SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB/A
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AMENDMENT TO APPLICATION OR REPORT
Filed pursuant to Section 12, 13 or 15(d) of
THE SECURITIES EXCHANGE ACT OF 1934
AUGMENT SYSTEMS, INC.
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(Exact name of registrant as specified in charter)
AMENDMENT NO. 1
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The undersigned Registrant hereby amends the following items,
financial statements, exhibits or other portions of its Annual Report on Form
10-KSB for the Fiscal Year ended December 31, 1998, as set forth in the pages
attached hereto:
AMENDED: 10-K COVER & PAGES 3,4,5,8,9,10,11,13,14 & 17
NEW: ITEM 7: PART II-ITEM 7, THE FINANCIAL STATEMENTS
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this amendment to be signed on its behalf
by the undersigned, thereunto duly authorized.
AUGMENT SYSTEMS, INC.
(Registrant)
Dated: May 28, 1999 By: /s/ Duane Mayo
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Duane Mayo
Chief Financial Officer
<PAGE>
AMENDED 10-K COVER & PAGES 3,4,5,8,9,10,11,13,14 & 17
OF THE
ANNUAL REPORT ON FORM 10-KSB OF
AUGMENT SYSTEMS, INC. (the "Company")
FOR ITS FISCAL YEAR ENDED DECEMBER 31, 1999
<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
(X) Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (Fee Required)
For the fiscal year ended December 31, 1998
( ) Transition report under section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from __________________ to
Commission file number 0-22341
AUGMENT SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Delaware 04-3089539
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(State or other jurisdiction of (I. R. S. Employer
incorporation or organization) Identification No.)
790 Turnpike Street Suite 202 North Andover, MA 01845
(Address of principal executive offices) (Zip Code)
978-725-8156
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Exchange Act:
Not Applicable
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, $.01 par value
Common Stock Purchase Warrants
Check whether the Issuer: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirement for the past
90 days.
(1) Yes X No (2) Yes X No
----- ----- ----- -----
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B in this form, and no disclosure will be contained, to the best of
the registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this form. Yes X NO
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The issuer's revenues for the fiscal year ended December 31, 1998 was
$1,062,000. As of April 15, 1999, there were 11,898,951 shares of the Issuer's
Common Stock, $.01 par value, issued and outstanding. The aggregate market value
of the Issuer's voting stock held by non-affiliates was approximately $118,990
based upon the average of the bid and ask prices of such stock on that date.
<PAGE>
SALES AND MARKETING
The Company's sales and marketing strategy employed multiple
distribution channels, including direct sales and value added resellers (VARs).
The Company believed that broad distribution would enable its products to be
exposed to the maximum number of end-users, whether as an add-on upgrade to
sophisticated early adopters or as part of a large solution when packaged with
electronic publishing applications and hardware.
RESEARCH AND DEVELOPMENT
The market for the Company's products is characterized by extensive
research and development and rapid technological advances in both hardware and
software development, resulting in frequent introductions of new products. The
introduction of products embodying new technology and the emergence of new
industry standards can render existing products obsolete and unmarketable. In
the fiscal years ended December 31, 1997 and December 31, 1998, respectively,
the Company expended $3,812,326, and 2,338,222 respectively, for research and
development.
CUSTOMER SERVICE AND SUPPORT
The Company provided customer training, installation and integration
support, and maintained systems sold directly to end users in North America
through an internal systems integration organization. The Company covered its
server products against defects in material and workmanship for 90 days. During
the warranty period, the Company would repair or replace, within two days, any
server component(s) which the Company identified as containing defects which did
not prevent the continued use of the server. For defects that did prevent the
continued use of the server, the Company would attempt to repair or replace the
identified defective component within 24 hours. The Company offered service and
maintenance contracts to its customers.
MANUFACTURING AND SUPPLIERS
The Company's manufacturing operations consisted of product assurance,
quality control of materials, components and subassemblies, final assembly and
system test. The Company relied on numerous high-quality ISO 9002 class vendors
located in New England for the manufacture of mechanical subsystems and printed
circuit boards. This strategy minimized capital investment and overhead
expenditures and provided the Company with the ability to increase production to
meet market demand.
LICENSES
The Company's server systems included proprietary software and hardware
developed by the Company, hardware and software components manufactured by third
party vendors, proprietary software and hardware technology licensed from Radius
and proprietary software technology licensed from Polybus.
3
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On September 27, 1995, the Company obtained a worldwide license from
Radius to use certain of Radius' technology in its products. The license was
exclusive except as to Radius, which retained rights to its technology. Under
the agreement with Radius, the royalties payable by the Company initially were
the greater of $1,500 per unit or two percent of the purchase price per unit for
the first 200 units, declining in increments based on the number of units sold
to the greater of $750 per unit or one percent of the purchase price per unit
after 1001 units are sold. Royalties will be paid until the cumulative total of
royalties paid equals $10,000,000 at which time the Company will have a royalty-
free license. If the Company failed to sell the minimum number of units required
to be sold pursuant to the agreement for two consecutive calendar quarters, as
was the case in 1998, the technology can be licensed to other parties. In
addition, the Company had granted to Radius an irrevocable, perpetual,
non-exclusive, worldwide, royalty-free license to any modifications to the
Radius technology made by the Company.
The Company entered into a Development and License Agreement dated
August 1, 1996 with Polybus pursuant to which the Company obtained an
irrevocable, perpetual, worldwide, nonexclusive (except as to publishing for
which the license is exclusive) license to a high speed file manager software
package in consideration for royalty payments. The royalties payable by the
Company pursuant to the Development and License Agreement were initially $800
per server and $400 per workstation, declining in increments based upon the
number of systems sold to $50 per server and $25 per workstation until the first
100,000 systems are sold by the Company. No royalties were payable after the
Company sold 100,000 systems. The initial term of the Development and License
Agreement was 25 years and the agreement could be terminated sooner by Polybus
only in the event of a payment default by the Company. Upon termination of the
Development and License Agreement, Polybus may license the software to third
parties in the publishing market.
On January 22, 1999, Polybus and the Company terminated the Development
and License Agreement and entered into a Software License Agreement. Under the
terms of the new agreement Polybus granted to Augment a perpetual, worldwide,
irrevocable, nonexclusive license to distribute Polybus Macintosh Client
software; and, Augment granted to Polybus a perpetual, irrovocable, royalty free
license for Augment's NT Client software.
EMPLOYEES
As of April 15, 1999, the Company employed 1 full-time employee to
dispose of all assets, settle any outstanding debts and explore potential
mergers.
POTENTIAL FOR BANKRUPTCY - NEED FOR ADDITIONAL FINANCING
The Company's continued viability depends in part, on its ability to
negotiate or litigate substantial reductions in the amounts owed by the Company
to its creditors and successfully settle or defend any creditor's claims or
actions. In the event the Company is unable to achieve this objective, it would
not have adequate cash resources to meet its obligations and would, in most
likelihood, be forced into the filing of a petition in bankruptcy. In addition,
the creditors of the Company could involuntarily place the Company in
bankruptcy. Either of the foregoing events would have a material adverse effect
on the value of the Company to its current shareholders and its secured and
unsecured creditors. In the event of bankruptcy, current equity and
warrant-holders could be substantially diluted or have their interests
extinguished.
4
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In addition, the Company may also need to raise capital from other
financings. There can be no assurances that the Company will be able to obtain
such additional financings on terms acceptable to the Company or in a timeframe
required by the Company, if at all. In such event, the Company may be required
to materially alter its plans. Any such additional financing may result in
significant dilution to existing stockholders or the issuance of securities with
rights superior to those of the existing shareholders. In the event that the
Company is unable to raise or borrow additional funds, the Company may be forced
into bankruptcy.
In addition, the Company is seeking to be acquired by another entity
with growth potential. If any such entity is located, there can be no assurances
that the Company will be able to obtain such a merger on terms acceptable to the
Company and within an acceptable timeframe required by the Company, if at all.
Any such transaction may result in significant dilution to existing stockholders
or the issuance of securities with rights superior to those of the existing
stockholders. In the event that the Company is unable to consummate such a
transaction, the Company may be forced to file for bankruptcy.
ITEM 2. DESCRIPTION OF PROPERTY
Facilities
The Company has a month to month lease for 700 square feet of shared
office space in North Andover, Massachusetts, which currently accommodates the
Company's headquarters, administrative, and financial functions. The Company
vacated its principal office at 2 Robbins Road in Westford, Massachusetts,
consisting of approximately 30,000 square feet. The monthly rent is $1,000. The
Company believes that its facilities are adequate to meet its current business
requirements. See Footnote 5 of Notes to the Financial Statements.
ITEM 3. LEGAL PROCEEDINGS
In March 1998, the Company's former President and CEO, Lorrin Gale,
left the Company at the request of the Board of Directors. On May 29, 1998, Mr.
Gale filed a complaint against the Company in the Superior Court of the
Commonwealth of Massachusetts seeking relief for breach of an employment
contract. In September 1998, the Company reached a settlement with Mr. Gale,
which required that the Company pay $150,000 in severance pay and an additional
$45,000 in increments of $15,000 over the next three years commencing in July
1999. In the event the Company does not make payments under the terms of the
settlement agreement or is unable to work out an arrangement for payment, Mr.
Gale could obtain a judgement against the Company, which would have a material
adverse affect on the prospects of the Company.
The Company had received a letter from a printing vendor claiming that
the Company owes the vendor approximately $50,000 for printing services
rendered. The Company's position was that it had provided consideration to the
vendor for the printing services in the form of equipment and software, in
accordance with an understanding between the parties established in November
1996. The Company is negotiating a settlement with the vendor. In the event the
Company cannot work out a viable agreement, it would have a material adverse
affect on the prospects of the Company.
The Company is not involved in any other material legal proceedings.
Although the Company has effectively ceased operations, there are numerous
secured and unsecured creditors who could commence litigation against the
Company. In the event that the Company has insufficent funds to settle or defend
these matters, the Company or its creditors could cause the filing of a
bankruptcy proceeding. See Item 1 - Business - Potential for Bankruptcy - Need
for Financing and Item 6 Management Discussion and Analysis or Plan of
Operation.
5
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8. In December 1998, the Board of Directors authorized the
issuance of warrants to purchase 359,282 shares of Common Stock to the
underwriter involved in private placements of the Company's Common Stock during
January 1998 and May 1998. The issuance of the warrants was pursuant to specific
terms of the private placement relating to missing certain revenue milestones.
As of April 1999, the Company had not issued those warrants.
The offerings described in Numbers 1 through 8, inclusive, were exempt
from registration pursuant to Section 4(2) of the Securities Act of 1933 and the
Securities and Exchange Commission Rule 506.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The Private Securities Litigation Reform Act of 1995 contains safe
harbor provisions regarding forward-looking statements. Except for historical
information contained herein, the matters discussed in the Liquidity and Capital
Resources section below contain potential risks and uncertainties, including,
without limitation, risks related to the Company's ability to successfully
identify potential merger partners and settle any outstanding debts. The Company
will need to attract partners in order to execute its revised business strategy,
and there can be no assurance that the Company will be successful in attracting
such partners.
GENERAL
In January 1999, the Board of Directors of the Company elected to
suspend ongoing operations, layoff all but one of its employees, dispose of all
physical assets, attempt to settle any outstanding short and long term debts,
seek buyers or strategic partners for the further development of its existing
technology as well as explore merger opportunities.
Prior to January 15, 1999, the Company designed, developed and sold
fibre channel based network file server systems designed to increase data
transfer and file storage on computer networks. In September 1998, the Company
obtained $1,500,000 in bridge financing of secured convertible promissory notes
and common stock purchase warrants. The Company used a portion of the proceeds
of the bridge financing to repay in full its indebtedness to a major bank. In
November 1998, the Company was informed by an investment bank, that provided the
bridge financing, that they would be unable to secure the additional funding
required to repay the outstanding bridge loan, provide the Company with the
necessary working capital to support the execution of its business plan and
ongoing operations. The Company began to seek alternative financing, however,
was unable to secure the funds necessary to maintain ongoing operations.
From October 1995 through March 1997, the Company operated as a
development stage company and engaged principally in research and development,
recruitment of personnel and financing activities. The Company conducted limited
marketing activities and did not commence beta shipments of its initial products
until February 1997. During the second quarter ended June 30, 1997, the Company
commenced commercial shipment of its server product and recognized initial
revenue in April 1997. The Company's initial target market was the electronic
publishing industry, which required the rapid and efficient movement of large
image and data files over networks.
PLAN OF OPERATION
In January 1999, the Board of Directors of the Company elected to
suspend ongoing operations, layoff all but one of its employees, dispose of all
physical assets, attempt to settle any outstanding short and long term debts,
seek buyers for its technology, and explore merger opportunities.
8
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Revenues for the fiscal year ended December 31, 1998 were $1,062,203 as
compared to $989,609 in revenues for the fiscal year ended December 31, 1997.
Prior to the second quarter ended June 30, 1997, the Company was a development
stage company and had not recognized revenues. Gross product margin on product
sales was a negative 23% for the period ended December 31, 1998 versus a 40%
gross product margin on product sales for the period ended December 31, 1997.
The decrease in the gross product margin was due primarily to the $542,000
writedown of inventory in 1998. During 1997 and 1998, product revenue were
primarily generated through domestic end-user sales.
Research and development costs for the fiscal year ended December 31,
1998 were $2,338,222 as compared to $3,812,326 for fiscal year ended December
31, 1997. The $1,474,014 decrease was primarily attributable to a reduction in
engineering personnel and consultants associated with the development of the
Company's server product and lack of capital. The Company also decreased
spending for associated engineering supplies and prototype materials used in the
development of its server product. The Company does not anticipate spending any
additional funds on research and development for the foreseeable future.
General and administrative costs for the fiscal year ended December 31,
1998 were $2,102,945 as compared to $1,565,274 for the fiscal year ended
December 31, 1997. The $537,671 increase is attributable to increased spending
for legal fees, fund raising activities and severance to former employees. The
Company anticipates that spending for general and administrative costs for the
next six months at less than $150,000.
Selling and marketing costs for the fiscal year ended December 31, 1998
were $1,886,850 as compared to $3,141,843 for the fiscal year ended December 31,
1997. The $1,254,993 decrease is attributable to an decrease in marketing
support and sales personnel, participation in various trade shows and decreased
spending on sales promotional material and lack of capital. The Company does not
plan on spending any funds on selling and marketing expenses in the foreseeable
future.
The Company recognized a net loss for the fiscal year ended December
31, 1998 of $7,239,529 as compared to $9,380,055 for the fiscal year ended
December 31, 1997. The decrease in net loss of $2,140,526 was attributable to a
decrease in personnel to support research and development, sales and marketing
and administration activities. As a result of the Board of Directors decision to
shut down its operations, the Company recognized a write down of unique
inventory associated with the Company's products and recognized an increase in
the reserve for bad debts of approximately $542,000 and $258,000, respectively,
for the fiscal year ended December 31, 1998. In addition, the Company recognized
a write down of fixed assets and capitalized software of approximately $450,000
associated with the net value realized in a liquidation of fixed assets.
The Company currently has 1 full-time employee to dispose of all
physical assets, attempt to settle any outstanding short and long term debts,
seek buyers or strategic partners for the further development of its existing
technology as well as explore merger opportunities.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations since October 1995 principally
from a combination of debt and equity financings totaling approximately
$22,975,000. Prior to May 1997, the Company issued convertible promissory notes
in the aggregate principal amount of approximately $864,000. Approximately
$802,000 of the principal balance of these notes plus accrued interest was
converted into shares of Common Stock in November 1996 at a conversion price of
$4.00 per share. In December 1996 and February 1997, the Company raised gross
proceeds of $3,585,000 in a private placement of promissory notes and common
stock purchase warrants. The promissory notes, bearing interest at 12% per
annum, were repaid from the proceeds of its initial public offering. In
addition, from September 1995 through August 1996, the Company issued 1,653,623
shares of its Common Stock for approximately $3,372,000 in gross proceeds.
9
<PAGE>
On May 16, 1997, the Company completed its initial public offering of
1,800,000 shares of its Common Stock at a price of $5.50 per share and 2,070,000
Redeemable Common Stock Purchase Warrants at $.15 per warrant. Each Redeemable
Common Stock Purchase Warrant entitles the holder to purchase one share of
Common Stock for $6.60 during the four-year period commencing May 12, 1998. The
net proceeds from the Company's initial public offering, after deducting
underwriting discounts and commissions and estimated expenses payable by the
Company, were approximately $8,220,000.
In October 1997, the Company obtained a $750,000 loan from Fleet
National Bank. The loan was secured by all of the Company's assets, bore
interest at Fleet National Bank's prime rate plus 2% and was originally payable
by December 31, 1997 or upon completion of a financing resulting in net proceeds
to the Company of at least $5,000,000. Pursuant to the terms of the loan, the
Company issued detachable warrants to purchase 100,000 shares of Common Stock at
an exercise price of $1.00 per share exercisable over five years. This loan was
extended through and until July 31, 1998. On July 31, 1998, the Company made a
payment in the amount of $300,000 to Fleet National Bank and the final $450,000
balance was retired on August 31, 1998.
During December 1997 and January 1998, the Company secured $1,000,000
in bridge financing from institutional and private investors in anticipation of
the private placement of the Company's Common Stock. The bridge financing
promissory notes accrued interest at 8% per annum with interest and principal
payable at maturity on the initial closing of the private placement. In
addition, the Company issued to bridge investors five year warrants to purchase
up to 750,000 shares in the aggregate of the Company's Common Stock at $1.00 per
share. In February 1998, the Company repaid $200,000 of these promissory notes
plus interest and the holders of $800,000 of these promissory notes converted
their notes into shares of the Company's Common Stock at $1.00 per share. In
January 1998, the Company closed on an initial amount of $6,180,000 of a private
placement initiated in December 1997. In early May 1998, the Company closed on
an additional $575,000 and terminated the offering started in December 1997. The
aforementioned funds were used to repay outstanding accounts payable debts
incurred during 1997 of approximately $1,400,000, repay bridge financing of
approximately $200,000 and bank debt of approximately $300,000, support research
and development expenses of approximately $2,000,000, sales and marketing
expenses of approximately $1,700,000, and $675,000 in administrative and other
expenses.
In September 1998, the Company obtained $1,500,000 in bridge financing
of secured convertible promissory notes and common stock purchase warrants. The
Company used a portion of the proceeds of the bridge financing to repay in full
its indebtedness to Fleet National Bank. The convertible promissory notes were
due and payable upon the earlier of the closing of a financing of a minimum of
$4,000,000 or in September 1999. In November 1998, the Company was informed by
the investment bank, that provided the bridge financing, that they would be
unable to secure the additional funding required to repay the outstanding bridge
loan and provide the Company with the necessary working capital to support its
business plan and ongoing operations. The Company began to seek alternative
financing, but, was unable to secure the funds necessary. On January 15, 1999,
the Board of Directors decided to shut down operations, lay-off all all but one
of its employees, liquidate assets, seek buyers or strategic partners for the
further development of its existing technology as well as explore merger
opportunities.
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These factors raise substantial doubt about the Company's ability to
continue as a going concern. The Company is dependent on its ability to settle
all debts with creditors, attract purchasers or strategic partners for the
Company's technology and attract potential merger partners, which will
undoubtedly result in substantial dilution to existing shareholders or may
result in the termination of their interests. Although the Company has
effectively ceased operations, there are numerous secured and unsecured
creditors who could commence litigation against the Company. see Item 3-legal
proceedings In the event that the Company has insufficent funds to settle or
defend these matters, the Company or its creditors could cause the filing of a
bankruptcy proceeding. See Item 1 - Business - Potential for Bankruptcy - Need
for Financing Item 3-Legal Proceedings. As a result of the uncertainty of the
Company to continue as a going concern the Company's Auditors were unable to
express an opinion on the Company's accompanying financial statements.
The Company is authorized to issue up to 50,000,000 shares of its
Common Stock and up to 2,000,000 shares of Preferred Stock. As of April 15,
1999, there were 11,898,951 shares of the Company's Common Stock issued and
outstanding and no Preferred Stock issued and outstanding. The Company is
obligated to issue additional 3,592,816 shares of Common Stock to certain
investors who participated in private placements of the Company's Common Stock
during January 1998 and May 1998. The shares had been authorized for issuance by
the Board of Directors during 1998. In addition, the Company has 7,413,111
Common Stock Purchase Warrants issued and outstanding, of which all 7,413,111
are substantially above the existing market price.
CAPITAL EXPENDITURES
The Company does not have any material commitments for capital
expenditures at this time.
EFFECTS OF INFLATION
The Company believes that the relatively moderate rate of inflation
over the past few years has not had a significant impact on the Company's sales
or operating results.
YEAR 2000 DISCLOSURE
The Company believes that its products are year 2000 compliant and does
not anticipate any claims relating thereto. As the Company effectively has no
operations, the year 2000 problem is not an issue at this point.
ITEM 7. FINANCIAL STATEMENTS
See Pages F-2 through F-19.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The Company does not have any disagreements with its auditors.
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<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
- -----------------------------------------------------------------------------------------------------------------------------------
Long-Term Compensation
Awards Payouts
Other Restricted
Annual Compensation Annual Stock LTIP All Other
Name and Position Year Salary($) Bonus($) Compensation Awards($) Options(#) Payouts($) Compensation Principal
(a) (b) (C) (d) (e) (f) (g) (h) (i)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Lorrin G. Gale 1998 73,253 - - - - - 195,000 (1) -
Chairman, President and 1997 120,000 - - - 75,000 (2) - - -
Chief Executive Officer * 1996 55,862 - - 3,186 (3) - - - -
1995 - - - 1,885 (4) - - - -
Laurence Liebson 1998 97,956 - - - 1,763,955 - - -
Chairman, President and (5)
Chief Executive Officer **
</TABLE>
(1) In March 1998, Mr. Gale left the Company at the request of the Board of
Directors. Pursuant to an employment agreement with the Company, he received
$150,000 in severance and is obligated to receive an additional $45,000 to be
paid in equal installments of $15,000 per year beginning July 1999.
(2) In January 1997, pursuant to an employment contract, the Company issued
incentive stock options to purchase up to 75,000 shares of Common Stock. Options
to purchase 15,000 shares of Common Stock vested upon the execution of the
agreement and options to purchase 30,000 shares of Common Stock vest on each of
the first and second anniversaries of the agreement. All options have an
exercise price of $4.00 per share.
(3) In July 1995, the Company issued 151,735 shares of restricted Common
Stock valued at $.021 per share to Mr. Gale in consideration for services
rendered.
(4) In June 1995, as part of a recapitalization, the Company issued to Mr.
Gale 89,747 shares of restricted Common Stock valued at $.021 per share in lieu
of payment of accrued compensation of $454,843 for the period commencing June
1992 through March 1995 and in lieu of repayment of $55,000 of loans payable to
Mr. Gale, as well as in exchange for all shares of preferred stock and common
stock then held by Mr. Gale.
(5) In May 1998, Laurence Liebson joined the Company as Chairman, President
and Chief Executive Officer. Pursuant to an employment contract, Mr. Liebson was
issued incentive stock options to purchase up to 1,763,955 shares of Common
Stock. Options to purchase 563,881 shares of Common Stock vested upon execution
of the agreement and options to purchase 300,019 shares vest on each of the
first, second, third and fourth anniversaries of the agreement. All options had
an exercise price of $1.00 per share
* In March 1998, Mr. Gale left the Company as President and Chief Executive
Officer
** In January 1999, Mr. Liebson left the Company as President and Chief
Executive Officer.
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EMPLOYMENT CONTRACTS
As of April 15, 1999, the Company had no employment contracts with its
employee.
Prior to 1999, the Company had entered into a two-year employment
agreement with Mr. Lorrin Gale. Pursuant to such contract, Mr. Gale would be
paid a base salary of $125,000 and had been granted incentive stock options to
purchase up to 75,000 shares of Common Stock. Options to purchase 15,000 shares
of Common Stock vested upon the execution of the agreement and options to
purchase 30,000 shares of Common Stock vest on each of the first and second
anniversaries of the agreement. All options had an exercise price of $4.00 per
share. Pursuant to his employment agreement, Mr. Gale agreed not to compete with
the Company during the term of his employment and for one year thereafter. Mr.
Gale left the Company as President and Chief Executive Officer in March 1998.
Effective as of May 1998, the Company entered into a two-year
employment agreement with Mr. Laurence Liebson. Pursuant to such agreement, Mr.
Liebson would be paid a base salary of $150,000 and receive $75,000 in
relocation expenses, which the Company was unable to pay. In addition, Mr.
Liebson was granted incentive stock options to purchase up to 1,763,955 shares
of common stock at $1.00 per share. Mr. Liebson left the Company as President
and Chief Executive Officer in January 1999.
(This page left intentionally blank.)
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In October 1996, the Company issued to Mr. Chanowski 19,123 shares of
Common Stock in consideration for consulting services rendered. Mr. Chanowski
also purchased 23,904 shares of Common Stock for $50,000 in October 1996 in
private placement. Mr. Chanowski paid the $50,000 purchase price by converting
the $25,000 promissory note issued to him in May 1996 and by investing an
additional $25,000 in cash. Mr. Chanowski is a 6.675% member in Alpha Ventures
LLC which holds 77,540 shares of the Company's Common Stock and warrants to
purchase 11,952 shares of Common Stock. In April 1997, the Company issued to
Venture Management Consultants, LLC ("Venture Management"), of which Mr.
Chanowski is a 20% member, a promissory note in the principal amount of $200,000
in consideration for a $200,000 loan. The promissory note bears interest at 18%
per annum with interest and principal payable at maturity on May 31, 1998. In
May 1997, the Company issued to Venture Management a promissory note in the
principal amount of $200,000 in consideration for a $200,000 loan. The
promissory note bears interest at 18% per annum with interest and principal
payable at maturity on June 30, 1998. In October 1997, the Company issued to
Venture Management in consideration of a $400,000 loan, a promissory note in the
principal amount of $400,000 plus a warrant to purchase up to 100,000 shares of
Common Stock at $3.00 per share. The promissory note bears interest at 9% per
annum with interest and principal payable at maturity on the earlier of (i)
December 11, 1997 or (ii) the completion of a financing by the Company. The
Company subsequently repaid all three of the promissory notes issued to Venture
Management. In October 1997, the Company entered into a Consulting Agreement
with Venture Management. In consideration for consulting services, the Company
issued Venture Management a warrant to purchase up to 400,000 shares of Common
Stock at $3.00 per share and agreed to pay consulting fees of $4,000 per month,
plus out-of-pocket expenses up to $1,000 per month. In October 1998, the Company
cancelled the Consulting Agreement with Venture Management signed in October
1997 and entered into a new Consulting Agreement with Venture Management. In
consideration for consulting services, the Company issued Venture Management a
warrant to purchase up 500,000 shares of common stock at $1.00 per share.
On March 31, 1999, Mr. Fred Chanowiski resigned from the Board of
Directors to pursue other interests.
In January 1998, Jeffrey Leventhal invested $200,000 in a private
placement of the Company's Common Stock. Mr. Leventhal was elected to the Board
of Directors in January 1998. On March 31, 1999 Mr. Leventhal resigned from the
Board of Directors to pursue other interests.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits.
*1.1 - Form of Underwriting Agreement
*3.1 - Certificate of Incorporation of the Company, as amended.
*3.1.1 - Restated Certificate of Incorporation of the Company.
*3.2 - By-laws of the Company.
*4.1 - Specimen Common Stock Certificate of the Company.
*4.2 - Form of Underwriters' Purchase Option.
*4.3 - Specimen Redeemable Common Stock Purchase Warrant.
*4.4 - Form of Warrant Agreement.
*5 - Opinion of Warner & Stackpole LLP on legality of securities
being registered.
*10.1 - Lease agreement of Corporate Headquarters in Westford,
Massachusetts between New England Mutual Life Insurance Company
and the Company dated October 23, 1995.
*10.1.1 - First Amendment to Lease Agreement of Corporate Headquarters
dated as of January 31, 1996.
*10.2 - Lease Agreement to Sales Office in San Diego,
California between The Parkwest Partners and the Company
dated July 1, 1996.
*10.3 - Restated Technology License Agreement between Radius and
the Company dated as of September 27, 1995.
*10.3.1 - First Amendment to Restated Technology Agreement between Radius
and the Company Dated as of October 28, 1996.
*10.4 - Software Development and License Agreement between Polybus
and the Company dated as of August 1, 1996.
*10.5 - Form of Warrant as issued to the Company's other
Warrantholders.
*10.6 - Form of Warrant as issued to placement agent in the Company's
private placement completed in May 1996.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
AUGMENT SYSTEMS, INC.
By: /s/ Duane A. Mayo
-------------------------
Duane A. Mayo
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant in
the capacities and on the dates indicated.
/s/Duane A. Mayo MAY 28, 1999
- ---------------- ------------
Chief Financial Officer, Treasurer and Secretary
(Principal Financial & Accounting Officer)
Member of the Board of Directors
19
<PAGE>
Augment Systems, Inc.
Index to financial Statements
<TABLE>
<CAPTION>
<S> <C>
Pages
-----
Report of Independent Certified Public Accountants F-2
Financial statements:
Balance sheet as of December 31, 1998 F-3
Statements of operations for the years ended December 31, 1998 and 1997 F-4
Statements of stockholders' deficit for the years ended December 31, 1998, and 1997 F-5
Statements of cash flows for the years ended December 31, 1998 and 1997 F-6
Notes to financial statements F-7 to F-19
</TABLE>
F-1
<PAGE>
Report of Independent Certified Public Accountants
To the Board of Directors
Augment Systems, Inc.
North Andover, Massachusetts
We have audited the accompanying balance sheet of Augment Systems, Inc.
as of December 31, 1998 and the related statements of operations,
stockholders' deficit, and cash flows for the years ended December 31,
1998 and 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to report on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our report.
The accompanying financial statements have been prepared assuming that
Augment Systems, Inc. will continue as a going concern. As discussed in
Note 1 to the financial statements, the Company has suffered recurring
losses from operations and has a net working capital deficiency and a
stockholders' deficit. In addition, the Company has suspended operations
and liquidated its assets. These circumstances raise substantial doubt
about the entity's ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note 1. The
financial statements do not include any adjustments that might result
from the outcome of this uncertainty.
Because of the significance of the uncertainty discussed in the preceding
paragraph, we are unable to express, and we do not express, an opinion on
the accompanying financial statements.
BDO Seidman, LLP
Boston, Massachusetts
April 9, 1999
F-2
<PAGE>
Augment Systems, Inc.
Balance Sheet
(Note 1)
<TABLE>
<CAPTION>
December 31,
1998
-------------
<S> <C>
Assets
Current assets:
Cash (Note 2) $ 187,815
Accounts receivable, net of allowance for doubtful accounts of $331,628 -
Inventory, net of allowance of $326,455 -
Prepaid expenses and other (Note 2) 27,936
Assets held for sale (Note 1) 75,000
--------------
Total current assets $ 290,751
=============
Liabilities and Stockholders' Deficit
Current liabilities:
Bridge financing (Note 4) $ 1,395,701
Accounts payable 377,935
Accrued expenses (Note 3) 182,012
Convertible promissory notes (Note 4) 20,743
Current portion of obligations under
capital leases (Note 5) 123,301
--------------
Total current liabilities 2,099,692
Commitments (Note 5)
Stockholders' deficit (Notes 4, 6, 8, 9 and 11):
Preferred stock, $.01 par value; 2,000,000 shares authorized; none issued
Common stock, $.01 par value; 50,000,000 shares authorized;
11,898,951 shares issued and outstanding 118,990
Additional paid-in capital 21,750,866
Deficit (23,678,797)
--------------
Total stockholders' deficit (1,808,941)
Total liabilities and stockholders' deficit $ 290,751
=============
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
AUGMENT SYSTEMS, INC.
STATEMENTS OF OPERATIONS
(NOTE 1)
<TABLE>
<CAPTION>
December 31,
---------------------------------
1998 1997
<S> <C> <C>
Net sales $ 1,062,203 $ 989,609
Cost of sales 1,311,031 597,924
------------- -------------
Gross margin (loss) (248,828) 391,685
------------- -------------
Operating expenses:
Research and development expenses 2,338,222 3,812,326
General and administrative expenses 2,102,945 1,565,274
Selling and marketing expenses 1,886,850 3,141,843
Loss on impairment of long-lived assets 449,975 -
------------- -------------
Total operating expenses 6,777,992 8,519,443
------------- -------------
Operating loss (7,026,820) (8,127,758)
------------- -------------
Other income (expense):
Interest income, net 56,847 13,323
Interest expense (Notes 4 and 6) (269,556) (835,815)
Other expense - (429,805)
------------- -------------
Total other expense, net (212,709) (1,252,297)
------------- -------------
Net loss (Notes 2 and 10) $ (7,239,529) $ (9,380,055)
============ ============
Net loss per share of common stock (Note 10):
Basic and diluted $ (0.65) $ (2.31)
============ ============
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
Augment Systems, Inc.
Statements of Stockholders' Deficit
(Notes 2, 4, 6, 8, 9 and 11)
<TABLE>
<CAPTION>
Additional Total
Common Stock Paid-in Stockholders'
Shares Amount Capital Deficit Deficit
------------------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1996 2,865,512 $ 28,655 $ 6,177,194 $ (7,059,213) $ (853,364)
Issuance of common stock for exercise of warrants 47,807 478 71,567 - 72,045
Issuance of warrants associated with short term
promissory notes - - 389,500 - 389,500
Initial public offering of 1,800,000 shares of common
stock at $5.50 per share and 2,070,000 common stock
warrants at $.15, net of $1,990,369 in offering costs 1,800,000 18,000 8,202,131 - 8,220,131
Issuance of warrants in consideration for consulting - - 271,950 - 271,950
Issuance of warrants in connection with bridge financing - - 174,068 - 174,068
Net loss - - - (9,380,055) (9,380,055)
---------- -------- ----------- ------------- -------------
Balance, December 31, 1997 4,713,319 47,133 15,286,410 (16,439,268) (1,105,725)
Issuance of warrants associated with bridge financing - - 211,588 - 211,588
Issuance of common stock in connection with
private placement of common stock at $1.00 per share,
including 378,910 shares issued in lieu of fees to
placement agent, net of placement fees of $453,881 5,758,910 57,589 4,868,530 - 4,926,119
Issuance of common stock upon conversion of
bridge financing 300,000 3,000 297,000 - 300,000
Issuance of common stock upon conversion of
notes payable 500,000 5,000 495,000 - 500,000
Issuance of common stock in connection with a private
placement of common stock at $1.00 per share, including
51,722 shares issued in lieu of fees to placement agent, net
of placement fees of $28,200 626,722 6,268 540,532 - 546,800
Issuance of warrants in consideration for consulting - - 17,138 - 17,138
Issuance of warrants as financing fees for bridge financing - - 34,668 - 34,668
Net loss - - - (7,239,529) (7,239,529)
---------- -------- ----------- ------------- -------------
Balance, December 31, 1998 11,898,951 $118,990 $21,750,866 $(23,678,797) $ (1,808,941)
========== ======== =========== ============ ============
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
AUGMENT SYSTEMS, INC.
STATEMENTS OF CASH FLOWS (Notes 2 and 12)
<TABLE>
<CAPTION>
December 31,
---------------------------------
1998 1997
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (7,239,529) $ (9,380,055)
Adjustments to reconcile net loss to net cash used for operating activities:
Depreciation and amortization 193,652 212,364
Finance fees paid in warrants 34,668 -
Consulting expense paid in warrants 17,138 271,950
Loss on impairment of long-lived assets 449,975 -
Provision for doubtful accounts 204,955 126,673
Provision for inventories 226,455 100,000
Loss on disposal of fixed assets - 12,375
Interest on warrants associated with debt 165,647 505,211
Changes in operating assets and liabilities:
Accounts receivable 20,014 (351,642)
Inventories 936,465 (673,569)
Prepaid expenses 91,763 (17,600)
Other assets 9,145 176,815
Accounts payable (993,697) 770,358
Accrued expenses (429,621) 415,529
------------- -------------
Net cash used for operating activities (6,312,970) (7,831,591)
------------- -------------
Cash flows from investing activities:
Purchase of property and equipment (43,779) (179,985)
Capitalized software - (265,000)
------------- -------------
Net cash used for investing activities (43,779) (444,985)
------------- -------------
Cash flows from financing activities:
Proceeds from issuance of common stock 5,472,919 72,045
Proceeds from bridge financing 1,800,000 500,000
Proceeds from issuance (payments) of note payable (750,000) 750,000
Payments of short-term promissory notes - (1,051,248)
Payments of short-term advance - (575,000)
Payments on capital lease obligations (4,827) (24,128)
Payments on convertible promissory notes (20,752) (20,753)
Net proceeds from initial public offering - 8,220,131
------------- -------------
Net cash provided by financing activities 6,497,340 7,871,047
------------- -------------
Net increase (decrease) in cash 140,591 (405,529)
Cash, beginning of year 47,224 452,753
------------- -------------
Cash, end of year $ 187,815 $ 47,224
============ ============
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
AUGMENT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION, BUSINESS AND BASIS OF PRESENTATION:
The Company was incorporated in 1990 to develop and distribute fiber optic
printed circuit boards in the publishing and printing markets. The fiber optic
products had limited success and in fiscal 1994 the Company began phasing out
the fiber optic operations and began the transition into a systems integration
and engineering consulting business. In 1995, the Company made a strategic shift
in its business operation into the server market.
Since October 1995 and through March 1997, the Company had been operating
as a development stage company and had been engaged principally in research and
development, recruitment of personnel and financing activities. During this
time, the Company had engaged in limited marketing activities and had not
commenced the selling of its initial products, which are high-end file
management network systems. During the second quarter ended June 30, 1997, the
Company commenced commercial shipment of its server product and recognized
initial revenue in April 1997.
The Company's initial target market was the electronic publishing
industry, which requires the rapid and efficient movement of large image and
data files over networks. In September 1997, the Company introduced a windows
NT-based client server for its file management network systems.
The accompanying financial statements have been prepared on a going
concern basis which contemplates the realization of assets and the satisfaction
of liabilities and commitments in the normal course of business.
The Company has incurred substantial losses since inception and has been
engaged primarily in product development. The Company has funded its losses
primarily from a combination of debt and equity financings. In addition, at
December 31, 1998 the Company has a working capital deficiency and a
stockholders' deficit.
Although the Company commenced shipment of its products in fiscal 1997,
the revenues recognized were less than originally anticipated by Company
management. The shortfall in 1997 revenues was attributed to product development
delays and problems with the Company's initial products sold. Such shortfalls in
revenues continued throughout the course of fiscal 1998.
In November 1998, the Company was informed by the investment bank that
provided the September 1998 bridge financing, that they would be unable to
secure the additional funding required to repay the outstanding bridge loan and
provide the Company with the necessary working capital to support its business
plan and ongoing operations. The Company began to seek alternative financing,
but was unable to secure the necessary funds.
In January 1999, the Board of Directors of the Company elected to
suspend ongoing operations, layoff all but one of its employees, dispose of all
assets, attempt to settle any outstanding short and long term debts, seek buyers
or strategic partners for the further development of its existing technology as
well as explore merger opportunities. The secured creditors formed a
representative committee of two people who initiated a plan to auction off all
remaining inventory and substantially all remaining fixed assets (retaining only
those assets necessary to effectively shut down operations, valued at
approximately $10,000). On January 28, with the aid of the committee-appointed
auctioneer, the client held the auction, with proceeds amounting to
approximately $65,000, indicating that the carrying value of such assets
exceeded their fair values. Accordingly, a loss of $184,975 was recorded in
operations in 1998 which represents the excess of the carrying value over the
fair value of $75,000. Also included in operations is the write-off of
capitalized software costs of $265,000 to reduce their carrying value to $0. The
Company also recorded charges to cost of sales of approximately $542,000 related
to the write-down of unique inventory associated with the Company's products.
Company plans include disposing of assets, settling of debt and seeking
buyers or strategic partners for the Company's technology as well as exploring
merger opportunities, if any.
These factors raise substantial doubt about the Company's ability to
continue as a going-concern. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
F-7
<PAGE>
AUGMENT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents. There were no cash
equivalents at December 31, 1998.
INVENTORIES
Inventories were stated at the lower of cost (first-in, first-out) or
market. Inventories were recorded at $0 at December 31, 1998 which reflected in
charges to cost of sales of $542,000 for the write-down to market.
PROPERTY AND EQUIPMENT
Property and equipment were recorded at cost. Depreciation is computed
using the straight-line method over the estimated useful lives of the related
assets ranging from three to five years. Property held under capital leases are
being amortized over the lesser of the lease term or their estimated useful
lives. The Company reduced the cost of property and equipment to its carrying
value of $75,000 resulting in a charge to operations of $184,975.
LONG-LIVED ASSETS
The Company follows the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 121 "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed of". SFAS 121 establishes accounting
standards for the impairment of long-lived assets and certain identifiable
intangibles to be held and used and for long-lived assets and certain
identifiable intangibles to be disposed of.
The Company reviews the carrying values of its long-lived and identifiable
intangible assets for possible impairment whenever events or changes in
circumstances indicate that the carrying amount of the assets may not be
recoverable. Due to the change in circumstances related to the operations of the
Company in fiscal 1998, impairment charges were recorded to reduce the carrying
value of long-lived assets (see Note 1).
REVENUE RECOGNITION
Revenue was recognized on system sales to end users when the system
performance has been accepted by the customer based on measurement against
pre-defined published specifications.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred.
In accordance with Statement of Financial Accounting Standards No. 86,
Accounting for the Costs of Computer Software To Be Sold, Leased or Otherwise
Marketed, the Company capitalizes software development costs incurred after
technological feasibility of the software development projects is established
and the reliability of such capitalized costs through future operations is
expected. The Company wrote-off all capitalized software costs during 1998
resulting in a charge of $265,000 to operations.
F-8
<PAGE>
AUGMENT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
INCOME TAXES
Income taxes are calculated using the liability method specified by
Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes.
FINANCIAL INSTRUMENTS
The estimated fair value of the Company's financial instruments, which
include accounts payable, related party accounts, debt instruments and
convertible promissory notes, approximate their carrying value.
CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMERS
A significant portion of the Company's sales were to customers in the
electronic publishing industry. The Company extended credit terms on a
customer-by-customer basis based on its evaluation of its collectibility
exposure. In management's opinion, the Company's allowance for doubtful accounts
is sufficient to cover any potential risk of loss from extending credit to
customers. In fiscal 1998, the Company derived sales from 5 customers which
represented 69% of net sales approximately as follows:
% Total
Customer Sales Sales
A 182,000 17%
B 180,000 17%
C 116,000 11%
D 142,000 13%
E 113,000 11%
STOCK OPTIONS
The Company follows the provisions of SFAS No. 123, Accounting for
Stock-Based Compensation. The Company has elected to continue to account for
stock options at their intrinsic value with disclosure of the effects of fair
value accounting on net earnings (loss) and earnings (loss) per share on a pro
forma basis.
NET LOSS PER SHARE OF COMMON STOCK
The Company follows the Statement of Financial Accounting Standards No.
128, Earnings Per Share ("SFAS No. 128"). SFAS No. 128 requires the presentation
of both basic and diluted earnings per share.
NEW ACCOUNTING STANDARD NOT YET ADOPTED
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No.
133"). SFAS No. 133 requires companies to recognize all derivative contracts as
either assets or liabilities in the balance sheet and to measure them at fair
value. If certain conditions are met, a derivative may be specifically
designated as a hedge, the objective of which is to match the timing of gain or
loss recognition on the hedging derivative with the recognition of (i) the
changes in the fair value of the hedged assets or liability or (ii) the earnings
effect of the hedged forecasted transaction. For a derivative not designated as
a hedging instrument, the gain or loss is recognized in income in the period of
change. SFAS No. 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999.
Historically, the Company has not entered into derivative contracts either
to hedge existing risks or for speculative purposes. Accordingly, the Company
does not expect adoption of the new standard to affect its financial statements.
F-9
<PAGE>
AUGMENT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
3. ACCRUED EXPENSES
ACCRUED EXPENSES CONSIST OF THE FOLLOWING:
December 31,
1998
Consulting $ 31,246
Professional fees 40,051
Severance 45,000
Interest 31,057
Other 34,658
---------
Total accrued expenses $ 182,012
=========
Included in accrued expenses is an accrual of $45,000 related to a
severance agreement with a former President and Chief Executive Officer of the
Company.
4. FINANCING ARRANGEMENTS
PRIVATE PLACEMENT
In January 1998, the Company completed a private placement of 6,180,000
shares of the Company's common stock at a price of $1.00 per share. The proceeds
from the private placement less placement fees of $453,881 were approximately
$4,926,000. An additional 378,910 shares were issued as part of the placement
fees.
In May 1998, the Company completed a private placement of 575,000 shares
of the Company's common stock at a price of $1.00 per share. The proceeds from
the private placement less placement fees of $28,200 were approximately
$546,800. An additional 51,722 shares were issued as part of the placement fees.
BRIDGE FINANCING
In January 1998, the Company entered into bridge financing made up of 10
units each consisting of (i) a convertible promissory note in the principal
amount of $50,000 bearing interest payable at maturity, at the rate of 8% per
annum, which shall be converted into shares of the Company's common stock at the
rate of one share of common stock per dollar loaned plus accrued interest as of
the date and upon the earlier of (a) the consummation of a financing by the
Company which results in net proceeds to the Company of at least $3,000,000 or
(b) June 30, 1998; and (ii) a warrant to purchase 25,000 shares of common stock
at an exercise price of $1.00 per share. Gross proceeds were $500,000. The
Company allocated proceeds of $47,689 to the detachable warrants and $452,131 to
the promissory notes. Upon the completion of a separate private equity placement
in January 1998, the above 10 units were converted into 500,000 shares of the
Company's common stock. The discount on the debt for the detachable warrants of
$47,689 was charged to interest expense upon conversion.
In September 1998, the Company obtained $1,500,000 in bridge financing
consisting of secured convertible promissory notes and 750,000 common stock
purchase warrants. The promissory notes bear interest at the rate of 8% and are
to be repaid at the earlier of July 31, 1999 or (i) any sale, pledge, assignment
or disposition of any assets of the borrower (ii) any merger or consolidation of
the borrower or "change of control" of the borrower or (iii) proceeds of at
least $4,000,000 from the sale or issuance of any debt or equity securities or
proceeds of any loans. Each warrant shall be exercisable for the number of
shares equal to 50% of the principal amount of the loans. The warrants are
exercisable at $.40 per share and expire five years from the date of issuance.
Of the $1,500,000 in gross proceeds, the Company allocated $163,899 to the
warrants and $1,336,101 to the notes. The discount on the debt is being
amortized over 11 months, the anticipated term of the loan. The unamortized
discount on the notes at December 31, 1998 was $104,299.
F-10
<PAGE>
AUGMENT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
4. FINANCING ARRANGEMENTS (concluded)
BRIDGE FINANCING (concluded)
In October 1997, the Company entered into a note agreement with a bank in
the principal amount of $750,000, with interest at the banks prime rate plus 2%
(9.75% at December 31, 1998). This loan was originally payable upon completion
of financing, resulting in net proceeds of at least $5,000,000. In December
1997, the loan agreement was amended to extend the due date on the loan to
February 28, 1998. In accordance with the original terms of the bridge loan, the
Company issued detachable warrants to purchase 100,000 shares of the Company's
common stock at an exercise price of $3.00 per share exercisable over 5 years.
In consideration of the extension granted in December 1997, the exercise price
of the detachable warrants was reduced from $3.00 per share to $1.00 per share.
Of the $750,000 in gross proceeds, the Company allocated $81,077 to the
detachable warrants and $668,923 to the note. The discount on the debt was
amortized over 5 months, the term of the extended loan. In September 1998, the
Company repaid the principal balance with a portion of the proceeds from the
September 1998 bridge financing. During the year ended December 31, 1998, the
remaining discount of $32,431 was charged to interest expense. Accrued interest
related to this bridge note of approximately $17,000 is included in current
liabilities at December 31, 1998.
In December 1997, the Company entered into bridge financing which
consisted of the sale of 10 units. Each unit consisted of (i) a promissory note
in the principal amount of $50,000 bearing interest payable at maturity at the
rate of 8% and payable on the earlier of (a) the date of consummation of
financing by the Company resulting in net proceeds of at least $3,000,000 or (b)
January 30, 1998; and (ii) a warrant to purchase 50,000 shares of common stock
at an exercise price of $1.00 per share and having an exercise period of 5
years. Proceeds were $500,000. The Company allocated gross proceeds of $51,852
to the detachable warrants and $448,148 to the promissory notes. The discount on
the debt was amortized over 2 months, the term of the loan. During the year
ended December 31, 1998, the remaining discount of $25,926 was charged to
interest expense. The Company extinguished this debt by paying $200,000 in cash
and converting the remaining balance into 300,000 shares the Company's common
stock in conjunction with the January 1998 private placement of 6,180,000 shares
of the Company's common stock at $1.00 per share.
CONVERTIBLE PROMISSORY NOTES
At June 30, 1996, the Company had outstanding $752,602 of convertible
promissory notes issued to various stockholders of the Company during September
1995 and May 1996 in connection with a private placement, as well as $111,674 of
convertible promissory notes issued (collectively referred to as the "Notes") to
MTDC and First Stage in connection with the conversion of demand promissory
notes issued in 1991. The Notes mature three years from date of issue and bear
interest of 10 percent per annum payable at maturity or upon the earlier of
redemption or conversion. The notes provided that following the public offering,
any portion of the principal and interest of the Notes not so converted may be
converted at the option of the holder at the offering price plus $1.33 per
share. However, if the price of the common stock is at least $4.00 above the
initial public offering price for a period of 10 consecutive trading days, the
Company may convert any of the remaining principal and accrued interest at a
price equal to $1.33 per share above the initial public offering price. On
November 30, 1996, $802,018 of the outstanding convertible promissory notes and
$71,488 of accrued interest, net of financing costs of $133,969, were converted
into 218,374 shares of the Company's common stock at a conversion rate of $4.00
per share. Outstanding balances on these notes amounted to $20,743 at December
31, 1998.
F-11
<PAGE>
AUGMENT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
5. COMMITMENTS
Leases
The Company is obligated for rental payments under two operating leases
for facilities that expire through August 2001. Rent expense under these
agreements for the years ended December 31, 1998 and 1997 was approximately
$522,000 and $431,000, respectively. In addition, the Company is obligated under
capital leases for equipment that continue through July 2000. Future minimum
payments, by year and in the aggregate, under capital leases and operating
leases with initial or remaining terms of one year or more was approximately as
follows at December 31, 1998:
Year ended December 31, Capital Leases Operating Leases
1999 $ 99,361 $ 504,000
2000 33,940 504,000
2001 - 358,000
---------- ------------
Total minimum lease payments 133,301 $ 1,366,000
===========
Less amount representing interest 10,000
Present value of minimum lease payments $ 123,301
=========
Subsequent to year end, the Company returned all equipment under capital
leases and cancelled the operating leases. No amounts have been accrued by the
Company as a result of canceling the operating leases. The Company is attempting
to negotiate a settlement under non-cancellable capital leases and operating
leases and has been released from any future obligations under one of the
operating leases.
LICENSE AGREEMENTS
On September 27, 1995, the Company obtained a worldwide license from
Radius, Inc. ("Radius") to use certain of Radius' technology in its products. In
addition, the Company granted to Radius an irrevocable, perpetual,
non-exclusive, worldwide, royalty-free license to any modifications to the
Radius technology made by the Company. During 1998 and 1997, the Company failed
to meet the unit sales requirement. As a result, the Company no longer has the
exclusive right to the Radius technology and it may be licensed to other
parties. Royalty expense under this license amounted to approximately $3,000 and
$16,500 in 1998 and 1997, respectively.
The Company entered into a Development and License Agreement dated August
1, 1996 with Polybus Systems Corporation ("Polybus") pursuant to which the
Company obtained an irrevocable, perpetual, worldwide, nonexclusive (except as
to publishing for which the license is exclusive) license to a high speed file
manager software package in consideration for royalty payments. The royalties
payable by the Company pursuant to the Development and License Agreement are
initially $800 per server and $400 per workstation, declining in increments
based upon the number of systems sold to $50 per server and $25 per workstation
until the first 100,000 systems are sold by the Company. No royalties are
payable after the Company sells 100,000 systems. The initial term of the
Development and License Agreement is 25 years and the agreement may be
terminated sooner by Polybus only in the event of a payment default by the
Company. Upon termination of the Development and License Agreement, Polybus may
license the software to third parties in the publishing market. The Company made
advances of $0 and $109,100 pursuant to the agreement, as of December 31, 1998
and 1997, respectively. On January 22, 1999, Polybus and the Company terminated
the development and license agreement and entered into a software license
agreement. Under the terms of the new agreement, Polybus granted to the Company
a perpetual worldwide, irrevocable, nonexclusive license to distribute Polybus
Macintosh client software and the Company granted to Polybus a perpetual,
irrevocable royalty free license for the Company's NT client server. Included in
royalty expense is $106,000 of prepaid royalties which were written-off in the
current year due to the uncertainty of future sales using the software package.
F-12
<PAGE>
AUGMENT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
5. COMMITMENTS (concluded)
EMPLOYMENT CONTRACTS
Effective January 1, 1997, the Company entered into a two-year employment
agreement with Mr. Lorrin Gale, the Company's former President and Chief
Executive Officer. Pursuant to such contract, Mr. Gale was paid a base salary of
$125,000 and was granted incentive stock options to purchase up to 75,000 shares
of common stock. Options to purchase 15,000 shares of common stock vested upon
the execution of the agreement and options to purchase 30,000 shares of common
stock vest on each of the first and second anniversaries of the agreement. All
options have an exercise price of $4.00 per share. Pursuant to his employment
agreement, Mr. Gale may not compete with the Company during the term of his
employment and for one year thereafter. Mr. Gale left the Company as President
and Chief Executive Officer in March 1998. In September 1998, the Company
reached a settlement with Mr. Gale which required the Company to pay $150,000 in
severance pay and an additional $45,000 in increments of $15,000 over three
years beginning July 1999.
Effective January 1, 1997, the Company entered into an employment
agreement with Mr. Duane Mayo, the Company's Chief Financial Officer, for a term
equal to the duration of his employment. In consideration of the agreement, Mr.
Mayo's annual salary increased from $85,000 to $100,000. Mr. Mayo may not
compete with the Company throughout the term of his employment and for one year
thereafter.
Effective May 1998, the Company entered into a two-year employment
agreement with Lawrence Liebson, the Company's President and Chief Executive
Officer. Pursuant to the contract, Mr. Liebson was to be paid a base salary of
$150,000 and was granted incentive stock options to purchase up to 1,763,955
shares of common stock. Options to purchase 563,881 shares of common stock
vested upon execution of the agreement and options to purchase 300,019 shares
vest on each of the first, second, third and fourth anniversaries of the
agreement. All options had an exercise price of $1.00 per share.
Mr. Liebson left the Company as President and Chief Executive Officer in
January 1999.
In December 1998, the Company authorized the issuance of an additional
3,592,816 shares of common stock to investors and the issuance of warrants to
purchase 359,282 shares of common stock to the underwriter who participated in
the January and May 1998 private placements. The issuance of the shares and
warrants was pursuant to specific terms of the private placement related to
missing certain revenue milestones.
6. RELATED PARTY TRANSACTIONS
In February 1997, the Stanley A. Young Family Limited Partnership, an
entity affiliated with Stanley A. Young, a company director until June 1997, was
issued, in a private placement, promissory notes in the aggregate principal
amount of $50,000 and warrants to purchase 6,375 shares of common stock at an
exercise price of $2.75 per share and warrants to purchase 6,375 shares of
common stock at an exercise price of $4.125 per share.
In April 1997, the Company issued to Venture Management Consultants, LLC
("Venture Management"), of which Fred L. Chanowski, a director of the Company
until March 1999, is a 20% member, a promissory note in the principal amount of
$200,000 in consideration for a $200,000 loan. The promissory note bears
interest at 18% per annum with interest and principal payable at maturity on May
31, 1998. In May 1997, the Company issued to Venture Management a promissory
note in the principal amount of $200,000 in consideration for a $200,000 loan.
The promissory note bears interest at 17% per annum with interest and principal
payable at maturity on June 30, 1998. In October 1997, the Company issued to
Venture Management, in consideration of a $400,000 loan, a promissory note in
the principal amount of $400,000 plus a warrant to purchase up to 100,000 shares
of Common Stock at $3.00 per share. The promissory note bears interest at 9% per
annum with interest and principal payable at maturity on the earlier of (i)
December 11, 1997; or (ii) the completion of a financing by the Company. The
Company subsequently repaid all three of the promissory notes
F-13
<PAGE>
AUGMENT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
6. RELATED PARTY TRANSACTIONS (concluded)
issued to Venture Management. In October 1997, the Company entered into a
Consulting Agreement with Venture Management. In consideration for consulting
services, the Company issued Venture Management a warrant to purchase up to
400,000 shares of common stock at $3.00 per share and agreed to pay consulting
fees of $4,000 per month, plus out-of-pocket expenses up to $1,000 per month.
Included in consulting expense in 1997 is approximately $196,000 related to
these services. In October 1998, the Company cancelled the consulting agreement
with Venture Management signed in October 1997 and the warrant to purchase up to
400,000 shares of common stock and entered into a new consulting agreement with
Venture Management. In consideration of consulting services, the Company issued
a warrant to purchase up to 500,000 shares of common stock at $1.00 per share.
Included in consulting expense for 1998 is approximately $17,000 related to
these warrants.
In January 1998, Leventhal Paget LLC, of which Jeffrey Leventhal, a
director of the Company until March 1999, is a member, purchased 200,000 shares
of Common Stock for $200,000 in a private placement of the Company's Common
Stock.
7. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
At December 31, 1998 the Company had a gross deferred tax asset of
$8,457,000 related to a net operating loss carryforward, for which a valuation
allowance of $8,457,000 was recorded. The Company had no deferred tax liability
at December 31, 1998. The current year increase in the deferred tax asset and
the related valuation allowance of $2,957,000 was primarily attributable to the
increase in the deferred asset related to the net operating loss carryforward.
Due to operating losses generated, there is no provision for federal and
state income taxes for the years ended December 31, 1998 and December 31, 1997.
The difference between the effective tax rate and the United States
federal rate of 34 percent for the years ended December 31, 1998 and December
31, 1997 relates to the limitations applicable to the recognition of tax
benefits from the net operating losses.
At December 31, 1998, the Company had a net operating loss carryforward
for federal income tax purposes of approximately $20,300,000 which expires in
2012. Net operating loss carryforwards are subject to review and possible
adjustment by the Internal Revenue Service and may be limited in the event of
certain cumulative changes in the ownership interests of significant
stockholders over a three year period in excess of 50 percent. As a result of
the change in ownership of the Company in June 1995, the ultimate utilization of
the Company's net operating losses were substantially eliminated as of June 30,
1995. As a result of the changes in ownership of the Company in June 1996, May
1997, January 1998 and May 1998, the ultimate utilization of the Company's net
operating losses are expected to be limited.
F-14
<PAGE>
AUGMENT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
8. CAPITAL STOCK
PREFERRED STOCK
In July 1995, the Board of Directors' approved an increase in the number
of authorized shares of preferred stock from 593,602 shares to 2,000,000 shares.
The preferred stock may be issued in one or more series, the terms of which may
be determined at the time of issuance by the Board of Directors, without further
action by stockholders, and may include voting rights, preferences to dividends
and liquidation, conversion and redemption rights and sinking fund provisions.
COMMON STOCK
In June 1998, the Board of Directors' approved an increase in the number
of authorized shares of common stock from 30,000,000 shares to 50,000,000
shares.
In March 1997, the Company issued 47,807 shares of common stock in
connection with the exercise of a warrant to purchase common stock for $1.507
per share.
In May 1997, the Company issued 1,800,000 shares of common stock in
connection with an initial public offering.
In April 1997, the Board of Directors declared a three-for-four reverse
stock split of the Company's common stock. All common stock, common stock
options and per share information disclosed in the financial statements and
notes thereto have been adjusted to give effect for this stock split.
In January 1998, in connection with a $6,180,000 private placement of the
Company's common stock, the Company issued warrants for the purchase of up to
655,891 shares of common stock to the underwriter and 12 of its designees. These
warrants have an exercise price of $1.00 per share; rights to purchase shares
granted by these warrants will expire on January 8, 2003.
In May 1998, in connection with a $575,000 private placement of the
Company's common stock, the Company issued 51,722 shares of common stock, to the
underwriter. The shares of common stock were issued in lieu of cash compensation
payments to the underwriter.
At December 31, 1998, 4,800,000 shares of common stock were reserved for
issuance under outstanding stock options and 7,501,681 shares were reserved for
issuance under warrants.
WARRANTS
In January 1998, in connection with a $500,000 bridge financing, the
Company issued promissory notes with a stated principal of $500,000 and warrants
to purchase up to 250,000 shares at $1.00 per share.
In January 1998, in connection with a $6,180,000 private placement of the
Company's common stock, the Company issued 378,910 shares of common stock, to
the underwriter and 4 of its designees. The shares of common stock were issued
in lieu of cash compensation payments to the underwriter.
In May 1998, in connection with a $575,000 private placement of the
Company's common stock, the Company issued warrants for the purchase of up to
62,673 shares of common stock to the underwriter and 4 of its designees. These
warrants have an exercise price of $1.00 per share; rights to purchase shares
granted by these warrants will expire May 30, 2003.
F-15
<PAGE>
8. CAPITAL STOCK (concluded)
WARRANTS (concluded)
In September 1998, in connection with a $1,500,000 bridge financing, the
Company issued secured promissory notes with a stated principal of $1,500,000
and warrants to purchase up to 750,000 shares of the Company's common stock at
$.40 per share.
In September 1998, in connection with the execution of a consulting
agreement and securing of $1,500,000 the Company issued warrants to purchase
1,000,000 shares of the Company's common stock to an underwriter and 4 of its
designees. These warrants have an exercise price of $.40 per share; rights to
purchase shares granted by these warrants will expire on September 30, 2003.
In October 1998, the Company cancelled warrants to purchase up to 400,000
in common stock associated with a consulting agreement and entered into a new
consulting agreement by issuing warrants to purchase 500,000 shares of the
Company's common stock at $1.00 per share expiring in October 2003.
In December 1998, the Board of Directors authorized the issuance of an
additional 3,592,816 shares of common stock to 66 accredited investors who
participated in private placements of the Company's common stock during January
and May 1998. The issuance of the shares was pursuant to specific terms of the
private placement relating to missing certain revenue milestones. As of April
1999, the Company had not issued those shares.
In December 1998, the Board of Directors authorized the issuance of
warrants to purchase 359,282 shares of common stock to the underwriter involved
in private placements of the Company's common stock during January 1998 and May
1998. The issuance of the warrants was pursuant to specific terms of the private
placement relating to missing certain revenue milestones. As of April 1999, the
Company has not issued those warrants.
From November 1995 to May 1996, the Company issued (i) warrants to
purchase in the aggregate 244,059 shares of common stock at an exercise price of
$1.507, of which 21,514 have an expiration date four years from the date of
issuance and 222,545 have an expiration date five years from the date of
issuance; and (ii) warrants (to a placement agent) to purchase an aggregate of
21,966 shares of common stock at a price of $1.507 per share and expiring
between November 22, 2000 and May 31, 2001. In July 1996, the Company issued a
warrant to purchase 23,904 shares of common stock at an exercise price equal to
one half of the price of the shares of common stock in the Company's initial
public offering and with an expiration date five years from the date of
issuance. In October 1996, the Company issued a warrant to purchase 11,952
shares of common stock at an exercise price of $2.093 per share and with an
expiration date five years from the date of issuance. In December 1996, the
Company issued a warrant to purchase 37,500 shares of the Company's common stock
at an exercise price of $4.00 per share and with an expiration date five years
from the date of issuance. From December 1996 through February 1997, the Company
issued warrants to purchase in the aggregate 914,188 shares of common stock,
457,094 of which have an exercise price of $2.75 per share and 457,094 of which
have an exercise price equal of $4.125 per share. These warrants are exercisable
for a period of three years commencing on December 30, 1997.
In connection with an initial public offering declared effective on May
12, 1997, 2,070,000 redeemable common stock purchase warrants were issued by the
Company. Each warrant entitles the holder to purchase one share of common stock
for $6.60 during the four-year period commencing one year from the date of the
offering.
F-16
<PAGE>
AUGMENT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
9. STOCK OPTION PLAN
In July 1995, the Company adopted its 1995 Stock Option Plan. Under this
plan, the Board of Directors, at their discretion, can issue either incentive
stock options or nonqualified options to employees and nonqualified options to
consultants, directors or other nonemployees.
Incentive stock options may not be granted at a price less than the fair
market value of the shares at the grant date (or less than 110% of fair market
value in the case of employees or officers holding 10% or more of the voting
stock) while the nonqualified options may be granted at a price determined by
the Board of Directors except that the Company has agreed with the Underwriters
not to grant any nonqualified options at a price lower than 85% of the fair
market value of the shares at the date of the grant. All grants as of December
31, 1998 were at fair market value or greater. The options generally vest 10%
after 30 days from the date of grant and the balance ratably over a period of
four years. Incentive stock options granted under the plan expire not more than
10 years from the date of grant and not more than five years in the case of
incentive stock options granted to an employee or officer holding 10% or more of
the voting stock of the Company. All options not exercised at the end of the
vesting period automatically expire. The aggregate number of shares which may be
granted under this plan may not exceed 4,800,000 shares.
Changes in options outstanding under the 1995 Stock Option Plan are
summarized as follows:
Weighted-Average
Shares Exercise Price
Balance, December 31, 1996 304,589 $2.14
Granted 223,813 3.82
Exercised - -
Cancelled or expired (153,918) 3.09
--------- ------
Balance, December 31, 1997 374,484 2.58
Granted 2,492,260 1.00
Exercised - -
Cancelled or expired (601,124) 1.87
--------- ------
Balance, December 31, 1998 2,265,620 $1.04
========= =====
The following table summarizes information about stock options outstanding
at December 31, 1998:
Options Outstanding
-------------------------------------
Weighted-
Number Average Weighted-
Range of Outstanding at Remaining Average
Exercise December 31, Contractual Exercise
Prices 1998 Life (years) Price
- --------------------------------------------------------------------------------
$1.00 2,187,439 4.4 $ 1.00
1.51 64,541 2.0 1.51
2.09 2,390 2.8 2.09
3.00 11,250 3.5 3.00
- --------------- ---------- --- -------
$1.00- $3.00 2,265,620 4.3 $ 1.04
====== ======= ========== === ======
F-17
<PAGE>
AUGMENT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
9. STOCK OPTION PLAN (concluded)
Options Exercisable
---------------------------------------
Number Weighted-
Range of Exercisable at Average
Exercise December 31, Exercise
Prices 1998 Price
- --------------------------------------------------------------------------
$1.00 782,830 $1.00
1.51 49,214 1.51
2.09 1,404 2.09
3.00 4,782 3.00
- --------------- -------- ------
$1.00- $3.00 838,230 $1.03
====== ======= ======== =====
The Company follows the provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation". The Company has elected to continue to account for
stock options at intrinsic value with disclosure of the effects of fair value
accounting on net income (loss) and earnings (loss) per share on a pro forma
basis. Had compensation costs for the stock option plans been determined using
the fair value method, the Company's pro forma net loss and loss per share would
have been as follows:
December 31,
----------------------------------
1998 1997
----------------------------------
Net loss As reported $ (7,239,529) $ (9,380,055)
Pro forma $ (7,814,319) $ (9,480,378)
Basic and diluted loss
per share As reported $ (0.65) $ (2.31)
Pro forma $ (0.70) $ (2.33)
Pro forma compensation cost may not be representative of that to be
expected in future years.
The Company has computed the pro forma disclosures required under SFAS No.
123 using the Black-Scholes option pricing model prescribed by SFAS No. 123. The
weighted average assumptions used for the year ended December 31, 1998 are as
follows: risk free interest rates range of 5.67%, expected dividend yield of 0%
and expected option life of 60 months; and expected volatility of 50%. The
weighted average assumptions used for the year ended December 31, 1997 are as
follows: risk free interest rate ranging from 5.97% to 6.33%, expected dividend
yield of 0% and expected option life of 60 months; and expected volatility of
46.5%. The weighted average fair value of all options granted during the years
ended December 31, 1998 and December 31, 1997 were $0.51 and $1.07,
respectively.
F-18
<PAGE>
10. NET LOSS PER SHARE OF COMMON STOCK
The Company follows Statement of Financial Accounting Standards (SFAS) No.
128, Earnings per Share, issued by the Financial Accounting Standards Board.
Under SFAS No. 128, the basic and diluted net loss per share of common stock for
the years ended December 31, 1998 and December 31, 1997 is computed by dividing
the net loss by the weighted average number of common shares outstanding during
the period.
The weighted average number of common shares outstanding is summarized as
follows:
December 31,
-------------------
1998 1997
---- ----
Denominator for basic and diluted loss per share:
Weighted average common stock
shares outstanding 11,102,306 4,062,360
The Company's convertible preferred stock and other convertible
instruments are not considered outstanding for the diluted calculation since
their effect is antidilutive.
11. INITIAL PUBLIC OFFERING
During fiscal 1997, the Company consummated an initial public offering of
its common stock and common stock purchase warrants under the Securities Act of
1933 with the Securities and Exchange Commission. Pursuant to the offering,
1,800,000 shares of common stock and 2,070,000 redeemable common stock purchase
warrants were issued and sold by the Company. Each warrant entitles the holder
to purchase one share of common stock for $6.60 during the four-year period
commencing one year from the date of the offering. The Registration Statement
was declared effective on May 12, 1997. The Company received net proceeds after
expenses of approximately $8,220,000.
12. SUPPLEMENTAL CASH FLOW INFORMATION
December 31,
1998 1997
Supplemental schedule of cash payments:
Cash paid for interest $ - $ 180,549
Supplemental schedule of noncash financing
and investing activities:
Conversion of bridge financing into common stock 300,000 -
Conversion of notes payable into common stock 500,000 -
Debt discount paid in warrants 211,588 -
Financing fees paid in warrants 34,668 -
Consulting expense paid with warrants 17,138 271,950
Property and equipment acquired by
capital lease obligations - 105,713
F-19
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS FOR THE PERIOD ENDED DECEMBER 31, 1998, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 187,815
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 290,751
<CURRENT-LIABILITIES> 2,099,692
<BONDS> 0
0
0
<COMMON> 118,990
<OTHER-SE> (1,808,941)
<TOTAL-LIABILITY-AND-EQUITY> 290,751
<SALES> 1,062,203
<TOTAL-REVENUES> 1,062,203
<CGS> 1,311,031
<TOTAL-COSTS> 6,777,994
<OTHER-EXPENSES> 212,709
<LOSS-PROVISION> (7,239,529)
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (7,239,529)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,239,529)
<EPS-BASIC> (.65)
<EPS-DILUTED> (.65)
</TABLE>
