,883
----------- -----------
Pretax Income (2,580,528) 1,264,081
Cumulative effect of a change in accounting -- --
principle
Income (Loss) on discontinued operations 570,275 --
Income Taxes -- --
----------- -----------
Net Income (Loss) $(2,010,253) $ 1,264,081
=========== ===========
Reconciliation to Normalized EBITDA:
Net Income (Loss) $(2,010,253) $ 1,264,081
Legal Settlement (1,815,000)
Interest Expense (Income) 96,946 301,067
Other Expense (Income) (944,170) (1,328,883)
Depreciation & Amortization 60,123 --
Income (Loss) on discontinued operations (570,275) --
Non-Recurring Expenses 1,281,737 3,803,650
----------- -----------
Normalized EBITDA $(2,085,892) $ 2,224,915
=========== ===========
Comparison of 12 month pro forma periods ended June 30, 2005 and June 30, 2004
Sources of Revenue
Firepond generates revenue from license and service revenue. License revenue is
generated from licensing the rights to the use of FP's packaged software
products. Service revenue is generated from sales of maintenance, consulting and
training services performed for customers that license FP's products.
In the twelve months ended June 30, 2004 and June 30, 2005, Firepond generated
the follow revenues from these sources:
Twelve Months Ended Twelve Months Ended
June 30, 2004 June 30, 2005
------------------------------------------
License $ 592,053 $ 4,887,964
Services & Maintenance $ 7,348,377 $ 3,987,256
26
The increase in Product License revenue in the 12 months ended June 30, 2005 is
attributable to the renewal of a license with a legacy client. This renewal
changed a periodic license to a permanent license and made up 61.4% of Product
License revenues in the period. Service and Maintenance revenue fell 45.7% as
Firepond refocused efforts to launch its OnDemand product rather than focus on
legacy enterprise software services and maintenance contracts. Total revenue
increased 11.8% year over year due primarily to the noted permanent license
renewal.
Cost of Revenue
Total cost of revenue decreased $ 0.2 million, or 6.7%, to $2.6 million in the
twelve months ended June 30, 2005 from $2.8 million in the twelve months ended
June 30, 2004. Total cost of revenue as a percentage of total revenue decreased
to 29.2% in the twelve months ended June 30, 2005 from 35.0% in the twelve
months ended June 30, 2004.
Cost of licenses includes costs of royalties, media, product packaging,
documentation, other production costs and the amortization of capitalized
software development costs (if any)
Cost of product-related services and maintenance and cost of custom development
services revenue consist primarily of salaries, related costs for development,
consulting, training and customer support personnel, including cost of services
provided by third-party consultants engaged by Firepond or FP.
In the twelve months ended June 30, 2004 and June 30, 2005 Firepond incurred the
following costs of revenues from these sources:
Twelve Months Ended Twelve Months Ended
June 30, 2004 June 30, 2005
------------------------------------------
Cost of Product License $ 112,915 $ 48,393
Cost of Product Services/Maintenance $ 2,668,762 $ 2,547,317
Cost of license revenue decreased $64,522, or 57.1%, in the twelve months ended
June 30, 2005 from the same period ended June 30, 2004. Cost of license revenue
as a percentage of license revenue decreased to 1.0% in the twelve months ended
June 30, 2005 from 19.1% in the twelve months ended June 30, 2004. The decrease
in absolute dollars and as a percentage of license revenue is due primarily to a
refocusing of operations to our OnDemand products.
Cost of product-related services and maintenance revenue decreased $0.1 million,
or 4.6%, to $2.5 million in the twelve months ended June 30, 2005 from $2.7
million in the twelve months ended on June 30, 2004. Cost of product-related
services and maintenance revenue as a percentage of product-related services and
maintenance revenue increased to 63.9 % in the twelve months ended June 30, 2005
from 36.3% in the twelve months ended June 30, 2004. The increase as a
percentage of total product-related services and maintenance revenue is due the
drop in real dollar product related service and maintenance revenues from 2004
to 2005 without a commensurate adjustment in salaries and personnel providing
such services.
Components of Operating Expenses and Other Items:
Sales and Marketing Expenses
In the twelve months ended June 30, 2004 and June 30, 2005, Firepond incurred
the following sales and marketing expenses:
Twelve Months Ended Twelve Months Ended
June 30, 2004 June 30, 2005
------------------------------------------
Sales and Marketing $2,204,191 $1,053,244
27
Sales and marketing expenses consist primarily of salaries, commissions and
bonuses for sales and marketing personnel and promotional expenses. Sales and
marketing expenses decreased $1.15 million, or 52.2% in the twelve months ended
June 30, 2005. Sales and marketing expenses as a percentage of total revenue
decreased to 11.9% for the twelve months ended June 30, 2005 from 27.8% for the
twelve months ended June 30, 2004. Sales and marketing expenses decreased in
absolute dollars and as a percentage of total revenue primarily due to the
decrease in headcount in our sales and marketing operations as we continued to
restructure our operations and decrease our marketing program spending. We
expect sales and marketing expenses will increase for the next fiscal year as we
expand our sales force to promote our recently released OnDemand products. We
will also invest in marketing programs as necessary.
Research and Development Expenses
In the twelve months ended June 30, 2004 and June 30, 2005, Firepond incurred
the following research and development expenses:
Twelve Months Ended Twelve Months Ended
June 30, 2004 June 30, 2005
------------------------------------------
Research and Development $2,289,477 $1,802,511
Research and development expenses consist primarily of salaries and
personnel-related costs and the costs of contractors associated with the
development of new products, the enhancement of existing products, and the
performance of quality assurance and documentation activities. Research and
development expenses decreased $0.5 million, or 21.3% for the twelve month
period ended June 30, 2005. Research and development expenses as a percentage of
total revenue increased to 20.3% in the twelve months ended June 30, 2005 from
28.8% in the twelve months ended June 30, 2004. These expenses decreased in
absolute dollars as a result of our restructuring efforts, including the
reduction in headcount and decreased utilization of engineering and product
development contractors. Research and development expenses decreased as a
percentage of total revenue primarily due to a combination of increased revenue
and decreased research and development expenses. We expect research and
development expenses will increase for the next fiscal year as we roll out our
new OnDemand products, including additional applications. We will continue to
make necessary investments to enhance our existing products and develop new
products.
General and Administrative Expenses
In the twelve months ended June 30, 2004 and June 30, 2005, Firepond incurred
the following general and administrative expenses:
Twelve Months Ended Twelve Months Ended
June 30, 2004 June 30, 2005
------------------------------------------
General and Administrative $2,750,977 $ 1,198,840
General and administrative expenses consist primarily of salaries and other
personnel-related cost for executive, financial, human resource, information
services, and other administrative functions, as well as legal and accounting
costs. General and administrative expenses decreased $1.5 million, or 56.4%, in
the twelve months ended June 30, 2005 from the same twelve month period ended
June 30, 2004. General and administrative expenses as a percentage of total
revenue decreased to 13.5% in the twelve months ended June 30, 2005 from 34.6%
for the twelve months ended June 30, 2004. These expenses decreased in absolute
dollars primarily as a result of decreased headcount, especially for executive
management, which resulted in reduced payroll and other related expenses. Also
legal expenses and insurance costs decreased during the period. The decrease in
general and administrative expenses as a percentage of total revenue is
attributable to higher revenue against lower costs. We expect that general and
administrative expenses will increase moderately for the next fiscal year as
additional personnel are hired to execute our OnDemand business requirements.
28
Litigation Settlement Expense
In the twelve months ended June 30, 2004 and June 30, 2005 Firepond incurred
litigation settlement expenses primarily related to litigation instituted by a
former customer as follows:
Twelve Months Ended Twelve Months Ended
June 30, 2004 June 30, 2005
------------------------------------------
Litigation Settlement Expense $0 $(1,815,000)
On April 8, 2004 Firepond entered in an agreement with General Motors
Corporation settling all matters between the companies arising under prior
management for the sum of $7 million. Firepond executed a note payable to GM as
part of the settlement. During the twelve month period ended June 30, 2005
Firepond made payments on the GM note in the form of both cash and assignment of
certain notes receivable related to the sale of former subsidiaries of Firepond
In conjunction with these payments, GM agreed to reduce the note obligation by
$1,815,000 in excess of the payments made on the note. This reduction is
reflected as a negative adjustment to Litigation Settlement Expense.
Amortization of Intangible Assets Expense
In December 2003, Firepond was acquired in a merger such that 100% of Firepond's
equity was acquired by Jaguar Technology Holdings, LLC. This transaction has
been accorded purchase accounting treatment for the fiscal year 2004. As such,
Firepond shareholders' equity was treated as if Firepond were a new entity. The
stated equity of the new owner became the shareholder equity of Firepond. This
treatment required Firepond to revalue all of its assets consistent with the
purchase price paid for Firepond. Firepond's intangible assets were revalued
from $23,767 at November 30, 2003 to $1,731,200 at the time of the closing of
the acquisition of Firepond. The remaining portion of the purchase price not
allocated to shareholder equity or intangible assets was allocated to Goodwill
($5,581,088)
In the twelve months ended June 30, 2004 and June 30, 2005, Firepond incurred
amortization of intangible assets expense as follows:
Twelve Months Ended Twelve Months Ended
June 30, 2004 June 30, 2005
------------------------------------------
Amortization of Intangible Assets $60,123 $ 0
The amortization adjustment in the twelve months ended June 30, 2004 is related
to a final adjustment regarding the sale of a former subsidiary as a result of
the our adoption of SFAS No. 142 Goodwill and Other Intangible Assets.
Restructuring and other Special Charges Expense
In the twelve months ended June 30, 2004 and June 30, 2005, Firepond incurred
the following restructuring and other special charges expenses:
Twelve Months Ended Twelve Months Ended
June 30, 2004 June 30, 2005
------------------------------------------
Restructuring Charges $ 1,281,737 $ 3,803,650
During the fiscal year ended October 31, 2003 and continuing into fiscal year
2005, Firepond undertook plans to restructure its operations as a result of a
prolonged slowdown of global information technology spending, specifically
within the enterprise software marketplace. As such, Firepond announced a
strategic realignment to better align its cost structure with projected revenue
and preserve cash. Firepond reduced its headcount and facilities as well as
wrote-off excess equipment and terminated and restructured certain contractual
relationships. During the twelve month period ended June 30, 2004 and June 30,
2005 Firepond terminated several employees. The restructuring and other special
charges for the twelve month period ended June 30, 2004 and June 30, 2005
totaled $1,281,737 and $3,803,650, respectively. The Company believes
restructuring efforts are ended. There may be reversals of previous reserves
taken with respect to restructuring issues in subsequent periods, especially
those reserves related to discontinued operations in Europe. However, the
Company does not expect any additional cash expenditures related to the
restructuring efforts begun in 2003.
29
Other Income (Expense) Net
In the twelve months ended June 30, 2004 and June 30, 2005, Firepond incurred
the following other income (expense), net:
Twelve Months Ended Twelve Months Ended
June 30, 2004 June 30, 2005
------------------------------------------
Other Income (Expense), Net $847,224 $1,027,816
Other income (expense), net primarily consists of interest expense or income,
bank fees, certain state and local taxes and foreign currency transaction
gains/losses. Other income (expense), net increased $180,592, or 21.3%, in the
twelve months ended June 30, 2005 from the twelve months ended June 30, 2004.
The increase is due primarily to gain from the transfer of certain intellectual
property rights to a third party and the sale of assets of a former subsidiary.
Income(Loss) from Continuing Operations:
The above resulted in a loss from continuing operations of $2,580,528 for the
twelve months ended June 30, 2004 and an income from continuing operations of
$1,264,081 for the twelve months ended June 30, 2005.
Comparison of quarter periods ended September 30, 2005 and September 30, 2004
(pro forma)
The following presentation comparing our quarter periods ended September 30,
2005 and September 30, 2004 (pro forma). The quarter period ended September 30,
2004 is pro forma as Firepond was on an October 31 fiscal year end at the time.
Changes in the presentation are evident to accommodate our changing focus to
OnDemand revenues.
Sources of Revenue
Today the Company generates revenue from its new OnDemand subscription based
software as well as legacy license and service revenue. The OnDemand product was
launched in commercial form in August 2005. License revenue is generated from
licensing the rights to the use of FP's packaged software products. Service
revenue is generated from sales of maintenance, consulting and training services
performed for customers that license FP's products.
In the quarter periods ended September 30, 2004 and September 30, 2005, Firepond
generated the follow revenues from these sources:
Quarter Period Ended Quarter Period Ended
September 30, 2004 September 30, 2005
-------------------------------------------
OnDemand $ 0 $ 41,555
Enterprise Revenue $ 5,093,140 $ 1,106,174
Through the middle of 2005, Firepond conducted only its legacy enterprise
software business. The launch of OnDemand in August 2005 has been warmly
received in the market. From a non-existent product, OnDemand generated $41,555
in revenues for the quarter period ended September 30, 2005. The decrease in
Enterprise Revenue in the three months ended September 30, 2005 versus the same
period in 2004 is attributable to the renewal of a license with a legacy client.
This renewal changed a periodic license to a permanent license and made up
approximately 60.0% of Enterprise Revenues in the period. Further, Enterprise
Revenue decline in the quarter period ended September 30, 2005 as FP Technology
transitioned to its OnDemand focus.
Cost of Revenue
Total cost of revenue decreased $ 0.2 million, or 27.7%, to $0.5 million in the
quarter period ended September 30, 2005 from $0. 64 million in the quarter ended
September 30, 2004. Total cost of revenue as a percentage of total revenue
increased to 40.6% in the quarter period ended September 30, 2005 from 12.6% in
the quarter period ended September 30, 2004.
30
Cost of licenses includes costs of royalties, media, product packaging,
documentation, and other production costs.
Cost of product-related services and maintenance and cost of custom development
services revenue consist primarily of salaries, related costs for development,
consulting, training and customer support personnel, including cost of services
provided by third-party consultants engaged by FP.
In the quarter periods ended September 30, 2004 and September 30, 2005, Firepond
incurred the following cost of revenues:
Quarter Period Ended Quarter Period Ended
September 30, 2004 September 30, 2005
-------------------------------------------
Cost of OnDemand $ 0 $ 76,848
Cost of Enterprise $ 644,121 $389,073
The cost of delivering our OnDemand products is expected to be fairly high in
comparison to revenue during its launch period as FP must incur substantial
upfront costs associated with building a hosting environment. Initial hosting
costs are high as FP must invest significant sums in hosting hardware and
software. Over time, as the subscription base broadens, relative hosting costs
should fall.
The Cost of Enterprise revenues decreased $255,048 or 39.6% in the quarter ended
September 30, 2005 versus the same period in 2004. The decrease in absolute
dollars and as a percentage of license revenue is due primarily to a refocusing
of operations to our OnDemand products.
Components of Operating Expenses and Other Items
Sales, General and Administrative
In the quarter periods ended September 30, 2004 and September 30, 2005, Firepond
incurred the following sales, general and administrative costs:
Quarter Period Ended Quarter Period Ended
September 30, 2004 September 30, 2005
-------------------------------------------
Sales, General and Administrative $413,055 $416,575
Sales and marketing expenses consist primarily of salaries, commissions and
bonuses for sales and marketing personnel and promotional expenses. General and
administrative expenses consist primarily of salaries and other
personnel-related cost for executive, financial, human resource, information
services, and other administrative functions, as well as legal and accounting
costs.
Sales, general and administrative expenses increased $3,520, or 0.9% in the
quarter period ended September 30, 2005. Sales, general and administrative
expenses as a percentage of total revenue increased to 36.3% for the quarter
period ended September 30, 2005 from 8.1% for the quarter period ended September
30, 2004. Sales, general and administrative expenses increased in absolute
dollars and as a percentage of total revenue primarily due to the hiring of two
executive officers in June 2005 and an increase in sales and marketing activity
related to the launch of our OnDemand product. We expect sales, general and
administrative expenses will increase for the next fiscal year as we expand our
sales force to promote our recently released OnDemand products. We will also
invest in marketing programs as necessary.
Research and Development Expenses
In the quarter periods ended September 30, 2004 and September 30, 2005, Firepond
incurred the following research and development expenses:
31
Quarter Period Ended Quarter Period Ended
September 30, 2004 September 30, 2005
-------------------------------------------
Research and Development $554,169 $495,274
Research and development expenses consist primarily of salaries and
personnel-related costs and the costs of contractors associated with the
development of new products, the enhancement of existing products, and the
performance of quality assurance and documentation activities.
Research and development expenses decreased $58,895, or 10.6% for the quarter
period ended September 30, 2005. Research and development expenses as a
percentage of total revenue increased to 43.2% in the quarter period ended
September 30, 2005 from 10.9% in the quarter period ended September 30, 2004.
These expenses decreased in absolute dollars as a result of our 2004
restructuring efforts, including decreased utilization of engineering and
product development contractors. Research and development expenses increased as
a percentage of total revenue primarily due to our transition to a subscription
based revenue model which model was only launched in August 2005. We expect
research and development expenses will increase for the next fiscal year as we
roll out our new OnDemand products, including additional applications. We will
continue to make necessary investments to enhance our existing products and
develop new products.
Settlement of Claim
In the quarter periods ended September 30, 2004 and September 30, 2005, Firepond
incurred a settlement of claim expense as follows:
Quarter Period Ended Quarter Period Ended
September 30, 2004 September 30, 2005
-------------------------------------------
Litigation Settlement Expense $0 $(1,712,500)
On April 8, 2004, Firepond entered in an agreement with General Motors
Corporation settling all matters between the companies arising under prior
management for the sum of $7 million. Firepond executed a note payable to GM as
part of the settlement. During the quarter period ended September 30, 2005 FP
Technology made payments on the GM note. In conjunction with these payments, GM
agreed to reduce the note obligation by $1,712,500 in excess of the payments
made on the note. This reduction is reflected as a negative adjustment to
settlement of claim expense.
Restructuring and other Special Charges Expense
In the quarter periods ended September 30, 2004 and September 30, 2005, Firepond
incurred the following restructuring and other special charges:
Quarter Period Ended Quarter Period Ended
September 30, 2004 September 30, 2005
------------------------------------------
Restructuring Charges $ 0 $ 4,617
During the fiscal year ended October 31, 2003 and continuing into fiscal year
2005, Firepond undertook plans to restructure its operations as a result of a
prolonged slowdown of global information technology spending, specifically
within the enterprise software marketplace. The adjustment in the quarter ended
September 30, 2005 reflects a minor adjustment to previous accruals. The Company
believes restructuring efforts are ended. There may be reversals of previous
reserves taken with respect to restructuring issues in subsequent periods,
especially those reserves related to discontinued operations in Europe. However,
the Company does not expect any additional cash expenditures related to the
restructuring efforts begun in 2003.
Other Income (Expense) Net
In the quarter periods ended September 30, 2004 and September 30, 2005, Firepond
incurred the following restructuring and other special charges:
32
Quarter Period Ended Quarter Period Ended
September 30, 2004 September 30, 2005
------------------------------------------
Other Income (Expense), Net $(232,996) $(90,361)
Other income (expense), net primarily consists of interest expense or income,
bank fees, certain state and local taxes and foreign currency transaction
gains/losses. Other income (expense) decreased $142,635 in the quarter period
ended September 30, 2005 from the quarter period ended September 30, 2004.
Income(Loss) from Continuing Operations
The above resulted in an income from continuing operations of $3,248,799 for the
quarter ended September 30, 2004 and an income from continuing operations of
$1,387,481 for the quarter ended September 30, 2005.
Loss from Discontinued Operations
In the quarter periods ended September 30, 2004 and September 30, 2005, Firepond
incurred the following losses from discontinued operations:
Quarter Period Ended Quarter Period Ended
September 30, 2004 September 30, 2005
------------------------------------------
Loss from Discontinued Operations $98,401 $616,704
The Loss from Discontinued Operations in the quarter period ended September 30,
2004 is from currency translation losses. The Loss from Discontinued Operations
in the quarter ended September 30, 2004 represents the write off of FX
(comprehensive losses) associated with the liquidation of the German subsidiary.
Comparison of quarter periods ended December 31, 2005 and December 31, 2004 (pro
forma)
The following presentation comparing our quarter periods ended December 31, 2005
and December 31, 2004 (pro forma) will bring our discussion current. The quarter
period ended December 31, 2004 is pro forma as Firepond was on an October 31
fiscal year end at the time. Changes in the presentation are evident to
accommodate our changing focus to OnDemand revenues.
Sources of Revenue
Today Firepond generates revenue from its new OnDemand subscription based
software as well as legacy license and service revenue. The OnDemand product was
launched in commercial form in August 2005. License revenue is generated from
licensing the rights to the use of FP's packaged software products. Service
revenue is generated from sales of maintenance, consulting and training services
performed for customers that license FP's products.
In the quarter periods ended December 31, 2004 and December 31, 2005, Firepond
generated the follow revenues from these sources:
Quarter Period Ended Quarter Period Ended
December 31, 2004 December 31, 2005
-------------------------------------------
OnDemand $0 $ 40,684
Enterprise Revenue $947,404 $ 649,386
Through the middle of 2005, Firepond conducted only its legacy enterprise
software business. The launch of OnDemand in August 2005 has been warmly
received in the market. OnDemand generated $40,684 in revenues for the quarter
period ended December 31, 2005. The decrease in Enterprise Revenue in the three
months ended December 31, 2005 versus the same period in 2004 is attributable to
FP Technology transitioning to its OnDemand focus with corresponding less focus
on its legacy business.
33
Cost of Revenue
Total cost of revenue increased $ 0.11 million, or 27.9% in the quarter period
ended December 31, 2005 from $.40 million in the quarter ended December 31,
2004. Total cost of revenue as a percentage of total revenue increased to 73.3%
in the quarter period ended December 31, 2005 from 41.7% in the quarter period
ended December 31, 2004.
Cost of licenses includes costs of royalties, media, product packaging,
documentation, and other production costs.
Cost of product-related services and maintenance and cost of custom development
services revenue consist primarily of salaries, related costs for development,
consulting, training and customer support personnel, including cost of services
provided by third-party consultants engaged by FP.
In the quarter periods ended December 31, 2004 and December 31, 2005, Firepond
incurred the following cost of revenues:
Quarter Period Ended Quarter Period Ended
December 31, 2004 December 31, 2005
------------------------------------------
Cost of OnDemand $ 0 $106,505
Cost of Enterprise $395,313 $399,265
The cost of delivering our OnDemand products is expected to be fairly high in
comparison to revenue during its launch period as FP must incur substantial
upfront costs associated with building a hosting environment. Initial hosting
costs are high as FP must invest significant sums in hosting hardware and
software. Over time, as the subscription base broadens, relative hosting costs
should fall.
The Cost of Enterprise revenues increased $3,952 or 1.0% in the quarter ended
December 31, 2005 versus the same period in 2004. The costs in the December 31,
2004 quarter were reduced as a result of an accounting adjustment arising from
the elimination of a royalty accrual of $85,000.
Components of Operating Expenses and Other Items:
Sales, General and Administrative
In the quarter periods ended December 31, 2004 and December 31, 2005, Firepond
incurred the following sales, general and administrative costs:
Quarter Period Ended Quarter Period Ended
December 31, 2004 December 31, 2005
------------------------------------------
Sales, General and Administrative $743,530 $533,056
Sales, general and administrative expenses decreased $210,474 in the quarter
period ended December 31, 2005. Sales, general and administrative expenses as a
percentage of total revenue decreased to 77.2% for the quarter period ended
December 31, 2005 as compared to 78.5% for the quarter period ended December 31,
2004. Sales, general and administrative expenses decreased in absolute dollars
due to continued restructuring of operations begun in 2003. We expect sales,
general and administrative expenses will increase for the next fiscal year as we
expand our sales force to promote our recently released OnDemand products. We
will also invest in marketing programs as necessary.
Research and Development Expenses
In the quarter periods ended December 31, 2004 and December 31, 2005, Firepond
incurred the following research and development expenses:
34
Quarter Period Ended Quarter Period Ended
December 31, 2004 December 31, 2005
------------------------------------------
Research and Development $411,444 $400,824
Research and development expenses decreased $10,620, or 2.6% for the quarter
period ended December 31, 2005. Research and development expenses as a
percentage of total revenue increased to 58.1% in the quarter period ended
December 31, 20005 from 43.4% in the quarter period ended December 31, 2004.
These expenses increased in absolute dollars and as a percentage of revenue
primarily due to our transition to a subscription based revenue model which
model was only launched in August 2005. We expect research and development
expenses will increase for the next fiscal year as we roll out our new OnDemand
products, including additional applications. We will continue to make necessary
investments to enhance our existing products and develop new products.
Restructuring and other Special Charges Expense
In the quarter periods ended December 31, 2004 and December 31, 2005, Firepond
incurred the following restructuring and other special charges:
Quarter Period Ended Quarter Period Ended
December 31, 2004 December 31, 2005
------------------------------------------
Restructuring Charges $3,480,110 $ 0
During the fiscal year ended October 31, 2003 and continuing into fiscal year
2005, Firepond undertook plans to restructure its operations as a result of a
prolonged slowdown of global information technology spending, specifically
within the enterprise software marketplace. The adjustment in the quarter ended
December 31, 2004 reflects accruals Firepond deemed necessary with respect to
the liquidation of its foreign subsidiaries. The Company believes restructuring
efforts are ended. There may be reversals of previous reserves taken with
respect to restructuring issues in subsequent periods, especially those reserves
related to discontinued operations in Europe. However, the Company does not
expect any additional cash expenditures related to the restructuring efforts
begun in 2003.
Settlement of Claim
Quarter Period Ended Quarter Period Ended
December 31, 2004 December 31, 2005
------------------------------------------
Settlement of Claim $686,863 $0
In the quarter ended December 31, 2004, Firepond recorded a settlement gain of
$686,863 as part of a settlement with General Motors Corporation.
Other Income (Expense) Net
In the quarter periods ended December 31, 2004 and December 31, 2005, Firepond
incurred the following restructuring and other special charges:
Quarter Period Ended Quarter Period Ended
December 31, 2004 December 31, 2005
------------------------------------------
Other Income (Expense), Net $(196,896) $(246,057)
Other income (expense), net primarily consists of interest expense or income,
bank fees, certain state and local taxes and foreign currency transaction
gains/losses. Other income (expense) increased by $49,161 from the quarter
period ended December 31, 2004 to $246,057 in the quarter period ended December
31, 2005. In the quarter ended December 31, 2005, FP Technology recorded
interest expense based on the reduced indebtedness as a result of the GM
settlement and amortization of the loan discount.
35
Liquidity and Capital Resources
As of September 30, 2005, cash and cash equivalents were $706,237 and short-term
investments were $0 as compared with $6,418,130 of cash and cash equivalents and
$0 of short-term investments as of September 30, 2004. Our working capital at
September 30, 2005 was ($2,599,513) compared to a working capital of $1,620,239
at September 30, 2004.
Net cash used in operating activities was $3,493,768 in the twelve months ended
June 30, 2005, compared with net cash provided by operating activities of
$3,210,597 in the twelve months ended June 30, 2004. Cash used in operating
activities in the twelve months ended June 30, 2005 was primarily attributable
to renewal of a large enterprise license with one of our legacy clients as well
as a significant reduction in general and administrative costs.
Net cash provided by investing activities was $68,807 in the twelve months ended
June 30, 2005 compared with net cash used in investing activities of $4,162,128
in the twelve months ended June 30, 2004. Net cash provided by investing
activities in the twelve months ended June 30, 2005 was primarily attributable
to change in other assets.
We lease facilities under non-cancelable operating leases which have various
expiration dates ranging from 2008 to 2009. At June 30, 2005, future minimum
annual lease payments amounted to approximately $1.0 million under these leases.
On September 13, 2005, Firepond sold most of its assets and transferred most of
its liabilities to FP Technology as part of a new financing of FP Technology.
Trident Growth Fund, LLC lent FP $2,000,000 in the form of convertible debt with
attached warrants. Interest accrues on the associated secured note ("September
Note") at 12% per annum. Interest is payable monthly. Principal is due September
30, 2006.
For purposes of the discussion immediately following, the report of results for
the three month period ended September 30, 2005 assumes that Firepond and FP
operated as a single company. As such their results of operations have been
combined.
In the three month period ended September 30, 2005, FP's revenues were
$1,147,729. The Cost of Revenue for this same period was $465,921. Gross Profit
was $681,808.
Operating Expenses totaled ($796,034), consisting of Sales, General and
Administrative cost of $416,575; Research and Development costs of $495,274;
Restructuring and Other Special Charges of $4,617; and a Settlement of Claim
positive item of $1,712,500 resulting from favorable negotiations for the
obligation owed GM.
Income from continuing operations equaled $1,477,842. Other Income (Expense)
equaled $(90,361) during the period.
Net Income from continuing operations for the three months ended September 30,
2005 totaled $1,387,481. The loss from discontinued operations was $616,704. Net
income for the quarter was $770,777.
Net cash used in operating activities was $84,487 in the three months ended
September 30, 2005. Cash used in operating activities in the three months ended
September 30, 2005 reflected normal operations from a cost perspective. However,
FP revenues were adversely affected by the planned launch of our OnDemand
product and the changing focus for our legacy business.
Net cash provided by investing activities was $16,345 in the three months ended
September 30, 2005. Net cash provided by investing activities in this period was
primarily attributable to change in other assets.
36
Net cash provided from financing activities was $750,000 for the three months
ended September 30, 2005. This reflects receipt of the $2,000,000 debt facility
from Trident Growth Fund offset by the payment of $1,250,000 towards the debt
owed GM. As noted above, this payment resulted in an overall reduction of the GM
debt from $3,000,000 to $250,000. This debt is now a general obligation of FP.
In the three month period ended December 31, 2005, Company revenues were
$690,070. The Cost of Revenue for this same period was $505,771. Gross Profit
was $184,299.
Operating Expenses totaled $933,880, consisting of Sales, General and
Administrative cost of $533,056; and Research and Development costs of $400,824.
Net Loss for the three months ended December 31, 2005 totaled $995,638.
Net cash used in operating activities was $725,348 in the three months ended
December 31, 2005. Cash used in operating activities in the three months ended
December 31, 2005 reflected normal operations from a cost perspective. However,
FP revenues were adversely affected by the planned launch of our OnDemand
product and changing focus for our legacy business.
Net cash used in investing activities was $9,362 in the three months ended
December 31, 2005.
Net cash provided from financing activities was $500,000 for the three months
ended December 31, 2005. This reflects receipt of the second advance on the debt
facility from Trident Growth Fund.
We believe the results of the three month periods ended September 30, 2005 and
December 31, 2005 reflect planned activities, including securing the Trident
Growth Fund debt, transitioning our revenue model to our OnDemand product and
positioning FP for additional opportunities.
We anticipate continued spending on capital expenditures consistent with
anticipated requirements for operations, infrastructure and personnel. We
believe that our existing cash balances will be sufficient to meet our
anticipated cash need for working capital and capital expenditures for at least
the next 12 months. However, we will likely need to raise additional funds in
the next 12 months or in the future to support expansion of our sales force,
develop new or enhanced products or services, respond to competitive pressures,
acquire complementary businesses or technologies or respond to unanticipated
requirements. We may not be able to obtain additional funds on terms which are
favorable or acceptable to us. Business Combination Transaction Proposals that
we present to the Note Holders may not be approved. If we raise additional funds
through the issuance of equity securities, the percentage ownership of our
existing stockholders would be reduced. Furthermore, these securities may have
rights, preferences or privileges senior to our common stock.
On September 13, 2005, Firepond sold most of its assets and transferred most of
its liabilities to FP as part of a new financing of FP. Trident Growth Fund, LLC
lent FP $2,000,000 in the form of convertible debt with attached warrants.
Interest accrues on the September Note at 12% per annum. Interest is payable
monthly. Principal is due September 30, 2006.
On November 25, 2005, FP Technology closed an additional $500,000 convertible
note with warrants (the "November Note") with Trident Growth Fund on the same
terms and conditions as the September Note. The funds received pursuant to the
September Note and the November Note have been used for working capital required
as FP transitions from its legacy enterprise software business to its OnDemand
revenue model.
On March 29, 2006, the Company entered into a Security Purchase Agreement and
related agreements resulting in the commitment of $50.0 million as Senior
Secured Notes. The funds will be used to fund acquisition of target companies
consistent with FP Technology's OnDemand offering and, to the extent permitted
by the Indenture, for general corporate purposes. At the same time as closing
the Security Purchase Agreement, a wholly-owned subsidiary of AFG Enterprises
USA, Inc., a company already registered with the Securities and Exchange
Commission, merged into FP. See "Acquisition by AFG Enterprises USA, Inc.;
Recent Private Financings" discussion above.
37
Quantitative and Qualitative Disclosures about Market Risk
We develop products in the United States and sell them in the United States and
Europe as well as Japan through a channel partner. As a result, our financial
results could be affected by factors such as changes in foreign currency
exchange rates or weak economic conditions in foreign markets. Since our sales
are currently priced in U.S. dollars and are translated to local currency
amounts, a strengthening of the dollar could make our products less competitive
in foreign markets. Interest income and expense are sensitive to changes in the
general level of U.S. interest rates, particularly since our investments are in
short-term instruments. Based on the nature of our investments, however, we have
concluded that there is no material market risk exposure.
38
RISK FACTORS
You should carefully consider the following risk factors and all other
information contained in this Report before purchasing our common stock. The
risks and uncertainties described below are not the only ones facing us.
Additional risks and uncertainties that we are unaware of, or that we currently
deem immaterial, also may become important factors that affect us. If any of the
following risks occur, our business, financial condition or results of
operations could be materially and adversely affected. In that case, the trading
price of our common stock could decline, and you may lose some or all of your
investment.
RISKS RELATING TO OUR BUSINESS
Our company has undergone significant restructuring, making it difficult to
assess its ability to meet its business objectives
Firepond was founded in 1983, experienced rapid growth in the 1990s, and
completed its initial public offering in April 2000. In December 2003, Firepond
was acquired by Jaguar Technology Holdings, LLC. On September 13, 2005, Firepond
sold all of its assets and most of its liabilities to FP Technology. FP
Technology adopted a June 30 fiscal year end. On March 29, 2006, FP Technology
was acquired by AFG Enterprises USA, Inc.
Soon after going public in April 2000, Firepond experienced a number of
setbacks. It was sued by a large customer, implemented a number of senior
management changes and experienced a dramatic downturn in its business
prospects, consistent with the downturn in the technology sector generally.
After the acquisition by Jaguar Technology Holdings, Firepond implemented a
significant restructuring of its operations, business and management. Among
other things, it reduced overhead substantially (including dramatic reductions
in staffing, termination of all senior management and reductions in facilities
costs), sold assets that were either non-core or not essential to its business,
and entered into an agreement to settle litigation with a former customer.
Our planned growth could strain our personnel resources and infrastructure, and
if we are unable to implement appropriate controls and procedures, we may not be
able to successfully implement our business plan
Our plans provide for rapid growth in headcount and operations, which will place
significant strain on our management, administrative, operational and financial
infrastructure. We anticipate that further growth will be required to address
increases in our customer base, as well as our expansion into new geographic
areas. Our success will depend in part upon the ability of our senior management
to manage this growth effectively. To do so, we must continue to hire, train and
manage new employees as needed. If our new hires perform poorly, or if we are
unsuccessful in hiring, training, managing and integrating these new employees,
or if we are not successful in retaining our existing employees, our business
may be harmed. To manage the expected growth of our operations and personnel, we
will need to continue to improve our operational, financial and management
controls and our reporting systems and procedures. The additional headcount and
capital investments we are adding will increase our cost base, which will make
it more difficult for us to offset any future revenue shortfalls by offsetting
expense reductions in the short term. If we fail to successfully manage our
growth, we will be unable to execute our business plan.
The Company recently hired a new senior management team, including Bill Santo
(CEO) and Stephen Peary (CFO). This team has not worked together previously and
may not work effectively together. Moreover, the new management team has limited
experience in developing, marketing, selling, implementing and servicing CPQ
software. The new team may not be able to meet the Company's business
objectives, including the marketing of our new OnDemand product. There can be no
assurance that the Company will be able to successfully manage future expansion
successfully, and any inability to do so could have a material adverse effect on
our business, results of operations and financial condition.
Our "On Demand" business is unproven, which makes it difficult to evaluate a
large portion of our future business and prospects
Our business is substantially dependent upon its ability to generate revenue by
selling a software license to corporations that have a need for its technology.
While we and our predecessors have been in business for over 20 years, the On
Demand software market is a relatively new industry and Firepond began offering
theses services in late 2004, which makes evaluation of our current business and
future prospects difficult. The revenue and income potential of our business and
the On Demand software market are unproven. In addition, because the market for
On Demand CPQ software is new and rapidly evolving, we have limited insight into
trends that affect this business. You must consider our business and prospects
in light of the risks and difficulties we may encounter as a company in a new
and rapidly evolving market. Factors that may affect market acceptance of the On
Demand software service include:
39
o reluctance by enterprises to migrate to an on-demand application
service;
o the price and performance of this service;
o the level of customization we can offer;
o the availability, performance and price of competing products and
services;
o reluctance by enterprises to trust third parties to store and manage
their internal data; and
o adverse publicity about us, our service or the viability or security
of on-demand application services generally from third party
reviews, industry analyst reports and adverse statements made by
competitors.
Many of these factors are beyond our control. The inability of our On Demand
application service to achieve widespread market acceptance would harm our
business and have a material adverse effect on the Company.
Defects in our products and services could diminish demand for our products and
services and subject us to substantial liability
Because our products and services are complex and have incorporated a variety of
software both developed in-house and acquired from third party vendors, its
products and services may have errors or defects that users identify after they
begin using it that could result in unanticipated downtime for its subscribers
and harm its reputation and our business. Traditional enterprise software
products and Internet-based services frequently contain undetected errors when
first introduced or when new versions or enhancements are released. We have from
time to time found defects in our products and services and new errors in its
existing products and services may be detected in the future. Since our
customers use our products and services for important aspects of their business,
any errors, defects or other performance problems with its products or services
could hurt our reputation and may damage our customers' businesses. If that
occurs, customers could elect not to renew, or delay or withhold payment to us,
we could lose future sales or customers may make warranty claims against us,
which could result in an increase in our provision for doubtful accounts, an
increase in collection cycles for accounts receivable or the expense and risk of
litigation.
Interruptions or delays in service from our third-party Web hosting facility
could impair the delivery of our service and harm our business
FP provides its OnDemand service through computer hardware that is currently
located in a third-party Web hosting facility in Minneapolis, Minnesota operated
by Qwest Communications International Inc. FP does not control the operation of
this facility, which is subject to damage or interruption from earthquakes,
floods, fires, power loss, telecommunications failures and similar events. It is
also subject to break-ins, sabotage, intentional acts of vandalism, work
stoppages, strikes and similar misconduct. Despite precautions taken at the
facility, the occurrence of a natural disaster, a decision to close the facility
without adequate notice or other unanticipated problems at the facility could
result in lengthy interruptions in our service. In addition, the failure by the
Qwest facility to provide our required data communications capacity could result
in interruptions in our service. FP is currently in the process of obtaining
additional business continuity services and additional data center capacity,
however, none of the services or capacity is currently operational. Any damage
to, or failure of, our systems could result in interruptions in our service.
Interruptions in our service may reduce our revenue, cause us to issue credits
or pay penalties, cause customers to terminate their subscriptions and adversely
affect our renewal rates. Our business will be harmed if our customers and
potential customers believe our service is unreliable.
40
FP and its predecessors have incurred losses in the past and we may not be able
to maintain profitability in the future
Firepond has incurred quarterly and annual losses intermittently since it was
formed in 1983, and regularly since fiscal 1997. Firepond incurred net losses
of, $20.6 million in fiscal 2003, $23.7 million in fiscal 2002, $70.3 million
for fiscal 2001, and $16.3 million for fiscal 2000. Firepond may not be able to
establish or maintain profitable operations in the future. We also expect that
our operating expenses will continue to increase in the future.. We cannot
provide assurance that we will be able to generate sufficient revenue to
establish or maintain profitability. You should not consider any historical
performance of FP or Firepond as necessarily being indicative of our future
results.
FP's quarterly revenue and operating results are volatile and difficult to
predict, and if we fail to meet the expectations of investors, the market price
of our common stock would likely decline significantly
Our revenue and operating results are likely to fluctuate significantly from
quarter to quarter, due to a number of factors. These factors include:
o our ability to retain and increase sales to existing customers,
attract new customers and satisfy our customers' requirements;
o the timing of additional investments in our OnDemand application
service and in our maintenance services;
o technical difficulties or interruptions in our service;
o the rate of expansion and effectiveness of our sales force;
o the length of the sales cycle for our service;
o our ability to form strategic relationships with third parties for
the distribution of our software, and the level of costs that these
arrangements entail;
o our ability to promote software products, as well as the cost and
effectiveness of such advertising;
o costs or potential limitations on our business activities resulting
from litigation and regulatory developments in our industry, which
could be significant;
o our ability to obtain additional customers or to derive additional
revenue from our existing customers;
o downward pricing pressures on our software licenses;
o costs associated with any future acquisitions;
o our ability to respond to technological developments in our
industry; and
o fluctuations in economic and market conditions, particularly those
affecting the market for technology spending or the industries of
our customers, such as manufacturing, insurance and financial
services.
Many of these factors are largely outside of our control, and there are many
facets of each of these factors over which we have limited control. As a result
of the factors above and the evolving nature of our business and industry, we
may be unable to forecast our revenue accurately. We plan our expenses based on
operating plans and estimates of future revenue. We may be unable to adjust our
spending in a timely manner to compensate for any unexpected revenue shortfalls.
Additionally, a failure to meet our revenue or expense projections would have an
immediate and negative impact on our operating results. If this were to happen,
the market price of our common stock would likely decline significantly.
41
If our security measures are breached and unauthorized access is obtained to a
customer's data, our service may be perceived as not being secure, customers may
curtail or stop using our service and we may incur significant liabilities
FP's service involves the storage and transmission of customers' proprietary
information, and security breaches could expose us to a risk of loss of this
information, litigation and possible liability. If our security measures are
breached as a result of third-party action, employee error, malfeasance or
otherwise, and, as a result, someone obtains unauthorized access to one of our
customers' data, our reputation will be damaged, our business may suffer and we
could incur significant liability. Because techniques used to obtain
unauthorized access or to sabotage systems change frequently and generally are
not recognized until launched against a target, we may be unable to anticipate
these techniques or to implement adequate preventative measures. If an actual or
perceived breach of our security occurs, the market perception of the
effectiveness of our security measures could be harmed and we could lose sales
and customers.
Because we will recognize revenue from subscriptions for our service over the
term of the subscription, downturns or upturns in sales may not be immediately
reflected in our operating results
FP generally recognizes license/subscription revenue from its traditional On
Premise products ratably over the terms of their license/subscription
agreements, which are typically 12 to 24 months, although terms can range from
1-60 months. As a result, much of the revenue that FP reports in each quarter is
deferred revenue from license/subscription agreements entered into during
previous quarters. Consequently, a decline in new or renewed
licenses/subscriptions in any one quarter will not necessarily be fully
reflected in the revenue in that quarter and will negatively affect our revenue
in future quarters. In addition, we may be unable to adjust our cost structure
to reflect these reduced revenues. Accordingly, the effect of significant
downturns in sales and market acceptance of our products and services may not be
fully reflected in our results of operations until future periods. FP's
license/subscription model also makes it difficult for us to rapidly increase
our revenue through additional sales in any period, as revenue from new
customers must be recognized over the applicable subscription term.
The market for FP's technology delivery model and on-demand application services
is immature and volatile, and if it does not develop or develops more slowly
than we expect, our business will be harmed
The market for on-demand application services is new and unproven, and it is
uncertain whether these services will achieve and sustain high levels of demand
and market acceptance. Our success will depend to a substantial extent on the
willingness of enterprises, large and small, to increase their use of on-demand
application services in general, and for CPQ in particular. Many enterprises
have invested substantial personnel and financial resources to integrate
traditional enterprise software into their businesses, and therefore may be
reluctant or unwilling to migrate to on-demand application services.
Furthermore, some enterprises may be reluctant or unwilling to use on-demand
application services because they have concerns regarding the risks associated
with security capabilities, among other things, of the technology delivery model
associated with these services. If enterprises do not perceive the benefits of
on-demand application services, then the market for these services may not
develop at all, or it may develop more slowly than we expect, either of which
would significantly adversely affect our operating results. In addition, as a
new company in this unproven market, we have limited insight into trends that
may develop and affect our business. We may make errors in predicting and
reacting to relevant business trends, which could harm our business.
FP does not have an adequate history with its subscription model to predict the
rate of customer subscription renewals and the impact these renewal rates will
have on our future revenue or operating results
FP's customers have no obligation to renew their subscriptions for our service
after the expiration of their initial subscription period and in fact, some
customers have elected not to do so. In addition, these customers may renew for
a lower priced edition of our service or for fewer subscriptions. We have
limited historical data with respect to rates of customer subscription renewals,
so we cannot accurately predict customer renewal rates. FP's customers' renewal
rates may decline or fluctuate as a result of a number of factors, including
their dissatisfaction with our service and their ability to continue their
operations and spending levels. If FP's customers do not renew their
subscriptions for our service, our revenue will decline and our business will
suffer.
Our future success also depends in part on our ability to sell additional
features or enhanced editions of our service to our current customers. This may
require increasingly sophisticated and costly sales efforts that are targeted at
senior management. If these efforts are not successful, our business may suffer.
42
The market in which FP participates is intensely competitive, and if we do not
compete effectively, our operating results could be harmed
The market for CRM and CPQ applications is intensely competitive and rapidly
changing, barriers to entry are relatively low, many of our competitors are
larger and have more resources than we do, and with the introduction of new
technologies and market entrants, we expect competition to intensify in the
future. If we fail to compete effectively, our operating results will be harmed.
Some of our principal competitors offer their products at a lower price, which
has resulted in pricing pressures. If we are unable to maintain our current
pricing, our operating results could be negatively impacted. In addition,
pricing pressures and increased competition generally could result in reduced
sales, reduced margins or the failure of our service to achieve or maintain more
widespread market acceptance, any of which could harm our business.
Any efforts we may make in the future to expand our service beyond the CPQ
market may not succeed
To date, FP has focused its business on providing on-demand application services
for the CPQ market, but we may in the future seek to expand into other markets.
However, any efforts to expand beyond the CPQ market may never result in
significant revenue growth for us. In addition, efforts to expand our on-demand
application service beyond the CPQ market may divert management resources from
existing operations and require us to commit significant financial resources to
an unproven business, which may harm our business.
Any failure to adequately expand our direct sales force will impede our growth
FP continues to be substantially dependent on its direct sales force to obtain
new customers, particularly large enterprise customers, and to manage its
customer base. We believe that there is significant competition for direct sales
personnel with the advanced sales skills and technical knowledge we need. Our
ability to achieve significant growth in revenue in the future will depend, in
large part, on our success in recruiting, training and retaining sufficient
numbers of direct sales personnel. New hires require significant training and
may, in some cases, take more than a year before they achieve full productivity.
Recent hires and planned hires may not become as productive as we would like,
and we may be unable to hire sufficient numbers of qualified individuals in the
future in the markets where we do business. If we are unable to hire and develop
sufficient numbers of productive direct sales personnel, sales of our service
will suffer and our growth will be impeded.
FP relies on third-party hardware and software that may be difficult to replace
or which could cause errors or failures of our service
FP relies on hardware purchased or leased and software licensed from third
parties in order to offer its service, including Weblogic Application Server
software from BEA. This hardware and software may not continue to be available
on commercially reasonable terms, or at all. Any loss of the right to use any of
this hardware or software could result in delays in the provisioning of our
service until equivalent technology is either developed by us, or, if available,
is identified, obtained and integrated, which could harm our business. Any
errors or defects in third-party hardware or software could result in errors or
a failure of our service which could harm our business.
If we acquire any companies or technologies in the future, they could prove
difficult to integrate, disrupt our business, dilute shareholder value and
adversely affect our operating results
We will seek to acquire or make investments in complementary companies, services
and technologies in the future. Present management has not made any acquisitions
or investments to date on behalf of FP, and therefore our ability as an
organization to make acquisitions or investments is unproven. Acquisitions and
investments involve numerous risks, including:
o difficulties in integrating operations, technologies, services and
personnel;
o diversion of financial and managerial resources from existing
operations;
o risk of entering new markets;
43
o potential write-offs of acquired assets or investments;
o potential loss of key employees;
o inability to generate sufficient revenue to offset acquisition or
investment costs; and
o delays in customer purchases due to uncertainty.
In addition, if we finance acquisitions by issuing convertible debt or equity
securities, our existing shareholders may be diluted which could affect the
market price of our stock. As a result, if we fail to properly evaluate and
execute acquisitions or investments, our business and prospects may be seriously
harmed.
The success of our business depends on the continued growth and acceptance of
the Internet as a business tool
Expansion in the sales of our service depends on the continued acceptance of the
Internet as a communications and commerce platform for enterprises. The Internet
could lose its viability as a business tool due to delays in the development or
adoption of new standards and protocols to handle increased demands of Internet
activity, security, reliability, cost, ease-of-use, accessibility and
quality-of-service. The performance of the Internet and its acceptance as a
business tool has been harmed by "viruses," "worms" and similar malicious
programs, and the Internet has experienced a variety of outages and other delays
as a result of damage to portions of its infrastructure. If for any reason the
Internet does not remain a widespread communications medium and commercial
platform, the demand for our service would be significantly reduced, which would
harm our business.
Because competition for our employees is intense, we may not be able to attract
and retain the highly skilled employees we need to support our planned growth
To continue to execute on our growth plan, we must attract and retain highly
qualified personnel. Competition for these personnel is intense, especially for
engineers with high levels of experience in designing and developing software
and Internet-related services and senior sales executives. We may not be
successful in attracting and retaining qualified personnel. FP and its
predecessors have from time to time in the past experienced, and we expect to
experience in the future, difficulty in hiring and retaining highly skilled
employees with appropriate qualifications. Many of the companies with which we
compete for experienced personnel have greater resources than we have. In
addition, in making employment decisions, particularly in the Internet and
high-technology industries, job candidates often consider the value of the stock
options they are to receive in connection with their employment. Volatility in
the price of our stock may therefore adversely affect our ability to attract or
retain key employees. Furthermore, the new requirement to expense stock options
may discourage us from granting the size or type of stock option awards that job
candidates require to join our company. In order to attract personnel to meet
our technical development needs in the future we may have to pay above market
rates or open satellite offices. Such additional costs could negatively impact
our profitability. If we fail to attract new personnel or fail to retain and
motivate our current personnel, our business and future growth prospects could
be harmed.
We might require additional capital to support business growth, and this capital
might not be available
We intend to continue to make investments to support our business growth and may
require additional funds to respond to business challenges or opportunities,
including the need to develop new services or enhance our existing service,
enhance our operating infrastructure or acquire complementary businesses and
technologies. Accordingly, we may need to engage in equity or debt financings to
secure additional funds. If we raise additional funds through further issuances
of equity or convertible debt securities, our existing shareholders could suffer
significant dilution, and any new equity securities we issue could have rights,
preferences and privileges superior to those of holders of our common stock. Any
debt financing secured by us in the future could involve restrictive covenants
relating to our capital raising activities and other financial and operational
matters, which may make it more difficult for us to obtain additional capital
and to pursue business opportunities, including potential acquisitions. In
addition, we may not be able to obtain additional financing on terms favorable
to us, if at all. If we are unable to obtain adequate financing or financing on
terms satisfactory to us, when we require it, our ability to continue to support
our business growth and to respond to business challenges could be significantly
limited.
44
A delayed recovery in information technology spending could reduce sales of our
products
Average license fees for FP's product suite typically range from approximately
less than a hundred thousand dollars to several million dollars. Often this
represents a significant information technology capital expenditure for the
companies to which FP targets its sales efforts. In addition, regardless of the
cost of FP's products, many companies may elect not to pursue information
technology projects, which may incorporate either of FP's product suites or its
individual components, as a result of the global information technology spending
slowdown. Consequently, if the current global environment in information
technology spending should continue, whether resulting from a weakened economy
or other factors, we may be unable to maintain or increase our sales volumes and
achieve our targeted revenue growth. In addition, FP depends on its customers to
pay recurring maintenance fees for technical support and product upgrades.
Often, this represents a significant and recurring information technology
capital expenditure for our customers. As a result, if the global environment in
information technology should continue, whether resulting from a weakened
economy or other factors, we may be unable to maintain our maintenance revenues
at their current levels and achieve our targeted revenues.
If the markets for sales configuration and customer service solutions do not
expand, we may not be successful
FP's products address a new and emerging market for solutions that optimize the
"lead-to-order" process and solutions, which address guided customer service.
The failure of these markets to expand, or a delay in the expansion of these
markets, would seriously harm our business. FP's business depends on the
successful customer acceptance of its products and we expect that we will
continue to depend on revenue from new and enhanced versions of our products.
Our business would be harmed if our target customers do not adopt and expand
their use of our products.
We depend on key personnel and must attract and retain qualified personnel to be
successful
Our success depends upon the continued contributions of our senior management,
sales, engineers, and professional services personnel, who perform important
functions and would be difficult to replace. Also, we believe that our future
success is highly dependent on Bill Santo, our chief executive officer. The loss
of the services of any key personnel, particularly senior management, sales,
engineers, or professional services personnel could seriously harm our business.
FP depends on its direct sales force for a significant portion of its current
sales and our growth depends on the ability of this direct sales force to
increase sales to a level that will allow us to reach and maintain profitability
Our ability to increase sales will depend on our ability to train and retain top
quality sales people who are able to target prospective customers' senior
management, and who can productively and efficiently generate and service large
accounts. Competition for these individuals is intense, and we may not be able
to attract, assimilate or retain highly qualified personnel in the future.
Turnover among our sales staff has been significant and a number of our
employees have left or been terminated. If we are unable to retain qualified
sales personnel, or if newly hired personnel fail to develop the necessary
skills or to reach productivity when anticipated, we may not be able to increase
sales of our products and services.
In addition, in connection with FP's effort to streamline its operations, reduce
costs and bring its staffing and infrastructure in line with industry standards,
Firepond restructured its organization and reduced its workforce. In connection
with the restructurings, during fiscal 2001 Firepond terminated 363 employees
and 90 consultants, and during fiscal 2002 it terminated 93 employees. In fiscal
2003, Firepond eliminated 55 positions and shut down its foreign offices. In
fiscal 2004, Firepond eliminated 36 positions and continued to streamline its
operations by closing its Bloomington office. This restructuring may also yield
unanticipated consequences, such as attrition beyond our planned reduction in
workforce and loss of employee morale and decreased performance. Continuity of
personnel is an important factor in the successful completion of FP's business
plan and ongoing turnover in our personnel could materially and adversely impact
our sales and marketing efforts, current customer implementations, and our
development projects. We believe that hiring and retaining qualified individuals
at all levels is essential to our success, and there can be no assurance that we
will be successful in attracting and retaining the necessary personnel.
45
Difficulties and financial burdens associated with mergers and acquisitions
could harm our business and financial results
On February 15, 2001, Firepond acquired all of the outstanding stock of
Brightware, Inc. This acquisition proved difficult to integrate into Firepond's
operations and product base. In May 2004 Firepond sold the Brightware assets to
a third party. We will seek to acquire additional assets or companies that
require integration of operations or products with our present operations or
products. There can be no assurance that the integration of any acquired
operations or technologies will be successful or will not result in unforeseen
difficulties that may absorb significant management attention.
In the future, we may acquire additional businesses or product lines or be the
target of a potential merger or acquisition. Any such merger or acquisition of
or by us may not produce the revenue, earnings or business synergies that we
anticipated, and an acquired product, service or technology might not perform as
expected. Prior to completing a merger or acquisition, however, it is difficult
to determine if such benefits can actually be realized. The process of
integrating companies into our business or integrating our company into another
business may also result in unforeseen difficulties. Unforeseen operating
difficulties may absorb significant management attention, which we might
otherwise devote to our existing business. Also, the process may require
significant financial resources that we might otherwise allocate to other
activities, including the ongoing development or expansion of our existing
operations. If we pursue a future merger or acquisition, our management could
spend a significant amount of time and effort identifying and completing the
merger or acquisition. If we make a future acquisition, we could issue equity
securities which would dilute current shareholders' percentage ownership, incur
substantial debt, assume contingent liabilities or incur a one-time charge.
Failure to expand our relationships with third party channels may adversely
impact our support and maintenance of existing customers, delay the
implementation of our products and delay the growth of our revenue
Our business strategy includes expanding and increasing third party channels
which license and support FP's products, such as resellers, distributors, OEMs,
system integrators and consulting firms. This often requires that these third
parties recommend our products to their customers and install and support our
products for their customers. To increase our revenue and implementation
capabilities, we must develop and expand our relationships with these third
parties. In addition, if these firms fail to implement our products successfully
for their clients, we may not have the resources to implement our products on
the schedule required by the client which would result in our inability to
recognize revenue from the license of our products to these customers.
Difficulties associated with the protection of our intellectual property and
potential claims alleging infringement of third party's intellectual property
could harm our ability to compete and result in significant expense to us and
loss of significant rights
Our success and ability to compete is dependent in part upon our proprietary
technology. Any infringement of our proprietary rights could result in
significant litigation costs, and any failure to adequately protect our
proprietary rights could result in our competitors' offering similar products,
potentially resulting in loss of a competitive advantage and decreased revenue.
Existing patent, copyright, trademark and trade secret laws afford only limited
protection. In addition, the laws of some foreign countries do not protect our
proprietary rights to the same extent as do the laws of the United States.
Therefore, we may not be able to protect our proprietary rights against
unauthorized third party copying or use. Furthermore, policing the unauthorized
use of our products is difficult. Some of our contractual arrangements provide
third parties with access to our source code and other intellectual property
upon the occurrence of specified events. This access could enable these third
parties to use our intellectual property and source code to develop and
manufacture competing products, which would adversely affect our performance and
ability to compete. Litigation may be necessary in the future to enforce our
intellectual property rights, to protect our trade secrets or to determine the
validity and scope of the proprietary rights of others. This litigation could
result in substantial costs and diversion of resources and could materially
adversely affect our future operating results.
Further, the software industries are characterized by the existence of frequent
litigation of intellectual property rights. From time to time, third parties may
assert patent, copyright, trademark and other intellectual property rights to
technologies that are important to our business. Any claims, with or without
merit, could be time-consuming, result in costly litigation, divert the efforts
of our technical and management personnel, cause product shipment delays,
disrupt our relationships with our customers or require us to enter into royalty
or licensing agreements, any of which could have a material adverse effect upon
our operating results. Royalty or licensing agreements, if required, may not be
available on terms acceptable to us. If a claim against us is successful and we
cannot obtain a license to the relevant technology on acceptable terms, license
a substitute technology or redesign our products to avoid infringement, our
business, financial condition and results of operations would be materially
adversely affected.
46
Intense competition from other technology companies could prevent us from
increasing or sustaining revenue and prevent us from achieving or sustaining
profitability
The market for sales configuration solutions is intensely competitive and we
expect that this competition will increase. Many of our current and potential
competitors have longer operating histories, greater name recognition and
substantially greater resources than we do. Therefore, they may be able to
respond more quickly than we can to new or changing opportunities, technologies,
standards or customer requirements. If we are unable to compete effectively, our
revenue could significantly decline.
Our failure to successfully implement our products in a timely manner could
result in negative publicity and reduced sales, both of which would
significantly harm our business and operating results
In the future, our customers may experience difficulties or delays in completing
the implementation of our products. We have found that implementing our CPQ
products may be more time consuming than we or our customers anticipate. The
unique configuration or integration with our customers' legacy systems, such as
existing databases and enterprise resource planning software, may be
underestimated and the deployment of our products can be delayed. Failing to
meet customer expectations on deployment of our products could result in a loss
of customers and negative publicity regarding us and our products, which could
adversely affect our ability to attract new customers. In addition,
time-consuming deployments may also increase the amount of professional services
we allocate to each customer, thereby increasing our costs and adversely
affecting our business and operating results.
FP depends upon technology licensed to us by third parties, the loss of which
could adversely affect out competitive position
FP licenses technology from a small number of software providers for use with
our products and implementation services. We anticipate that we will continue to
license and rely on technology from third parties in the future. This technology
may not continue to be available on commercially reasonable terms, if at all,
and some of the technology we license would be difficult to replace. The loss of
the use of this technology would result in delays in the license and
implementation of our products until equivalent technology, if available, is
identified, licensed and integrated. In turn, this could prevent the
implementation or impair the functionality of our products, delay new product
introductions, or injure our reputation.
If we are unable to introduce new and enhanced products on a timely basis that
respond effectively to changing technology, our revenue may decline
FP's market is characterized by rapid technological change, changes in customer
requirements, frequent new product and service introductions and enhancements,
and evolving industry standards. Advances in Internet technology or in
e-commerce software applications, or the development of entirely new
technologies to replace existing software, could lead to new competitive
products that have better performance or lower prices than our products and
could render our products obsolete and unmarketable. In addition, if a new
software language or operating system becomes standard or is widely adopted in
our industry, we may need to rewrite portions of our products in another
computer language or for another operating system to remain competitive. If we
are unable to develop new and enhanced products on a timely basis that respond
to changing technology, our business could be seriously harmed.
If our new and sophisticated products fail to perform properly, our revenue
would be adversely affected
Software products as sophisticated as ours may contain undetected errors, or
bugs which result in product failures, or may cause our products to fail to meet
our customers' expectations. FP's products may be particularly susceptible to
bugs or performance degradation because of the evolving nature of Internet
technologies and the stress that full deployment of our products over the
Internet to thousands of end-users may cause. Product performance problems could
result in loss of or delay in revenue, loss of market share, failure to achieve
market acceptance, diversion of development resources or injury to our
reputation.
47
Product liability claims related to our customers' critical business operations
could result in substantial costs
FP's products are critical to the business operations of its customers. If one
of our products fails, a customer may assert a claim for substantial damages
against us, regardless of our responsibility for the failure. Our product
liability insurance may not cover claims brought against us. Product liability
claims could require us to spend significant time and money in litigation or to
pay significant damages. Any product liability claims, whether or not
successful, could seriously damage our reputation and our business.
Control by Douglas Croxall will limit your ability to influence the outcome of
director elections and other matters requiring shareholder approval
Douglas Croxall, the Chairman of the Board of Directors of the Company,
beneficially holds, directly or indirectly, 2,802,414 shares or approximately
54.9% of the issued and outstanding shares of our common stock. Therefore, Mr.
Croxall will have the ability to elect the Board of Directors of the Company and
decide the outcome of any matter presented for a vote to the shareholders of the
Company. This concentration of ownership could also have the effect of delaying
or preventing a change in our control or discouraging a potential acquirer from
attempting to obtain control of us, which in turn could have a material adverse
effect on the market price of the common stock or prevent our shareholders from
realizing a premium over the market price for their shares of common stock.
We may be subject to intellectual property infringement claims, which could
cause us to incur significant expenses, pay substantial damages and be prevented
from providing our services
Third parties may claim that our products or services infringe or violate their
intellectual property rights. Any such claims could cause us to incur
significant expenses and, if successfully asserted against us, could require
that we pay substantial damages and prevent us from providing our services. Even
if we were to prevail, any litigation regarding our intellectual property could
be costly and time-consuming and divert the attention of our management and key
personnel from our business operations. We may also be obligated to indemnify
our business partners in any such litigation, which could further exhaust our
resources. Furthermore, as a result of an intellectual property challenge, we
may be prevented from providing some or all of our services unless we enter into
royalty, license or other agreements. We may not be able to obtain such
agreements at all or on terms acceptable to us, and as a result, we may be
precluded from offering most or all of our products and services.
FP's software products are dependent, in part, on a non-exclusive worldwide
license from Orion IP, LLC to utilize certain critical patents and related
rights in connection with the conduct of its business. We expect that such
license will be transferred to the Company in connection with the merger.
As we expand FP's services internationally, our business will be susceptible to
additional risks associated with international operations
We believe we must expand FP's services internationally and expect to commit
significant resources to this expansion. As we increase our international
activities, we will be exposed to additional challenges, including:
o fluctuations in currency exchange rates;
o seasonal fluctuations in purchasing patterns in other countries;
o different regulatory requirements;
o difficulties in collecting accounts receivable in other countries;
o the burdens of complying with a wide variety of foreign laws;
o challenges in staffing and managing foreign operations;
o political and economic instability; and
o potentially adverse tax consequences, including those resulting from
unexpected changes in tax laws.
48
We have limited experience operating outside the United States and with
marketing our services globally. Our presence in global markets may require
significant management attention and financial resources which may adversely
affect our ability to effectively manage our business.
Our reported financial results may be adversely affected by changes in generally
accepted accounting principles
Generally accepted accounting principles are subject to interpretation by the
Financial Accounting Standards Board, or FASB, the American Institute of
Certified Public Accountants, the Securities and Exchange Commission, or SEC,
and various bodies formed to promulgate and interpret appropriate accounting
principles. A change in these principles or interpretations could have a
significant effect on our reported financial results, and could affect the
reporting of transactions completed before the announcement of a change. For
example, the FASB has announced its support for recording expense for the fair
value of stock options granted, although final adoption of the standard has been
delayed.
We will incur increased costs as a result of being a public company, compared to
the historical operations of Firepond
As a public company, we will incur significant legal, accounting and other
expenses that FP or Firepond did not incur as a private company. In addition,
the Sarbanes-Oxley Act of 2002, as well as new rules implemented by the SEC,
require changes in corporate governance practices of public companies. In
addition, if our stock is listed on NASDAQ or another major exchange, we will
incur additional compliance expenses. We expect these new rules and regulations
to increase our legal and financial compliance costs and to make some activities
more time-consuming and costly. In addition, we will incur additional costs
associated with our public company reporting requirements. We also expect these
new rules and regulations to make it more difficult and more expensive for us to
obtain director and officer liability insurance and we may be required to accept
reduced policy limits and coverage or incur substantially higher costs to obtain
the same or similar coverage. As a result, it may be more difficult for us to
attract and retain qualified persons to serve on our board of directors or as
executive officers.
Our compliance with the Sarbanes-Oxley Act and SEC rules concerning internal
controls may be time consuming, difficult and costly.
It may be time consuming, difficult and costly for us to develop and implement
the additional internal controls, processes and reporting procedures required by
the Sarbanes-Oxley Act after the recapitalization. We may need to hire
additional financial reporting, internal auditing and other finance staff in
order to develop and implement appropriate additional internal controls,
processes and reporting procedures. If we are unable to comply with these
requirements of the Sarbanes-Oxley Act, we may not be able to obtain the
independent accountant certifications that the Sarbanes-Oxley Act requires
publicly traded companies to obtain.
If we fail to comply in a timely manner with the requirements of Section 404 of
the Sarbanes-Oxley Act of 2002 regarding internal control over financial
reporting or to remedy any material weaknesses in our internal controls that we
may identify, such failure could result in material misstatements in our
financial statements, cause investors to lose confidence in our reported
financial information and have a negative effect on the trading price of our
common stock.
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 and current SEC
regulations, beginning with our annual report on Form 10-K for the 2007 fiscal
year, we will be required to furnish a report by our management on our internal
control over financial reporting. Such report will contain, among other matters,
an assessment of the effectiveness of our internal control over financial
reporting as of the end of 2007. We are just beginning the process of
documenting and testing our internal control procedures in order to satisfy
these requirements, which is likely to result in increased general and
administrative expenses and may shift management time and attention from
revenue-generating activities to compliance activities. While our management is
expending significant resources in an effort to complete this important project,
there can be no assurance that we will be able to achieve our objective on a
timely basis. There also can be no assurance that our auditors will be able to
issue an unqualified opinion on management's assessment of the effectiveness of
our internal control over financial reporting. Failure to achieve and maintain
an effective internal control environment or complete our Section 404
certifications could have a material adverse effect on our stock price.
49
In addition, in connection with our on-going assessment of the effectiveness of
our internal control over financial reporting, we may discover "material
weaknesses" in our internal controls as defined in standards established by the
Public Company Accounting Oversight Board, or the PCAOB. A material weakness is
a significant deficiency, or combination of significant deficiencies, that
results in more than a remote likelihood that a material misstatement of the
annual or interim financial statements will not be prevented or detected. The
PCAOB defines "significant deficiency" as a deficiency that results in more than
a remote likelihood that a misstatement of the financial statements that is more
than inconsequential will not be prevented or detected.
In the event that a material weakness is identified, we will employ qualified
personnel and adopt and implement policies and procedures to address any
material weaknesses that we identify. However, the process of designing and
implementing effective internal controls is a continuous effort that requires us
to anticipate and react to changes in our business and the economic and
regulatory environments and to expend significant resources to maintain a system
of internal controls that is adequate to satisfy our reporting obligations as a
public company. We cannot assure you that the measures we will take will
remediate any material weaknesses that we may identify or that we will implement
and maintain adequate controls over our financial process and reporting in the
future.
Any failure to complete our assessment of our internal control over financial
reporting, to remediate any material weaknesses that we may identify or to
implement new or improved controls, or difficulties encountered in their
implementation, could harm our operating results, cause us to fail to meet our
reporting obligations or result in material misstatements in our financial
statements. Any such failure also could adversely affect the results of the
periodic management evaluations of our internal controls and, in the case of a
failure to remediate any material weaknesses that we may identify, would
adversely affect the annual auditor attestation reports regarding the
effectiveness of our internal control over financial reporting that are required
under Section 404 of the Sarbanes-Oxley Act of 2002. Inadequate internal
controls could also cause investors to lose confidence in our reported financial
information, which could have a negative effect on the trading price of our
common stock.
RISKS RELATING TO OUR COMMON STOCK
There has been no active public market for our common stock, and prospective
investors may not be able to resell their shares at or above the purchase price
paid by such investor, or at all.
It is intended that our common stock will become eligible for trading on the OTC
Bulletin Board trading system. The OTC Bulletin Board tends to be highly
illiquid, in part because there is no national quotation system by which
potential investors can track the market price of shares except through
information received or generated by a limited number of broker-dealers that
make markets in particular stocks. There is a greater chance of market
volatility for securities that trade on the OTC Bulletin Board as opposed to a
national exchange or quotation system. This volatility may be caused by a
variety of factors including:
o The lack of readily available price quotations.
o The absence of consistent administrative supervision of "bid" and
"ask" quotations.
o Lower trading volume.
o Market conditions.
In addition, the value of our common stock could be affected by:
o Actual or anticipated variations in our operating results.
o Changes in the market valuations of other similarly situated
companies developing similar software products.
o Announcements by AFG or its competitors of significant acquisitions,
strategic partnerships, joint ventures or capital commitments.
50
o Adoption of new accounting standards affecting our industry.
o Additions or departures of key personnel.
o Introduction of new product or services by AFG or its competitors.
o Sales of common stock or other securities in the open market.
o Changes in financial estimates by securities analysts.
o Conditions or trends in the market in which AFG operates.
o Changes in earnings estimates and recommendations by financial
analysts.
o Our failure to meet financial analysts' performance expectations.
o Other events or factors, many of which are beyond our control.
In a volatile market, you may experience wide fluctuations in the market price
of our securities. These fluctuations may have an extremely negative effect on
the market price of our securities and may prevent you from obtaining a market
price equal to your purchase price when you attempt to sell our securities in
the open market. In these situations, you may be required either to sell our
securities at a market price which is lower than your purchase price, or to hold
our securities for a longer period of time than you planned. An inactive market
may also impair our ability to raise capital by selling shares of capital stock
and may impair our ability to acquire other companies or technologies by using
common stock as consideration.
We have no current plan to pay dividends on our common stock and investors may
lose the entire amount of their investment.
We have no current plans to pay dividends on our common stock. Therefore,
investors will not receive any funds absent a sale of their shares. We cannot
assure investors of a positive return on their investment when they sell their
shares nor can we assure that investors will not lose the entire amount of their
investment.
Our common stock may be considered "a penny stock" and may be difficult to sell.
The SEC has adopted regulations which generally define "penny stock" to be an
equity security that has a market price of less than $5.00 per share or an
exercise price of less than $5.00 per share, subject to specific exemptions. If,
upon development of a market, the market price of the common stock falls below
$5.00 per share, the SEC's penny stock rules require a broker-dealer, before a
transaction in a penny stock not otherwise exempt from the rules, to deliver a
standardized risk disclosure document that provides information about penny
stocks and the risks in the penny stock market. The broker-dealer must also
provide the customer with current bid and offer quotations for the penny stock,
the compensation of the broker-dealer and the salesperson in the transaction,
and monthly account statements showing the market value of each penny stock held
in the customer's account. In addition, the penny stock rules generally require
that before a transaction in a penny stock, the broker-dealer make a special
written determination that the penny stock is a suitable investment for the
purchaser and receive the purchaser's agreement to the transaction. These rules
may restrict the ability of brokers-dealers to sell the common stock and may
affect the ability of investors to sell their shares.
A significant amount of common stock will be eligible for sale on the second
year anniversary following our CAP financing, and its sale could depress the
market price of our common stock.
Members of our senior management are prohibited from selling shares of their
common stock during the two year period beginning March 29, 2006. Sales of a
significant number of shares of common stock in the public market commencing in
a year could lower the market price of our common stock. All of AFG's
stockholders are subject to Rule 144 under the Securities Act, which, in
general, permits a person who has held restricted shares for a period of one
year, upon filing with the SEC a notification on Form 144, to sell into the
market common stock in an amount equal to the greater of 1% of the outstanding
shares or the average weekly number of shares sold in the last four weeks prior
to such sale. Such sales may be repeated once each three months, and any of the
restricted shares may be sold by a non-affiliate after they have been held two
years.
51
We cannot assure you that we will list our common stock on NASDAQ or any other
securities exchange.
Although we intend to apply to list the common stock on NASDAQ or the American
Stock Exchange in the future, we cannot assure you that we will be able to meet
the initial listing standards of either of those or any other stock exchange, or
that we will be able to maintain a listing of the common stock on either of
those or any other stock exchange. After the merger of FP and our
recapitalization, if we were unable to list the common stock on NASDAQ, the
American Stock Exchange or another stock exchange, or to maintain the listing,
we expect that our common stock will be eligible to trade on the OTC Bulletin
Board, maintained by NASDAQ, another over-the-counter quotation system, or on
the "pink sheets," where an investor may find it more difficult to dispose of
shares or obtain accurate quotations as to the market value of our common stock.
In addition, we would be subject to a SEC rule that, if we failed to meet the
specified criteria, imposes various practice requirements on broker-dealers who
sell securities governed by the rule to persons other than established customers
and accredited investors. Consequently, such rule may deter broker-dealers from
recommending or selling our common stock, which may further affect the liquidity
of the common stock. It would also make it more difficult for us to raise
additional capital after the recapitalization.
Securities analysts may not initiate coverage or continue to cover our common
stock and this may have a negative impact on our common stock's market price.
The trading market for our common stock may depend significantly on the research
and reports that securities analysts publish about us or our business. We do not
have any control over these analysts. There is no guarantee that securities
analysts will cover our common stock. If securities analysts do not cover our
common stock, the lack of research coverage may adversely affect our common
stock's market price. If we are covered by securities analysts, and our stock is
downgraded, our stock price would likely decline. If one or more of these
analysts ceases to cover us or fails to publish regularly reports on us, we
could lose visibility in the financial markets, which could cause our stock
price or trading volume to decline.
52
MANAGEMENT
Executive Officers and Directors
The following table sets forth the name, age and position of each of our
directors, executive officers and significant employees at the closing of this
offering:
Name Age Position(s)
- ---- --- -----------
Douglas Croxall 37 Chairman of the Board
William Santo 50 Chief Executive Officer, Director
Stephen Peary 57 Chief Financial Officer, Secretary
Mark Campion 50 Director
William Santo serves as the Chief Executive Officer and a director of the
Company, and served as the Chief Executive Officer of Firepond and FP since June
1, 2005. Prior to joining the Company, Bill was a Managing Director at Sanders
Morris Harris, a publicly traded diversified financial services firm. Prior to
joining SMH, Bill was a successful entrepreneur involved in numerous start-up
opportunities, primarily in the software industry. Most recently, Mr. Santo
co-founded Magnetic Alliance, an online marketplace, facilitating co-marketing
and co-branding opportunities between consumer brands and entertainment content
producers. Before that Mr. Santo co-founded the Web acceleration firm, wwWhoosh,
Inc., and served as its Chief Executive Officer from 2000 through 2001. Prior to
wwWhoosh, he founded and was Chief Executive Officer of InfoCellular, a company
that developed customer acquisition software for the wireless communications
industry. InfoCellular was founded in 1993 with four employees, and within five
years 26 wireless carriers in five countries used its products. Mr. Santo
graduated from the University of Massachusetts, Amherst with a B.S. in Political
Science. He also holds a Juris Doctor degree from New England School of Law.
Stephen Peary serves as the Chief Financial Officer and Secretary of the
Company, and served as the Chief Financial Officer of FP since April 28, 2005.
He has been consulting with FP regarding restructuring operations, finance,
audit and insurance matters since September 2004. From 2001 to 2005, Mr. Peary
was Managing Director of Stinson Capital Management, Ltd., a Bermuda
corporation, and its affiliates managing investment portfolios and financing
marine and energy related assets. From 1997 to 2001 he was Managing Director of
Liverpool & London Protection and Indemnity Association, a mutual manager of
marine assets and liability risks located in Liverpool, England. From 1987 to
1997, Mr. Peary was Senior Vice President at PLM International, Inc. (AMEX:PLM),
manager of diversified investment portfolios focused on transportation related
equipment, including ships, commercial aircraft, marine containers, and oil
drilling rigs. He is a graduate of the University of Illinois (BA, Economics),
Georgetown University Law Schools (J.D.) and Boston University (LLM - Taxation).
Douglas Croxall has served as the Chairman of the Board of Directors of the
Company since December 3, 2003, and was the Chief Executive Officer of Firepond
and FP from December 2003 until May 2005. A company controlled by Mr. Croxall is
the managing member of Jaguar Technology Holdings, LLC. Since December 2001, Mr.
Croxall has served as the managing member of Riverland Enterprises LLC, a
privately-held company which holds investments and provides strategic advisory
services. Since August 2001, Mr. Croxall has served as an officer of Acclaim
Financial Group Venture III, LLC, which provides strategic advisory services.
From September 1999 until May 2001, Mr. Croxall served as the Chief Financial
Officer of Load Media Network, Inc., an Internet and software company based in
Hollywood, California. From August 1995 until September 1999, Mr. Croxall served
as a Manager for KPMG in the Strategic Transaction Services Group. Mr. Croxall
received his Bachelor of Arts degree in Political Science from Purdue University
and his Master Degree in Finance from Pepperdine University.
Mark Campion has served as a member of the Company's Board of Directors since
March 2006. Mr. Campion joined PolyFuel as Chief Financial Officer in April
2003. Mark personally led PolyFuel's equity raise and listing on the London AIM
in July 2005. Mark has more than 20 years of experience across a broad range of
financial and operational disciplines, including public and private financing,
treasury, corporate operations, information technology, planning and budgeting,
credit and risk management, accounting and taxation, human resources and
corporate administration. He has held senior-level positions with a number of
public and private companies, including Atomic Tangerine, Trans Ocean, GRI
International, Activision, and KPMG. Mark received a B.S. in business from the
University of California at Berkeley and is a graduate of the Harvard Business
School's Advanced Executive Management Program. He is a Certified Public
Accountant.
53
We may add other qualified directors to the Board in the future, as candidates
become available.
Election of Directors and Officers
Holders of our Common Stock are entitled to one (1) vote for each share held on
all matters submitted to a vote of the shareholders, including the election of
directors. Cumulative voting with respect to the election of directors is not
permitted by the Company's Articles of Incorporation. The board of directors
shall be elected at the annual meeting of the shareholders or at a special
meeting called for that purpose. Each director shall hold office until the next
annual meeting of shareholders and until the director's successor is elected and
qualified. If a vacancy occurs on the board of directors, including a vacancy
resulting from an increase in the number of directors, then the shareholders may
fill the vacancy at the next annual meeting or at a special meeting called for
the purpose, or the board of directors may fill such vacancy.
Board Committees
Our Board of Directors will form certain Committees including Compensation,
Audit and Nominating and Governance Committees. If we proceed with the listing
of our common stock on Nasdaq, each member of the Compensation, Audit and
Nominating and Governance Committees will be determined by the Board of the
Directors to be "independent" within the meaning of Nasdaq Rule 4200(a)(15) and,
in addition, each member of the Audit Committee will be "independent" within the
meaning of applicable rules and regulations of the Securities and Exchange
Commission regarding the independence of audit committee members.
Compensation Committee. The Compensation Committee will be charged with
recommending to the Board the compensation for the Company's executives and
administering the Company's stock incentive and benefit plans.
Audit Committee. The Audit Committee will be charged with, among other things,
the appointment of independent auditors of the Company, as well as discussing
and reviewing with the independent auditors the scope of the annual audit and
results thereof, pre-approving the engagement of the independent auditors for
all audit-related services and permissible non-audit related services, and
reviewing and approving all related-party transactions. The Audit Committee will
also review interim financial statements included in the Company's quarterly
reports and will review documents filed with the SEC. Mr. Campion will be
Chairman of the Audit Committee.
Nominating and Governance Committee. The Nominating and Governance Committee
will be charged with assisting the Board in its selection of individuals as
nominees for election to the Board at annual meetings of the Company's
shareholders and to fill any vacancies or newly created directorships on the
Board.
Code of Business Conduct and Ethics. We intend to adopt a Code of Business
Conduct and Ethics applicable to our directors, officers (including our
principal executive officer, principal financial officer, principal accounting
officer and controller) and employees. We intend to satisfy the disclosure
requirement under Item 10 of Form 8-K relating to amendments or waivers from any
provision of the Company's Code of Business Conduct and Ethics applicable to the
Company's principal executive officer, principal financial officer, principal
accounting officer or controller by either filing a Form 8-K or posting this
information on the Company's website within five days business days following
the date of amendment or waiver.
54
EXECUTIVE COMPENSATION
Prior to the acquisition of FP, the Company did not pay any compensation to its
executive officers. The following table sets forth the cash compensation earned
for services performed for FP and its predecessors during the calendar years
ended December 31, 2005, December 31, 2004 and December 31, 2003 by the FP's
Chief Executive Officer and each of its other four most highly compensated
executive officers, who are referred to collectively as the "Named Executive
Officers."
Summary Compensation Table
Long-Term Compensation
-----------------------------------------------
Awards Payouts
------------------------------------ --------
Annual Compensation Restricted Stock Securities LTIP All Other
------------------------------- Award(s) Underlying Payouts Compensation
Name and Principal Position Year Salary($) Bonus($) ($) Options/SARs(#) ($) ($)(3)
- --------------------------- ----- -------- -------- ------------------ --------------- -------- ------------
William Santo(1) 2005 125,000
Chief Executive Officer 2004 0
2003 0
Stephen Peary(2) 2005 106,250 50,000(4)
Chief Financial Officer 2004 20,000(5)
2003 0
Douglas Croxall 2005 5,168
Chairman 2004 29,133
2003 16,795
Craig Christensen 2005 123,097
Vice President, 2004 112,193
Development 2003 115,159
Gary Roseberry 2005 100,650
Vice President, 2004 98,955
Services and Support 2003 89,833
____________
(1) William Santo was appointed Chief Executive Officer on June 1, 2005.
(2) Stephen Peary was appointed Chief Financial Officer on April 28, 2005. Prior
to that time Mr. Peary served as an independent consultant to FP.
(3) Amounts represent FP's Profit Sharing and 401(k) Plan contributions,
payments of term life insurance premiums and medical cost reimbursement. In the
year ended December 31, 2004 and December 31, 2005, FP did not make any
contributions to the FP's Profit Sharing and 401(k) Plan.
In the year ended December 31, 2004, life insurance premium payments by FP were
$ 201.70 and $ 229.10 for Messrs. Christiansen and Mr. Roseberry, respectively.
In the year ended December 31, 2004, medical reimbursements were $ 8,502.27, $
8075.89 and $ 8075.89 for Messrs. Croxall, Christiansen and Roseberry,
respectively.
In the year ended December 31, 2005, life insurance premium payments by the
Company were $ 240.00, $204.00, $ 272.40 and $242.40 for Messrs. Santo, Peary,
Christiansen and Mr. Roseberry, respectively. In the year ended December 31,
2005, medical reimbursements were $ 9,398.43, $4,699.89, $4,699.89, $ 8,973.89
and $ 8,973.89 for Messrs. Croxall, Santo, Peary, Christiansen and Roseberry,
respectively.
(4) Mr. Peary received $50,000 for services rendered to FP as a consultant prior
to Mr. Peary's appointment as Chief Financial Officer.
(5) Mr. Peary received $20,000 for services rendered to FP as a consultant prior
to Mr. Peary's appointment as Chief Financial Officer. See section titled
"Certain Relationships and Related Transactions" below.
55
Employment Agreements
On May 16, 2005, Firepond entered into three-year employment agreements with
William Santo, its CEO, and Stephen Peary, its CFO, on the following material
terms:
o CEO base salary of $200,000 per year;
o Bonus as determined by the Board of Directors;
o Restricted stock grant - 750,000 common shares in FP Technology, all
of which vest on the third anniversary of the date of grant, or
January 5, 2009. This restricted stock was exchanged for 302,419
restricted common shares in the Company as of the Effective Time;
o Medical and dental insurance; and
o Up to three weeks vacation annually.
o CFO base salary of $170,000 per year;
o Bonus as determined by the Board of Directors;
o Restricted stock grant - 500,025 common shares, all of which vest on
the third anniversary of the date of grant, or on January 5, 2009.
This restricted stock was exchanged for 201,622 restricted common
shares in the Company as of the Effective Time;
o Medical and dental insurance; and
o Up to three weeks vacation annually.
The CEO and CFO current base salaries have since been increased to $300,000 and
$250,000 per year, respectively.
By operation of the merger, the Company assumed the obligations of Firepond
under these employment agreements as of the Effective Time. Each of these
employment agreements is filed as an exhibit attached to this report.
Compensation of Directors
Each member of our board of directors who is not an employee of the Company (a
"non-employee director") will receive an annual retainer of $10,000 and will
receive $1,000 for each meeting of our board of directors attended in order to
defray travel expenses. Under a Stock Incentive Plan that will be adopted after
the closing, each non-employee director will be granted annually an option to
purchase 1,000 shares of our common stock on the day following our annual
meeting of shareholders, with an exercise price per share equal to the fair
market value of our common stock on such date. Each such option will have a ten
year term and will vest with respect to one-third of the shares subject thereto
on the date of the next three annual meetings of shareholders. In addition, each
such option will become fully vested upon a "change in control" (as defined in
the plan) of the Company or such director's death. In the event a non-employee
director ceases to be a director for any reason (other than death), such
director may exercise his or her then vested options for six months. In the
event of death, his or her options shall remain exercisable for a period of
twelve months.
In addition, members of the board of directors will receive restricted stock
grants ranging from 60,000 common shares to 101,000 common shares.
Our employee directors do not receive any additional compensation for serving on
our board of directors or any committee of our board of directors. Board members
may receive additional compensation for attending special meetings of the board
of directors. Our non-employee directors do not receive any compensation from us
other than the retainer, attendance fees and stock option grants described
above.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Management of the Company believes that all of the below transactions were on
terms at least as favorable as could have been obtained from unrelated third
parties.
The Company was a party to a certain Credit Agreement, dated as of July 15, 2003
(the "Credit Agreement"), with Acclaim Financial Group Venture II, LLC
("AFGVII") pursuant to which the Company was indebted to AFGVII in the
approximate amount of $313,421.44 as of March 29, 2006 (the "Claim"). The
aggregate amount loaned to the Company from AFGVII over the last two years under
the Credit Agreement totaled approximately $200,000. On March 29, 2006, AFGVII
sold its rights to the Claim to Benchmark Equity Group, Inc. Douglas Croxall,
who is Chairman of the Board and a principal shareholder of the Company,
indirectly holds (through Riverland Enterprises, LLC) a 50% membership interest
in AFGVII. Prior to the acquisition of FP by AFG, AFGVII was a principal
shareholder of AFG.
56
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information known to us with respect to
the beneficial ownership of common stock as of March 29, 2006 by (i) each person
who is known by us to own beneficially more than 5% of our common stock, (ii)
each of our directors and Named Executive Officers and (iii) all of our
executive officers and directors as a group. Except as otherwise listed below,
the address of each person is c/o AFG Enterprises USA, Inc., 181 Wells Avenue,
Suite 100, Newton, Massachusetts 02459. As of March 29, 2006, there were
outstanding 5,100,441 shares of our common stock.
Name of Beneficial Owner Shares (1) Percent
------------------------ ---------- -------
5% or Greater Stockholders:
Jaguar Technology Holdings, LLC 2,177,414 42.7%
Benchmark Equity Group 1,008,062 19.8%
Directors and Executive Officers:
Douglas Croxall 2,802,414(2) 54.9%
William Santo 614,919(3) 12.0%
Stephen Peary 514,122(4) 10.1%
Mark Campion 60,484(5) 1.2%
All current directors and executive officers as a group (4 persons) 3,991,939 78.3%
______________________
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or investment
power with respect to securities. Shares of common stock subject to options and
warrants currently exercisable or convertible, or exercisable or convertible
within 60 days of March 29, 2006 are deemed outstanding for computing the
percentage of the person holding such option or warrant but are not deemed
outstanding for computing the percentage of any other person. Except as pursuant
to applicable community property laws, the persons named in the table have sole
voting and investment power with respect to all shares of common stock
beneficially owned.
(2) Includes 2,177,414 shares held by Jaguar Technology Holdings, LLC. Mr.
Croxall is the sole member of Riverland Enterprises LLC, which is the sole
member-manager of Jaguar Technology Holdings LLC. Mr. Croxall disclaims
beneficial ownership, except to the extent of his pecuniary interest therein, if
any, of the shares held by Jaguar Technology Holdings LLC. Also includes 625,000
shares of restricted common stock, all of which will vest on the second
anniversary of the financing transaction by the Company of $50 million in Senior
Secured Convertible and Nonconvertible Notes Due 2011 and Warrants (the "CAP
Financing"). Vesting of the restricted common stock of the Company is contingent
upon Mr. Croxall's continuous service with the Company and the meeting of
certain conditions of the CAP Financing.
(3) Consists of (i) 302,419 shares of restricted common stock, all of which will
vest on the third anniversary of the January 5, 2006 grant date, and (ii)
312,500 shares of restricted common stock, all of which will vest on the second
anniversary of the CAP Financing contingent upon (a) Mr. Santo's continuous
service with the Company and (b) the meeting of certain conditions of the CAP
Financing.
(4) Consists of (i) 201,622 shares of restricted common stock, all of which will
vest on the third anniversary of the January 5, 2006 grant date, and (ii)
312,500 shares of restricted common stock, all of which will vest on the second
anniversary of the CAP Financing contingent upon (a) Mr. Peary's continuous
service with the Company and (b) the meeting of certain conditions of the CAP
Financing.
(5) Consists of 60,484 shares of restricted common stock, all of which will vest
on the third anniversary of the January 5, 2006 grant date.
DESCRIPTION OF SECURITIES
The Company's authorized capital stock consists of 300,000,000 shares of common
stock, $.001 par value per share, and 5,000,000 shares of preferred stock, $.001
par value per share.
The holders of common stock are entitled to one vote for each share held of
record on all matters to be voted on by the stockholders. The holders of common
stock are entitled to receive dividends ratably, when, as and if declared by the
Board of Directors, out of funds legally available therefore. In the event of a
liquidation, dissolution or winding-up of the Company's business, the holders of
common stock are entitled to share equally and ratably in all assets remaining
available for distribution after payment of liabilities.
57
The holders of shares of common stock, as such, have no conversion, preemptive,
or other subscription rights and there are no redemption provisions applicable
to the common stock. All of the outstanding shares of common stock are validly
issued, fully paid and non-assessable.
The Company has never paid any cash dividends on its common stock and the
Company does not anticipate paying any cash dividends in the foreseeable future.
The Company intends to retain future earnings to fund ongoing operations and
future capital requirements of its business. Any future determination to pay
cash dividends will be at the discretion of the Board of Directors and will be
dependent upon the Company's financial condition, results of operations, capital
requirements and such other factors as the Board of Directors deems relevant.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information
The Company's common stock is currently quoted in The Pink Sheets under the
symbol "AFGU." The following table shows the range of high and low bid
quotations for the Company's Common Stock for the period from January 1, 2004
until December 31, 2005, as reported by The Pink Sheets, LLC. Prices reflect
inter-dealer prices, and do not necessarily reflect actual transactions, retail
mark-up, mark-down, or commission. The prices reflected below are prior to the
50 to 1 reverse split effective on March 10, 2006.
STOCK QUOTATIONS
Period Ended Closing Sales
- ------------ -------------
2005 2004
High Low High Low
---- --- ---- ---
December 31 $0.000 $0.000 $0.0001 $0.0001
September 30 0.000 0.000 0.015 0.0001
June 30 0.000 0.000 0.02 0.0001
March 31 0.000 0.000 0.005 0.0001
Holders
As of March 23, 2006, the Company's shares of common stock were held by
approximately 496 stockholders of record.
Dividends
The Company has not declared any dividends to date. The Company has no present
intention of paying any cash dividends on its common stock in the foreseeable
future, as the Company intends to use earnings, if any, to generate growth. The
payment by the Company of dividends, if any, in the future, rests within the
discretion of the Board of Directors and will depend, among other things, upon
the Company's earnings, capital requirements and our financial condition, as
well as other relevant factors. There are no restrictions in the Company's
articles of incorporation or bylaws that restrict the Company from declaring
dividends.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Bylaws require that the Company indemnify and hold harmless
officers, directors and former officers and directors for any obligations
arising by reason of being or having been directors or officers of the Company,
except in relation to matters as to which any such director or officer or former
director or officer or person is adjudged to be liable for negligence or
misconduct in the performance of duty. Such indemnification is not exclusive of
any other rights to which those indemnified may be entitled, under any Bylaw,
agreement, vote of stockholders, or otherwise.
58
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to directors, officers or persons controlling us pursuant to the
foregoing provisions, or otherwise, the Company has been advised that in the
opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable.
RECENT SALES OF UNREGISTERED SECURITIES
In connection with the merger of FP as described in Item 1.01 above, the Company
completed the following transactions described below. These transactions were
exempt from registration requirements pursuant to Section 4(2) of the Securities
Act of 1933, as amended (the "Securities Act"), and Rule 506 promulgated
thereunder.
CAP Financing - Private Placement of Notes and Warrants
On March 29, 2006, the Company entered into a Securities Purchase Agreement (the
"Purchase Agreement") with each of the investors listed on the Schedule of
Buyers attached thereto (the "Buyers"), pursuant to which the Buyers agreed to
purchase (i) the Company's Senior Secured Nonconvertible Notes due 2011 (the
"Nonconvertible Notes") in an aggregate principal amount of $50,000,000, which
Nonconvertible Notes may be exchanged for Senior Secured Convertible Notes due
2011 (the "Convertible Notes", and together with the Nonconvertible Notes, the
"Notes") or redeemed under certain circumstances, and which Convertible Notes
are convertible into shares of the Company's common stock (the "Conversion
Shares"); and (ii) warrants (the "Warrants") to acquire in the aggregate up to
6,875,000 shares of the Company's common stock in such amounts set forth
opposite each Buyer's name in the Schedule of Buyers attached to the Purchase
Agreement (the "Warrant Shares"), exercisable from the earlier of six months
after issuance or the Threshold Acquisition Date (as such term is defined in the
Indenture, described below) until March 29, 2011 at an exercise price equal to
the lower of $8.00 and 125% of the per share price of the Company's common stock
to be sold in a new private placement transaction which the Company intends to
complete within six months. The purchase and sale of the Notes and Warrants was
consummated on March 29, 2006.
On March 29, 2006, the Company also entered into a Registration Rights Agreement
with the Buyers, whereby the Company agreed to provide certain registration
rights in respect of the Conversion Shares and the Warrant Shares under the
Securities Act of 1933 and the rules and regulations promulgated thereunder, and
applicable state securities laws.
Pursuant to the terms of an Indenture dated as of March 29, 2006 (the
"Indenture") executed by the Company, as Issuer, and The Bank of New York, as
Trustee (in such capacity, the "Trustee"), the Company issued the Nonconvertible
Notes to the Buyers. Under the terms of the Indenture and the Escrow Agreement
dated as of March 29, 2006 (the "Escrow Agreement") between the Company and the
Trustee, ninety-five percent of the proceeds of the Nonconvertible Notes were
paid into an interest-bearing account (the "Escrow Account") maintained by the
Escrow Agent for the benefit of the holders of the Nonconvertible Notes (the
"Nonconvertible Holders").
While any Nonconvertible Notes are outstanding, the Company may propose to
consummate a business combination transaction in which the Company will acquire
by merger, securities purchase, asset purchase or otherwise, a majority of the
assets or equity of another entity for a purchase price of at least $15,000,000,
and each Nonconvertible Holders may vote to approve such transaction. Approval
of a business combination transaction requires the affirmative vote of holders
of at least 75% of the principal amount of outstanding Nonconvertible Notes. The
amount funded from the Escrow Account must be (i) at least 50% of the amount
required for an approved business combination transaction (including purchase
price, fees and expenses of the transaction and additional working capital
requirements of the Company), unless the available amount from the Escrow
Account at such time is less than 50% of the amount required, in which case such
amount shall equal the available amount, and (ii) at least $15 million . A pro
rata amount of the principal amount of the Nonconvertible Notes of each
Nonconvertible Holder voting in favor of such business combination transaction
will be exchanged for Convertible Notes, and an amount equal to the total
principal amount of such exchanged Nonconvertible Notes will be released from
the Escrow Account and used to consummate such business combination transaction.
The indebtedness evidenced by the Notes is senior secured indebtedness of the
Company, and ranks superior to the Company's other indebtedness. Interest on the
Notes accrues at a rate equal to the greater of (A) 4.51% and (B) the three
month U.S. Treasury Rate (as reported on Bloomberg). As security for the
Company's obligations under the Indenture, the Company and FP Technology
Holdings, Inc., a Delaware corporation and wholly owned subsidiary of the
Company ("FP"), have each executed (i) a Security Agreement dated as of March
29, 2006 (the "Security Agreement"), pursuant to which the Company and FP
granted a security interest in all assets of the Company and FP in favor of the
Trustee, in its capacity as collateral agent for the Nonconvertible Holders and
the holders of the Convertible Notes under the Indenture (in such capacity, the
"Collateral Agent"), and (ii) a Pledge Agreement dated as of March 29, 2006,
pursuant to which the Company pledged its interest in FP in favor of the
Collateral Agent. FP has executed a separate Guaranty dated as of March 29, 2006
in favor of the Collateral Agent.
59
The securities issued under the Purchase Agreement were not registered under the
Securities Act of 1933, as amended, and may not be offered or sold in the United
States absent registration under the Securities Act and applicable state
securities laws or an applicable exemption from those registration requirements.
Agreements with Trident Growth Fund, LP
The Company completed its acquisition of FP on March 29, 2006 (the "FP
Acquisition"). In connection with the FP Acquisition, on March 29, 2006 the
Company entered into a Master Amendment (the "Master Amendment"), by and among
the Company, FP and Trident Growth Fund, L.P. ("Trident"). The Master Amendment
amended the operative documents entered into by FP in September and November
2005 relating to certain financing transactions between FP and Trident pursuant
to which Trident provided an aggregate of $2,500,000 in debt financing to FP.
The Master Amendment also added the Company as a party to certain of these
agreements, including the Debentures and Warrants.
The Master Amendment amended the following agreements (the "Trident Financing
Documents") and added the Company as a party to each of them: (i) Securities
Purchase Agreement, dated September 13, 2005, as amended by that First Amendment
dated November 15, 2005; (ii) 12% Senior Secured Convertible Debentures No. 1,
dated September 13, 2005 and November 15, 2005, in the aggregate principal
amount of $500,000; and (iii) Common Stock Purchase Warrants initial, dated
September 13, 2005, and November 15, 2005.
In addition, on March 29, 2006, the Company entered into an Intercreditor and
Subordination Agreement with FP and Trident (the "Subordination Agreement"),
pursuant to which Trident agreed to subordinate its rights under the Trident
Financing Documents, including a Security Agreement, dated September 13, 2005,
entered into between Trident and FP (the "Security Agreement"), to the rights of
the Holders of Notes.
Private Placement of Common Stock
The Company was a party to a certain Credit Agreement, dated as of July 15, 2003
(the "Credit Agreement"), with Acclaim Financial Group Venture II, LLC ("AFGV"),
pursuant to which the Company was indebted to AFGV in the approximate amount of
$313,421.44 as of March 29, 2006 (the "Claim"). On March 29, 2006, AFGV sold its
rights to the Claim to Benchmark Equity Group, Inc. ("BMEG"), which agreed with
the Company to cancel the Claim in full in exchange for 1,008,062 shares of
common stock of the Company to be issued to BMEG or its designees, pursuant to
an Exchange Agreement between the Company and BMEG (the "Exchange Agreement").
On March 29, 2006, the Company issued 1,008,062 shares of the Company's common
stock to BMEG and its designees pursuant to the Exchange Agreement.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
The Audit Committee of the Board of Directors is in the process of engaging a
new independent firm to audit the Registrant's financial statements for the year
ended. The Registrant has been notified by its prior independent auditors,
Singer Lewak Greenbaum & Goldstein LLP ("SLGG"), that it is no longer the
Registrant's independent auditor as SLGG has resigned.
SLGG's report on Registrant's financial statements for the fiscal year ended
December 31, 2004 contained language regarding the Company's ability to continue
as a going concern.
There were no disagreements ("Disagreements") between Registrant and SLGG during
either (i) the Prior Fiscal Year, or (ii) the period January 1, 2006 through
March 10, 2006 (the "Interim Period") on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure, which
Disagreement, if not resolved to the satisfaction of SLGG, would have caused
SLGG to make reference to the subject matter of the Disagreement in connection
with its report for the Prior Fiscal Years.
There were no reportable events under Item 304(a)(1) of Regulation S-B, during
either (i) the Prior Fiscal Years or (ii) the Interim Period.
Pursuant to Item 4.01 of Form 8-K and Item 304(a)(3) of Regulation S-B,
Registrant has provided SLGG with a copy of this Report on Form 8-K and SLGG
provided the Registrant with a response addressed to the Securities and Exchange
Commission as to SLGG's agreement with the statements made in this Item 4.01 as
to SLGG. Such response is filed as an exhibit to this Report.
60
The Company is currently in discussions with Causey Demgen & Moore Inc. ("CDM")
to replace SLGG as its independent public accountants. CDM previously served as
the Company's independent public accountants until April 2005. CDM also has been
engaged by FP to audit the financial statements as of and for the period ended
June 30, 2005 and review the unaudited financial statements for the periods
ended September 30, 2004 and 2005 and December 31, 2004 and 2005 included in
this Report.
On April 21, 2005, CDM declined to stand for re-appointment as the Company's
independent public accountants for the fiscal year ended December 31, 2004 due
to the restrictions imposed by Section 208(a) of the Sarbanes-Oxley Act of 2002
and the rules and regulations of the Securities Exchange Commission that
prohibit partners on the audit engagement team from providing audit services to
the issuer for more than five consecutive years and from returning to audit
services with the same issuer within five years. The Company appointed SLGG to
serve as independent public accountants of the Company for the fiscal year
ending December 31, 2004.
CDM is awaiting a decision from the PCAOB as to whether it can serve as the
Company's independent public accountants in light of the acquisition of FP
through a merger of a subsidiary of the Company with and into FP. If CDM is
allowed to serve as the Company's independent public accountants, the Company
anticipates that its board of directors will recommend that CDM be appointed as
the Company's independent public accountants. If the Company is not able to
appoint CDM as its auditors on a going forward basis, the Company will appoint a
new independent accounting firm to serve as its auditors.
CDM's report on the Company's financial statements for the fiscal years ended
December 31, 2003 and 2002 did not contain an adverse opinion or disclaimer of
opinion, or was modified as to uncertainty, audit scope or accounting
principles. However, they did include an explanatory paragraph wherein they
expressed substantial doubt about the Company's ability to continue as a going
concern.
During the years ended December 31, 2003 and 2002 and through April 21, 2005,
there were no disagreements with CDM on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure which,
if not resolved to CDM's satisfaction, would have caused them to make reference
to the subject matter of such disagreements in connection with their report on
the Company's financial statements for such years.
EXHIBITS
Please see "Item 9.01 Financial Statements and Exhibits" of this Form 8-K.
* * END OF FORM 10-SB DISCLOSURES * *
Item 3.02 Unregistered Sales of Equity Securities
Reference is made to the disclosure set forth under Form 10-SB Information,
"Recent Sales of Unregistered Securities", which disclosure is incorporated
herein by reference.
Item 4.01 Changes in Registrant's Certifying Accountant
Reference is made to the disclosure set forth under Form SB Information,
"Changes in and Disagreements with Accountants", which disclosure is
incorporated herein by reference.
Item 5.01 Changes in Control of Registrant
As a result of the consummation of the merger described in Item 1.01 above,
which information is incorporated herein by reference, Douglas Croxall became a
controlling stockholder of the Company as a result of his direct or indirect
beneficial ownership of 2,177,414 shares or approximately 54.9% of the
outstanding shares of common stock of the Company immediately following the
Effective Time. The previous controlling stockholder of the Company was Erich
Spangenberg, who directly or indirectly beneficially owned 60,000 shares or
approximately 60.0% of the outstanding shares of common stock of the Company as
of December 31, 2005.
As described in Item 5.02 below, immediately after the consummation of the
merger, the board of directors of the Company consists of William Santo, Mark
Campion and Douglas Croxall.
61
Item 5.02. Departure of Directors or Principal Officers; Election of Directors;
Appointment of Principal Officers.
On March 29, 2006, in connection with the merger of FP described in Item 1.01
above, Douglas Croxall, William Santo and Mark Campion were elected to the board
of directors of the Company and Joseph Rozelle resigned as its Chief Executive
Officer, Treasurer, Secretary and sole director. On March 29, 2006, the
Company's board of directors appointed William Santo as the Company's Chief
Executive Officer and Stephen Peary as its Chief Financial Officer and
Secretary. Reference is hereby made to the disclosure set forth under Form 10-SB
Information, "Management," which disclosure is incorporated herein by reference.
Item 5.03 Amendments to Articles of Incorporation or Bylaws; Change in Fiscal
Year.
On March 29, 2006, in connection with the merger with FP, the Company amended
its bylaws in the form of the amended and restated bylaws attached as an exhibit
hereto.
On March 29, 2006, we changed our fiscal year to the fiscal year ended June 30.
The change in fiscal year will be reflected in our Form 10-KSB for the fiscal
year ended June 30, 2006. The change of fiscal year is in connection with our
acquisition of FP described in Item 1.01 above. The transaction is accounted for
as a reverse acquisition. As a result, FP is the accounting acquiring entity,
and our historical financial statements will reflect the operations of FP as if
FP had made the acquisition.
Item 5.06 Change in Shell Company Status
Reference is made to the disclosure set forth under Item 2.01 of this report,
which disclosure is incorporated herein by reference.
Item 9.01 Financial Statements and Exhibits
(a) Financial statements of business acquired.
The financial statements of Firepond and FP on pages F-1 through F-98 at
the end of this report are herein incorporated by reference.
(b) Pro forma financial information.
The pro forma balance sheet information beginning on page F-96 is
incorporated herein by reference. We are not including pro forma income
statement information.
(c) Exhibit index.
Exhibit No. Description
----------- -----------
2.1 Agreement and Plan of Merger, dated March 29, 2006, by and
among AFG Enterprises USA, Inc., FP Merger Sub, Inc., and FP
Technology Holdings, Inc.*
3.1 Amended and Restated Articles of Incorporation of AFG
Enterprises USA, Inc.**
3.2 Amended and Restated Bylaws of AFG Enterprises USA, Inc.*
4.1 Specimen of Common Stock of AFG Enterprises USA, Inc.**
16.1 Letter of Singer Lewak Greenbaum & Goldstein LLP, dated April
4, 2006, to the Securities and Exchange Commission
62
99.1 Employment Agreement, dated May 16, 2005, by and between
Firepond, Inc. and William Santo*
99.2 Employment Agreement, dated May 16, 2005, by and between
Firepond, Inc. and Stephen Peary*
*Filed herewith.
**Previously filed with the Securities and Exchange Commission as an exhibit to
the Annual Report on Form 10-K of AFG Enterprises USA, Inc. for the fiscal year
ended December 31, 2005.
63
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: April 4, 2006
AFG Enterprises USA, Inc.
By: /s/ Stephen Peary
----------------------------------
Stephen Peary
Chief Financial Officer
64
AFG ENTERPRISES USA, INC.
INDEX TO FINANCIAL STATEMENTS
Page
----
Unaudited Combined Financial Statements of Firepond, Inc. and FP Technology Holdings For the Three
Months Ended December 31, 2004 and 2005, the Three Months Ended September 30, 2004 and 2005, and
For the Six Months Ended December 31, 2004 and 2005
Unaudited Combined Balance Sheet at December 31, 2005 F-1
Unaudited Combined Balance Sheet at September 30, 2005 F-2
Unaudited Combined Statement of Income For the Three Months Ended December 31, 2004 and 2005 F-3
Unaudited Combined Statement of Income For the Three Months Ended September 30, 2004 and 2005 F-4
Unaudited Combined Statement of Income For the Six Months Ended December 31, 2004 and 2005 F-5
Unaudited Combined Statement of Stockholders' Equity For the Period from June 30, 2005 to December F-6
31, 2005
Unaudited Combined Statement of Cash Flows For the Three Months Ended December 31, 2004 and 2005 F-7
Unaudited Combined Statement of Cash Flows For the Three Months Ended September 30, 2004 and 2005 F-8
Unaudited Combined Statement of Cash Flows For the Six Months Ended December 31, 2004 and 2005 F-9
Notes to Unaudited Financial Statements F-10
Audited Consolidated Financial Statements of Firepond, Inc. and Subsidiaries For the Period From
November 1, 2004 to June 30, 2005
Report of Independent Registered Public Accounting Firm F-18
Audited Consolidated Balance Sheet at June 30, 2005 F-19
Audited Consolidated Statement of Income for the period from November 1, 2004 to June 30, 2005 F-21
Audited Consolidated Statement of Stockholders' Equity for the period from November 1, 2004 to F-22
June 30, 2005
Audited Consolidated Statement of Cash Flows for the period from November 1, 2004 to June 30, 2005 F-23
Notes to Consolidated Financial Statements F-24
Audited Consolidated Financial Statements of Firepond, Inc. and Subsidiaries For the Period From
December 2, 2003 (Acquisition) to October 31, 2004
Report of Independent Registered Public Accounting Firm F-44
Audited Balance Sheet at October 31, 2004 F-45
Audited Consolidated Statement of Income for the period from December 2, 2003 (Acquisition) to F-47
October 31, 2004
65
Page
----
Audited Consolidated Statement of Stockholders' Deficit for the period from December 2, 2003 F-48
(Acquisition) to October 31, 2004
Audited Consolidated Statement of Cash Flows for the period from December 2, 2003 (Acuisition) to F-49
October 31, 2004
Notes to Consolidated Financial Statements F-50
Audited Consolidated Financial Statements of Firepond, Inc. and Subsidiaries For the Year Ended
October 31, 2003
Report of Independent Registered Public Accounting Firm F-70
Audited Balance Sheet at October 31, 2003 F-71
Audited Consolidated Statement of Income for the year ended October 31, 2003 F-73
Audited Consolidated Statement of Stockholders' Equity(Deficit) for the year ended October 31, F-75
2003
Audited Consolidated Statement of Cash Flows for the year ended October 31, 2003 F-76
Notes to Consolidated Financial Statements F-77
Unaudited Pro Form Financial Statements of Firepond, Inc., FP Technology Holdings, Inc. and AFG
Enterprises USA, Inc.
Unaudited Pro Forma Information F-96
Unaudited Pro Forma Combined Balance Sheet at December 31, 2005 F-97
Notes to Unaudited Pro Forma Combined Balance Sheet F-98
66
FIREPOND, INC. AND FP TECHNOLOGY HOLDINGS, INC.
COMBINED BALANCE SHEET
December 31, 2005
(Unaudited)
- --------------------------------------------------------------------------------
ASSETS
Current assets
Cash and cash equivalents $ 471,527
Accounts receivable, net of allowance for doubtful
accounts of $10,000 306,255
Assets to be sold 106,374
Debt issuance costs 99,063
Other current assets 81,960
-----------
Total current assets 1,065,179
Property and equipment, net 241,135
Goodwill 4,772,413
Deposits 12,140
-----------
Total assets $ 6,090,867
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current portion of long-term debt net of discount of $505,250 $ 1,994,750
Accounts payable 199,546
Accrued liabilities 557,676
Accrued merger and restructuring costs 257,123
Deferred revenue 1,462,776
-----------
Total current liabilities 4,471,871
Long-term notes payable 250,000
Commitments and contingencies
Stockholders' equity
Firepond, Inc. common stock, $0.01 par value
Authorized - 100,000,000 shares
Issued and outstanding - 99,001,000 shares 990,010
FP Technology Holdings, Inc. preferred stock, $0.01 par value
Authorized - 10,000,000 shares
Issued and outstanding - none --
FP Technology Holdings, Inc. common stock, $0.01 par value
Authorized - 20,000,000 shares
Issued and outstanding - 5,000,000 shares 50,000
Deficiency in capital (1,365,000)
Retained earnings 1,747,128
Accumulated other comprehensive loss (53,142)
-----------
Total shareholders' equity 1,368,996
-----------
Total liabilities and stockholders' equity $ 6,090,867
===========
The accompanying notes are an integral part of these financial statements.
F-1
FIREPOND, INC. AND FP TECHNOLOGY HOLDINGS, INC.
COMBINED BALANCE SHEET
September 30, 2005
(Unaudited)
- --------------------------------------------------------------------------------
ASSETS
Current assets
Cash and cash equivalents $ 706,237
Accounts receivable, net of allowance for doubtful
accounts of $10,000 610,712
Assets to be sold 106,374
Debt issuance costs 55,150
Other current assets 60,629
-----------
Total current assets 1,539,102
Property and equipment, net 269,594
Goodwill 4,772,413
Deposits 12,140
-----------
Total assets $ 6,593,249
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current portion of long-term debt net of discount of $488,750 $ 1,511,250
Accounts payable 207,671
Accrued liabilities 703,291
Accrued merger and restructuring costs 270,974
Deferred revenue 1,445,429
-----------
Total current liabilities 4,138,615
Long-term notes payable 250,000
Commitments and contingencies
Stockholders' equity
Firepond, Inc. common stock, $0.01 par value
Authorized - 100,000,000 shares
Issued and outstanding - 99,001,000 shares 990,010
FP Technology Holdings, Inc. preferred stock, $0.01 par value
Authorized - 10,000,000 shares
Issued and outstanding - none --
FP Technology Holdings, Inc. common stock, $0.01 par value
Authorized - 20,000,000 shares
Issued and outstanding - 5,000,000 shares 50,000
Deficiency in capital (1,525,000)
Retained earnings 2,742,766
Accumulated other comprehensive loss (53,142)
-----------
Total shareholders' equity 2,204,634
-----------
Total liabilities and stockholders' equity $ 6,593,249
===========
The accompanying notes are an integral part of these financial statements.
F-2
FIREPOND, INC. AND FP TECHNOLOGY HOLDINGS, INC.
COMBINED STATEMENT OF INCOME
For the Three Months Ended
December 31, 2004 and 2005
(Unaudited)
- --------------------------------------------------------------------------------
2004 2005
----------- -----------
Revenues
ON Demand Revenues $ -- $ 40,684
Enterprise Revenues 947,404 649,386
----------- -----------
Total Revenues 947,404 690,070
Cost of goods sold
ON Demand costs -- 106,505
Enterprises costs 395,313 399,265
Total cost of goods 395,313 505,771
----------- -----------
Gross profit 552,091 184,299
Operating expenses
Sales, general and administrative 743,530 533,056
Research and development 411,444 400,824
Restructuring and other special charges 3,480,110 --
Settlement of claim (646,863) --
----------- -----------
Total operating expenses 3,988,222 933,880
Income from operations
(3,436,131) (749,581)
Other income (expense), net
Interest (expense) (69,542) (234,975)
Other income (127,354) (11,082)
----------- -----------
Total other income (expense), net (196,896) (246,057)
Net income before discontinued operations (3,633,027) (995,638)
Loss from discontinued operations (342,085) --
----------- -----------
Net Income (Loss) $(3,975,112) $ (995,638)
=========== ===========
The accompanying notes are an integral part of these financial statements.
F-3
FIREPOND, INC. AND FP TECHNOLOGY HOLDINGS, INC.
COMBINED STATEMENT OF INCOME
For the Three Months Ended
September 30, 2004 and 2005
(Unaudited)
- --------------------------------------------------------------------------------
2004 2005
----------- -----------
Revenues
ON Demand revenues $ -- $ 41,555
Enterprise revenues 5,093,140 1,106,174
----------- -----------
Total revenues 5,093,140 1,147,729
Cost of goods sold
ON Demand costs -- 76,848
Enterprises costs 644,121 389,073
----------- -----------
Total cost of goods sold 644,121 465,921
----------- -----------
Gross profit 4,449,019 681,808
Operating expenses
Sales, general and administrative 413,055 416,575
Research and development 554,169 495,274
Restructuring and other special charges -- 4,617
Settlement of claim -- (1,712,500)
----------- -----------
Total operating expenses 967,224 (796,034)
----------- -----------
Income from operations 3,481,795 1,477,842
Other income (expense), net
Interest (expense) (103,192) (71,250)
Other income (129,804) (19,111)
----------- -----------
Total other income (expense), net (232,996) (90,361)
Net income from continuing operations 3,248,799 1,387,481
Loss from discontinued operations (98,401) (616,704)
----------- -----------
Net Income $ 3,150,397 $ 770,777
=========== ===========
The accompanying notes are an integral part of these financial statements.
F-4
FIREPOND, INC. AND FP TECHNOLOGY HOLDINGS, INC.
COMBINED STATEMENT OF INCOME
For the Six Months Ended
December 31, 2004 and 2005
(Unaudited)
- --------------------------------------------------------------------------------
2004 2005
----------- -----------
Revenues
ON Demand revenues $ -- $ 82,239
Enterprise revenues 6,040,543 1,755,560
----------- -----------
Total revenues 6,040,543 1,837,799
Cost of goods sold
ON Demand costs -- 183,353
Enterprises costs 1,039,434 788,338
----------- -----------
Total cost of goods sold 1,039,434 971,692
----------- -----------
Gross profit 5,001,109 866,107
Operating expenses
Sales, general and administrative 1,156,586 949,631
Research and development 965,613 896,098
Restructuring and other special charges 3,480,110 4,617
Settlement of claim (646,863) (1,712,500)
----------- -----------
Total operating expenses 4,955,446 137,846
----------- -----------
Income/(loss) from operations 45,663 728,261
Other income (expense), net
Interest (expense) (172,734) (306,225)
Other income (expense) (257,156) (30,193)
----------- -----------
Total other income (expense), net (429,890) (336,418)
Net income from continuing operations (384,228) 391,843
Loss from discontinued operations (440,486) (616,704)
----------- -----------
Net Income (Loss) $ (824,714) $ (224,861)
=========== ===========
The accompanying notes are an integral part of these financial statements.
F-5
FIREPOND, INC. AND FP TECHNOLOGY HOLDINGS, INC.
COMBINED STATEMENT OF STOCKHOLDERS' EQUITY
For the Period from June 30, 2005
to December 31, 2005
(Unaudited)
- --------------------------------------------------------------------------------
Firepond, Inc.
Preferred Stock Common Stock
--------------- --------------
$0.10 $0.01
Shares Par Value Shares Par Value
------------- ------------- ------------- -----------------
Balance, June 30, 2005 -- $ -- 99,001,000 $ 990,010
FP Technology - Common Stock
FP Technology - Additional Paid
in Capital
Issuance of convertible debt with
warrants
Combined Net income -- -- -- --
------------- ------------- ------------- -----------------
Balance, September 30,2005 -- $ -- 99,001,000 $ 990,010
------------- ------------- ------------- -----------------
Issuance of convertible debt with
warrants
Combined Net income -- -- -- --
------------- ------------- ------------- -----------------
Balance, December 31, 2005 -- $ -- 99,001,000 $ 990,010
============= ============= ============= =================
FP Technology Holdings, Inc.
Common Stock
------------
$0.01 Deficiency Accumulated
Equity
Shares Par Value In Capital (Deficit)
------------- ----------------- ------------- -------------
Balance, June 30, 2005 -- $ -- $ (1,985,000) $ 1,971,989
FP Technology - Common Stock 5,000,000 50,000
FP Technology - Additional Paid
in Capital (50,000)
Issuance of convertible debt with
warrants 510,000
Combined Net income -- -- -- 770,777
------------- ----------------- ------------- -------------
Balance, September 30,2005 5,000,000 $ 50,000 $ (1,525,000) $ 2,742,766
------------- ----------------- ------------- -------------
Issuance of convertible debt with
warrants 160,000
Combined Net income -- -- -- (995,638)
------------- ----------------- ------------- -------------
Balance, December 31, 2005 5,000,000 $ 50,000 $ (1,365,000) $ 1,747,128
============= ================= ============= =============
Accumulated
Other Stockholders'
Comprehensive Equity Comprehensive
Income (Loss) (Deficit) Income (Loss)
------------- ------------- -------------
Balance, June 30, 2005 $ (680,778) $ 296,221 $ 1,291,211
FP Technology - Common Stock 50,000
FP Technology - Additional Paid
in Capital (50,000)
Issuance of convertible debt with
warrants 510,000
Combined Net income 627,636 1,398,413 1,398,413
------------- ------------- -------------
Balance, September 30,2005 $ (53,142) $ 2,204,634 $ 2,689,624
------------- ------------- -------------
Issuance of convertible debt with
warrants 160,000
Combined Net income -- (995,638) (995,638)
------------- ------------- -------------
Balance, December 31M 2005 $ (53,142) $ 1,368,996 $ 1,693,986
============= ============= =============
The accompanying notes are an integral part of these financial statements.
F-6
FIREPOND, INC. AND FP TECHNOLOGY HOLDINGS, INC.
COMBINED STATEMENT OF CASH FLOWS
For the Three Months Ended
December 31, 2004 and 2005
(Unaudited)
- --------------------------------------------------------------------------------
2004 2005
----------- -----------
Cash flows from operating activities
Net income (loss) $(3,975,112) $ (995,638)
Adjustments to reconcile net loss to net cash
used in operating activities
Settlement of claim (465,000) --
Depreciation and amortization 37,800 181,321
Changes in assets and liabilities
Accounts receivables 564,480 304,457
Debt issuance costs -- (99,063)
Unbilled services 6,821 --
Assets to be sold 402,022 --
Prepaid expenses and other assets 92,738 33,819
Accounts payable (82,861) (8,125)
Accrued liabilities (371,319) (145,615)
Restructuring accrual (234,801) (13,851)
Deferred revenue (133,839) 17,347
----------- -----------
Net cash used in operating activities (4,159,069) (725,348)
----------- -----------
Cash flows from investing activities
Purchase of property and equipment (62,665) (9,362)
Other assets 45,593 --
----------- -----------
Net cash provided by (used in) investing activities (17,072) (9,362)
----------- -----------
Cash flows from financing activities
Borrowings from note payable -- 500,000
Payments on notes payable (1,600,000) --
----------- -----------
Net cash provided by (used in) financing activities (1,600,000) 500,000
----------- -----------
Effect of exchange rate changes on cash and cash equivalents (162,522) --
----------- -----------
Net decrease in cash and cash equivalents (5,938,662) (234,710)
Cash and cash equivalents, on september 30, 2004 and 2005 6,418,130 706,237
----------- -----------
Cash and cash equivalents, on december 31, 2004 and 2005 $ 479,468 $ 471,527
=========== ===========
Supplemental cash flow information:
Interest paid $ -- $ 76,388
=========== ===========
The accompanying notes are an integral part of these financial statements.
F-7
FIREPOND, INC. AND FP TECHNOLOGY HOLDINGS, INC.
COMBINED STATEMENT OF CASH FLOWS
For the Three Months ended
September 30, 2004 and 2005
(Unaudited)
- --------------------------------------------------------------------------------
2004 2005
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 3,150,397 $ 770,777
Adjustments to reconcile net income to net cash used in operating
activities
Settlement of claim (13,312) (1,712,500)
Depreciation and amortization 250,141 60,723
Loss from discontinued operations -- 616,704
Changes in assets and liabilities
Accounts receivables (605,519) (61,756)
Unbilled services 71,009 2,748
Debt issuance costs 71,113 (55,150)
Prepaid expenses and other assets 82,980 9,134
Accounts payable (223,329) 47,928
Accrued liabilities 31,773 (11,003)
Restructuring accrual (30,000) (9,233)
Liabilities associated with assets to be sold 18,608 --
Deferred revenue (639,184) 257,142
----------- -----------
Net cash provided by (used in) operating activities 2,164,677 (84,487)
----------- -----------
Cash flows from investing activities
Purchase of property and equipment (5,161) (4,457)
Other assets 4,077 20,802
----------- -----------
Net cash provided by (used in) investing activities (1,084) 16,345
----------- -----------
Cash flows from financing activities
Payments on notes payable -- (1,250,000)
Proceeds from notes payable -- 2,000,000
----------- -----------
Net cash provided by financing activities -- 750,000
----------- -----------
Effect of exchange rate changes on cash and cash equivalents 315,003 --
----------- -----------
Net increase in cash and cash equivalents 2,478,596 681,858
Cash and cash equivalents, on June 30, 2005 3,939,534 24,379
----------- -----------
Cash and cash equivalents, end of period $ 6,418,130 $ 706,237
=========== ===========
Supplemental cash flow information:
Interest paid $ -- $ 50,000
=========== ===========
The accompanying notes are an integral part of these financial statements.
F-8
FIREPOND, INC. AND FP TECHNOLOGY HOLDINGS, INC.
COMBINED STATEMENT OF CASH FLOWS
For the Six Months ended
December 31, 2004 and 2005
(Unaudited)
- --------------------------------------------------------------------------------
2004 2005
----------- -----------
Cash flows from operating activities
Net income (loss) $ (824,714) $ (224,861)
Adjustments to reconcile net loss to net cash
used in operating activities
Gain on sale of fixed assets 193,869 --
Settlement of claim (465,000) (1,712,500)
Depreciation and amortization 75,600 257,131
Loss from discontinued operations -- 616,704
Changes in assets and liabilities
Accounts receivables (41,039) 242,701
Debt issuance costs -- (114,150)
Unbilled services 77,830 2,748
Assets to be sold 491,743 --
Prepaid expenses and other assets 175,719 (12,197)
Accounts payable (306,190) 39,803
Accrued liabilities (339,546) (156,618)
Restructuring accrual (264,801) (23,084)
Deferred revenue (773,022) 274,489
----------- -----------
Net cash used in operating activities (1,999,552) (809,834)
----------- -----------
Cash flows from investing activities
Purchase of property and equipment (62,665) (13,819)
Other assets 49,670 20,802
----------- -----------
Net cash from investing activities (12,995) 6,983
----------- -----------
Cash flows from financing activities
Borrowings from note payable -- 2,500,000
Payments on notes payable (1,600,000) (1,250,000)
----------- -----------
Net cash provided by (used in) financing activities (1,600,000) 1,250,000
----------- -----------
Effect of exchange rate changes on cash and cash equivalents 152,481 --
----------- -----------
Net (decrease) increase in cash and cash equivalents (3,460,066) 447,149
Cash and cash equivalents, on September 30, 2004 and 2005 3,939,534 24,379
----------- -----------
Cash and cash equivalents, on December 31, 2004 and 2005 $ 479,468 $ 471,527
=========== ===========
Supplemental cash flow information:
Interest paid $ -- $ 126,388
=========== ===========
The accompanying notes are an integral part of these financial statements.
F-9
FIREPOND, INC. AND FP TECHNOLOGY HOLDINGS, INC.
Notes to Unaudited Financial Statements
- --------------------------------------------------------------------------------
1. Basis of Presentation:
The accompanying unaudited financial statements have been prepared by the
Company. In the opinion of management, the accompanying unaudited
financial statements contain all adjustments (consisting of only normal
recurring accruals) necessary for a fair presentation of the financial
position as of September 30, 2005 and December 31, 2005, and the results
of operations and cash flows for the periods ended September 30, 2004 and
2005 and December 31, 2004 and 2005.
2. Income taxes:
No provision for income taxes is required at September 30, 2005 and
December 31, 2005, because, in management's estimation the Company will
not recognize any taxable income through the fiscal year ended June 30,
2006.
3. General Motors Settlement:
On October 19, 2001, General Motors Corporation filed a complaint against
the Company in the Superior Court of Massachusetts, Middlesex County. The
complaint alleges, among other things, a breach of contract under
agreements entered into in 1994, as amended; anticipatory repudiation in
the spring of 2000 of agreements entered into in 1994, as amended; unjust
enrichment; establishment of a constructive trust; rescission and
restitution based upon failure of consideration as well as extortion and
coercion relating to agreements entered into in 1994, as amended; breach
of the covenant of good faith and fair dealing; fraud; as well as
violation of Chapter 93A of the General Laws of the Commonwealth of
Massachusetts relating to unfair and deceptive trade practices. General
Motors' claims further relate to license agreements, services agreements
and a general release entered into with the Company in May 2000. This
matter was settled on April 14, 2004, per the terms of the settlement, the
Company estimated and accrued a liability of $7,000,000 as of October 31,
2003.
On December 7, 2004, the Company entered into a revised settlement
agreement that called for a promissory note of $3,000,000, the assigning
of $1,350,000 of Firepond notes receivable to General Motors, as well as a
cash payment of $1,600,000.
During the period ended June 30, 2005, the Company negotiated a further
settlement of the note payable and recorded a favorable settlement amount
of $450,000 plus accrued interest into its records.
On September 13, 2005, Firepond, FP Technology Holdings, Inc. and General
Motors entered into a letter agreement whereby General Motors accepted
$1,250,000 in cash from FP Technology Holdings, received a $250,000
unsecured note from FP Technology Holdings, cancelled the note due from
Firepond and released its security interest in Firepond assets.
F-10
FIREPOND, INC. AND FP TECHNOLOGY HOLDINGS, INC.
Notes to Unaudited Financial Statements
- --------------------------------------------------------------------------------
4. Notes Payable:
On September 13, 2005, Firepond, Inc. sold most of its assets and
transferred most of its liabilities to FP Technology Holdings, Inc. as
part of a new financing of the Company.
Trident Growth Fund, LLC loaned FP Technology Holdings, Inc.
$2,000,000. Interest accrues on the associated secured note
("September Note") at 12% per annum. Interest is payable monthly.
Principal is due September 30, 2006 or on consummation of a change
in control transaction. The note is convertible into shares of
common stock at 80% of the average price per share of common stock
and common stock equivalents sold to any person in the first
Qualifying Transaction consummated or $.01 per share if no
Qualifying Transaction has occurred. The agreement calls for the
Company to maintain certain financial ratios commencing December 31,
2005. Under the September Note, the Company granted Trident the
right to subscribe for and purchase ("Warrant Shares"). The number
of which is calculated based upon the following formula.
2,000,000 divided by: 80% of the average price per share of the
Common Stock and Common Stock Equivalents sold to any Person in the
first Qualifying Transaction to be consummated following the Initial
Exercise Date (determined by dividing the total number of shares of
Common Stock issued plus shares issuable under Common Stock
Equivalents in such Qualifying Transaction, by the aggregate
consideration received by the Company plus all consideration to be
received upon exercise or conversion of all Common Stock Equivalents
issued in such Qualifying Transaction). With respect to determining
the price paid per share in any asset purchase, only shares of
Common Stock actually issued and outstanding shall be used in
determining such per share calculation.
In the event no Qualifying Transaction has been consummated on or by
the first anniversary hereof, then the number of Warrant Shares
purchasable hereby shall equal 5% (subject to adjustment as set
forth in the Purchase Agreement) of the then outstanding Common
Stock, computed on a Fully Diluted Basis.
The purchase for such shares being determined in accordance with the
following formula. The Exercise Price of each share of Common Stock under
this Warrant shall be equal to:
(i) 50% of the average price per share of the Common Stock and
Common Stock Equivalents sold to any Person in the first
Qualifying Transaction to be consummated following the Initial
Exercise Date (determined by dividing the total number of
shares of Common Stock issued plus shares issuable under
Common Stock Equivalents in such Qualifying Transaction, by
the aggregate consideration received by the Company plus all
consideration to be received upon exercise or conversion of
all Common Stock Equivalents issued in such Qualifying
Transaction). With respect to determining the price paid per
share in any asset purchase, only shares of Common Stock
actually issued and outstanding shall be used in determining
such per share calculation; or
F-11
FIREPOND, INC. AND FP TECHNOLOGY HOLDINGS, INC.
Notes to Unaudited Financial Statements
- --------------------------------------------------------------------------------
(ii) if no Qualifying Transaction as described in subsection (i)
above has occurred on or by the first anniversary hereof,
$0.01 per share.
On November 25, 2005, the Company closed an additional $500,000 note (the
"November Note") with Trident Growth Fund on the same terms and conditions
as the September Note. The funds received pursuant to the September Note
and the November Note have been used for working capital required as the
Company transitions from its legacy enterprise software business to its
OnDemand revenue model.
5. Litigation
On October 19, 2001, General Motors Corporation filed a complaint against
the Company in the Superior Court of Massachusetts, Middlesex County. The
complaint alleges, among other things, a breach of contract under
agreements entered into in 1994, as amended; anticipatory repudiation in
the spring of 2000 of agreements entered into in 1994, as amended; unjust
enrichment; establishment of a constructive trust; rescission and
restitution based upon failure of consideration as well as extortion and
coercion relating to agreements entered into in 1994, as amended; breach
of the covenant of good faith and fair dealing; fraud; as well as
violation of Chapter 93A of the General Laws of the Commonwealth of
Massachusetts relating to unfair and deceptive trade practices. General
Motors' claims further relate to license agreements, services agreements
and a general release entered into with the Company in May 2000. This
matter was settled on April 14, 2004, per the terms of the settlement, the
Company estimated and accrued a liability of $7,000,000 as of October 31,
2003. During the period ended June 30, 2005, the Company negotiated a
further settlement of the note payable and recorded a favorable settlement
amount of $450,000 into its records.
On December 7, 2004, the Company entered into a revised settlement
agreement that called for a promissory note of $3,000,000, the assigning
of $1,350,000 of
Firepond notes receivable to General Motors, as well as a cash payment of
$1,600,000.
On September 13, 2005, Firepond, FP Technology Holdings, Inc. and General
Motors entered into a letter agreement whereby General Motors accepted
$1,250,000 in cash from FP Technology Holdings, received a $250,000
unsecured note from FP Technology Holdings Inc., cancelled the note due
from Firepond and released its security interest in Firepond assets.
F-12
FIREPOND, INC. AND FP TECHNOLOGY HOLDINGS, INC.
Notes to Unaudited Financial Statements
- --------------------------------------------------------------------------------
Litigation (continued)
On or about December 1, 2004, Freightliner LLC filed a complaint against
the Company. The plaintiff alleges breach of contacts, breath of warranty
arising out of the parties' License Agreement and Services Agreement. This
matter was settled on August 1, 2005, per the terms of the settlement the
Company agreed to pay $3,000,000 over a period of 70 days. The settlement
was covered by the Company's insurance carrier, Steadfast Insurance
Company ("Steadfast"), which provided the full amount for the settlement
except for a $50,000 deductible which the Company has accrued. Firepond
has agreed that Steadfast has the right to seek a judicial determination
as to the reasonableness of the settlement value of the Freightliner claim
and the $3,000,000 settlement. Firepond has acknowledged and granted
Steadfast the right to recoup from Firepond the amount which represents
the difference between the judicially determined settlement value and the
$3,000,000 settlement, if the court determines that the reasonable
settlement value of the Freightliner claim is less than $3,000,000. The
amount to be reimbursed to Steadfast, if any, is not estimatable and is
not accrued on the financial statements as of June 30, 2005.
Beginning in August 2001, a number of securities class action complaints
were filed in the Southern District of New York seeking an unspecified
amount of damages on behalf of an alleged class of persons who purchased
shares of the Company's common stock between the date of its initial
public offering and December 6, 2000. The complaints name as defendants
the Company and certain of its directors and officers, Fleet Boston
Robertson Stephens, and other parties as underwriters of the Company's
initial public offering. This matter was settled on or about June 8, 2004
and this settlement is subject to final approval by the court. On August
4, 2004 the plaintiffs and issuer defendants separately filed replies to
the underwriter defendants' objectives to the settlement. The court
granted the preliminary approval motion on February 15, 2005, subject to
certain modifications. The parties are directed to report back to the
court regarding the modifications. If the parties are able to agree upon
the required modifications, and such modifications are acceptable to the
court, notice will be given to all class members of the settlement, a
"fairness" hearing has been set for April 26, 2006 and if the court
determines that the settlement is fair to the class members, the
settlement will be approved. There can be no assurance that this proposed
settlement will be approved and implemented. Any direct financial impact
of the proposed settlement is expected to be borne by the Company's
insurance carriers.
The Company is also subject to various other claims and legal actions
arising in the ordinary course of business. In the opinion of management,
after consultation with legal counsel, the ultimate disposition of these
matters is not expected to have a material effect on the Company's
business, financial condition, or results of operations.
F-13
FIREPOND, INC. AND FP TECHNOLOGY HOLDINGS, INC.
Notes to Unaudited Financial Statements
- --------------------------------------------------------------------------------
6. Subsequent events:
In connection with the employment of the Chief Executive Officer and the
Chief Financial Officer, FP previously agreed to issue restricted stock
awards for 750,000 shares to Mr. Santo and 500,025 to Mr. Peary On January
5, 2006, such restricted stock awards were issued. On March 11, 2006
additional awards were made to Mssrs. Santo and Peary in the amount of
775,002 shares each contigent upon the obtaining of specified CAP
financing in the amount of $50,000,000.
On March 11, 2006, the Chairman of the Board of Directors was also awarded
1,550,004 shares and 150,000 shares were awarded to a new independent
director. Prior to the merger, the Board authorized the increase of Jaguar
Technology's holdings from 5,000,000 shares to 5,400,000 shares. The total
FP shares outstanding prior to the merger were 9,900,033.
Merger Transaction
On March 29, 2006, AFG Enterprises USA, Inc., a Nevada corporation
("AFGE"), entered into an Agreement and Plan of Merger by and among AFGE,
FP Merger Sub, Inc., a Delaware corporation and wholly-owned subsidiary of
AFGE, and FP Technology Holdings, Inc., a Delaware corporation ("FP"),
pursuant to which AFGE agreed to acquire all of the issued and outstanding
capital stock of FP (the "FP Acquisition"). AFGE completed the acquisition
of FP on the same date, and FP became a wholly-owned subsidiary of AFGE.
In connection with the FP Acquisition, AFGE changed its fiscal year from
December 31 to June 30.
As a result of the merger, each share of common stock of FP outstanding
immediately prior to the effective time of the merger (the "Effective
Time") was converted into the right to receive shares of common stock of
AFGE at an exchange ratio of 0.4032248 share of AFGE common stock for each
share of FP common stock. AFGE issued an aggregate of 3,991,939 shares of
its common stock, par value $0.001 per share (the "Purchase Price") in
exchange for all issued and outstanding shares of FP common stock. The
issuance of such shares of common stock was exempt from registration
requirements pursuant to Section 4(2) of the Securities Act of 1933, as
amended (the "Securities Act"), and Rule 506 promulgated thereunder. After
the merger, AFGE had 1,108,502 pre-existing shares and 3,991,939 issued in
connection with the merger for a total of 5,100,441 shares outstanding.
CAP Financing - Private Placement of Notes and Warrants
On March 29, 2006, AFG Enterprises USA, Inc., a Nevada corporation (the
"Company"), entered into a Securities Purchase Agreement (the "Purchase
Agreement") with each of the investors listed on the Schedule of Buyers
attached thereto (the "Buyers"), pursuant to which the Buyers agreed to
purchase (i) the Company's Senior Secured Nonconvertible Notes due 2011
(the "Nonconvertible Notes") in an aggregate principal amount of
$50,000,000, which Nonconvertible Notes may be exchanged for Senior
Secured Convertible Notes due 2011 (the "Convertible Notes", and together
with the Nonconvertible Notes, the "Notes") or redeemed, and which
Convertible Notes are convertible into shares of the Company's common
stock (the "Conversion Shares"); and (ii) warrants (the "Warrants") to
acquire up to that number of shares of the Company's common stock set
forth opposite each Buyer's name in the Schedule of Buyers attached to the
Purchase Agreement (the "Warrant Shares"), exercisable from the Threshold
Acquisition Date (as such term is defined in the Indenture) until March
29, 2011 at an exercise price equal to the lower of $8.00 and 125% of the
per share price of the Company's common stock to be sold in a new private
placement transaction which the Company intends to complete within six
months. The purchase and sale of the Notes and Warrants was consummated on
March 29, 2006.
F-14
FIREPOND, INC. AND FP TECHNOLOGY HOLDINGS, INC.
Notes to Unaudited Financial Statements
- --------------------------------------------------------------------------------
On March 29, 2006, the Company also entered into a Registration Rights
Agreement with the Buyers, whereby the Company agreed to provide certain
registration rights in respect of the Conversion Shares and the Warrant
Shares under the Securities Act of 1933 and the rules and regulations
promulgated thereunder, and applicable state securities laws.
Pursuant to the terms of an Indenture dated March 29, 2006 (the
"Indenture") executed by the Company, as Issuer, and The Bank of New York,
as Trustee (in such capacity, the "Trustee"), the Company issued the
Nonconvertible Notes to the Buyers. Under the terms of the Indenture and
the Escrow Agreement dated March 29, 2006 (the "Escrow Agreement") between
the Company and the Trustee, ninety-five percent of the proceeds of the
Nonconvertible Notes were paid into an interest-bearing account (the
"Escrow Account") maintained by the Trustee for the benefit of the holders
of the Nonconvertible Notes (the "Nonconvertible Holders"). Such proceeds
are eligible to be released upon the affirmative vote of at least 75% of
the noteholders for an approved business transaction. Additionally, AFGE
must raise at least $7,000,000 in additional equity in not less than 6
months following the closing, March 29, 2006.
Agreements with Trident Growth Fund, LP
AFGE completed its acquisition of FP on March 29, 2006 (the "FP
Acquisition"). In connection with the FP Acquisition, on March 29, 2006
AFGE entered into a Master Amendment (the "Master Amendment"), by and
among AFGE, FP and Trident Growth Fund, L.P. ("Trident"). The Master
Amendment amended the operative documents entered into by FP in September
2005 relating to certain financing transactions between FP and Trident
pursuant to which Trident provided $2,500,000 in debt financing to FP. The
Master Amendment also added AFGE as a party to certain of these
agreements.
The Master Amendment amended the following agreements (the "Trident
Financing Documents") and added AFGE as a party to : (i) Securities
Purchase Agreement, dated September 13, 2005, as amended by that First
Amendment dated November 15, 2005; (ii) 12% Senior Secured Convertible
Debenture No. 1, dated September 13, 2005, in the initial principal amount
of $2,000,000, and 12% Senior Secured Convertible Debenture No. 2, dated
November 15, 2005, in the initial principal amount of $500,000; and (iii)
Common Stock Purchase Warrant No. 1, dated September 13, 2005, and Common
Stock Purchase Warrant No. 2, dated November 15, 2005.
In addition, on March 29, 2006, AFGE entered into an Intercreditor and
Subordination Agreement with FP and Trident (the "Subordination
Agreement"), pursuant to which Trident agreed to subordinate its rights
under the Trident Financing Documents, including a Security Agreement,
dated September 13, 2005, entered into between Trident and FP (the
"Security Agreement").
F-15
FIREPOND, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIOD
FROM NOVEMBER 1, 2004 TO JUNE 30, 2005
F-16
FIREPOND, INC. AND SUBSIDIARIES
CONTENTS
June 30, 2005
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheet
Consolidated Statement of Income
Consolidated Statement of Stockholders' Equity (Deficit)
Consolidated Statement of Cash Flows
Notes to Consolidated Financial Statements
F-17
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Firepond, Inc. and subsidiaries
We have audited the accompanying consolidated balance sheet of Firepond,
Inc. (a wholly owned subsidiary of Jaguar Technology Holdings, LLC) and
subsidiaries as of June 30, 2005 and the related consolidated statements
of income, stockholders' equity (deficit), and cash flows for the period
from November 1, 2004 to June 30, 2005. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable
basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Firepond, Inc. and subsidiaries as of June 30, 2005 and the results of
their operations and their cash flows for the period from November 1, 2004
to June 30, 2005 in conformity with accounting principles generally
accepted in the United States of America.
Denver, Colorado
January 6, 2006 Causey Demgen and Moore Inc.
F-18
FIREPOND, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
June 30, 2005
- --------------------------------------------------------------------------------
ASSETS
Current assets
Cash and cash equivalents $ 24,379
Accounts receivable, net of allowance
for doubtful accounts of $10,000 548,956
Unbilled revenue 2,748
Assets to be sold 127,035
Other current assets 69,763
----------
Total current assets 772,881
Property and equipment, net 304,610
Goodwill 4,772,413
Deposits 32,942
----------
Total assets $5,882,846
==========
The accompanying notes are an integral part of these financial statements.
F-19
FIREPOND, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
June 30, 2005
- --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current portion of long-term debt $ 1,000,000
Accounts payable 159,743
Accrued liabilities 926,794
Accrued merger and restructuring costs 280,207
Deferred revenue 1,188,287
Liabilities associated with assets to be sold 31,594
-----------
Total current liabilities 3,586,625
Long-term notes payable 2,000,000
Commitments and contingencies
Stockholders' equity
Preferred stock, $0.01 par value
Authorized - 5,000,000 shares
Issued and outstanding - none --
Common stock, $0.01 par value
Authorized - 100,000,000 shares
Issued and outstanding 99,001,000 shares 990,010
Deficiency in capital (1,985,000)
Retained earnings 1,971,989
Accumulated other comprehensive loss (680,778)
-----------
Total shareholders' equity 296,221
-----------
Total liabilities and stockholders' equity $ 5,882,846
===========
The accompanying notes are an integral part of these financial statements.
F-20
FIREPOND, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
For the Period from November 1,2004 to June 30, 2005
- --------------------------------------------------------------------------------
Revenues $ 2,841,394
Cost of goods sold 1,269,357
------------
Gross profit 1,572,037
Operating expenses
Sales, general and administrative 1,343,750
Research and development 1,118,141
Restructuring and other special charges 176,578
Settlement of claim (646,863)
------------
Total operating expenses 1,991,606
------------
Income from operations (419,569)
Other income (expense), net
Interest (expense) (128,333)
Other income 28,209
------------
Total other income (expense), net (100,124)
------------
Net loss from continuing operations (519,693)
Gain on disposal of discontinued operations 2,560,885
------------
Net Income $ 2,041,192
============
Net income (loss) per share - basic and diluted
Loss from continuing operations $ (0.01)
Gain from disposal of discontinued operations $ (0.03)
------------
Basic and diluted loss per share $ 0.02
============
Basic and diluted weighted average common shares outstanding 99,001,000
============
The accompanying notes are an integral part of these financial statements.
F-21
FIREPOND, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
For the Period from November 1,2004 to June 30, 2005
- --------------------------------------------------------------------------------
Preferred Stock Common Stock
--------------- -------------
$0.01 $0.01 Deficiency Accumulated
Shares Par Value Shares Par Value In Capital Equity (Deficit)
------------- ------------- ------------- ------------- ------------- -------------
Balance, October 31, 2004 -- $ -- 99,001,000 $ 990,010 $ (990,000) $ (69,203)
Debt write off -- -- -- -- (1,175,000)
Capital contribution 180,000
Net income -- -- -- -- -- 2,041,192
------------- ------------- ------------- ------------- ------------- -------------
Balance, June 30, 2005 -- $ -- $ 99,001,000 $ 990,010 $ (1,985,000) $ 1,971,989
============= ============= ============= ============= ============= =============
Accumulated
Other
Loans Comprehensive Stockholders' Comprehensive
Receivable Income (Loss) Equity (Deficit) Income (Loss)
------------- ------------- ------------- -------------
Balance, October 31, 2004 $ (1,175,000) $ (721,761) $ (1,965,954) $ (790,964)
Debt write off 1,175,000 -- --
Capital contribution 180,000
Net income -- 40,983 2,082,175 2,082,175
------------- ------------- ------------- -------------
Balance, June 30, 2005 -- $ (680,778) $ 296,221 $ 1,291,211
============= ============= ============ =============
The accompanying notes are an integral part of these financial statements.
F-22
FIREPOND, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Period from November 1, 2004 to June 30, 2005
- --------------------------------------------------------------------------------
Cash flows from operating activities
Net income $ 2,041,192
Adjustments to reconcile net income to net cash
used in operating activities
Loss on disposal of fixed assets 19,298
Gain on disposal of discontinued operations (2,514,837)
Depreciation and amortization 105,863
Settlement of claim (646,863)
Net change in assets and liabilities
Accounts receivables 29,603
Unbilled services 1,269
Prepaid expenses and other assets 78,729
Accounts payable (137,832)
Accrued liabilities 134,432
Restructuring accrual 56,874
Deferred revenue (281,047)
-----------
Net cash used in operating activities (1,113,319)
-----------
Cash flows from investing activities
Purchase of property and equipment (19,032)
Other assets 29,002
-----------
Net cash provided by investing activities 9,970
-----------
Cash flows from financing activities
Payments on notes payable (1,600,000)
Capital contributions 180,000
-----------
Net cash used in financing activities (1,420,000)
-----------
Net decrease in cash and cash equivalents (2,523,349)
Cash and cash equivalents, on October 31, 2004 2,547,728
-----------
Cash and cash equivalents, on June 30, 2005 $ 24,379
===========
Supplemental cash flow information:
Interest paid $ --
Non Cash Financing Activities
The Company transferred a note receivable of $1,350,000 and
recorded income of $646,863 in connection with the settlement
of the GM note in the principal amount of $1,800,000 plus
accrued interest of $196,863.
The accompanying notes are an integral part of these financial statements.
F-23
FIREPOND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Period from November 1, 2004 to June 30, 2005
- --------------------------------------------------------------------------------
NOTE 1 - ORGANIZATION AND LINES OF BUSINESS
Firepond, Inc. (a wholly-owned subsidiary of Jaguar Technology Holdings,
LLC), together with its wholly-owned subsidiaries (collectively, the
"Company" or "Firepond") considers itself to be a pioneer in software
solutions that help companies with complex products to convert more leads
into accurate orders. Companies with complex products may achieve a
measurable and meaningful return on investment in Firepond, Inc.
technology by reducing their total cost of sales, whether they sell
through a direct sales force, an indirect channel network or via the web.
A wholly owned subsidiary ("Fire Transaction Sub, Inc.") of Jaguar
Technology Holding, LLC ("Jaguar") completed a tender offer ("Tender
Offer") for FirePond on December 2, 2003, after which Fire Transaction
Sub, Inc. ("Fire Sub") held 90.3% of FirePond's total shares outstanding.
Immediately after consummation of the Tender Offer, Fire Sub completed a
merger (the "Merger") without the vote of shareholder's in accordance with
Delaware's short form merger procedures. Pursuant to the Tender Offer and
the Merger, each share of FirePond common stock was converted into the
right to receive $3.16 in cash, without interest. Upon completion of the
Merger, the shareholders were redeemed at the tender offer price, and
Jaguar owned all of the outstanding equity of FirePond.
At the completion of the merger, Jaguar assumed control of the Company. In
accordance with FAS 141, the net assets were adjusted to reflect the new
basis of the assets.
The difference between the Company's new basis and the fair market value
of its assets at the date of the acquisition was recorded as goodwill. A
summary of the assets purchased in the acquisition is as follows:
Cash $ 5,109,081
Receivables 859,571
Assets to be sold 2,465,174
Other assets 641,065
Property and equipment 191,600
Intangible assets 1,731,200
Accounts Payable (481,062)
Accrued liabilities (1,920,701)
Deferred Revenue (3,207,042)
Accrued Restructuring (809,818)
Liabilities associated with assets to be sold (3,160,156)
Notes Payable (7,000,000)
-----------
Basis of net liabilities assumed (5,581,088)
-----------
Goodwill 5,581,088
-----------
F-24
FIREPOND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Period from November 1, 2004 to June 30, 2005
- --------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Firepond, Inc. and its wholly owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in the
accompanying financial statements.
Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to
make estimates and assumptions that affect the amounts reported in the
consolidated financial statements and accompanying notes. Actual results
could differ from those estimates.
Liquidity
During the period from November 1, 2004 to June 30, 2005, the Company
incurred loses of $519,693 from continuing operations and had negative
cash flow from operations of $1,113,319. Subsequent to year end, the
Company secured new funding in the form of $2,500,000 in debentures as
described in Note 13.
Revenue Recognition
The Company recognizes revenue based on the provisions of the American
Institute of Certified Pubic Accountants (AICPA) Statement of Position,
No. 97-2, "Software Revenue Recognition" ("SOP 97-2"), as amended, and
Statement of Position No. 81-1, "Accounting for Performance of
Construction-Type and Certain Production-Type Contracts" ("SOP 81-1").
The Company generates revenue from license and service revenue. License
revenue is generated from licensing the rights to the use of the Company's
packaged software products. Service revenue is generated from sales of
maintenance, consulting and training services performed for customers that
license the Company's products.
The Company has concluded that generally, where the Company is responsible
for implementation services for the SalesPerformer product suite and its
components, the implementation services are essential to the customer's
use of the packaged software products. In such arrangements, the Company
recognizes revenue following the percentage-of-completion method over the
implementation period. Percentage of completion is measured by the
percentage of implementation hours incurred to date compared to estimated
total 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. When the current estimates of total contract revenue and
contract cost indicate a loss, a provision for the entire loss on the
contract is recorded.
F-25
FIREPOND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Period from November 1, 2004 to June 30, 2005
- --------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition (Continued)
In situations where the Company is not responsible for implementation
services for the SalesPerformer product suite, the Company recognizes
revenue on delivery of the packaged software if there is persuasive
evidence of an arrangement, collection is probable and the fee is fixed or
determinable. In situations where the Company is not responsible for
implementation services for the SalesPerformer product suite, but is
obligated to provide unspecified additional software products in the
future, the Company recognizes revenue as a subscription over the term of
the commitment period.
For separate sales of the eServicePerformer product line, which was
acquired in connection with the Brightware transaction, the Company
recognizes revenue on delivery of the packaged software if there is
persuasive evidence of an arrangement, collection is probable, and the fee
is fixed or determinable. The Company has determined that implementation
services are not essential to the functionality of the eServicePerformer
product. In situations where the Company enters into a license agreement
for both its SalesPerformer Suite and its eServicePerformer product and is
responsible for implementation services, it will recognize revenue for the
entire arrangement under SOP 81-1.
For product sales that are recognized on delivery, the Company will
execute contracts that govern the terms and conditions of each software
license, as well as maintenance arrangements and other services
arrangements. If an arrangement includes an acceptance provision,
acceptance occurs upon the earlier of receipt of a written customer
acceptance or expiration of the acceptance period.
Revenue under multiple element arrangements, which may include several
different software products and services sold together, is allocated to
each element based on the residual method in accordance with Statement of
Position, No. 98-9, "Software Revenue Recognition with Respect to Certain
Arrangements" ("SOP 98-9"). The Company uses the residual method when
vendor-specific objective evidence of fair value does not exist for one of
the delivered elements in the arrangement. Under the residual method, the
fair value of the undelivered elements is deferred and subsequently
recognized. The Company has established sufficient vendor-specific
objective evidence for professional services, training and maintenance and
support services based on the price charged when these elements are sold
separately. Accordingly, software license revenue is recognized under the
residual method in arrangements in which software is licensed with
professional services, training, and maintenance and support services.
The Company, under certain business arrangements, will not actually
deliver a software product to a customer for installation on the
customer's in-house systems but rather make the software available to the
customer under a hosting arrangement. In this case the Company installs
and runs the software application on either its own or a third-party's
server giving customers access to the application via the Internet or a
dedicated line. Accordingly, the Company evaluates its revenue recognition
in consideration of SOP 97-2 or whether such activity falls outside of
such guidance.
F-26
FIREPOND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Period from November 1, 2004 to June 30, 2005
- --------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Revenue Recognition (Continued)
The Emerging Issues Task Force was tasked with assessing the applicability
of SOP 97-2 to such hosting arrangements and considering how a vendor's
hosting obligation would impact revenue recognition. This discussion
resulted in the issuance of EITF 00-03, Application of AICPA Statement of
Position 97-2 to Arrangements That Include the Right to Use Software
Stored on Another Entity's Hardware. Under this EITF, the Task Force
reached a consensus that a hosting arrangement is within the scope of SOP
97-2 if:
o the customer has the contractual right to take possession of the
software at any time during the hosting period without significant
penalty; and
o it is feasible for the customer to either run the software on its
own hardware or contract with another party unrelated to the vendor
to host the software without significant penalty.
This allows the Company the ability to recognize that portion of the fee
attributable to the license on delivery, while that portion of the fee
related to the hosting element would be recognized ratably as the service
is provided, assuming all other revenue recognition criteria have been
met.
If a hosting arrangement fails to meet the requirements of EITF 00-03 then
the arrangement is not considered to have a software element and therefore
is outside of the scope of SOP 97-2. The hosting arrangement, which would
follow a services accounting model, would then likely be accounted for in
accordance with the guidance contained in SAB 101.
SAB 101 contains the same four basic criteria for revenue recognition as
SOP 97-2:
o Persuasive evidence of an arrangement exists;
o Delivery has occurred or services have been rendered;
o The vendor's price to the buyer is fixed or determinable; and
o Collectibility is reasonably assured.
Once these conditions have been met, revenue can be recognized. SAB 101
was amended by SAB 104 which codified current and existing revenue
recognition issues.
In consideration of the above criteria, in general terms, revenue from a
product-related hosted solution is recognized ratably over the term of the
contract after payment has been received. Hosted solution includes
unspecified upgrades, end user support for up to two primary contacts and
hosted server support.
Revenue from maintenance services is recognized ratably over the term of
the contract, typically one year. Consulting revenue is primarily related
to implementation services performed on a time-and-materials basis under
separate service arrangements. Revenue from consulting and training
services is recognized as services are performed.
F-27
FIREPOND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Period from November 1, 2004 to June 30, 2005
- --------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Revenue Recognition (Continued)
The Company has recorded deferred revenue on amounts billed or collected
by the Company before satisfying the above revenue recognition criteria.
Deferred revenue at June 30, 2005 consisted of the following:
Period Ended
June 30, 2005
----------
Product License $ 34,023
Product-related services 46,314
Product-related maintenance 1,107,950
----------
$1,188,287
==========
Cost of Revenue
Cost of licenses includes royalties, media, product packaging,
documentation, other production costs.
Cost of product-related services and maintenance and cost of custom
development services revenue consist primarily of salaries, related costs
for development, consulting, training and customer support personnel,
including cost of services provided by third-party consultants engaged by
the Company.
Advertising Costs
Advertising costs are expensed as incurred. Advertising expense for the
period was $713.
Income Taxes
Income taxes are accounted for based on guidance in Standard Financial
Accounting Statement No. 109, "Accounting for Income Taxes" ("SFAS No.
109"). Under SFAS No. 109, deferred income tax liabilities and assets are
determined based on the difference between the financial reporting and tax
bases of assets and liabilities using currently enacted tax rates.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand and in banks. The
Company maintains its cash deposits at numerous banks located throughout
the United States, which at times, may exceed federally insured limits.
The Company has not experienced any losses in such accounts and believes
it is not exposed to any significant risk on cash and cash equivalents.
F-28
FIREPOND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Period from November 1, 2004 to June 30, 2005
- --------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Cash and Cash Equivalents (Continued)
Cash equivalents are short-term, highly liquid investments with original
maturity dates of three months or less. Cash equivalents consist of money
market, commercial paper and U.S. federal agency securities. Cash
equivalents are carried at cost, which approximates fair market value.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets, as
follows:
Computer equipment and software 2 to 5 years
Furniture and fixtures 5 years
Leasehold improvements 5 years
The cost of assets retired or disposed of and the accumulated depreciation
thereon are removed from the accounts with any gain or loss realized upon
sale or disposal credited or charged to operations, respectively.
Goodwill
Prior to the January 1, 2002 implementation of Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets" (SFAS
142"), goodwill was amortized on a straight-line basis over 5-20 years.
Since that date, goodwill has been subject to periodic impairment tests in
accordance with SFAS 142.
The Company identifies and records impairment losses on long-lived assets,
including goodwill that is not identified with an impaired asset, when
events and circumstances indicate that an asset might be impaired. Events
and circumstances that may indicate that an asset is impaired include
significant decreases in the market value of an asset, a change in the
operating model or strategy and competitive forces.
If events and circumstances indicate that the carrying amount of an asset
may not be recoverable and the expected undiscounted future cash flow
attributable to the asset is less than the carrying amount of the asset,
an impairment loss equal to the excess of the asset's carrying value over
its fair value is recorded. Fair value is determined based on the present
value of estimated expected future cash flows using a discount rate
commensurate with the risk involved, quoted market prices or appraised
values, depending on the nature of the assets. To date no such impairment
has been recorded.
F-29
FIREPOND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Period from November 1, 2004 to June 30, 2005
- --------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Concentration of Credit Risk
SFAS No. 105, "Disclosure of Information about Financial Instruments with
Off-Balance-Sheet Risk and Financial Instruments with Concentrations of
Credit Risk," requires disclosure of any significant off-balance sheet
risks and credit risk concentrations. The Company has no significant
off-balance-sheet risks. Financial instruments that potentially subject
the Company to concentrations of credit risk are principally cash and cash
equivalents, short-term investments, and accounts receivable. The Company
maintains its cash and cash equivalents with established financial
institutions. The Company's credit risk is managed by investing its cash
in high quality money market instruments and high quality corporate
issuers.
Concentration of credit risk related to accounts receivable and unbilled
services is limited to several customers to whom the Company makes
substantial sales. The Company performs periodic credit evaluations of its
customers and has recorded allowances for estimated losses. The Company
has not experienced any material losses related to receivables from
individual customers, geographic regions or groups of customers.
During the period ended June 30, 2005, the Company conducted business with
four customers whose sales made up 14.1% (foreign customer), 13.4%, 10.4%
(foreign customer) and 10.0% of net revenues. As a percentage of total
revenues, domestic sales were approximately 58.1% and foreign sales were
approximately 41.9%.
Net Income (Loss) Per Share
Net income (loss) per share is computed based on the guidance of SFAS No.
128, "Earnings per Share" ("SFAS No. 128"). SFAS No. 128 requires
companies to report both basic income (loss) per share, which is computed
by dividing the net income (loss) by the weighted average number of common
shares outstanding, and diluted income (loss) per share, which is computed
by dividing the net income (loss) by the weighted average number of common
shares outstanding plus the weighted average dilutive potential common
shares outstanding using the treasury stock method.
Foreign Currency Translation
The local currency is the functional currency of the Company's
subsidiaries. Assets and liabilities are translated into U.S. dollars at
exchange rates in effect at the balance sheet date, and income and expense
items are translated at average rates for the period. Gains and losses
arising from translation are accumulated as a separate component of
stockholder's equity. Gains and losses arising from transactions
denominated in foreign currencies are included in other income.
F-30
FIREPOND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Period from November 1, 2004 to June 30, 2005
- --------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Computer Software Development Costs and Research and Development Expenses
The Company incurs software development costs associated with its licensed
products as well as new products. Since June 1997, the Company 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. Because the development costs incurred
between the time technological feasibility is established and general
release of the product are not material, the Company expenses these costs
as incurred.
Discontinued Operations
On August 26, 2003, the Company decided to discontinue the operations of
all foreign subsidiaries. The results of operations of the foreign
subsidiaries of the Company have been classified as discontinued
operations in the accompanying consolidated statements of operations for
the period ended June 30, 2005.
The assets and liabilities of the discontinued operations at June 30, 2005
consisted of the following:
Assets to be sold $127,035
--------
Total assets of discontinued operations $127,035
========
Accounts payable $ 3,652
Accrued liabilities 27,942
--------
Total liabilities of discontinued operations $ 31,594
========
During the period, the Company recorded the elimination of the liabilities
associated with its foreign discontinued operations except for Germany and
Switzerland which are still in the liquidation process. This elimination
resulted in the Company recording approximately $2.5 million in gain on
disposal of discontinued operations.
F-31
FIREPOND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Period from November 1, 2004 to June 30, 2005
- --------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recently Issued Accounting Pronouncements
In November 2004, the FASB issued SFAS No. 151,"Inventory Costs". SFAS No.
151 amends the accounting for abnormal amounts of idle facility expense,
freight, handling costs, and wasted material (spoilage) under the guidance
in ARB No. 43, Chapter 4,"Inventory Pricing". Paragraph 5 of ARB No. 43,
Chapter 4, previously stated that ". . . under some circumstances, items
such as idle facility expense, excessive spoilage, double freight, and
re-handling costs may be so abnormal as to require treatment as current
period charges. . . ." This Statement requires that those items be
recognized as current-period charges regardless of whether they meet the
criterion of "so abnormal." In addition, this Statement requires that
allocation of fixed production overheads to the costs of conversion be
based on the normal capacity of the production facilities. This statement
is effective for inventory costs incurred during fiscal years beginning
after June 15, 2005. Management does not expect adoption of SFAS No. 151
to have a material impact on the Company's financial statements.
In December 2004, the FASB issued SFAS No. 153,"Exchanges of Nonmonetary
Assets," an amendment to Opinion No. 29, "Accounting for Nonmonetary
Transactions". Statement No. 153 eliminates certain differences in the
guidance in Opinion No. 29 as compared to the guidance contained in
standards issued by the International Accounting Standards Board. The
amendment to Opinion No. 29 eliminates the fair value exception for
nonmonetary exchanges of similar productive assets and replaces it with a
general exception for exchanges of nonmonetary assets that do not have
commercial substance. Such an exchange has commercial substance if the
future cash flows of the entity are expected to change significantly as a
result of the exchange. SFAS No. 153 is effective for nonmonetary asset
exchanges occurring in periods beginning after June 15, 2005. Earlier
application is permitted for nonmonetary asset exchanges occurring in
periods beginning after December 16, 2004. Management does not expect
adoption of SFAS No. 153 to have a material impact on the Company's
financial statements.
In May, 2005 the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections - a replacement of APB Opinion No. 20 and FASB Statement No.
3." SFAS No. 154 replaces APB Opinion ("APB") No. 20, "Accounting
Changes", and SFAS No. 3, "Reporting Accounting Changes in Interim
Financial Statements," and changes the requirements for the accounting for
and reporting of a change in accounting principle. SFAS No. 154 will apply
to all voluntary changes in accounting principle as well as to changes
required by an accounting pronouncement in the unusual instance that the
pronouncement does not include specific transition provisions. APB No. 20
previously required that most voluntary changes in accounting principle be
recognized by including in net income of the period of the change the
cumulative effect of changing to the new accounting principle.
F-32
FIREPOND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Period from November 1, 2004 to June 30, 2005
- --------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recently Issued Accounting Pronouncements (Continued)
SFAS No. 154 requires retrospective application to prior periods'
financial statements of changes in accounting principle, unless it is
impracticable to determine either the period-specific effects or the
cumulative effect of the change. When it is impracticable to determine the
period-specific effects of an accounting change on one or more individual
prior periods presented, SFAS No. 154 requires that the new accounting
principle be applied to the balances of assets and liabilities as of the
beginning of the earliest period for which retrospective application is
practicable and that a corresponding adjustment be made to the opening
balance of retained earnings (or other appropriate components of equity or
net assets in the statement of financial position) for that period rather
than being reported in an income statement. When it is impracticable to
determine the cumulative effect of applying a change in accounting
principle to all prior periods, SFAS No. 154 requires that the new
accounting principle be applied as if it were adopted prospectively from
the earliest date practicable. SFAS No. 154 carries forward without change
the guidance contained in APB No. 20 for reporting the correction of an
error in previously issued financial statements and a change in accounting
estimate, and also the guidance in APB No. 20 requiring justification of a
change in accounting principle on the basis of preferability. SFAS No. 154
is effective for accounting changes and corrections of errors made in
fiscal years beginning after December 15, 2005. Early adoption is
permitted for accounting changes and corrections of errors made in fiscal
years beginning after the date SFAS No. 154 was issued. The Company
presently does not believe that the adoption of the provisions of SFAS No.
154 will have a material affect on its financial statements.
In December 2004, the FASB issued SFAS No. 123 (Revised 2004), "Share
Based Payment," which eliminates the use of APB Opinion No. 25 and will
require the Company to measure the cost of employee services received in
exchange for an award of equity instruments based on the grant-date fair
value of the award. That cost will be recognized over the period during
which an employee is required to provide service in exchange for the
reward (the requisite service period). No compensation cost is recognized
for equity instruments for which employees do not render the requisite
service. The grant-date fair value of employee share options and similar
instruments will be estimated using option-pricing models adjusted for the
unique characteristics of those instruments. SFAS 123 (Revised) must be
applied to all options granted or modified after its effective date and
also to recognize the cost associated with the portion of any option
awards made before its effective date for with the associated service has
not been rendered as of its effective date.
On April 14, 2005, the U.S. Securities and Exchange Commission announced
that the effective date of SFAS 123(Revised) is deferred for calendar year
companies until the beginning of 2006. The Company is still studying the
requirements of SFAS No. 123 (Revised 2004) and has not yet determined
what impact it will have on the Company's results of operations and
financial position.
F-33
FIREPOND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Period from November 1, 2004 to June 30, 2005
- --------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recently Issued Accounting Pronouncements (Continued)
In March 2005, the FASB issued FASB Interpretation ("FIN") No. 47,
"Accounting for Conditional Asset Retirement Obligations". FIN No. 47
clarifies that the term conditional asset retirement obligation as used in
FASB Statement No. 143, "Accounting for Asset Retirement Obligations,"
refers to a legal obligation to perform an asset retirement activity in
which the timing and (or) method of settlement are conditional on a future
event that may or may not be within the control of the entity. The
obligation to perform the asset retirement activity is unconditional even
though uncertainty exists about the timing and (or) method of settlement.
Uncertainty about the timing and/or method of settlement of a conditional
asset retirement obligation should be factored into the measurement of the
liability when sufficient information exists. This interpretation also
clarifies when an entity would have sufficient information to reasonably
estimate the fair value of an asset retirement obligation. Fin No. 47 is
effective no later than the end of fiscal years ending after December 15,
2005 (December 31, 2005 for calendar-year companies). Retrospective
application of interim financial information is permitted but is not
required. Management does not expect adoption of FIN No. 47 to have a
material impact on the Company's financial statements.
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment at June 30, 2005 consisted of the following:
Property and equipment:
Computer equipment and software $3,677,176
Furniture and fixtures 527,902
Leasehold improvements 19,915
----------
4,224,993
Less accumulated depreciation and amortization 3,920,383
----------
Property and equipment, net $ 304,610
==========
Depreciation expense was $105,863 for period.
NOTE 4 -NOTES RECEIVABLE
On January 28, 2004, FirePond entered into a Patent Purchase Agreement
("Patent Purchase Agreement") with Orion IP, LLC ("Orion"), pursuant to
which, among other things, (i) Orion purchased all of the domestic and
foreign patents (and all extensions, continuations, provisionals,
derivatives and related applications) ("Patents") of FirePond, (ii)
FirePond and Orion entered into a non-exclusive patent license agreement
with respect to the Patents and (iii) Orion issued a promissory note to
FirePond in the amount of $1,000,000 and agreed to pay certain legal fees
that had been incurred by FirePond with respect to the Patents.
F-34
FIREPOND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Period from November 1, 2004 to June 30, 2005
- --------------------------------------------------------------------------------
NOTE 4 -NOTES RECEIVABLE (Continued)
On May 17, 2004, FirePond entered into an Asset Purchase Agreement ("Asset
Purchase Agreement") with edocs, Inc. ("edocs"). Pursuant to the Asset
Purchase Agreement, among other things, (i) edocs purchased certain assets
(including customer contracts, code and accounts receivable) related to
FirePond's Brightware business unit ("Brightware") and (ii) edocs paid
certain cash consideration to FirePond and issued FirePond a promissory
note in the amount of $350,000.
These promissory notes in the total amount of $1,350,000 were assigned as
partial payment of notes payable due to General Motors. (See Note 6)
NOTE 5 - ACCRUED LIABILITIES
Accrued liabilities at June,30 2005 consisted of the following:
Accrued interest $162,500
Consulting and professional fees 148,355
Compensation and benefits 190,832
Sales, use and other taxes 239,943
Other 185,164
--------
Total accrued liabilities $926,794
========
NOTE 6 -NOTES PAYABLE
Notes payable at June 30, 2005 consists of the following:
Note payable to General Motors, with interest at 5.00% with
annual interest and principal payments due in December of
EACH year until December 2007 secured by all assets
of the Company $3,000,000
Less current portion 1,000,000
----------
Long-term portion $2,000,000
==========
Future maturities of note payable at June 30, 2005 were as follows (See
Note 10):
Year Ending
June 30,
2006 $1,000,000
2007 1,000,000
2008 1,000,000
----------
Total $3,000,000
==========
F-35
FIREPOND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Period from November 1, 2004 to June 30, 2005
- --------------------------------------------------------------------------------
NOTE 7 - ACCUMULATED OTHER COMPREHENSIVE LOSS
The components of accumulated other comprehensive loss at June 30, 2005
was as follows:
Foreign currency translation $ (680,778)
-----------
Accumulated other comprehensive loss $ (680,778)
===========
NOTE 8 - RESTRUCTURING AND OTHER SPECIAL CHARGES
During the period from December 2, 2003 (Acquisition) to October 31, 2004,
the Company undertook plans to restructure its operations as a result of a
prolonged slowdown of global information technology spending, specifically
within the enterprise software marketplace. As such, the Company announced
a strategic realignment to further enhance its focus on the
"lead-to-order" market as well as measures to better align its cost
structure with projected revenue and preserve cash. The Company reduced
its headcount and facilities as well as wrote-off excess equipment and
terminated and restructured certain contractual relationships. Overall,
the Company terminated 11 general and administrative, nine sales and
marketing, 13 professional services and 13 development employees. The
restructuring and other special charges for the period ended October 31,
2004 totaled $3.4 million.
Accrued Merger and Restructuring
A summary of the accrued merger and restructuring costs is as follows:
Period Ended
June 30, 2005
---------
Accrued merger and restructuring:
Balance at October 31, 2004 $ 223,333
Additional accrual 176,579
Severance payments (52,817)
Facilities related payments (51,079)
Other payments (15,809)
---------
Balance at June 30, 2005 $ 280,207
=========
F-36
FIREPOND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Period from November 1, 2004 to June 30, 2005
- --------------------------------------------------------------------------------
NOTE 9 - INCOME TAXES
The Company's deferred tax assets (net of deferred tax liabilities) are
comprised primarily of the following:
Period Ended
June 30, 2005
-------------
Net operating losses and credit carryforwards $5,133,424
Nondeductible reserves and accruals 618,065
Depreciation and amortization 78,274
Capitalized research and development 1,316,060
----------
Gross deferred tax assets 7,145,823
Valuation allowance $7,145,823
----------
Net deferred tax assets $ --
==========
During the period ended June 30, 2005, the Company utilized previously
limited NOL carryforwards due to the built-in gain provisions as a result
of the $2.6 million foreign subsidiary liquidations and $450,000 related
to the GM settlement. As of June 30, 2005, the Company has available net
operating losses of approximately $15.0 million to reduce future federal
income taxes. These carry forwards expire beginning in fiscal year 2022
and may be subject to review and possible adjustment by the Internal
Revenue Service. Utilization of these carry forwards have been subjected
to substantial limitations due to the ownership change limitations
provided by the Internal Revenue Code of 1986. A valuation allowance has
been provided for the full amount of the deferred tax assets, due to the
uncertainty of realization. The net operating loss carry forward expires
as follows:
2022 $3,548,000
2023 7,095,000
2024 4,193,000
2025 151,000
----------
$14,987,000
===========
F-37
FIREPOND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Period from November 1, 2004 to June 30, 2005
- --------------------------------------------------------------------------------
NOTE 10 - COMMITMENTS AND CONTINGENCIES
Litigation
On October 19, 2001, General Motors Corporation filed a complaint against
the Company in the Superior Court of Massachusetts, Middlesex County. The
complaint alleges, among other things, a breach of contract under
agreements entered into in 1994, as amended; anticipatory repudiation in
the spring of 2000 of agreements entered into in 1994, as amended; unjust
enrichment; establishment of a constructive trust; rescission and
restitution based upon failure of consideration as well as extortion and
coercion relating to agreements entered into in 1994, as amended; breach
of the covenant of good faith and fair dealing; fraud; as well as
violation of Chapter 93A of the General Laws of the Commonwealth of
Massachusetts relating to unfair and deceptive trade practices. General
Motors' claims further relate to license agreements, services agreements
and a general release entered into with the Company in May 2000. This
matter was settled on April 14, 2004, per the terms of the settlement, the
Company estimated and accrued a liability of $7,000,000 as of October 31,
2003. During the period ended June 30, 2005, the Company negotiated a
further settlement of the note payable and recorded a favorable settlement
amount of $450,000 into its records.
On December 7, 2004, the Company entered into a revised settlement
agreement that called for a promissory note of $3,000,000, the assigning
of $1,350,000 of Firepond notes receivable to General Motors, as well as a
cash payment of $1,600,000.
On September 13, 2005, Firepond, FP Technology Holdings, Inc. and General
Motors entered into a letter agreement whereby General Motors accepted
$1,250,000 in cash from FP Technology Holdings, received a $250,000
unsecured note from FP Technology Holdings Inc., cancelled the note due
from Firepond and released its security interest in Firepond assets.
On or about December 1, 2004, Freightliner LLC filed a complaint against
the Company. The plaintiff alleges breach of contacts, breath of warranty
arising out of the parties' License Agreement and Services Agreement. This
matter was settled on August 1, 2005, per the terms of the settlement the
Company agreed to pay $3,000,000 over a period of 70 days. The settlement
was covered by the Company's insurance carrier, Steadfast Insurance
Company ("Steadfast"), which provided the full amount for the settlement
except for a $50,000 deductible which the Company has accrued. Firepond
has agreed that Steadfast has the right to seek a judicial determination
as to the reasonableness of the settlement value of the Freightliner claim
and the $3,000,000 settlement. Firepond has acknowledged and granted
Steadfast the right to recoup from Firepond the amount which represents
the difference between the judicially determined settlement value and the
$3,000,000 settlement, if the court determines that the reasonable
settlement value of the Freightliner claim is less than $3,000,000. The
amount to be reimbursed to Steadfast, if any, is not estimatable and is
not accrued on the financial statements as of June 30, 2005.
F-38
FIREPOND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Period from November 1, 2004 to June 30, 2005
- --------------------------------------------------------------------------------
NOTE 10 - COMMITMENTS AND CONTINGENCIES (Continued)
Litigation (Continued)
Beginning in August 2001, a number of securities class action complaints
were filed in the Southern District of New York seeking an unspecified
amount of damages on behalf of an alleged class of persons who purchased
shares of the Company's common stock between the date of its initial
public offering and December 6, 2000. The complaints name as defendants
the Company and certain of its directors and officers, Fleet Boston
Robertson Stephens, and other parties as underwriters of the Company's
initial public offering. This matter was settled on or about June 8, 2004
and this settlement is subject to final approval by the court. On August
4, 2004 the plaintiffs and issuer defendants separately filed replies to
the underwriter defendants' objectives to the settlement. The court
granted the preliminary approval motion on February 15, 2005, subject to
certain modifications. The parties are directed to report back to the
court regarding the modifications. If the parties are able to agree upon
the required modifications, and such modifications are acceptable to the
court, notice will be given to all class members of the settlement, a
"fairness" hearing has been set for April 26, 2006 and if the court
determines that the settlement is fair to the class members, the
settlement will be approved. There can be no assurance that this proposed
settlement will be approved and implemented. Any direct financial impact
of the proposed settlement is expected to be borne by the Company's
insurance carriers.
The Company is also subject to various other claims and legal actions
arising in the ordinary course of business. In the opinion of management,
after consultation with legal counsel, the ultimate disposition of these
matters is not expected to have a material effect on the Company's
business, financial condition, or results of operations.
Leases
The Company leases its office space under operating leases expiring at
various dates through 2009. For the period from November 1, 2004 to June
30, 2005, rent expense under these agreements totaled approximately
$132,612.
At June 30, 2005, the minimum future obligations under operating leases,
exclusive of sublease income are as follows:
For the Fiscal Year Ended June 30,
2006 252,000
2007 257,000
2008 262,000
2009 191,000
---------
$ 962,000
=========
F-39
FIREPOND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Period from November 1, 2004 to June 30, 2005
- --------------------------------------------------------------------------------
NOTE 11 - STOCKHOLDERS' EQUITY
Restricted Stock Awards
In connection with the employment of the Chief Executive Officer and the
Chief Financial Officer, the Company agreed to issue restricted stock
awards for 10% and 6.67% respectively of the fully diluted stock in the
Company subject to obtaining certain capital funding for the Company.
Loan Receivable
The Company made a loan to an entity controlled by the previous Chief
Executive Officer and majority shareholder in the Company in the amount of
$1,175,000. In conjunction with the GM settlement, management determined
that the loan was uncollectible and accordingly, the receivable was
written off as a charge to additional paid in capital during the period
ended June 30, 2005.
NOTE 12 - PROFIT-SHARING PLAN
The Company sponsors a defined contribution profit-sharing plan for US
employees which conforms to Internal Revenue Service provisions for 401(k)
plans. Employees must be at least 21 years of age to be eligible to
participate in the plan. Participants may contribute up to 100% of their
earnings. The Company has the option to match 50% of the first 2% and 25%
of the next 4% of employee contributions and may make additional
contributions as determined by the board of directors. There were no
employer matching contributions in the period from November 1, 2004 to
June 30, 2005.
NOTE 13 - SUBSEQUENT EVENTS
On September 13, 2005, the Company executed an asset purchase agreement
with a newly formed entity, FP Technology Holdings, Inc. ("FP
Technology"), whereby FP Technology acquired substantially all of the
assets and, except for certain excluded liabilities, all of the
liabilities of the Company in exchange for common stock in FP Technology
as part of a new financing of the Company. Jaguar Technology Holdings,
LLC, the parent company of the Company, remains the 100% owner of FP
Technology.
Trident Growth Fund, LLC loaned FP Technology Holdings, Inc. $2,000,000.
Interest accrues on the associated secured note ("September Note") at 12%
per annum. Interest is payable monthly. Principal is due September 30,
2006 or on consummation of a change in control transaction. The note is
convertible at 80% of the average price per share of common stock and
common stock equivalents sold to any person in the first Qualifying
Transaction consummated or $.01 per share if no Qualifying Transaction has
occurred. The agreement calls for the Company to maintain certain
financial ratios commencing December 31, 2005. Under the September Note,
the Company granted Trident the right to subscribe for and purchase
("Warrant Shares"). The number of which is calculated based upon the
following formula.
F-40
FIREPOND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Period from November 1, 2004 to June 30, 2005
- --------------------------------------------------------------------------------
NOTE 13 - SUBSEQUENT EVENTS (Continued)
2,000,000 divided by: 80% of the average price per share of the
Common Stock and Common Stock Equivalents sold to any Person in the
first Qualifying Transaction to beconsummated following the Initial
Exercise Date (determined by dividing the total number of shares of
Common Stock issued plus shares issuable under Common Stock
Equivalents in such Qualifying Transaction, by the aggregate
consideration received by the Company plus all consideration to be
received upon exercise or conversion of all Common Stock Equivalents
issued in such Qualifying Transaction). With respect to determining
the price paid per share in any asset purchase, only shares of
Common Stock actually issued and outstanding shall be used in
determining such per share calculation.
In the event no Qualifying Transaction has been consummated on or by
the first anniversary hereof, then the number of Warrant Shares
purchasable hereby shall equal 5% (subject to adjustment as set
forth in the Purchase Agreement) of then outstanding Common Stock,
computed on a Fully Diluted Basis.
The purchase for such shares being determined in accordance with the
following formula. The Exercise Price of each share of Common Stock under
this Warrant shall be equal to:
(i) 50% of the average price per share of the Common Stock and
Common Stock Equivalents sold to any Person in the first
Qualifying Transaction to be consummated following the Initial
Exercise Date (determined by dividing the total number of
shares of Common Stock issued plus shares issuable under
Common Stock Equivalents in such Qualifying Transaction, by
the aggregate consideration received by the Company plus all
consideration to be received upon exercise or conversion of
all Common Stock Equivalents issued in such Qualifying
Transaction). With respect to determining the price paid per
share in any asset purchase, only shares of Common Stock
actually issued and outstanding shall be used in determining
such per share calculation; or
(ii) if no Qualifying Transaction as described in subsection (i)
above has occurred on or by the first anniversary hereof, $.01
per share.
On September 13, 2005, Firepond, FP Technology Holdings, Inc. and General
Motors entered into a letter agreement whereby General Motors accepted
$1,250,000 in cash from FP Technology Holdings, received a $250,000
unsecured note from FP Technology Holdings, Inc., cancelled the note due
from Firepond and released its security interest in Firepond assets.
On November 25, 2005, the Company closed an additional $500,000 note (the
"November Note") with Trident Growth Fund on the same terms and conditions
as the September Note. The funds received pursuant to the September Note
and the November Note have been used for working capital required as the
Company transitions from its legacy enterprise software business to its
OnDemand revenue model.
On January 5, 2006, restricted stock awards were issued to the Chief
Executive Officer and the Chief Financial Officer as more fully discussed
in Note 11.
F-41
FIREPOND, INC. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF JAGUAR TECHNOLOGY HOLDINGS, LLC)
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD FROM DECEMBER 2, 2003 (ACQUISITION) TO
OCTOBER 31, 2004
F-42
FIREPOND, INC. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF JAGUAR TECHNOLOGY HOLDINGS, LLC)
CONTENTS
October 31, 2004
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheet
Consolidated Statement of Income
Consolidated Statement of Stockholders' Deficit
Consolidated Statement of Cash Flows
Notes to Consolidated Financial Statements
F-43
[GRAPHIC OMITTED - SINGER LEWAK GREENBAUM & GOLDSTEIN LLP LETTERHEAD]
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
FirePond, Inc. and Subsidiaries
(A Wholly-Owned Subsidiary of Jaguar Technology Holdings, LLC)
We have audited the accompanying consolidated balance sheet of FirePond, Inc.
and subsidiaries (a wholly-owned subsidiary of Jaguar Technology Holdings, LLC)
as of October 31, 2004 and the related consolidated statements of income,
stockholders' deficit, and cash flows for the period from December 2, 2003
(Acquisition) to October 31, 2004. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of FirePond, Inc. and
subsidiaries (a wholly-owned subsidiary of Jaguar Technology Holdings, LLC) as
of October 31, 2004 and the results of their operations and their cash flows for
the period from December 2, 2003 (Acquisition) to October 31, 2004 in conformity
with accounting principles generally accepted in the United States of America.
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
April 25, 2005
F-44
FIREPOND, INC. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF JAGUAR TECHNOLOGY HOLDINGS, LLC)
CONSOLIDATED BALANCE SHEET
October 31, 2004
- --------------------------------------------------------------------------------
ASSETS
Current assets
Cash and cash equivalents $2,547,728
Accounts receivable, net of allowance
for doubtful accounts of $64,284 578,559
Unbilled revenue 4,017
Assets to be sold 110,038
Other current assets 148,492
----------
Total current assets 3,388,834
Property and equipment, net 270,917
Notes receivable 1,350,000
Goodwill 4,772,413
Other assets 61,944
----------
Total assets $9,844,108
==========
The accompanying notes are an integral part of these financial statements.
F-45
FIREPOND, INC. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF JAGUAR TECHNOLOGY HOLDINGS, LLC)
CONSOLIDATED BALANCE SHEET
October 31, 2004
- --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Accounts payable $ 297,560
Accrued liabilities 989,225
Accrued merger and restructuring costs 223,333
Deferred revenue 1,469,334
Notes payable 900,000
Liabilities associated with assets to be sold $ 2,430,609
-----------
Total current liabilities $ 6,310,062
Long-term notes payable $ 5,500,000
Commitments and contingencies
Stockholders' deficit
Common stock, $0.01 par value
Authorized - 100,000,000 shares
Issued and outstanding 99,001,000 shares $ 990,010
Deficiency in capital (990,000)
Retained deficit (69,203)
Loan receivable from owner (1,175,000)
Accumulated other comprehensive loss $ (721,761)
-----------
Total stockholders' deficit $(1,965,954)
-----------
Total liabilities and stockholders' deficit $ 9,844,108
===========
The accompanying notes are an integral part of these financial statements.
F-46
FIREPOND, INC. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF JAGUAR TECHNOLOGY HOLDINGS, LLC)
CONSOLIDATED STATEMENT OF INCOME
For the Period from December 2, 2003 (Acquisition) to October 31, 2004
- --------------------------------------------------------------------------------
Revenues $ 8,950,055
Cost of revenues 2,087,776
------------
Gross profit $ 6,862,279
Operating expenses
Sales, general and administrative $ 1,330,110
Research and development 1,953,895
Restructuring charges 3,447,293
------------
Total operating expenses $ 6,731,298
------------
Income from operations 130,981
Other income (expense), net
Interest expense (208,787)
Other income 126,608
------------
Total other income (expense), net (82,179)
Net income before discontinued operations 48,802
Loss from discontinued operations (118,005)
------------
Net loss $ (69,203)
============
Net loss per share - basic and diluted
Loss from continuing operations (0.01)
Loss from discontinued operations (0.01)
------------
Basic and diluted loss per share $ --
============
Basic and diluted weighted-average
common shares outstanding 99,001,000
============
F-47
FIREPOND, INC. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF JAGUAR TECHNOLOGY HOLDINGS, LLC)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
For the Period from December 2, 2003 (Acquisition) to October 31, 2004
- --------------------------------------------------------------------------------
Preferred Stock Common Stock
----------------------- -----------------------------
$0.10 $0.01 Deficiency Accumulated
Shares Par Value Shares Par Value In Capital Deficit
---------- ---------- ------------- ------------- ------------- -------------
Balance, December 2,
2003 (Acquisition) -- $ -- 1,000 $ 10 $ -- $ --
Dividend of shares issued
to shareholders 99,000,000 990,000 (990,000) --
Loan receivable from owner -- -- -- -- --
Currency translation
adjustment -- -- -- -- -- --
Net loss (69,203)
Comprehensive loss for the
year ended October 31, 2003 -- -- -- -- -- --
---------- ---------- ------------- ------------- ------------- -------------
Balance, October 31, 2004 -- $ -- 99,001,000 $ 990,010 $ (990,000) $ (69,203)
========== ========== ============= ============= ============= =============
Loans Accumulated Other
Receivable Comprehensive Stockholders' Comprehensive
From Owner Income (Loss) (Deficit) Income (Loss)
------------- ---------------- ------------- -------------
Balance, December 2,
2003 (Acquisition) $ -- $ -- $- $ --
Dividend of shares issued
to shareholders -- -- -- --
Loan receivable from owner (1,175,000) (1,175,000) --
Currency translation
adjustment -- (721,761) (721,761) (721,761)
Net loss (69,203) (69,203)
Comprehensive loss for the
year ended October 31, 2003 -- -- -- --
------------- ---------------- ------------- -------------
Balance, October 31, 2004 $ (1,175,000) $ (721,761) $ (1,965,964) $ (790,964)
============= ================ ============= =============
The accompanying notes are an integral part of these financial statements.
F-48
FIREPOND, INC. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF JAGUAR TECHNOLOGY HOLDINGS, LLC)
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Period from December 2, 2003 (Acquisition) to October 31, 2004
- --------------------------------------------------------------------------------
Cash flows from operating activities
Net loss $ (69,203)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and amortization 92,734
Accounts receivables 281,012
Unbilled services 36,039
Prepaid expenses and other assets 390,572
Decrease in
Accounts payable (183,502)
Accrued liabilities (931,476)
Restructuring accrual (586,485)
Deferred revenue (1,737,708)
-----------
Net cash used in operating activities (1,082,426)
-----------
Cash flows from investing activities
Change in goodwill value 808,685
Change in intangible assets 1,731,200
Purchase of property and equipment (172,051)
-----------
Net cash used in investing activities 2,367,834
-----------
Cash flows from financing activities
Issuance of notes receivable (1,350,000)
Issuance of note receivable to owner (1,175,000)
Payments on note payable (600,000)
-----------
Net cash provided by financing activities (3,125,000)
-----------
Effect of exchange rate changes on cash and cash equivalents (721,761.0)
-----------
Net (decrease) increase in cash and cash equivalents (2,561,353)
Cash and cash equivalents, on December 3, 2003 (Acquisition) 5,109,081
-----------
Cash and cash equivalents, end of period $ 2,547,728
===========
F-49
FIREPOND, INC. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF JAGUAR TECHNOLOGY HOLDINGS, LLC)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Period from December 2, 2003 (Acquisition) to October 31, 2004
- --------------------------------------------------------------------------------
NOTE 1 - ORGANIZATION AND LINES OF BUSINESS
FirePond, Inc., together with its wholly-owned subsidiaries (a
wholly-owned subsidiary of Jaguar Technology Holdings, LLC) (collectively,
the "Company") considers itself to be a pioneer in software solutions that
help companies with complex products to convert more leads into accurate
orders. Companies with complex products may achieve a measurable and
meaningful return on investment in FirePond, Inc. technology by reducing
their total cost of sales, whether they sell through a direct sales force,
an indirect channel network or via the web.
A wholly-owned subsidiary ("Fire Transaction Sub, Inc.") of Jaguar
Technology Holding, LLC ("Jaguar") completed a tender offer ("Tender
Offer") for FirePond on December 2, 2003, after which Fire Transaction
Sub, Inc. ("Fire Sub") held 90.3% of FirePond's total shares outstanding.
Immediately after consummation of the Tender Offer, Fire Sub completed a
merger (the "Merger") without the vote of shareholder's in accordance with
Delaware's short form merger procedures. Pursuant to the Tender Offer and
the Merger, each share of FirePond common stock was converted into the
right to receive $3.16 in cash, without interest. Upon completion of the
Merger, the shareholders were redeemed at the tender offer price, and
Jaguar owned all of the outstanding equity of FirePond.
At the completion of the merger, Jaguar assumed control of the Company. In
accordance with FAS No. 141, the net assets were adjusted to reflect the
new basis of the assets.
The difference between the fair market value of the Company's assets and
the liabilities assumed has been recorded as goodwill. A summary of the
assets purchased and liabilities assumed in the acquisition is as follows:
Cash $ 5,109,081
Receivables 859,571
Assets to be sold 2,465,174
Other assets 641,065
Property and equipment 191,600
Intangible assets 1,731,200
Accounts payable (481,062)
Accrued liabilities (1,920,701)
Deferred revenue (3,207,042)
Accrued restructuring (809,818)
Liabilities associated with assets to be sold (3,160,156)
Notes payable (7,000,000)
Common stock (10)
-----------
Basis of net liabilities assumed (5,581,088)
-----------
Goodwill $ 5,581,088
===========
F-50
FIREPOND, INC. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF JAGUAR TECHNOLOGY HOLDINGS, LLC)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Period from December 2, 2003 (Acquisition) to October 31, 2004
- --------------------------------------------------------------------------------
NOTE 1 - ORGANIZATION AND LINES OF BUSINESS (Continued)
The Company's fiscal year end begins November 1, 2003. If the above
transaction had occurred on that date, the unaudited pro-forma results of
operation would be as follows:
Adjusted
11 Months One Month Proforma ADJ Proforma
------------ ------------ ------------ ------------
Revenues $ 8,950,055 $ 458,780 $ -- $ 9,408,835
Cost of goods sold 2,087,776 243,765 -- 2,331,541
------------ ------------ ------------ ------------
Gross profit 6,862,279 215,015 -- 7,077,294
Operating expenses 6,731,298 1,077,254 724,633(a) 8,533,185
------------ ------------ ------------ ------------
Other income
(expense), net (82,179) (163,171) 1,189,885(b) 944,535
Loss from
discontinued
operations (118,005) 4,087 -- (113,918)
------------ ------------ ------------ ------------
Net loss $ (69,203) $ (1,021,323) $ 465,252 $ (625,274)
============ ============ ============ ============
(a) Related to fixed asset expenses including depreciation that would
have occurred had the fixed assets not been revalued to their fair
market value in the purchase price allocation.
(b) Represents gain on sale of intangibles that would have occurred if
intangibles had not been revalued to their fair market value in the
purchase price allocation
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
FirePond, Inc. and its wholly-owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in the
accompanying financial statements. Certain prior year amounts have been
reclassified to conform to the current year presentation.
Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to
make estimates and assumptions that affect the amounts reported in the
consolidated financial statements and accompanying notes. Actual results
could differ from those estimates.
F-51
FIREPOND, INC. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF JAGUAR TECHNOLOGY HOLDINGS, LLC)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Period from December 2, 2003 (Acquisition) to October 31, 2004
- --------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Liquidity
During the period from December 2, 2003 (Acquisition) to October 31, 2004,
the Company incurred net losses of $69,203 and had negative cash flows
from operations of $1,067,541. In addition, the Company had negative
working capital of $2,921,228 and shareholders deficit of $1,965,954 at
October 31, 2004. Subsequent to year end, the Company secured new funding
in the form of a $2,000,000 debenture as described in Note 14.
Revenue Recognition
The Company recognizes revenue based on the provisions of the American
Institute of Certified Pubic Accountants (AICPA) Statement of Position,
No. 97-2, "Software Revenue Recognition" ("SOP 97-2"), as amended, and
Statement of Position No. 81-1, "Accounting for Performance of
Construction-Type and Certain Production-Type Contracts" ("SOP 81-1").
The Company generates revenue from license and service revenue. License
revenue is generated from licensing the rights to the use of the Company's
packaged software products. Service revenue is generated from sales of
maintenance, consulting and training services performed for customers that
license the Company's products.
The Company has concluded that generally, where the Company is responsible
for implementation services for the SalesPerformer product suite and its
components, the implementation services are essential to the customer's
use of the packaged software products. In such arrangements, the Company
recognizes revenue following the percentage-of-completion method over the
implementation period. Percentage of completion is measured by the
percentage of implementation hours incurred to date compared to estimated
total 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. When the current estimates of total contract revenue and
contract cost indicate a loss, a provision for the entire loss on the
contract is recorded.
In situations where the Company is not responsible for implementation
services for the SalesPerformer product suite, the Company recognizes
revenue on delivery of the packaged software if there is persuasive
evidence of an arrangement, collection is probable and the fee is fixed or
determinable. In situations where the Company is not responsible for
implementation services for the SalesPerformer product suite, but is
obligated to provide unspecified additional software products in the
future, the Company recognizes revenue as a subscription over the term of
the commitment period.
F-52
FIREPOND, INC. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF JAGUAR TECHNOLOGY HOLDINGS, LLC)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Period from December 2, 2003 (Acquisition) to October 31, 2004
- --------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Revenue Recognition (Continued)
For product sales that are recognized on delivery, the Company will
execute contracts that govern the terms and conditions of each software
license, as well as maintenance arrangements and other services
arrangements. If an arrangement includes an acceptance provision,
acceptance occurs upon the earlier of receipt of a written customer
acceptance or expiration of the acceptance period.
Revenue under multiple element arrangements, which may include several
different software products and services sold together, is allocated to
each element based on the residual method in accordance with Statement of
Position, No. 98-9, "Software Revenue Recognition with Respect to Certain
Arrangements" ("SOP 98-9"). The Company uses the residual method when
vendor-specific objective evidence of fair value does not exist for one of
the delivered elements in the arrangement. Under the residual method, the
fair value of the undelivered elements is deferred and subsequently
recognized. The Company has established sufficient vendor-specific
objective evidence for professional services, training and maintenance and
support services based on the price charged when these elements are sold
separately. Accordingly, software license revenue is recognized under the
residual method in arrangements in which software is licensed with
professional services, training, and maintenance and support services.
Revenue from maintenance services is recognized ratably over the term of
the contract, typically one year. Consulting revenue is primarily related
to implementation services performed on a time-and-materials basis under
separate service arrangements. Revenue from consulting and training
services is recognized as services are performed.
The Company has recorded deferred revenue on amounts billed or collected
by the Company before satisfying the above revenue recognition criteria.
Deferred revenue at October 31, 2004 consisted of the following:
Fiscal Year Ended
October 31,
2004
---------------
Product license $ 31,250
Product-related services 1,424,957
Product-related maintenance 13,127
---------------
Total $ 1,469,334
===============
Cost of Revenue
Cost of licenses includes royalties, media, product packaging,
documentation, other production costs and the amortization of capitalized
software development costs.
F-53
FIREPOND, INC. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF JAGUAR TECHNOLOGY HOLDINGS, LLC)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Period from December 2, 2003 (Acquisition) to October 31, 2004
- --------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Cost of Revenue (Continued)
Cost of product-related services and maintenance and cost of custom
development services revenue consist primarily of salaries, related costs
for development, consulting, training and customer support personnel,
including cost of services provided by third-party consultants engaged by
the Company.
Advertising Costs
Advertising costs are expensed as incurred.
Income Taxes
Income taxes are accounted for based on guidance in Standard Financial
Accounting Statement No. 109, "Accounting for Income Taxes" ("SFAS No.
109"). Under SFAS No. 109, deferred income tax liabilities and assets are
determined based on the difference between the financial reporting and tax
bases of assets and liabilities using currently enacted tax rates.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand and in banks. The
Company maintains its cash deposits at numerous banks located throughout
the United States, which at times, may exceed federally insured limits.
The Company has not experienced any losses in such accounts and believes
it is not exposed to any significant risk on cash and cash equivalents.
Cash equivalents are short-term, highly liquid investments with original
maturity dates of three months or less. Cash equivalents consist of money
market, commercial paper and U.S. federal agency securities. Cash
equivalents are carried at cost, which approximates fair market value.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets, as
follows:
Computer equipment and software 2 to 5 years
Furniture and fixtures 5 years
Leasehold improvements 5 years
The cost of assets retired or disposed of and the accumulated depreciation
thereon is removed from the accounts with any gain or loss realized upon
sale or disposal credited or charged to operations, respectively.
F-54
FIREPOND, INC. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF JAGUAR TECHNOLOGY HOLDINGS, LLC)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Period from December 2, 2003 (Acquisition) to October 31, 2004
- --------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Goodwill and Other Intangibles
Prior to the January 1, 2002 implementation of Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets"
("SFAS 142"), goodwill was amortized on a straight-line basis over 5-20
years. Since that date, goodwill has been subject to periodic impairment
tests in accordance with SFAS 142. Other intangibles consist primarily of
covenants not to compete and are amortized on a straight-line basis over
three to five years.
The Company identifies and records impairment losses on long-lived assets,
including goodwill that is not identified with an impaired asset, when
events and circumstances indicate that such assets might be impaired.
Events and circumstances that may indicate that an asset is impaired
include significant decreases in the market value of an asset, a change in
the operating model or strategy and competitive forces.
If events and circumstances indicate that the carrying amount of an asset
may not be recoverable and the expected undiscounted future cash flow
attributable to the asset is less than the carrying amount of the asset,
an impairment loss equal to the excess of the asset's carrying value over
its fair value is recorded. Fair value is determined based on the present
value of estimated expected future cash flows using a discount rate
commensurate with the risk involved, quoted market prices or appraised
values, depending on the nature of the assets. To date, no such impairment
has been recorded.
Concentration of Credit Risk
SFAS No. 105, "Disclosure of Information about Financial Instruments with
Off-Balance-Sheet Risk and Financial Instruments with Concentrations of
Credit Risk," requires disclosure of any significant off-balance sheet
risks and credit risk concentrations. The Company has no significant
off-balance-sheet risks. Financial instruments that potentially subject
the Company to concentrations of credit risk are principally cash and cash
equivalents, short-term investments, and accounts receivable. The Company
maintains its cash and cash equivalents with established financial
institutions. The Company's credit risk is managed by investing its cash
in high quality money market instruments and high quality corporate
issuers.
Concentration of credit risk related to accounts receivable and unbilled
services is limited to several customers to whom the Company makes
substantial sales. The Company performs periodic credit evaluations of its
customers and has recorded allowances for estimated losses. The Company
has not experienced any material losses related to receivables from
individual customers, geographic regions or groups of customers.
During the year ended October 31, 2004, the Company conducted business
with two customers whose sales made up 44.6% and 11.1% of net revenues.
F-55
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Net Loss per Share
Net loss per share is computed based on the guidance of SFAS No. 128,
"Earnings per Share" ("SFAS No. 128"). SFAS No. 128 requires companies to
report both basic loss per share, which is computed by dividing the net
loss by the weighted average number of common shares outstanding, and
diluted loss per share, which is computed by dividing the net loss by the
weighted average number of common shares outstanding plus the weighted
average dilutive potential common shares outstanding using the treasury
stock method. As a result of the losses incurred by the Company for all
fiscal periods presented, all potential common shares were anti-dilutive
and were excluded from the diluted net loss per share calculations.
Foreign Currency Translation
The local currency is the functional currency of the Company's
subsidiaries. Assets and liabilities are translated into U.S. dollars at
exchange rates in effect at the balance sheet date, and income and expense
items are translated at average rates for the period. Gains and losses
arising from translation are accumulated as a separate component of
stockholder's equity. Gains and losses arising from transactions
denominated in foreign currencies are included in other income.
Computer Software Development Costs and Research and Development Expenses
The Company incurs software development costs associated with its licensed
products as well as new products. Since June 1997, the Company 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. Because the development costs incurred
between the time technological feasibility is established and general
release of the product are not material, the Company expenses these costs
as incurred.
Discontinued Operations
On August 26, 2003, the Company decided to discontinue the operations of
all foreign subsidiaries. The results of operations of the foreign
subsidiaries of the Company have been classified as discontinued
operations in the accompanying consolidated statements of operations for
the fiscal year ended October 31, 2004.
The assets and liabilities of the discontinued operations at fiscal year
ended 2004 consisted of the following:
Cash $ 18,244
Other assets 91,814
--------
Total assets of discontinued operations $110,038
========
F-56
FIREPOND, INC. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF JAGUAR TECHNOLOGY HOLDINGS, LLC)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Period from December 2, 2003 (Acquisition) to October 31, 2004
- --------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Discontinued Operations (Continued)
Accounts payable $ 82,405
Accrued liabilities 2,259,315
Accrued restructuring 88,889
----------
Total liabilities of discontinued operations $2,430,609
==========
Recently Issued Accounting Pronouncements
In November 2004, the FASB issued SFAS No. 151,"Inventory Costs". SFAS No.
151 amends the accounting for abnormal amounts of idle facility expense,
freight, handling costs, and wasted material ("spoilage") under the
guidance in ARB No. 43, Chapter 4, "Inventory Pricing". Paragraph 5 of ARB
No. 43, Chapter 4, previously stated that ". . . under some circumstances,
items such as idle facility expense, excessive spoilage, double freight,
and re-handling costs may be so abnormal as to require treatment as
current period charges. . . ." This statement requires that those items be
recognized as current-period charges regardless of whether they meet the
criterion of "so abnormal." In addition, this Statement requires that
allocation of fixed production overheads to the costs of conversion be
based on the normal capacity of the production facilities. This statement
is effective for inventory costs incurred during fiscal years beginning
after June 15, 2005. Management does not expect adoption of SFAS No. 151
to have a material impact on the Company's financial statements.
In December 2004, the FASB issued SFAS No. 152,"Accounting for Real Estate
Time-Sharing Transactions". The FASB issued this Statement as a result of
the guidance provided in AICPA Statement of Position (SOP)
04-2,"Accounting for Real Estate Time-Sharing Transactions". SOP 04-2
applies to all real estate time-sharing transactions.
Among other items, the SOP provides guidance on the recording of credit
losses and the treatment of selling costs, but does not change the revenue
recognition guidance in SFAS No. 66,"Accounting for Sales of Real Estate",
for real estate time-sharing transactions. SFAS No. 152 amends Statement
No. 66 to reference the guidance provided in SOP 04-2. SFAS No. 152 also
amends SFAS No. 67, "Accounting for Costs and Initial Rental Operations of
Real Estate Projects", to state that SOP 04-2 provides the relevant
guidance on accounting for incidental operations and costs related to the
sale of real estate time-sharing transactions. SFAS No. 152 is effective
for years beginning after June 15, 2005, with restatements of previously
issued financial statements prohibited. This statement is not applicable
to the Company.
In December 2004, the FASB issued SFAS No. 153,"Exchanges of Nonmonetary
Assets," an amendment to Opinion No. 29,"Accounting for Nonmonetary
Transactions". Statement No. 153 eliminates certain differences in the
guidance in Opinion No. 29 as compared to the guidance contained in
standards issued by the International Accounting Standards Board.
F-57
FIREPOND, INC. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF JAGUAR TECHNOLOGY HOLDINGS, LLC)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Period from December 2, 2003 (Acquisition) to October 31, 2004
- --------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recently Issued Accounting Pronouncements (Continued)
The amendment to Opinion No. 29 eliminates the fair value exception for
nonmonetary exchanges of similar productive assets and replaces it with a
general exception for exchanges of nonmonetary assets that do not have
commercial substance. Such an exchange has commercial substance if the
future cash flows of the entity are expected to change significantly as a
result of the exchange. SFAS No. 153 is effective for nonmonetary asset
exchanges occurring in periods beginning after June 15, 2005. Earlier
application is permitted for nonmonetary asset exchanges occurring in
periods beginning after December 16, 2004. Management does not expect
adoption of SFAS No. 153 to have a material impact on the Company's
financial statements.
In December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment".
SFAS 123(R) amends SFAS No. 123,"Accountung for Stock-Based Compensation",
and APB Opinion 25,"Accounting for Stock Issued to Employees." SFAS
No.123(R) requires that the cost of share-based payment transactions
(including those with employees and non-employees) be recognized in the
financial statements. SFAS No. 123(R) applies to all share-based payment
transactions in which an entity acquires goods or services by issuing (or
offering to issue) its shares, share options, or other equity instruments
(except for those held by an ESOP) or by incurring liabilities (1) in
amounts based (even in part) on the price of the entity's shares or other
equity instruments, or (2) that require (or may require) settlement by the
issuance of an entity's shares or other equity instruments. This statement
is effective (1) for public companies qualifying as SEC small business
issuers, as of the first interim period or fiscal year beginning after
December 15, 2005, or (2) for all other public companies, as of the first
interim period or fiscal year beginning after June 15, 2005, or (3) for
all nonpublic entities, as of the first fiscal year beginning after
December 15, 2005. Management is currently assessing the effect of SFAS
No. 123(R) on the Company's financial statements.
In March 2005, the FASB issued FASB Interpretation ("FIN") No. 47,
"Accounting for Conditional Asset Retirement Obligations". FIN No. 47
clarifies that the term conditional asset retirement obligation as used in
FASB Statement No. 143, "Accounting for Asset Retirement Obligations,
"refers to a legal obligation to perform an asset retirement activity in
which the timing and (or) method of settlement are conditional on a future
event that may or may not be within the control of the entity. The
obligation to perform the asset retirement activity is unconditional even
though uncertainty exists about the timing and (or) method of settlement.
Uncertainty about the timing and/or method of settlement of a conditional
asset retirement obligation should be factored into the measurement of the
liability when sufficient information exists. This interpretation also
clarifies when an entity would have sufficient information to reasonably
estimate the fair value of an asset retirement obligation.
F-58
FIREPOND, INC. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF JAGUAR TECHNOLOGY HOLDINGS, LLC)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Period from December 2, 2003 (Acquisition) to October 31, 2004
- --------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recently Issued Accounting Pronouncements (Continued)
Fin No. 47 is effective no later than the end of fiscal years ending after
December 15, 2005 (December 31, 2005 for calendar-year companies).
Retrospective application of interim financial information is permitted
but is not required. Management does not expect adoption of FIN No. 47 to
have a material impact on the Company's financial statements.
NOTE 3 - RELATED PARTY TRANSACTIONS AND RELATIONSHIPS
The Company is a wholly-owned subsidiary of Jaguar Technology Holding, LLC
which may have the ability to influence the nature and extent of the costs
incurred by the Company. Consolidation of the companies could result in
operating results or the financial position of the Company being
significantly different from those which would have been obtained if the
entities were autonomous
The Company loaned $1,175,000 to the Chief Executive Officer and majority
shareholder. The notes are due on March 7, 2009 and currently bear
interest at 3% per annum. Interest income from these notes was $29,002 for
the period from December 2, 2003 (Acquisition) to October 31, 2004.
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment at October 31, 2004 consisted of the following:
Property and equipment
Computer equipment and software $4,375,138
Furniture and fixtures 527,902
Leasehold improvements 187,000
----------
5,090,040
Less accumulated depreciation and amortization 4,819,123
----------
Property and equipment, net $ 270,917
==========
Depreciation and amortization expense was $92,734 for fiscal year 2004.
F-59
FIREPOND, INC. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF JAGUAR TECHNOLOGY HOLDINGS, LLC)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Period from December 2, 2003 (Acquisition) to October 31, 2004
- --------------------------------------------------------------------------------
NOTE 5 -NOTES RECEIVABLE AND SALE OF CERTAIN ASSETS
Notes Receivable
On January 28, 2004, FirePond entered into a Patent Purchase Agreement
("Patent Purchase Agreement") with Orion IP, LLC ("Orion"), pursuant to
which, among other things, (i) Orion purchased all of the domestic and
foreign patents (and all extensions, continuations, provisionals,
derivatives and related applications) ("Patents") of FirePond, (ii)
FirePond and Orion entered into a non-exclusive patent license agreement
with respect to the Patents and (iii) Orion issued a promissory note to
FirePond in the amount of $1,000,000 and agreed to pay certain legal fees
that had been incurred by FirePond with respect to the Patents. The
Company had previously valued its intangible assets in connection with the
Acquisition (see Note 1) at a like amount. As such, no gain or loss has
been recorded on the transaction.
On May 17, 2004, FirePond entered into an Asset Purchase Agreement ("Asset
Purchase Agreement") with edocs, Inc. ("edocs"). Pursuant to the Asset
Purchase Agreement, among other things, (i) edocs purchased certain assets
(including customer contracts code and accounts receivable) related to
FirePond's Brightware business unit ("Brightware") and (ii) edocs paid
certain cash consideration to FirePond and issued FirePond a promissory
note in the amount of $350,000.
Proceeds received and assets and liabilities involved in this transaction
were as follows:
Sale price
Cash received $ 443,966
Notes receivable received 350,000
-----------
793,966
Composition of sale
Assets 392,602
Liabilities (1,138,521)
Intangible assets 731,200
Goodwill 808,685
-----------
Net assets sold 793,966
-----------
Gain (loss) on disposal $ --
===========
Subsequent to year end, these promissory notes in the total amount of
$1,350,000 were assigned as partial payment of notes payable due to
General Motors (see Note 8).
F-60
FIREPOND, INC. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF JAGUAR TECHNOLOGY HOLDINGS, LLC)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Period from December 2, 2003 (Acquisition) to October 31, 2004
- --------------------------------------------------------------------------------
NOTE 6 - ACCRUED LIABILITIES
Accrued liabilities at October 31, 2004 consisted of the following:
Consulting and professional fees $137,576
Compensation and benefits 330,611
Sales, use and other taxes 250,142
Other 270,896
--------
Total accrued liabilities $989,225
========
NOTE 7 - NOTES PAYABLE
Notes payable at October 31, 2004 consists of the following:
Note payable to General Motors, with interest at 6.25% with
annual interest and principal payments due in April of
each year until April 2008 $6,400,000
Less current portion 900,000
----------
Long-term portion $5,500,000
==========
Future maturities of note payable at October 31, 2004 were as follows:
Year Ending
October 31,
-----------
2005 $ 900,000
2006 1,500,000
2007 2,000,000
2008 2,000,000
----------
Total $6,400,000
==========
Subsequent to year end, the Company entered into a revised settlement
agreement that called for a promissory note of $3,000,000, the assigning
of $1,350,000 of FirePond notes receivable (see Note 4) to General Motors,
as well as a cash payment of $1,600,000.
F-61
FIREPOND, INC. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF JAGUAR TECHNOLOGY HOLDINGS, LLC)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Period from December 2, 2003 (Acquisition) to October 31, 2004
- --------------------------------------------------------------------------------
NOTE 8 - ACCUMULATED OTHER COMPREHENSIVE LOSS
The components of accumulated other comprehensive loss at October 31, 2004
was as follows:
Foreign currency translation $(721,761)
---------
Accumulated other comprehensive loss $(721,761)
=========
NOTE 9 - RESTRUCTURING AND OTHER SPECIAL CHARGES
During the period from December 2, 2003 (Acquisition) to October 31, 2004,
the Company undertook plans to restructure its operations as a result of a
prolonged slowdown of global information technology spending, specifically
within the enterprise software marketplace. As such, the Company announced
a strategic realignment to further enhance its focus on the
"lead-to-order" market as well as measures to better align its cost
structure with projected revenue and preserve cash.
The Company reduced its headcount and facilities as well as wrote-off
excess equipment and terminated and restructured certain contractual
relationships. Overall, the Company terminated 11 general and
administrative, nine sales and marketing, 13 professional services and 13
development employees. The restructuring and other special charges for the
year ended October 31, 2004 totaled $3.4 million.
The significant components of the restructuring and other special charges
for the year ended October 31, 2004 were as follows:
Facilities related costs $ (109,721)
Excess contractual commitments and termination fees 3,557,014
-----------
$ 3,447,293
===========
The severance related cost component consists of a workforce reduction of
eight people. The reduction in facility related cost was due to a reversal
of expense due to a favorable settlement. The excess contractual
commitments and termination fee was mostly due to legal fees and
consulting fees for the Jaguar Technology Holdings, LLC acquisition of
FirePond.
F-62
FIREPOND, INC. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF JAGUAR TECHNOLOGY HOLDINGS, LLC)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Period from December 2, 2003 (Acquisition) to October 31, 2004
- --------------------------------------------------------------------------------
NOTE 9 - RESTRUCTURING AND OTHER SPECIAL CHARGES (Continued)
Accrued Merger and Restructuring
A summary of the short- and long-term accrued merger and restructuring is
as follows:
Fiscal Year Ended
October 31,
2004
---------------
Accrued merger and restructuring
Balance at December 2, 2003 (Acquisition) $ 809,817
Provision 3,447,293
Severance payments (353,823)
Contract termination fees (3,679,954)
---------------
Balance, end of year $ 223,333
===============
NOTE 10 - INCOME TAXES
The income tax provision (benefit) is as follows:
Fiscal Year Ended
October 31,
2004
---------------
Current income tax provision (benefit)
Federal $ --
State 1,600
---------------
1,600
Deferred income tax provision (benefit)
Federal --
State --
Change in valuation allowance --
---------------
--
---------------
Tax provision (benefit) $ 1,600
===============
F-63
FIREPOND, INC. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF JAGUAR TECHNOLOGY HOLDINGS, LLC)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Period from December 2, 2003 (Acquisition) to October 31, 2004
- --------------------------------------------------------------------------------
NOTE 10 - INCOME TAXES (Continued)
The Company's deferred tax assets (net of deferred tax liabilities) are
comprised primarily of the following:
Fiscal Year Ended
October 31,
2004
---------------
Net operating losses and credit carryforwards $ 515,000
Nondeductible reserves and accruals 719,000
Depreciation and amortization 152,000
Capitalized research and development 837,000
Other 1,000
---------------
Gross deferred tax assets 2,224,000
Less valuation allowance 2,224,000
---------------
Net deferred tax assets $ --
===============
As of October 31, 2004, the Company has available net operating losses of
approximately $11 million to reduce future federal income taxes. These
carryforwards expire beginning in fiscal year 2014 and may be subject to
review and possible adjustment by the Internal Revenue Service.
Utilization of these carryforwards may be subject to substantial
limitations due to the ownership change limitations provided by the
Internal Revenue Code of 1986. A valuation allowance has been provided for
the full amount of the deferred tax assets, due to the uncertainty of
realization.
NOTE 11 - COMMITMENTS AND CONTINGENCIES
Litigation
On October 19, 2001, General Motors Corporation filed a complaint against
the Company in the Superior Court of Massachusetts, Middlesex County. The
complaint alleges, among other things, a breach of contract under
agreements entered into in 1994, as amended; anticipatory repudiation in
the Spring of 2000 of agreements entered into in 1994, as amended; unjust
enrichment; establishment of a constructive trust; rescission and
restitution based upon failure of consideration as well as extortion and
coercion relating to agreements entered into in 1994, as amended; breach
of the covenant of good faith and fair dealing; fraud; as well as
violation of Chapter 93A of the General Laws of the Commonwealth of
Massachusetts relating to unfair and deceptive trade practices. General
Motors' claims further relate to license agreements, services agreements
and a general release entered into with the Company in May 2000.
This matter was settled on April 14, 2004, per the terms of the
settlement, the Company estimated and accrued a liability of $7,000,000 as
of October 31, 2003. During the period ended October 31, 2004, the
settlement was converted into a note payable agreement (see Note 8).
F-64
FIREPOND, INC. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF JAGUAR TECHNOLOGY HOLDINGS, LLC)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Period from December 2, 2003 (Acquisition) to October 31, 2004
- --------------------------------------------------------------------------------
NOTE 11 - COMMITMENTS AND CONTINGENCIES (Continued)
On or about December 1, 2004, Freightliner LLC filed a complaint against
the Company. The plaintiff alleged breach of contacts, breach of warranty
arising out of the parties' License Agreement and Services Agreement. This
matter was settled on August 1, 2005, per the terms of the settlement the
Company agreed to pay $3,000,000 over a period of 70 days. The settlement
was covered by the Company's insurance carrier, Steadfast Insurance
Company ("Steadfast"), which provided the full amount for the settlement.
Firepond has agreed that Steadfast has the right to seek a judicial
determination as to the reasonableness of the settlement value of the
Freightliner claim and the $3,000,000 settlement. Firepond has
acknowledged and granted Steadfast the right to recoup from Firepond the
amount which represents the difference between the judicially determined
settlement value and the $3,000,000 settlement, if the court determines
that the reasonable settlement value of the Freightliner claim is less
then $3,000,000. The amount to be reimbursed to Steadfast, if any, is not
estimate able and is not accrued on the financial statements at October
31, 2004.
Beginning in August 2001, a number of securities class action complaints
were filed in the Southern District of New York seeking an unspecified
amount of damages on behalf of an alleged class of persons who purchased
shares of the Company's common stock between the date of its initial
public offering and December 6, 2000. The complaints name as defendants
the Company and certain of its directors and officers, Fleet Boston
Robertson Stephens, and other parties as underwriters of the Company's
initial public offering. This matter was settled on or about June 8, 2004
and this settlement is subject to final approval by the court. On August
4, 2004 the plaintiffs and issuer defendants separately filed replies to
the underwriter defendants' objectives to the settlement. The court
granted the preliminary approval motion on February 15, 2005, subject to
certain modifications. The parties are directed to report back to the
court regarding the modifications.
If the parties are able to agree upon the required modifications, and such
modifications are acceptable to the court, notice will be given to all
class members of the settlement, a "fairness" hearing will be held and if
the court determines that the settlement is fair to the class members, the
settlement will be approved. There can be no assurance that this proposed
settlement will be approved and implemented.
The Company is also subject to various other claims and legal actions
arising in the ordinary course of business. In the opinion of management,
after consultation with legal counsel, the ultimate disposition of these
matters is not expected to have a material effect on the Company's
business, financial condition, or results of operations.
Leases
The Company leases its office space under operating leases expiring at
various dates through 2011. For the period from December 2, 2003
(Acquisition) to October 31, 2004, rent expense under these agreements
totaled approximately $340,744.
F-65
FIREPOND, INC. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF JAGUAR TECHNOLOGY HOLDINGS, LLC)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Period from December 2, 2003 (Acquisition) to October 31, 2004
- --------------------------------------------------------------------------------
NOTE 11 - COMMITMENTS AND CONTINGENCIES (Continued)
Leases (Continued)
At October 31, 2004, the minimum future obligations under operating
leases, exclusive of sublease income are as follows:
For Fiscal
Year Ended
October 31,
-----------
2005 $ 279,000
2006 254,000
2007 260,000
2008 257,000
Thereafter 193,000
-----------
$ 1,243,000
===========
NOTE 12 - STOCKHOLDERS' EQUITY
Stock Dividend
On December 3, 2003, the Board of Directors authorized a stock dividend of
99,000 shares of the Corporation's common stock, par value $0.01, for each
share of Common Stock currently outstanding.
Stock Options and Warrants
In connection with the acquisition of FirePond by Jaguar Technology
Holdings, LLC, FirePond paid out $87,462 in settlement of all outstanding
options and warrants. No options to purchase shares granted prior to the
acquisition date remained outstanding after the acquisition. No additional
grants to purchase shares have been issued since the acquisition date.
NOTE 13 - PROFIT-SHARING PLAN
The Company sponsors a defined contribution profit-sharing plan for US
employees which conforms to Internal Revenue Service provisions for 401(k)
plans. Employees must be at least 21 years of age to be eligible to
participate in the plan. Participants may contribute up to 100% of their
earnings. The Company has the option to match 50% of the first 2% and 25%
of the next 4% of employee contributions and may make additional
contributions as determined by the Board of Directors. There were no
employer matching contributions in the period from December 2, 2003
(Acquisition) to October 31, 2004.
F-66
FIREPOND, INC. AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF JAGUAR TECHNOLOGY HOLDINGS, LLC)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Period from December 2, 2003 (Acquisition) to October 31, 2004
- --------------------------------------------------------------------------------
NOTE 14 - SUBSEQUENT EVENTS
$2,000,000 Debenture
On September 13, 2005, the Company, through a newly organized entity FP
Technology Holdings Inc ("FP Technology"), closed and funded a $2,000,000
debenture. The debenture matures on September 12, 2006. A related warrant
agreement grants the owner the right to convert the debenture into equity
upon the occurrence of certain events. The debenture is secured by the
assets of FP Technology. The debenture requires that FP Technology meet
certain financial covenants during its term, including interest coverage,
cash flow and current ratios as well as minimum revenue targets.
As part of closing the $2,000,000 debenture, Firepond agreed to reorganize
itself into a newly organized entity, FP Technology. FP Technology was
formed on August 31, 2005. All the assets and employees of Firepond and a
substantial portion of its liabilities were transferred to FP Technology
on September 13, 2005. Jaguar Technology Holdings remains the 100% owner
of FP Technology. The Trident debenture was funded into FP Technology.
GM Note Obligation
Shortly following the funding of the $2,000,000 debenture and pursuant to
an agreement with General Motors Corporation, FP Technology paid
$1,250,000 to General Motors as partial payment for the GM settlement
obligation assumed from Firepond, Inc. See Note 8. As part of this
transaction, the GM obligation was reduced from $3,000,000 to $250,000. In
addition, GM released its security interest in the assets transferred to
FP Technology by Firepond. It also consented to the transfer of assets.
The remaining debenture funds were deposited to the accounts of FP
Technology for general corporate uses.
F-67
FIREPOND, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED
OCTOBER 31, 2003
F-68
FIREPOND, INC. AND SUBSIDIARIES
CONTENTS
October 31, 2003
- --------------------------------------------------------------------------------
INDEPENDENT AUDITOR'S REPORT
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheet
Consolidated Statement of Income
Consolidated Statement of Stockholders' Equity (Deficit)
Consolidated Statement of Cash Flows
Notes to Consolidated Financial Statements
F-69
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Firepond, Inc. and subsidiaries
We have audited the consolidated balance sheets of Firepond, Inc. and
subsidiaries as of October 31, 2003, and the related consolidated statements of
income, stockholders' equity (deficit), and cash flows for the years then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Firepond, Inc. and subsidiaries as
of October 31, 2003, and the results of their operations and their cash flows
for the years then ended in conformity with accounting principles generally
accepted in the United States of America.
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
May 19, 2004
F-70
FIREPOND, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
October 31, 2003
- --------------------------------------------------------------------------------
ASSETS
Current assets
Cash and cash equivalents $16,059,697
Short-term investments, available for sale 998,640
Accounts receivable, net of allowance for doubtful
accounts of $190,000 1,150,328
Unbilled revenue 10,820
Assets to be sold 2,496,443
Other current assets 490,835
-----------
Total current assets 21,206,763
Property and equipment, net 741,810
Other intangible assets, net of accumulated amortization of $180,367 34,356
Restricted cash 190,000
Other assets 37,258
-----------
Total assets $22,210,187
===========
The accompanying notes are an integral part of these financial statements.
F-71
FIREPOND, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
October 31, 2003
- --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 427,080
Accrued liabilities 2,137,676
Accrued legal settlement 7,000,000
Accrued merger and restructuring costs 492,724
Deferred revenue 3,085,830
Liabilities associated with assets to be sold 3,059,496
-------------
Total current liabilities 16,202,806
Long term accrued merger and restructuring costs 120,317
Commitments and contingencies
Stockholders' equity
Preferred stock, $0.10 par value
Authorized - 5,000,000 shares
Issued and outstanding - 0 shares --
Common stock, $0.10 par value
Authorized - 100,000,000 shares
Issued and outstanding 3,671,169 shares 367,117
Additional paid-in capital 198,893,792
Accumulated deficit (192,646,465)
Loans receivable (158,000)
Deferred compensation (6,327)
Accumulated other comprehensive loss (563,053)
-------------
Total shareholders' equity 5,887,064
-------------
Total liabilities and stockholders' equity $ 22,210,187
=============
The accompanying notes are an integral part of these financial statements.
F-72
FIREPOND, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
For the Year Ended October 31, 2003
- --------------------------------------------------------------------------------
Revenues
License $ 1,919,227
Services and maintenance 6,802,325
------------
Total revenue 8,721,552
------------
Cost of revenue
License 177,668
Product-related services and maintenance 3,075,645
------------
Total cost of revenue 3,253,314
------------
Gross profit 5,468,238
Operating expenses
Sales and marketing 2,771,918
Research and development 4,002,654
General and administrative 8,919,651
Legal settlement expense 7,000,000
Amortization of intangible assets 103,067
Restructuring and other special charges 1,047,060
------------
Total operating expenses 23,844,350
------------
Loss from operations (18,376,112)
Other income (expense), net
Interest income 305,028
Other income 361,384
Total other income (expense), net 666,412
Net loss before discontinued operations (17,709,700)
Loss from discontinued operations (714,454)
Loss on disposal of discontinued operations (2,127,950)
------------
Net loss $(20,552,104)
============
The accompanying notes are an integral part of these financial statements.
F-73
FIREPOND, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
For the Year Ended October 31, 2003
- --------------------------------------------------------------------------------
Net loss per share - basic and diluted
Loss from continuing operations $ (4.82)
Loss from discontinued operations (0.77)
-------------
Basic and diluted loss per share (5.59)
=============
Basic and diluted weighted average common shares outstanding 3,674,651
=============
The accompanying notes are an integral part of these financial statements.
F-74
FIREPOND, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
For the Year Ended October 31, 2003
- --------------------------------------------------------------------------------
Preferred Stock Common Stock
----------------------- ---------------------------
$0.10 $0.10 Additional Accumulated
Shares Par Value Shares Par Value Paid-in Capital Deficit
---------- ---------- ---------- ------------- ------------- -------------
Balance, October 31, 2002 -- $ -- 3,684,983 $ 368,498 $ 198,934,612 $(172,094,361)
Loan forgiveness
to employees (13,814) (1,381) (40,820)
to CEO -- -- -- -- -- --
Stock-based compensation
expense -- -- -- -- -- --
Currency translation
adjustment -- -- -- -- -- --
Reserve for loss on disposal
of discontinued operations --
Unrealized net loss on
investments -- -- -- -- -- --
Net loss (20,552,104)
Comprehensive loss for the
year ended October 31, 2003 -- -- -- -- -- --
---------- ---------- ---------- ------------- ------------- -------------
Balance, October 31, 2003 $ -- $ -- $3,671,169 $ 367,117 $ 198,893,792 $(192,646,465)
========== ========== ========== ============= ============= =============
Accumulated Other
Loans Deferred Comprehensive Stockholders' Comprehensive
Receivable Compensation Income (Loss) Equity (Deficit) Income (Loss)
------------- ------------- ------------- ------------- -------------
Balance, October 31, 2002 $ (4,287,489) $ (9,801) $ (1,540,063) $ 21,371,396 $ --
Loan forgiveness
to employees 272,363 230,162
to CEO 3,857,126 -- -- 3,857,126 --
Stock-based compensation
expense -- 3,474 -- 3,474 --
Currency translation
adjustment -- -- (1,195,998) (1,195,998) (1,195,998)
Reserve for loss on disposal
of discontinued operations 2,127,950 2,127,950 2,127,950
Unrealized net loss on
investments -- -- 45,058 45,058 45,058
Net loss (20,552,104) (20,552,104)
Comprehensive loss for the
year ended October 31, 2003 -- -- -- -- --
------------- ------------- ------------- ------------- -------------
Balance, October 31, 2003 $ (158,000) $ (6,327) $ (563,053) $ 5,887,064 $ (19,575,094)
============= ============= ============= ============= =============
The accompanying notes are an integral part of these financial statements.
F-75
FIREPOND, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Year Ended October 31, 2003
- --------------------------------------------------------------------------------
Cash flows from operating activities
Net loss $(20,552,104)
Adjustments to reconcile net loss to net cash used in operating activities
Stock-based compensation expense 233,633
Writedown of officer loan receivable 3,857,126
Loss on disposal of discontinued operations 2,127,950
Depreciation and amortization 1,461,041
Discontinued operations 414,856
(Increase) decrease in
Accounts receivables 377,123
Unbilled services 97,557
Prepaid expenses and other assets 338,376
Decrease in
Accounts payable (653,888)
Accrued liabilities 5,626,347
Restructuring accrual (1,812,999)
Deferred revenue (1,084,035)
------------
Net cash used in operating activities (9,569,017)
------------
Cash flows from investing activities
Proceeds from sale and maturities of short term investments 14,690,969
Purchase of property and equipment (72,806)
Decrease (increase) in restricted cash 199,197
------------
Net cash used in investing activities 14,817,360
------------
Cash flows from financing activities
Payments on note payable --
Proceeds from stocks options and warrants exercised --
------------
Net cash provided by financing activities --
------------
Effect of exchange rate changes on cash and cash equivalents (1,150,572.0)
------------
Net (decrease) increase in cash and cash equivalents 4,097,771
Cash and cash equivalents, beginning of period 11,961,926
------------
Cash and cash equivalents, end of period $ 16,059,697
============
Supplemental cash flow information:
Interest paid $ 3,822
============
The accompanying notes are an integral part of these financial statements.
F-76
FIREPOND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 31, 2003
- --------------------------------------------------------------------------------
NOTE 1 - ORGANIZATION AND LINES OF BUSINESS
Firepond, Inc., together with its wholly-owned subsidiaries (collectively,
the "Company") considers itself to be a pioneer in software solutions that
help companies with complex products convert more leads into accurate
orders. Companies with complex products may achieve a measurable and
meaningful return on investment in Firepond, Inc. technology by reducing
their total cost of sales, whether they sell through a direct sales force,
an indirect channel network or via the web. The Company changed ownership
subsequent to year end (see Note 12).
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Firepond, Inc. and its wholly owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in the
accompanying financial statements. Certain prior year amounts have been
reclassified to conform to the current year presentation.
Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to
make estimates and assumptions that affect the amounts reported in the
consolidated financial statements and accompanying notes. Actual results
could differ from those estimates.
Revenue Recognition
The Company recognizes revenue based on the provisions of the American
Institute of Certified Pubic Accountants (AICPA) Statement of Position,
No. 97-2, "Software Revenue Recognition" ("SOP 97-2"), as amended, and
Statement of Position No. 81-1, "Accounting for Performance of
Construction-Type and Certain Production-Type Contracts" ("SOP 81-1").
The Company generates revenue from license and service revenue. License
revenue is generated from licensing the rights to the use of the Company's
packaged software products. Service revenue is generated from sales of
maintenance and, consulting and training services performed for customers
that license the Company's products.
The Company has concluded that generally, where the Company is responsible
for implementation services for the SalesPerformer product suite and its
components, the implementation services are essential to the customer's
use of the packaged software products. In such arrangements, the Company
recognizes revenue following the percentage-of-completion method over the
implementation period. Percentage of completion is measured by the
percentage of implementation hours incurred to date compared to estimated
total implementation hours.
F-77
FIREPOND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 31, 2003
- --------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Revenue Recognition (Continued)
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. When the current estimates of total contract revenue and
contract cost indicate a loss, a provision for the entire loss on the
contract is recorded.
In situations where the Company is not responsible for implementation
services for the SalesPerformer product suite, the Company recognizes
revenue on delivery of the packaged software if there is persuasive
evidence of an arrangement, collection is probable and the fee is fixed or
determinable. In situations where the Company is not responsible for
implementation services for the SalesPerformer product suite; however, is
obligated to provide unspecified additional software products in the
future, the Company recognizes revenue as a subscription over the term of
the commitment period.
For separate sales of the eServicePerformer product line, which was
acquired in connection with the Brightware transaction, the Company
recognizes revenue on delivery of the packaged software if there is
persuasive evidence of an arrangement, collection is probable, and the fee
is fixed or determinable. The Company has determined that implementation
services are not essential to the functionality of the eServicePerformer
product. In situations where the Company enters into a license agreement
for both its SalesPerformer Suite and its eServicePerformer product and is
responsible for implementation services, it will recognize revenue for the
entire arrangement under SOP 81-1.
For product sales that are recognized on delivery, the Company will
execute contracts that govern the terms and conditions of each software
license, as well as maintenance arrangements and other services
arrangements. If an arrangement includes an acceptance provision,
acceptance occurs upon the earlier of receipt of a written customer
acceptance or expiration of the acceptance period.
Revenue under multiple element arrangements, which may include several
different software products and services sold together, is allocated to
each element based on the residual method in accordance with Statement of
Position, No. 98-9, "Software Revenue Recognition with Respect to Certain
Arrangements" ("SOP 98-9"). The Company uses the residual method when
vendor-specific objective evidence of fair value does not exist for one of
the delivered elements in the arrangement. Under the residual method, the
fair value of the undelivered elements is deferred and subsequently
recognized. The Company has established sufficient vendor-specific
objective evidence for professional services, training and maintenance and
support services based on the price charged when these elements are sold
separately. Accordingly, software license revenue is recognized under the
residual method in arrangements in which software is licensed with
professional services, training, and maintenance and support services.
F-78
FIREPOND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 31, 2003
- --------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Revenue Recognition (Continued)
Revenue from maintenance services is recognized ratably over the term of
the contract, typically one year. Consulting revenue is primarily related
to implementation services performed on a time-and-materials basis under
separate service arrangements. Revenue from consulting and training
services is recognized as services are performed.
The Company has recorded deferred revenue on amounts billed or collected
by the Company before satisfying the above revenue recognition criteria.
Deferred revenue at October 31, 2003 consisted of the following:
Product license $ 424,583
Product-related services 2,422,810
Product-related maintenance 238,437
-------------
$ 3,085,830
=============
Cost of Revenue
Cost of licenses includes royalties, media, product packaging,
documentation, other production costs and the amortization of capitalized
software development costs.
Cost of product-related services and maintenance and cost of custom
development services revenue consist primarily of salaries, related costs
for development, consulting, training and customer support personnel,
including cost of services provided by third-party consultants engaged by
the Company.
Advertising Costs
Advertising costs are expensed as incurred.
Income Taxes
Income taxes are accounted for based on guidance in Standard Financial
Accounting Statement No. 109, "Accounting for Income Taxes" ("SFAS No.
109"). Under SFAS No. 109, deferred income tax liabilities and assets are
determined based on the difference between the financial reporting and tax
bases of assets and liabilities using currently enacted tax rates.
F-79
FIREPOND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 31, 2003
- --------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand and in banks. The
Company maintains its cash deposits at numerous banks located throughout
the United States, which at times, may exceed federally insured limits.
The Company has not experienced any losses in such accounts and believes
it is not exposed to any significant risk on cash and cash equivalents.
Cash equivalents are short-term, highly liquid investments with original
maturity dates of three months or less. Cash equivalents consist of money
market, commercial paper and U.S. federal agency securities. Cash
equivalents are carried at cost, which approximates fair market value.
Short-term Investments
In accordance with SFAS No. 115 and based on the Company's intentions
regarding these instruments, the Company has classified all short-term
investments as available-for-sale. These investments consist primarily of
commercial paper and U.S. corporate debt securities with an original
maturity of less than a year from the balance sheet date. These
investments are carried at their market value. Unrealized investment gains
and temporary losses are included as a separate component of stockholders'
equity.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets, as
follows:
Computer equipment and software 2 to 5 years
Furniture and fixtures 7 years
Leasehold improvements 5 years
The cost of assets retired or disposed of and the accumulated depreciation
thereon are removed from the accounts with any gain or loss realized upon
sale or disposal credited or charged to operations, respectively.
Impairment of Long-Lived Assets
The Company evaluates the carrying value of long-lived assets, including
intangible assets, based on the guidance in SFAS No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets" which superseded SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." The Company's evaluation considers
non-financial data such as changes in the operating environment and
business strategy, competitive information, market trends and operating
performance. Based on this evaluation, the Company recorded an asset
impairment charge of $102,644 during fiscal year 2003 in connection with a
restructuring of the Company's operations.
F-80
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Concentration of Credit Risk
SFAS No. 105, "Disclosure of Information about Financial Instruments with
Off-Balance-Sheet Risk and Financial Instruments with Concentrations of
Credit Risk," requires disclosure of any significant of-balance sheet
risks and credit risk concentrations. The Company has no significant
of-balance-sheet risks. Financial instruments that potentially subject the
Company to concentrations of credit risk are principally cash and cash
equivalents, short-term investments, and accounts receivable. The Company
maintains its cash and cash equivalents with established financial
institutions. The Company's credit risk is managed by investing its cash
in high quality money market instruments and high quality corporate
issuers. Concentration of credit risk related to accounts receivable and
unbilled services is limited to several customers to whom the Company
makes substantial sales. The Company performs periodic credit evaluations
of its customers and has recorded allowances for estimated losses. The
Company has not experienced any material losses related to receivables
from individual customers, geographic regions or groups of customers.
During the year ended October 31, 2003, the Company conducted business
with three customers whose sales made up 12.3%, 12.4%, and 19.5% of net
revenues.
Net Loss Per Share
Net loss per share is computed based on the guidance of SFAS No. 128,
"Earnings per Share" ("SFAS No. 128"). SFAS No. 128 requires companies to
report both basic loss per share, which is computed by dividing the net
loss by the weighted average number of common shares outstanding, and
diluted loss per share, which is computed by dividing the net loss by the
weighted average number of common shares outstanding plus the weighted
average dilutive potential common shares outstanding using the treasury
stock method. As a result of the losses incurred by the Company for all
fiscal periods presented, all potential common shares were anti-dilutive
and were excluded from the diluted net loss per share calculations.
Stock-Based Compensation
Stock-based awards to non-employees are accounted for using the fair value
method in accordance with SFAS No. 123, "Accounting for Stock-Based
Compensation," and EITF Issue No. 96-18, "Accounting for Equity
Instruments that are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling Goods or Services." All transactions in which
goods or services are the consideration received for the issuance of
equity instruments are accounted for based on the fair value of the
consideration received or the fair value of the equity instrument issued,
whichever is more reliably measurable. The measurement date used to
determine the fair value of the equity instrument issued is the earlier of
the date on which the third-party performance is complete or the date on
which it is probable that performance will occur.
F-81
FIREPOND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 31, 2003
- --------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Stock-Based Compensation (Continued)
In December 2002, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure," ("SFAS No. 148") effective for fiscal years ending after
December 15, 2002. SFAS No. 148 amends SFAS No. 123 to provide alternative
methods of transition to the fair value method of accounting for
stock-based employee compensation. SFAS No. 148 also amends the disclosure
provisions of SFAS No. 123 to require disclosure in the summary of
significant accounting policies of the effects of an entity's accounting
policy with respect to stock-based employee compensation on reported net
income and earnings per share in annual and interim financial statements.
SFAS No. 148 does not amend SFAS No. 123 to require companies to account
for their employee stock-based awards using the fair value method. The
disclosure provisions are required, however, for all companies with
stock-based employee compensation, regardless of whether they utilize the
fair value method of accounting described in SFAS No. 123 or the intrinsic
value method described in Accounting Principles Board ("APB") Opinion No.
25, "Accounting for Stock Issued to Employees."
The Company has adopted the disclosure requirements of SFAS No. 148
effective January 1, 2003. The adoption of this standard did not have a
significant impact on the Company's financial condition or operating
results.
The Company accounts for stock-based awards to employees using the
intrinsic value method in accordance with APB Opinion No. 25 and FIN No.
44. As permitted by SFAS No. 123, as amended by SFAS No. 148, the Company
has chosen to continue to account for its employee stock-based
compensation plans under APB Opinion No. 25 and provide the expanded
disclosures specified in SFAS No. 123, as amended by SFAS No. 148.
Had compensation cost for the Company's stock option plan been determined
based on the fair value at the grant date for awards consistent with the
provisions of SFAS No. 123, the Company's net income (loss) and earnings
(loss) per share for the years ended December 31, 2003, 2002, and 2001
would have been decreased to the pro forma amounts indicated below:
F-82
FIREPOND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 31, 2003
- --------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Stock-Based Compensation (Continued)
Net loss applicable to shareholders, as reported $(20,552,104)
Net loss applicable to shareholders, pro forma (21,140,682)
Basic and diluted net loss per share, as reported $ (5.59)
Basic and diluted net loss per share, pro forma (5.75)
For purposes of computing the pro forma disclosures required by SFAS No.
123, the fair value of each option granted to employees and directors is
estimated using the Black-Scholes option-pricing model with the following
weighted-average assumptions for the years ended October 31, 2003:
dividend yields of 0%; expected volatility of 35%; risk-free interest
rates of 3%; and expected lives of 5 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options, which do not have vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions, including the
expected stock price volatility. 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.
Foreign Currency Translation
The local currency is the functional currency of the Company's
subsidiaries. Assets and liabilities are translated into U.S. dollars at
exchange rates in effect at the balance sheet date, and income and expense
items are translated at average rates for the period. Gains and losses
arising from translation are accumulated as a separate component of
stockholder's equity. Gains and losses arising from transactions
denominated in foreign currencies are included in other income.
Computer Software Development Costs and Research and Development Expenses
The Company incurs software development costs associated with its licensed
products as well as new products. Since June 1997, the Company 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. Because the development costs incurred
between the time technological feasibility is established and general
release of the product are not material, the Company expenses these costs
as incurred.
Discontinued Operations
On August 26, 2003, the Company decided to discontinue the operations of
all foreign subsidiaries. The results of operations of the foreign
subsidiaries of the Company have been classified as discontinued
operations in the accompanying consolidated statements of operations for
the fiscal year ended October 31, 2003.
F-83
FIREPOND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 31, 2003
- --------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Discontinued Operations (Continued)
The assets and liabilities of the discontinued operations at fiscal year
ended 2003 consisted of the following:
Cash $1,528,125
Accounts receivable 449,791
Property, plant and equipment, net 35,830
Other assets 482,697
----------
Total assets of discontinued operations $2,496,443
==========
Accounts payable $ 64,341
Accrued liabilities 1,440,391
Accrued restructuring 100,053
Deferred revenue 1,454,711
----------
Total liabilities of discontinued operations $3,059,496
==========
NOTE 3 - SHORT-TERM INVESTMENTS
The Company accounts for marketable securities in accordance with the
provisions of SFAS No. 115, which states that debt and equity securities
that have readily determinable fair values are to be classified in three
categories:
o Held to maturity - the positive intent and ability to hold to
maturity. Amounts are reported at amortized cost and adjusted for
amortization of premiums and accretion of discounts.
o Trading securities - bought principally for the purpose of selling
them in the near term. Amounts are reported at fair value with
unrealized gains and losses included in earnings.
o Available-for-sale - not classified in one of the above categories.
Amounts are reported at fair value with unrealized gains and losses
excluded from earnings and reported separately as a component of
shareholders' equity.
The Company has classified all investments as available-for-sale
securities. As of October 31, 2003, short-term investments are summarized
as shown below. The difference between fair value and amortized cost is
not material.
Fair Value
----------
Short-term investments:
Commercial paper $ 998,640
------------
Total short-term investments $ 998,640
============
F-84
FIREPOND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 31, 2003
- --------------------------------------------------------------------------------
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment at October 31, 2003 consisted of the following:
Property and equipment:
Computer equipment and software $5,010,919
Furniture and fixtures 527,902
Leasehold improvements 167,085
----------
5,705,906
Less accumulated depreciation and amortization 4,964,096
----------
Property and equipment, net $ 741,810
==========
Depreciation expense was approximately $1,353,234 for fiscal 2003.
NOTE 5 - ACCRUED LIABILITIES
Accrued liabilities at October 31, 2003 consisted of the following:
Consulting and professional fees $ 620,607
Compensation and benefits 493,825
Sales, use and other taxes 552,308
Facilities and office expenses 131,547
Legal settlement 7,000,000
Other 339,389
----------
Total accrued liabilities $9,137,676
==========
NOTE 6 - ACCUMULATED OTHER COMPREHENSIVE LOSS
The components of accumulated other comprehensive loss at October 31, 2003
was as follows:
Unrealized gain on short-term and
long-term investments $ 9,058
Foreign currency translation (572,111)
---------
Accumulated other comprehensive loss $(563,053)
=========
F-85
FIREPOND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 31, 2003
- --------------------------------------------------------------------------------
NOTE 7 - RESTRUCTURING AND OTHER SPECIAL CHARGES
During the year ended October 31, 2003, the Company undertook plans to
restructure its operations as a result of a prolonged slowdown of global
information technology spending, specifically within the enterprise
software marketplace. As such, the Company announced a strategic
realignment to further enhance its focus on the "lead-to-order" market as
well as measures to better align its cost structure with projected revenue
and preserve cash. The Company reduced its headcount and facilities as
well as wrote-off excess equipment and terminated and restructured certain
contractual relationships. Overall, the Company terminated 11 general and
administrative, nine sales and marketing, 13 professional services and 13
development employees. The restructuring and other special charges for the
year ended October 31, 2003 totaled $1 million.
The significant components of the restructuring and other special charges
were as follows:
Employee severance costs $ 700,196
Facilities related costs 414,543
Impairment of property and equipment 5,935
Excess contractual commitments and termination fees (41,333)
Other (32,281)
-----------
$ 1,047,060
===========
The facilities related cost component consists of idle lease space and
lease termination fees associated with closing the Company's Netherlands,
United Kingdom and San Rafael, California and Boston facilities. The
Company's assumptions considered current market value of similar
properties and ability, if any, to sublease the idle space or any other
future use.
The impairment of property and equipment charges consisted of excess
computer equipment and furniture and fixtures as well as leasehold
write-offs resulting from reductions-in-force and office closures.
F-86
FIREPOND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 31, 2003
- --------------------------------------------------------------------------------
NOTE 7 - RESTRUCTURING AND OTHER SPECIAL CHARGES (Continued)
Accrued Merger and Restructuring
A summary of the short- and long-term accrued merger and restructuring is
as follows:
Fiscal Year Ended
October 31, 2003
----------------
Accrued merger and restructuring:
Balance, beginning of year $ 1,941,571
Provision 1,266,337
Reversal of prior restructurings (227,916)
Purchase price adjustment --
Severance payments (696,333)
Facilities related payments (1,680,690)
Contract termination fees (18,463)
Other payments (12,841)
Asset impairment write-offs 41,376
----------------
Balance, end of year $ 613,041
================
The short-term portion of the accrued merger and restructuring is
approximately $492,724 and the long-term portion is approximately
$120,317. The long-term portion of the accrued merger and restructuring
will be paid out through fiscal 2006. The balance of the restructuring as
of October 31, 2003 will be paid out as follows: severance payments
through January 31, 2004, facilities related payments through December 7,
2004 and contract termination fees and other payments through December, 30
2005.
F-87
FIREPOND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 31, 2003
- --------------------------------------------------------------------------------
NOTE 8 - INCOME TAXES
The income tax provision (benefit) is as follows:
Fiscal Year Ended
October 31, 2003
----------------
Current income tax provision (benefit)
Federal $ --
State 1,600
----------------
1,600
----------------
Deferred income tax provision (benefit)
Federal 34,707,000
State (1,803,000)
Change in valuation allowance (32,904,000)
----------------
--
----------------
Tax provision (benefit) $ 1,600
================
The Company's deferred tax assets (net of deferred tax liabilities) are
comprised primarily of the following:
Fiscal Year Ended
October 31, 2003
----------------
Net operating losses and credit carryforwards $ 6,651,000
Nondeductible reserves and accruals 4,671,000
Depreciation and amortization 297,000
Capitalized research and development 10,372,000
Other --
----------------
Gross deferred tax assets 21,991,000
Valuation allowance (21,991,000)
----------------
Net deferred tax assets $ --
================
As of October 31, 2003, the Company has available net operating losses of
approximately $11 million to reduce future federal income taxes. These
carryforwards expire beginning in fiscal year 2012 and may be subject to
review and possible adjustment by the Internal Revenue Service.
Utilization of these carryforwards may be subject to substantial
limitations due to the ownership change limitations provided by the
Internal Revenue Code of 1986. A valuation allowance has been provided for
the full amount of the deferred tax assets, due to the uncertainty of
realization.
F-88
FIREPOND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 31, 2003
- --------------------------------------------------------------------------------
NOTE 8 - INCOME TAXES (Continued)
Included in the valuation allowance at October 31, 2003 is approximately
$52,390,000 for deferred tax assets attributable to the exercise of stock
options for which subsequently recognized tax benefits, if any, will be
credited directly to additional paid-in capital.
NOTE 9 - COMMITMENTS AND CONTINGENCIES
Litigation
On October 19, 2001, General Motors Corporation filed a complaint against
the Company in the Superior Court of Massachusetts, Middlesex County. The
complaint alleges, among other things, a breach of contract under
agreements entered into in 1994, as amended; anticipatory repudiation in
the spring of 2000 of agreements entered into in 1994, as amended; unjust
enrichment; establishment of a constructive trust; rescission and
restitution based upon failure of consideration as well as extortion and
coercion relating to agreements entered into in 1994, as amended; breach
of the covenant of good faith and fair dealing; fraud; as well as
violation of Chapter 93A of the General Laws of the Commonwealth of
Massachusetts relating to unfair and deceptive trade practices. General
Motors' claims further relate to license agreements, services agreements
and a general release entered into with the Company in May 2000. This
matter was settled on April 14, 2004, per the terms of the settlement, the
Company estimated and accrued a liability of $7,000,000 as of October 31,
2003.
Beginning in August 2001, a number of securities class action complaints
were filed in the Southern District of New York seeking an unspecified
amount of damages on behalf of an alleged class of persons who purchased
shares of the Company's common stock between the date of its initial
public offering and December 6, 2000. The complaints name as defendants
the Company and certain of its directors and officers, Fleet Boston
Robertson Stephens, and other parties as underwriters of the Company's
initial public offering. This matter was settled on or about June 8, 2004
and this settlement is subject to final approval by the court.
The Company is also subject to various other claims and legal actions
arising in the ordinary course of business. In the opinion of management,
after consultation with legal counsel, the ultimate disposition of these
matters is not expected to have a material effect on the Company's
business, financial condition, or results of operations.
Leases
The Company leases its office space under operating leases expiring at
various dates through 2011. Rent expense under these agreements totaled
approximately $616,584.
F-89
FIREPOND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 31, 2003
- --------------------------------------------------------------------------------
NOTE 9 - COMMITMENTS AND CONTINGENCIES (Continued)
Leases (Continued)
At October 31, 2003, the minimum future obligations under operating
leases, exclusive of sublease income are as follows:
For the Fiscal Year Ended October 31,
2004 $ 284,000
2005 250,000
2006 255,000
2007 260,000
2008 265,000
Thereafter 193,000
----------
$1,507,000
==========
Letter of Credit
The Company is obligated to maintain an irrevocable standby letter of
credit of approximately $190,000, which would be payable upon default of
the Company's non-cancelable facility lease that was entered into in May
1999. The letter of credit has been collateralized by cash, which has been
classified as restricted cash in the accompanying consolidated balance
sheet.
NOTE 10 - STOCKHOLDERS' EQUITY
Stock Options and Warrants
The Company has adopted four stock option plans: the 1997 Stock Option
Plan in May 1997, the 1999 Director Stock Option Plan in September 1999,
the 1999 Stock Option and Grant Plan in November 1999, and the Brightware
Acquisition Stock Option Plan in January 2001. For all four stock options
plans, the exercise price and vesting are determined by the board of
directors at the date of grant and options generally vest over three years
and expire five years after the date of grant.
On November 8, 1999, the Board of Directors adopted and on January 4, 2000
the stockholders approved an increase in the number of shares of common
stock reserved for issuance under the 1997 Stock Option Plan from 789,681
shares to 939,681 shares.
As of October 31, 2002, 139,385 shares were available for future issuance
under this plan.
The Company has reserved 50,000 shares of common stock for issuance under
the 1999 Director Stock Option Plan. As of October 31, 2003, 13,189 shares
were available for future issuance under this plan. On February 27, 2001,
the Board of Directors adopted and on March 22, 2001 the stockholders
approved an increase in the number of shares of common stock reserved for
issuance under the 1999 Stock Option and Grant Plan from 300,000 to
800,000 shares.
F-90
FIREPOND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 31, 2003
- --------------------------------------------------------------------------------
NOTE 10 - STOCKHOLDERS' EQUITY (Continued)
Stock Options and Warrants (Continued)
As of October 31, 2003, 739,866 shares were available for future issuance
under this plan. The Company has reserved 100,000 shares of common stock
for issuance under the Brightware Acquisition Stock Option Plan. As of
October 31, 2003, 99,286 shares were available for future issuance under
this plan.
Option activity for fiscal 2003 was as follows:
Weighted
Average
Number of Exercise
Shares Price Per Share Price
--------------- ------------------- --------------
Outstanding, October 31, 2002 642,073 $ 0.10 - 297.50 $ 11.78
Granted 305,913 2.36 - 3.48 2.91
Exercised (999) 3.51 3.51
Canceled (274,773) 2.48 - 95.00 6.15
--------------- ------------------- --------------
Outstanding, October 31, 2003 672,214 $ 0.10 - 297.50 $ 10.03
=============== =================== ==============
Options exercisable at October 31, 2003 were $294,804. Weighted average
exercise price of options exercisable at October 31, 2003 was $16.11.
The following table summarizes information relating to currently
outstanding and exercisable options as of October 31, 2003.
Outstanding Exercisable
------------------------------ -------------------------
Weighted
Average Weighted
Remaining Average Average
Number Contractual Exercise Number Exercise
Range of Exercise Prices of Shares Life (Years) Price of Shares Price
------------------------ ------------- ----------------- ----------- ----------- -----------
$ 0.10 - 5.00 287,575 9.32 $ 2.78 4,000 $ 0.10
6.40 - 6.90 277,791 7.93 6.60 211,777 6.60
7.10 - 20.00 58,833 8.05 11.24 36,043 11.58
21.30 - 297.50 48,015 5.81 71.84 42,984 68.22
------------- ----------------- ----------- ----------- -----------
Totals 672,214 8.38 $ 10.03 294,804 $ 16.11
============= ================= =========== =========== ===========
F-91
FIREPOND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 31, 2003
- --------------------------------------------------------------------------------
NOTE 10 - STOCKHOLDERS' EQUITY (Continued)
Stock Options and Warrants (Continued)
All options granted in fiscal year 2003 had an exercise price equal to the
stock price at the grant date. The weighted average fair value for options
granted during the year was $0.70, and the weighted average exercise price
was $2.91.
Employee and Director Stock Options
The Company granted stock options to employees that require the
recognition of stock-based compensation expense. In July 2001, the Company
completed a stock option exchange program in which its directors and
eligible employees were offered the opportunity to exchange existing stock
options for new stock options at a ratio of three to four. The new options
were granted on July 31, 2001, with an exercise price of $6.60 per share.
The Company accepted 717,929 stock options for exchange and issued 538,438
stock options in exchange for such tendered options.
As a result of the cancellation of the outstanding options, existing
unamortized deferred compensation of approximately $783,000 was amortized
and recorded as stock-based compensation during fiscal 2001. All option
grants issued in conjunction with the stock option exchange program are
subject to variable accounting. In fiscal years 2002 and 2001, the Company
recorded a reversal of $18,000 in stock based compensation expense and a
charge of $188,000 of stock based compensation expense, respectively. As
of October 31, 2003, the Company has recorded no deferred compensation
associated with these options because the fair market value of the
Company's common stock fell below the option price.
Non-employee Stock Options
The Company has granted stock options to non-employees that require the
recognition of stock-based compensation expense based on the fair market
value of the options granted as computed using an established option
valuation formula. The Company recorded $247,963 of stock based
compensation expense in fiscal 2003, related to these options. As of
October 31, 2003, the deferred compensation balance of $5,192 primarily
related to non-employee awards, will be recognized as an expense as earned
for non-employees in accordance with EITF 96-18.
Warrants
In October 1999, the Company approved the future issuance of warrants to
purchase 50,000 shares of common stock to customers and strategic
partners. Warrants to purchase a total of zero shares have been issued
from this pool of which warrants to purchase 3,333 shares remain
outstanding as of October 31, 2003.
In November 1999, in conjunction with the Company's issuance of a $6
million subordinated note, the Company issued fully vested warrants to
purchase an aggregate of 35,997 shares of common stock at an exercise
price of $52.50 per share to the holders of the subordinated note. The
warrants expire on November 11, 2004. As of October 31, 2003, none of
these warrants had been exercised.
F-92
FIREPOND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 31, 2003
- --------------------------------------------------------------------------------
NOTE 10 - STOCKHOLDERS' EQUITY (Continued)
Loans Receivable
On November 28, 2000, the Company's Board of Directors approved a loan
facility to Klaus Besier, the Company's Chairman and Chief Executive
Officer, allowing borrowings up to $3,000,000 bearing interest at the
applicable federal rate in effect during the term of the note. On January
9, 2001, the Company's Board of Director's approved an increase in the
loan facility to $4,000,000. Originally the outstanding principal together
with unpaid interest was due and payable on the earlier of October 31,
2001, an event of default, or an event of maturity, as defined. On
December 11, 2001, the Board of Directors amended the facility to extend
the maturity to May 1, 2006. Due to the modification of the facility, all
amounts outstanding have been reclassified as a component of stockholders'
equity. The promissory note is secured by a pledge of 50,000 shares of the
Company's common stock valued at $158,000 at October 31, 2003, and is
generally not a recourse obligation of the borrower, with specified
exceptions. Amounts totaling $4,000,000 have been advanced to Mr. Besier
under this facility as of October 31, 2003. Pursuant to the terms of the
note and the loan agreement, upon the acquisition of the Company by Jaguar
Technology Holdings, LLC which occurred on December 3, 2003 (see Note 12)
the loan agreement was terminated and the underlying 50,000 shares pledged
pursuant to the terms of the note were retained by the Company. As a
result of the loan termination, the Company recorded a charge of
$3,857,126 for the difference between the value of the shares securing the
notes and the $4,015,126 loan receivable balance.
In addition in prior years, the Company issued notes to two former
employees of the Company totaling $272,363. During the quarter ended
January 31, 2003, management determined that the remaining loans to the
former employees were uncollectible, resulting in a $230,162 charge to
stock-based compensation for the difference between the value of the
shares securing each note and the $272,363 loan receivable balance. In
connection with the termination of the former employee's employment with
the Company, the Company acquired the shares valued at approximately
$42,201 securing the notes.
F-93
FIREPOND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 31, 2003
- --------------------------------------------------------------------------------
NOTE 11 - PROFIT-SHARING PLAN
The Company sponsors a defined contribution profit-sharing plan for US
employees which conforms to Internal Revenue Service provisions for 401(k)
plans. Employees must be at least 21 years of age to be eligible to
participate in the plan. Participants may contribute up to 15% of their
earnings. The Company has the option to match 50% of the first 2% and 25%
of the next 4% of employee contributions and may make additional
contributions as determined by the board of directors. There were no
employer matching contributions in fiscal years 2002 or 2003.
NOTE 12 - SUBSEQUENT EVENTS
Acquisition of FirePond
A wholly owned subsidiary ("Fire Transaction Sub, Inc.") of Jaguar
Technology Holding, LLC ("Jaguar") completed a tender offer ("Tender
Offer") for FirePond on December 2, 2003, after which Fire Transaction
Sub, Inc. ("Fire Sub") held 90.3% of FirePond's total shares outstanding.
Immediately after consummation of the Tender Offer, Fire Sub completed a
merger (the "Merger") without the vote of shareholder's in accordance with
Delaware's short form merger procedures. Pursuant to the Tender Offer and
the Merger, each share of FirePond common stock was converted into the
right to receive $3.16 in cash, without interest. Upon completion of the
Merger, Jaguar owned all of the outstanding equity of FirePond.
Restructuring Efforts
Since the date of the acquisition by Jaguar, FirePond has embarked upon a
significant restructuring effort, which includes:
(i) Reducing overhead associated with excess leased office space in
Bloomington and Mankato, Minnesota; Tokyo, Japan; Paris, France; and
certain other European locations,
(ii) Closing operations in Japan and seeking liquidation of any remaining
Japanese subsidiaries,
(iii) Closing operations in Europe and seeking liquidation of any
remaining European subsidiaries,
(iv) Rationalizing FirePond's domestic and international employee base,
(v) Seeking alternative revenue opportunities in the competitive
enterprise software space, including by investing in and pursuing
opportunities in the on demand CPQ space,
(vi) After the Merger, Firepond and Jaguar entered into various
arrangements to facilitate among other things, management services,
cash management procedures and various other procedures and
arrangements to facilitate cost and managerial efficiencies,
F-94
FIREPOND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 31, 2003
- --------------------------------------------------------------------------------
NOTE 12 - SUBSEQUENT EVENTS (Continued)
Restructuring Efforts (Continued)
(vii) Management changes: substantially simultaneously with the Merger,
(a) the former Chief Executive Officer elected to terminate his
employment with Firepond and as a result claimed he was entitled to
certain payments from the Company and (b) the former Chief Financial
Officer elected to terminate her employment with the Company,
(viii)The management functions formerly performed by the CEO, President,
and CFO have been and are now being performed by Riverland
Enterprises, LLC (the ultimate parent entity and managing member of
Jaguar, "Riverland") and Douglas Croxall, who holds the titles of
Chief Executive Officer, Chief Financial Officer, Secretary and
Treasurer and is the sole member of the Board of Directors of
Firepond and the ultimate owner of Riverland,
(ix) Eliminating unnecessary legal actions that involved and compromised
Firepond's asset base and business by transferring those pending
lawsuits to a third party entity,
(x) System Upgrades: Immediately after the Merger, the Company sought to
replace its existing accounting system and procedures, which current
management believes were not adequate with an upgraded system at a
cost of approximately $100,000.00. As of September 1, 2004, the
Company has implemented this new accounting system and established
new procedures. Current management now believes that Firepond's
internal controls and accounting systems are adequate.
Sale of Patents
On January 28, 2004, FirePond entered into a Patent Purchase Agreement
("Patent Purchase Agreement") with Orion IP, LLC ("Orion"), pursuant to
which, among other things, (i) Orion purchased all of the domestic and
foreign patents (and all extensions, continuations, provisionals,
derivatives and related applications) ("Patents") of FirePond, (ii)
FirePond and Orion entered into a non-exclusive patent license agreement
with respect to the Patents and (iii) Orion issued a promissory note to
FirePond and agreed to pay certain legal fees that had been incurred by
FirePond with respect to the Patents.
Sale of Brightware
On May 17, 2004, FirePond entered into an Asset Purchase Agreement ("Asset
Purchase Agreement") with edocs, Inc. ("edocs"). Pursuant to the Asset
Purchase Agreement, among other things, (i) edocs purchased certain assets
(including customer contracts, code and accounts receivable) related to
FirePond's Brightware business unit ("Brightware") and (ii) edocs paid
certain cash consideration to FirePond and issues FirePond a promissory
note.
F-95
FIREPOND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 31, 2003
- --------------------------------------------------------------------------------
UNAUDITED PRO FORMA INFORMATION
On March 29, 2006, AFG Enterprises USA, Inc. ("AFGE") entered into an agreement
and plan of merger to acquire all of the issued and outstanding shares of FP
Technology Holdings, Inc. ("FP Tech") in exchange for 3,991,939 shares of AFGE
$.001 par value common stock.
After the exchange, FP Tech shareholders will own approximately 78.3% of the
outstanding stock in the surviving company. The FP Tech shareholders have
appointed a new Board of Directors who have in turn elected new officers.
FP Tech and through its predecessor company, Firepond, Inc., has been a leading
provider of enterprise software that optimizes the process of converting leads
into accurate orders. The SalesPerformer sales configuration system guides sales
people, channel partners and customers through the entire "lead-to-order"
business process -- delivering lead management, needs analysis, product and
pricing configuration, quote and proposal generation, and order management.
The Company provides interactive selling software solutions that help companies
profitably acquire and retain customers. The complementary configuration,
pricing and guided selling solutions are based on patented technology. FP Tech's
solutions help drive new revenue streams, increase profitability, and manage
customer interactions across all channels throughout the sales cycle.
In 2005, the Company launched Firepond OnDemand, our subscription based
configuration, price, quote (CPQ(TM) OnDemand) software. Firepond OnDemand
provides product configuration technology to companies of almost any size,
greatly expanding the client base to which we can market our solutions.
The following unaudited pro forma balance sheet assumes the exchange occurred on
December 31, 2005 and combines the financial positions of Firepond, Inc, FP Tech
and AFGE as of December 31, 2005, using the assumptions described in the
accompanying notes. Since FP Tech is the predominant entity and AFGE is a shell
company, this combination is accounted for as a recapitalization of FP Tech.
The unaudited pro forma results of the combined operations of AFGE and FP Tech
are not presented because the combination is accounted for as a recapitalization
at historical cost, not a business combination.
F-96
FIREPOND, INC.
FP TECHNOLOGY HOLDINGS, INC.
AFG ENTERPRISES USA, INC.
- --------------------------------------------------------------------------------
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
December 31, 2005
Historical Historical Pro Forma Pro Forma
ASSETS Firepond & FP Tech AFGE Adjustments Combined
---------------- ------------- ------------- -------------
Current assets
Cash and cash equivalents $ 471,527 $ 300 $ 471,827
Accounts receivable, net of allowance for
doubtful accounts of $10,000 306,255 306,255
Assets to be sold 106,374 106,374
Other current assets 181,023 3,471 -- 184,494
---------------- ------------- ------------- -------------
Total current assets 1,065,179 3,771 1,068,950
Property and equipment, net 241,135 -- 241,135
Goodwill and Intangibles 4,772,413 -- 4,772,413
Deposits 12,140 -- -- 12,140
---------------- ------------- ------------- -------------
Total assets $ 6,090,867 $ 3,771 $ -- $ 6,094,638
================ ============= ============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current portion of long-term debt net of
discount of $505,250 $ 1,994,750 $ 281,000 $ (281,000) (A) $ 1,994,750
Accounts payable 199,546 6,347 -- 205,893
Accrued liabilities 557,676 15,444 (13,074) (A) 560,046
Accrued merger and restructuring costs 257,123 -- -- 257,123
Deferred revenue 1,462,776 -- -- 1,462,776
---------------- ------------- ------------- -------------
Total current liabilities 4,471,871 302,791 (294,074) 4,480,588
Long-term notes payable 250,000 -- 250,000
Commitments and contingencies
Stockholders' equity
Firepond, Inc. common stock, $0.01 par value
Authorized - 100,000,000 shares
Issued and outstanding - 99,001,000 shares 990,010 990,010
Common stock, $0.001 par value
Authorized - 300,000,000 shares
2,177,414 FP Technology Holdings
100,440 AFGE
5,100,441 combined issued and outstanding 2,177 100 2,823 (A,B) 5,100
Deficiency in capital (1,317,177) 4,905 855,569 (A,B) (456,703)
Deferred compensation (564,317) (B) (564,317)
Retained earnings 1,747,128 (304,025) 1,443,103
Accumulated other comprehensive loss (53,142) -- -- (53,142)
---------------- ------------- ------------- -------------
Total shareholders' equity 1,368,996 (299,020) 294,074 1,069,976
---------------- ------------- ------------- -------------
Total liabilities and stockholders'
equity $ 6,090,867 $ 3,771 $ -- $ 6,094,638
================ ============= ============= =============
The accompanying notes are an integral part of these financial statements.
F-97
NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET
The pro forma adjustments assume the reverse split of AFGE common stock at 1
share for 50 shares, the reverse split of FP Tech common stock at 1 share for
2.48 shares (the exchange rate inherent in the acquisition transaction) and the
issuance of 2,177,414 shares of AFGE's $.001 par value common stock for the
issued and outstanding shares of FP Tech's common stock.
The acquisition is accounted for as a recapitalization of FP Tech and therefore,
assets and liabilities are combined at historical cost.
The following is a summary of the adjustments required based upon the above
assumptions:
A. Record the extinguishment of $294,074 in AFGE debt and accrued interest
through the issuance of 1,008,062 shares of AFGE common stock ($.31 per share).
B. Record the issuance of 1,814,525 shares of AFGE common stock to FP Tech
officers and directors in January and March of 2006 as deferred compensation for
future services valued at $564,317 ($.31 per share).
F-98