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, 1999
( ) 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
-------- ----------
(State or other jurisdiction of (I. R. S. Employer
incorporation or organization) identification No.)
P.O. Box 1111, West Newbury, MA, 01985
(Address of principal executive
offices)(Zip Code)
978-363-5349
(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 ___ NO X (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___
The issuer's revenues for the fiscal year ended December 31, 1999 was
$185,489. As of June 08, 2000, there were 15,178,007 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 asking prices of such stock on that date.
<PAGE>
Item 1. Description of Business
General/ Proposed Business
Prior to January 15, 1999, Augment Systems, Inc., (the "Company") designed,
developed and sold fibre channel based network file server systems designed to
increase data transfer and file storage on computer networks. While the Company
experienced initial success with the introduction of its products to customers,
long-term viability was dependent, in part, on migrating its technology to
standard hardware and software. However, without additional capital, the Company
was unable to complete research and development, maintain a sales force and
requisite administrative support.
On January 15, 1999, the Board of Directors elected to discontinue all
ongoing operations, layoff all but one of its employees, seek buyers for its
technology and inventory and look for a merger partner. The Company has ceased
sales, marketing and distribution of its products. On March 31, 1999, two of the
remaining three members of the Board of Directors resigned to pursue other
interests. As of June 08, 2000, the Company's Chief Financial Officer, and only
board member, was engaged in the disposition of assets, settlement of
outstanding debts, sale of the Company's technology, and exploration of
potential mergers. There are substantial risks that the Company will not be able
to settle its debts or find a suitable merger transaction. The Company may be
compelled to voluntarily file for bankruptcy or be forced by its creditors into
an involuntary bankruptcy. See Item 1 - Potential for Bankruptcy - Need for
Financing and Item 6 - Management's Discussion and Analysis or Plan of
Operation.
Prior Operations
Prior to January 15, 1999, Augment Systems, Inc. designed, developed
and sold fibre channel-based network file server systems designed to increase
data transfer and file storage on computer networks. The Company's initial
target market was the electronic printing and publishing industry which is
rapidly converting to digital technology, but suffered from critical workflow
bottlenecks due to the very large file sizes of color images which cannot be
efficiently transported over conventional networks. The Company sold fibre
channel-based network file server systems which included (i) one or more
end-to-end high speed fibre channel arbitrated loop ("FC-AL") interfaces; (ii) a
file server, the AFX 410, that performs a central file management function, high
speed large capacity storage, and high speed interconnects to the FC-AL
interfaces; and (iii) PCI cards and software for each client workstation to be
connected to the file server.
Sale of Securities/Proposed Business
On March 11, 2000, the Company entered into a Stock Purchase Agreement
pursuant to which the Company will sell to Right2web.Com, Inc ("Right2web")
Company preferred shares for $10,000 in cash and a 7% note due in one year for
$40,000. Right2web is a start-up business- -to- business internet venture, will
receive shares of the Company's Series A Convertible Preferred Stock subject to
various conditions of closing, including conversion of all outstanding warrants,
options and convertible notes into equity, of which all but $25,000 of the
convertible notes payable have been converted as of this date. Upon conversion
of the Preferred Stock, Right2Web.Com will own 92% of the Company on a fully
diluted basis. After dilution, current stockholders would hold 3% of the
Company's common stock and the convertible note holders would hold 5%. This
transaction should close in the near future.
Right2Web.Com, is owned principally by Jeffrey Leventhal, a former director
of the Company who resigned in March 1999. Mr. Leventhal has previously owned
three information technology companies, with his most previous venture having
been sold to a public company, Netlogics Communications, Inc. (NASDAQ:NETL).
Right2web's business model is to build a business-to-business internet
destination portal where small to medium sized companies can host their web
sites and direct employees to procure information, productivity tools and
products. In addition, Right2web intends to assist companies in developing and
hosting enabled web sites. Right2web will seek to establish services that will
complement the small business marketplace. Right2web has also advised that it
intends to make strategic acquisitions in businesses, which may provide related
services to small to mid-sized businesses such as advertising, marketing and
consulting firms, as well as other internet ventures.
Since Right2web is a start-up business-to-business e-commerce venture, it
will, among other things, be subject to intense competition, the need for
substantial financing, unforeseen technological changes, the risks inherent in
any internet business such as security concerns, technological difficulties,
development of new technology, the need to attract qualified personnel, reliance
on Jeffrey Leventhal, and the continuance of favorable market conditions for
internet companies, etc.
Employees
As of April 12, 2000, the Company employed Duane Mayo, on a part-time
basis, to dispose of all assets, settle any outstanding debts and explore
potential mergers. Mr. Mayo is the sole remaining officer and director of the
Company.
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 a petition in bankruptcy. In addition, the creditors
of the Company could 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, secured and unsecured creditors. In the event of
bankruptcy, current equity and warrant-holders could be substantially diluted.
In addition, the Company may also need to raise capital from other
financings to pay its debts. 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 time frame 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.
There can be no assurances that the Company will be able to consummate the
Right2web transaction within an acceptable time frame required by the Company,
if at all. If the Right2web transaction does close, the Company will still need
to raise substantial additional capital, the amount of which cannot be
determined at this time. Any such transaction will result in significant
dilution to existing stockholders or the issuance of securities with rights
superior to those of the existing stockholders. (See Item 1. General/Proposed
Business). In the event that the Company is unable to consummate the Right2web
transaction, the Company may be forced to file for bankruptcy or may cease all
activities.
ITEM 2. Description of Property
Facilities
The Company operates the day-to-day operation from the Chief Financial
Officer's residence. The Company believes that its facilities are adequate to
meet its current business requirements. Assuming completion of the Right2web
transaction, the Company's principal office will be moved to Right2web's
corporate headquarters in Florida.
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 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 insufficient 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 Additional Financing and Item 6 - Management's Discussion and Analysis or
Plan of Operation. Mr. Gale died in March 2000, and the Company is negotiating
with his estate to convert the balance due Mr. Gale to equity.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the year
ending December 31, 1999.
Item 5. Market for Common Equity and Related Stockholder Matters
The Company's Common Stock was traded on the Bulletin Board
Over-the-Counter ("OTC-BB) under the symbol "AUGS" and the Company's Common
Stock Purchase Warrants were traded on the Bulletin Board Over-the-Counter under
the symbol of "AUGSW". Until on or about June 1, 2000 (the Company was de-listed
due to its failure to timely file its latest annual and quarterly reports). The
Company intends to immediately seek to re-list its securities on the OTC-BB.
In February 1998, the NASD changed the listing requirements for companies
whose securities are listed on NASDAQ SmallCap Market. In light of those
changes, on February 26, 1998, NASDAQ informed the Company it was to have net
tangible assets of $5,000,000 by June 30, 1998, and granted the Company a
temporary listing exception until that time. Since, at June 30, 1998, the
Company did not meet the net tangible assets requirement, on July 7, 1998 NASDAQ
informed the Company that it's securities were no longer eligible for listing on
the NASDAQ SmallCap Market.
The following table sets forth the range of high and low prices quoted
for the Common Stock for the periods indicated. Such quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commission and do not
necessarily represent actual transactions.
Common Stock
<TABLE>
High Bid Low Bid
Price Price
<S> <C> <C>
1998
First Quarter......Privately held until May 1997.. $1.50 $1.00
Second Quarter.................................... $1.4375 $ .50
Third Quarter.................................... $ .5625 $ .21875
Fourth Quarter.................................... $ .375 $ .01
1999
First Quarter....................................... $ .01 $ .01
Second Quarter.................................... $ .01 $ .01
Third Quarter.................................. $ .01 $ .01
Fourth Quarter....................................... $ .01 $ .01
</TABLE>
Dividend Policy
The Company has never paid any cash dividends and does not anticipate
payment of cash dividends on the Company's Common Stock in the foreseeable
future. Under Delaware Corporation Law, dividends may be paid only out of
legally available funds as prescribed by statute, subject to the discretion of
the Company's Board of Directors.
Recent Sales of Unregistered Securities
The Company did not have any securities sold by the Company during the
period covered by this reporting period that were not registered under the
Securities Act of 1933 or otherwise reported on the Company's Form 10-QSBs filed
during this reporting period.
1. 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 June 8,
2000, the Company had not authorized the issuing of 3,279,455 shares.
2. 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 2000, the
Company had not issued those warrants.
The offerings described in Numbers 1 through 2, 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, retain key employees 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 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 for its
technology, and explore merger opportunities.
Prior to January 15, 1999, Augment Systems, Inc. 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, but, 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 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 for its
technology, and explore merger opportunities.
Revenue for the fiscal year ended December 31, 1999 were $185,489 as
compared to $1,062,203 in revenues for the fiscal year ended December 31, 1998.
Revenues in 1999 resulted from the sale of software and licenses versus revenues
in 1998 which were from products sales. During 1999 and 1998, product revenue
were primarily generated through domestic end-user sales.
The Company incurred no research and development costs for the fiscal year
ended December 31, 1999 as compared to $2,338,222 for the fiscal year ended
December 31, 1998. The $2,338,222 decrease was primarily attributable to
discontinued operations which resulted in a reduction in engineering personnel
and consultants associated with the development of the Company's server product
and a lack of capital. The Company does not anticipate spending any additional
funds on research and development in the foreseeable future.
General and administrative costs for the fiscal year ended December 31,
1999 were $177,757 as compared to $2,102,945 for the fiscal year ended December
31, 1998. The $1,925,188 decrease is attributable to decreased spending on
employees, and legal fees. The Company anticipates that spending for general and
administrative costs for the next six months at less than $150,000.
The Company incurred no sales and marketing costs for the fiscal year ended
December 31, 1999 as compared to $1,886,850 for the fiscal year ended December
31, 1998. The $1,886,850 decrease is attributable to a decrease in marketing
support and sales personnel. The Company does not plan on spending any funds on
selling and marketing expenses in the foreseeable future.
The Company recognized a net profit for the fiscal year ended December 31,
1999 of $184,527 as compared to a net loss of $7,239,529 for the fiscal year
ended December 31, 1998.
The Company currently has one part-time employee to dispose of all physical
assets, attempt to settle any outstanding short and long-term debts, seek buyers
for its technology, and 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.
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 from
certain investors (the "Convertible Note holders"). 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 but one of its employees,
liquidate assets, seek buyers for the Company's technology and look for merger
partners. On April 7, 2000, the Company requested that the Convertible Note
holders convert their interest into the aggregate of five percent (5%) of the
equity of the Company after completion of the Right2web transaction. To date
1,475,000 convertible note holders have agreed to convert their rights into
equity in the Company as previously described.
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 of the Company's technology and
attract potential merger partners, which will undoubtedly result in substantial
dilution to existing shareholders. 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 insufficient 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 Additional
Financing.
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 June 08, 2000, there
were 11,898,951 shares of the Company's Common Stock issued and outstanding and
no Preferred Stock issued and outstanding. The Company has issued an additional
3,279,455 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. Pursuant to the Right2web transaction, the Company
will issue Preferred Stock after a reverse split of the Company Common Stock
such that Right2web will own, through its convertible preferred shares, 92% of
the Common Stock of the Company on a fully diluted basis.
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.
Income Taxes
The Company adopted Statement No. 109 "Accounting for Income Taxes" in 1993
and its implementation has had no effect on the Company's financial position and
results of operation.
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
On April 10, 2000, the Company's Board of Directors of the Company,
dismissed its independent accountants BDO Seidman, LLP ("BDO Seidman") and
appointed the accounting firm of Bloom & Company ("Bloom & Company"), as the
Company's new outside auditors, subject to shareholder ratification of such
appointment at the Company's next annual or, if called prior thereto, special
shareholders' meeting. Due to the reduction in the Company's manufacturing and
distribution activities, as well as the Company's expected future operations,
the Board had determined that it did not need outside auditors with the
resources and breadth of operations of BDO Seidman and, based on a review of
several accounting firms, selected Bloom & Company which has public company and
auditing experience.
BDO Seidman had included a "going concern" paragraph in its auditor's
reports on the financial statements for the Company's two fiscal years ended
December 31, 1998 and December 31, 1997, which also indicated that the Company
had suspended operations and liquidated its assets. As a result of this
uncertainty, BDO Seidman was not able to express, and did not express, an
opinion on the 1998 and 1997 financial statements. During the two most recent
fiscal years and any subsequent interim period preceding BDO Seidman's
dismissal, there were no disagreements between the Company and the former
auditors on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure which, if not resolved to
the satisfaction of the former auditors, would have caused BDO Seidman to make a
reference to the subject matter of the disagreement in connection with its
auditors' reports in such financial statements other than their refusal to issue
an unqualifying opinion on the Company's operations for 1998.
Prior to engaging Bloom & Company, the Company consulted with several
of its clients as to its qualifications, experiences and ability to audit the
Company's financial statements. The Company and Bloom & Company did not have
substantive discussions regarding the application of accounting principles to a
specified transaction, either complete or proposed, or the type of audit opinion
that might be rendered on the registrant's financial statements and there are no
reports nor written or oral advice provided by the new accountants' experience,
provided in deciding to retain Bloom & Company. Further, as noted, there was no
matter that was the subject of a disagreement as described in Item 304(a)(1)(iv)
of Regulation S-K, promulgated by the Securities and Exchange Commission.
Prior to BDO Seidman's termination, BDO Seidman did not express a
difference of opinion regarding any events listed in Item 304(a)(2)(v)(A)
through (D) of Regulation S-K.
ITEM 9. Director's Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the
Exchange Act
The current directors, executive officers and key employees of the
Company, their ages and their positions held in the Company are as follows:
NAME AGE POSITION
---- --- --------
Duane A. Mayo 46 Chief Executive Officer
Vice President of Finance
and Administration, Chief Financial
Officer, Treasurer, Secretary and
Director
All directors hold office until the next annual meeting of stockholders
of the Company and until their successors have been duly elected and qualified.
The executive officers are appointed annually by, and serve at the discretion
of, the Board of Directors. In January 1999, Mr. Laurence Liebson, the former
President and CEO, resigned as an officer and member of the Board of Directors
and as of March 31, 1999, Mr. Fred Chanowski and Mr. Jeffrey Leventhal resigned
from the Board of Directors.
DUANE A. MAYO has served as Vice President of Finance and
Administration since March 1995 and as a director, Chief Financial Officer,
Secretary and Treasurer since May 1995. From April 1993 through February 1995,
he served as Chief Financial Officer for Xerographic Laser Images Corporation, a
publicly-held company involved in development of resolution enhancement
technology. From April 1988 to April 1993, Mr. Mayo was Corporate Controller for
Howtek, Inc., a publicly-held company and supplier of desktop scanners for the
color prepress marketplace.
COMMITTEES
The Board of Directors currently does not have any committees.
DIRECTOR COMPENSATION
The Company's directors do not receive compensation for serving on the
Board of Directors, however, the Company reimburses directors for travel
expenses incurred to attend Board meetings.
ITEM 10. Executive Compensation
The following table sets forth actual compensation, for the fiscal
years ended December 31, 1997, 1998 and 1999, including salary, bonuses and
certain other compensation, paid by the Company to its Chief Executive Officer.
None of the Company's executive officers received cash compensation in excess of
$100,000 in 1999.
<TABLE>
SUMMARY COMPENSATION TABLE
Long-Term Compensation
Awards Payouts
Other Restricted
Annual Compensation Annual Stock LTIP All Other
Name and Position Year Salary($) 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>
Duane Mayo (3) 1999 8,333 - - - - - - -
Chief Executive Officer
Lorrin G. Gale
Chairman, President and 1999 - - - - - - - -
Chief 1998 73,253 - - - - - 195,000 -
Executive Officer * 1997 120,000 - - - 75,000 (2) - (1) -
-
Laurence Liebson
Chairman, President and
Chief
Executive Officer **
1999 12,500 - - - - - - - -
1998 97,956 - - - - 1,763,955(3) - - -
</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 vested on each
of the first and second anniversaries of the agreement. All options have an
exercise price of $4.00 per share.
(3) 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 $.40 per share.
4) In January 1999, the former chairman, President and CEO resigned. Before
he resigned Laurence Liebson appointed Duane Mayo CEO and Mr. Mayo was left to
discontinue operations of the Company.
* 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.
EMPLOYMENT CONTRACTS
As of June 8, 2000, 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 vesting 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 at $.40 per share.
Mr. Liebson left the Company as President and Chief Executive Officer in January
1999.
(This page left intentionally blank.)
<PAGE>
ITEM 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets, as of April 12, 2000, certain information
with respect to the beneficial ownership of the capital stock of the Company for
(i) each person who is known by the Company to own beneficially 5% or more of
the outstanding shares of its Common Stock; (ii) each of the directors and
executive officers of the Company; and (iii) all directors and officers as a
group. Except as otherwise indicated, the stockholders listed in the table have
sole voting and investment powers with respect to the shares indicated. As of
April 12, 2000, the Company had 172 Stockholders of record. Unless otherwise
indicated, the address for directors, executive officers and 5% stockholders is
P.O. Box 1111, West Newbury, Massachusetts 01985.
<TABLE>
---------------------------------------------------------- ---------------------------------- ------------
Name and Address of Beneficial Owner Number of Shares of Percentage Class
Common Stock
Beneficially Owned(1)
-------------------------------------------------- ---------------------------------- --------------------
<S> <C> <C>
Duane A. Mayo 105,176 .9%
Nathan Low 972,942(2) 7.9%
Trussel & Co. 1,000,000 8.4%
-------------------------------------------------- ---------------------------------- --------------------
All directors and executive officers as a group 105,176 .9%
(1 person)
-------------------------------------------------- ---------------------------------- --------------------
</TABLE>
1. Pursuant to the rules of the Securities and Exchange Commission,
shares of Common Stock which an individual or group has a right to
acquire within 60 days pursuant to the exercise of options or warrants
are deemed to be outstanding for the purpose of computing the
percentage ownership of such individual or group, but are not deemed
to be beneficially owned and outstanding for the purpose of computing
the percentage ownership of any other person shown in the table.
2. Includes 210,440 shares of Common Stock held in Nathan A. Low and Ruth
I. Low JTWROS, and 95,000 shares held in Sunrise Foundation Trust.
Also includes 325,775 shares of Common Stock issuable upon exercise of
warrants held in Nathan A. Low and Ruth I. Low JTWROS, 50,000 shares
of Common Stock issuable upon exercise of warrants held in Sunrise
Foundation Trust, and 34,007 shares of Common Stock issuable upon
exercise of warrants held by Nathan Low.
Item 12. Certain Relationships and Related Transactions
In July 1995, the Company issued 105,176 shares of Common Stock valued
at $.021 per share to Duane Mayo for services rendered.
On March 11, 2000, the Company entered into a Stock Purchase Agreement
pursuant to which the Company will sell to Right2web for $50,000, a start-up
business-to-business internet venture, shares of the Company's Series A
Convertible Preferred Stock subject to various conditions of closing, including
conversion of all outstanding warrants, options and convertible notes into
equity, of which there can be no assurance. Upon conversion of the Preferred
Stock, Right2web will own 92% of the Company on a fully diluted basis. After
dilution, current stockholders would receive 3% of the Company's Common Stock
and the Convertible Note holders would receive 5%. This transaction should close
within the near future. In order for Right2web to hold 92% of the issued common
stock of the Company, the Company will have to authorize the reverse split of
its common stock which is subject to shareholder approval.
Right2Web, is owned principally by Jeffrey Leventhal, a former director
of the Company who resigned in March 1999. Mr. Leventhal has previously owned
three information technology companies, with his most previous venture having
been sold to a public company, Netlogics Communications, Inc. (NASDAQ:NETL).
Right2web's business model is to build a business-to-business internet
destination portal where small to medium sized companies can host their web
sites and direct employees to procure information, productivity tools and
products. In addition, Right2web intends on assisting companies in developing
and hosting enabled web sites. Right2web will seek to establish services that
will complement the small business marketplace. Right2web has also advised that
it intends to make strategic acquisitions in businesses, which may provide
related services to small to mid-sized businesses such as advertising, marketing
and consulting firms, as well as other internet ventures.
Since Right2web is a start-up business to business e-commerce venture. It
will, among other things, be subject to intense competition, the need for
financing, unforeseen technological changes, the risks inherent in any internet
businesses such as security concerns, technological difficulties, development of
new technology, the need to attract qualified personnel, reliance on Jeffrey
Leventhal, and the continuance of favorable market conditions for internet
companies, etc.
Item 13. Exhibits and Reports on Form 8-K (a) Exhibits.
27 - Financial Data Schedule.
(b) Reports of Form 8-K.
The Company filed a Form 8-K on April 14, 2000.
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 Chief Financial Officer, Treasurer and Secretary
-------------------- Principal Financial & Accounting Officer)
June 9, 2000 Member of the Board of Directors
--------------------
<PAGE>
Augment Systems, Inc.
Index to financial Statements
Financial statements:
Balance sheet as of December 31, 1999
Statements of operations for the years ended
December 31, 1999 and 1998
Statements of stockholders' deficit for the years ended
December 31, 1999, and 1998
Statements of cash flows for the years ended December 31, 1999 and 1998
Notes to financial statements
Report of Independent Certified Public Accountants
<PAGE>
Augment Systems, Inc.
Balance Sheet
(Note 1)
<TABLE>
December 31,
1999
----
Assets
Current assets:
<S> <C>
Cash (Note 2) $ 74,420
- -----------
Total current assets $ 74,420
===========
Liabilities and Stockholders' Deficit
Current liabilities:
Bridge financing (Note 4) $ 1,395,701
Accounts payable 54,942
Accrued expenses (Note 3) 195,000
Convertible promissory notes (Note 4) 6,432
Current portion of obligations under
capital leases (Note 5) 46,760
-----------
Total current liabilities 1,698,835
-----------
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 118,989
Additional paid-in capital 21,750,866
Deficit ( 23,494,270)
-----------
Total stockholders' deficit ( 1,624,415)
-----------
Total liabilities and stockholders' deficit $ 74,420
===========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
Augment Systems, Inc.
Statements of Operations
(Note 1)
<TABLE>
December 31,
-------------------------
1999 1998
<S> <C> <C>
Net sales $ 10,489 $1,062,203
Cost of sales -- 1,311,031
-------- ---------
Gross margin (loss) 10,489 ( 248,828)
-------- ---------
Operating expenses:
Research and development expenses -- 2,338,222
General and administrative expenses 177,757 2,102,945
Selling and marketing expenses -- 1,886,850
Loss on impairment of long-lived assets 10,000 449,975
---------- --------------
Total operating expenses 187,757 6,777,992
----------- -------------
Operating loss ( 177,268) ( 7,026,820)
---------- -----------
Other income (expense):
Interest income, net -- 56,847
Interest expense (Notes 4 and 6) ( 165,850) ( 269,556)
Sale of license rights 175,000 --
--------- -------------
Total other expense, net 9,150 ( 212,709)
---------- ------------
Net loss before extraordinary items ( 168,118) ( 7,239,529)
Gain from extinguishments of debt 352,645 --
---------- ------------
Income (loss) 184,527 ( 7,239,529)
Tax expense 55,358 --
Tax benefit ( 55,358) --
--------- ------------
Net (loss) income $ 184,527 $( 7,239,529)
--------- -----------
Number of shares
Net (loss) per share of common stock (Note 10):
Basic and diluted $ 0.02 $(0.65)
==== ====
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
Augment Systems, Inc.
Statements of Stockholders' Deficit
(Notes 2, 4, 6, 8, 9 and 11)
Additional
Common Stock Paid-in
Shares Amount Capital
<S> <C> <C> <C>
Balance, December 31, 1997 4,713,319 $ 47,132 15,286,410
Issuance of warrants associated with bridge financing - - 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
Issuance of common stock upon conversion of
bridge financing 300,000 3,000 297,000
Issuance of common stock upon conversion of
notes payable 500,000 5,000 495,000
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
Issuance of warrants in consideration for consulting -- -- 17,138
Issuance of warrants as financing fees for bridge financing -- -- 34,668
Net loss -- -- -
----------- -------- ----------
Balance December 31, 1998 11,898,951 118,989 21,750,866
Net income -- -- --
----------- -------- ----------
Balance, December 31, 1999 11,898,951 $ 118,989 $ 21,750,866
=========== ======== ==========
(concluded below)
</TABLE>
See accompanying notes to financial statements.
<TABLE>
Total
Stockholders'
Deficit Deficit
<S> <C> <C>
Balance, December 31, 1997 (16,439,268) (1,105,726)
Issuance of warrants associated with bridge financing - 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 - 4,926,119
Issuance of common stock upon conversion of
bridge financing - 300,000
Issuance of common stock upon conversion of
notes payable - 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 - 546,800
Issuance of warrants in consideration for consulting - 17,138
Issuance of warrants as financing fees for bridge financing - 34,668
Net loss ( 7,239,529) ( 7,239,529)
----------- ----------
Balance December 31, 1998 ( 23,678,797) ( 1,808,942)
Net income 184,527 184,527
------------ ---------
Balance, December 31, 1999 $( 23,494,270) $( 1,624,415)
============== ==========
See accompanying notes to financial statements.
</TABLE>
<PAGE>
Augment Systems, Inc.
Statements of Cash Flows (Notes 2 and 12)
<TABLE>
December 31,
----------------------------
1999 1998
Cash flows from operating activities:
<S> <C> <C>
Net income $ 184,527 $(7,239,529)
Adjustments to reconcile net loss to net
cash used for operating activities:
Depreciation and amortization -- 193,652
Finance fees paid in warrants -- 34,668
Consulting expense paid in warrants -- 17,138
Loss on impairment of long-lived assets 10,000 449,975
Provision for doubtful accounts -- 204,955
Provision for inventories -- 226,455
Sale of license rights ( 175,000) --
Gain on extinguishments of debt 352,645 --
Interest on warrants associated with debt -- 165,647
Changes in operating assets and liabilities:
Accounts receivable -- 20,014
Inventories -- 936,465
Prepaid expenses 27,936 91,763
Other assets -- 9,145
Accounts payable ( 675,639) ( 993,697)
Accrued expenses 12,988 ( 429,621)
--------- ----------
Net cash used for operating activities ( 262,543) ( 6,312,970)
--------- ----------
Cash flows from investing activities:
Purchase of property and equipment -- ( 43,779)
Sale of license rights 175,000 --
Sale of equipment 65,000 --
--------- ----------
Net cash used for investing activities 240,000 ( 43,779)
--------- ----------
Cash flows from financing activities:
Proceeds from issuance of common stock -- 5,472,919
Proceeds from bridge financing -- 1,800,000
Proceeds from issuance (payments) of note payable ( 14,311) ( 750,000)
Payments on capital lease obligations ( 76,541) ( 4,827)
Payments on convertible promissory notes -- ( 20,752)
---------- -----------
Net cash provided by financing activities 90,852 6,497,340
---------- ----------
Net increase (decrease) in cash ( 113,395) 140,591
Cash, beginning of year 187,815 47,224
---------- ----------
Cash, end of year $ 74,420 $ 187,815
========== =========
See accompanying notes to financial statements.
</TABLE>
<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.
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 decided to accomplish the
following:
1. Seek buyers, strategic partners, and merger opportunities to make the
Company economically viable.
2. 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, 1999 with
the aid of the committee-appointed auctioneer, the Company 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's strategic financial and operating plans were as follows:
Financial Plan
1. Sell the license rights to the Company's technology that is no longer
needed.
2. Settle the accounts payable related to the previous operations
3. Provide incentive to the short-term note holders to exchange their notes
and warrants for 5% of the Company's common stock.
4. Negotiate the termination of operating and capital lease agreements.
5. Maintain the status of the corporation as a public Company through
required SEC filings and compliance with other governmental regulations.
6. Seek and acquiring entity through the issuance of Series A preferred
shares that are convertible to 92% of the Company's common stock.
<PAGE>
Augment Systems, Inc.
Notes to Financial Statements
(Continued)
1. Organization, Business and Basis of Presentation: (continued)
Operating Plan
1. Build a business-to-business Internet destination portal where
small to medium sized companies can host their web sites and direct
employees to procure information, productivity tools and products.
2. Assist businesses in developing and hosting enabled web sites. The
Company will seek to establish services that will complement the small
business marketplace.
3. Acquire businesses, which may provide related services to small to
mid-sized businesses such as advertising, marketing and consulting firms,
as well as other Internet ventures.
In 1999, the Company began implementing its financial and operating
strategies.
1. The Company sold the license rights to its technology for $175,000.
2. The Company entered an agreement with the landlord and cancelled
the operating lease for its offices located at 2 Robbins Road, Westford,
Massachusetts. No additional obligations were incurred as a result of
cancellation.
3. The Company returned to the supplier certain equipment that was
obtained under capital lease agreement. In exchange for the cancellation of
lease, the Company paid $6,800 in cash and transferred certain accounts
receivable to settle additional $6,800 payable to the supplier.
4. The Company entered a release agreement regarding payment of any
future royalties.
5. Management began negotiations with new management who proposed to
purchase 92% of the Company stock and develop its Internet business. Also, a
proposal was made the note holders to convert their notes to 5% of the Company's
common stock.
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, 1999, the Company had a working capital deficiency and a
stockholders' deficit. Also, as a start-up business-to-business e-commerce
venture, the Company's new business, assuming the Right2web transaction closes,
is subject to various risks including intense competition, need for substantial
funds and qualified personnel, internet security concerns, potential
technological difficulties, development of new technology, reliance on key
personnel, and the continuance of favorable market conditions for internet
companies.
These factors raise substantial doubt about the Company's ability to
continue as a going-concern. 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 financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
<PAGE>
Augment Systems, Inc.
Notes to Financial Statements
(Continued)
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, 1999.
Inventories
The Company had no inventories for the fiscal year ended December 31,
1999. 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. Inventories
were stated at the lower of cost (first-in, first-out) or market.
Property and Equipment
Property and equipment were recorded at cost. Depreciation was 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 in December 1998, resulting in a charge to operations of
$184,975 in fiscal year 1998. In 1999, the Company sold most of its equipment
for $65,000 and wrote off the balance. As of December 31, 1999, the Company had
no fixed assets.
Long-Lived Assets
The Company follows the provisions of the 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 in December 1998(see Note 1).
Revenue Recognition
Revenue was recognized on sales to end users when the product was accepted
by the customer.
Research and Development
When research and development costs were incurred they were 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 capitalized 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.
<PAGE>
Augment Systems, Inc.
Notes to Financial Statements
(Continued)
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 in 1998 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. The Company's sales in 1999 represented a one time license fee for its
technology to one customer. In fiscal 1998, the Company derived sales from 5
customers which represented 69% of net sales approximately as follows:
<TABLE>
<S> <C> <C>
% Total
Customer Sales Sales
A 182,000 17%
B 180,000 17%
C 116,000 11%
D 142,000 13%
E 113,000 11%
</TABLE>
In 1999, the Company terminated the sale of products and services to all
customers.
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.
<PAGE>
Augment Systems, Inc.
Notes to Financial Statements
(Continued)
2. Summary of Significant Accounting Policies (continued)
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 in 1999 to affect its financial
statements.
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.
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.
<PAGE>
Augment Systems, Inc.
Notes to Financial Statements
(Continued)
4. Financing Arrangements (continued)
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 and $6,432 at December 31, 1999.
5. Commitments
Leases
The Company was obligated for rental payments under two operating leases
for facilities that expire through August 2001. Rent expense under these
agreements for the year ended December 31, 1999 and 1998 was approximately $-0-
and $522,000, 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, 1999:
<TABLE>
Year ended December 31, Capital Leases Operating Leases
<S> <C> <C>
2000 $ 0 0
2001 0 0
------- ----------
Total minimum lease payments 0 0
==========
Less amount representing interest 0
-------
Present value of minimum lease payments $ 0
=======
</TABLE>
Subsequent to 1998 year-end, the Company returned all equipment under
capital leases and cancelled the operating leases. No amounts have been accrued
or recorded by the Company as a result of cancelling the operating leases in
1999. The Company has negotiated a settlement for the non-cancellable capital
lease of all equipment and the operating lease for the Company headquarters, at
2 Robbins Road, Westford, Massachusetts, and has been released from any future
obligations. The remaining obligation, under non-cancellable capital lease, is
for the Company's telephone equipment. The amount owed is estimated at $46,700
and is included under current liabilities.
<PAGE>
Augment Systems, Inc.
Notes to Financial Statements
(Continued)
5. Commitments (continued)
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 $-0- and
$3,000 in 1999 and 1998, 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.
In 1999, the Company cancelled its agreement with Polybus and obtained a release
from any obligations.
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 vested 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
vested 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.
<PAGE>
Augment Systems, Inc.
Notes to Financial Statements
(Continued)
6. Related Party Transactions and Subsequent Events
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
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 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, purchased 200,000 shares of Common
Stock for $200,000 in a private placement of the Company's Common Stock.
On March 11, 2000, the Company entered into a Stock Purchase Agreement
pursuant to which the Company will sell to Right2web.Com, Inc ("Right2web"), a
start-up business-to-business internet venture, such number of shares of the
Company's Series A Convertible Preferred Stock of the Company subject to various
conditions of closing, including conversion of all outstanding warrants, options
and convertible notes into equity of which there can be no assurance. Upon
conversion of the Preferred Stock, Right2Web.Com will own 92% of the Company on
a fully diluted basis. After dilution, current stockholders would receive 3% of
the Company's common stock and the convertible note holders would receive 5%.
This transaction should close within the next sixty days.
Right2Web.Com, is owned principally by Jeffrey Leventhal, a former director
of the Company who resigned in March 1999. Mr. Leventhal has previously owned
three information technology companies, with his previous venture having been
sold to a public company, Netlogics Communications, Inc. (NASDAQ:NETL).
Right2web's business model is to build a business-to-business internet
destination portal where small to medium sized companies can host their web
sites and direct employees to procure information, productivity tools and
products. In addition, Right2web intends to assist companies in developing and
hosting enabled web sites. Right2web will seek to establish services that will
complement the small business marketplace. Right2web has also advised that it
intends to make strategic acquisitions in businesses, which may provide related
services to small to mid-sized businesses such as advertising, marketing and
consulting firms as well as other internet ventures.
Since Right2web is a start-up business-to-business e-commerce venture, it
will, among other things, be subject to intense competition, the need for
financing, unforeseen technological changes, the risks inherent in any internet
businesses such as security concerns, technological difficulties, development of
new technology, the need to attract qualified personnel, reliance on Jeffrey
Leventhal, and continuing of favorable market conditions for internet companies,
etc.
<PAGE>
Augment Systems, Inc.
Notes to Financial Statements
(Continued)
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, 1999 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, 1999 and December 31, 1998:
<TABLE>
Rate Amount
------- -------
<S> <C> <C>
Expected federal tax expense at statutory rate 27% $ 50,989
U.S. State income taxes 3 4,369
Tax benefit of loss carryforward (30) (55,358)
--- ------
Provision for income tax -- $ --
=== ======
</TABLE>
The difference between the effective tax rate and the United States
federal rate of 34 percent for the years ended December 31, 1999 and December
31, 1998 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.
<PAGE>
Augment Systems, Inc.
Notes to Financial Statements
(Continued)
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, 129,850 shares of common stock were reserved for
issuance under outstanding stock options and 7,501,681 shares were reserved for
issuance under warrants.
<PAGE>
Augment Systems, Inc.
Notes to Financial Statements
(Continued)
8. Capital Stock (continued)
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 April and May 2000
$1,475,000 of the convertible note holders agreed to convert their notes and
warrants into an aggregate of 5% of the equity of the Company after the proposed
reverse stock split.
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.
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.
<PAGE>
Augment Systems, Inc.
Notes to Financial Statements
(Continued)
8. Capital Stock (continued)
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.
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 vested 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.
<PAGE>
Augment Systems, Inc.
Notes to Financial Statements
(Continued)
9. Stock Option Plan (continued)
Changes in options outstanding under the 1995 Stock Option Plan are
summarized as follows:
<TABLE>
Weighted-Average
Shares Exercise Price
<S> <C> <C>
Balance, January 1, 1998 2,265,620 1.04
Granted -- --
Exercised -- --
Cancelled or expired (2,134,770) 1.04
---------- ------
Balance, December 31, 1998 130,850 $1.00
========== =====
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1999:
<TABLE>
Options Outstanding
-------------------
Weighted-
Number Average Weighted-
Range of Outstanding at Remaining Average
Exercise December 31, Contractual Exercise
Prices 1999 Life (years) Price
--------------------------------------------------------------------------------
<S> <C> <C> <C>
$1.00 130,850 4.4 $ 1.00
$1.00 130,850 4.4 $ 1.00
====== ======== === =====
</TABLE>
<PAGE>
Augment Systems, Inc.
Notes to Financial Statements
(Continued)
9. Stock Option Plan (concluded)
<TABLE>
Options Exercisable
Number Weighted-
Range of Exercisable at Average
Exercise December 31, Exercise
Prices 1999 Price
--------------------------------------------------------------------
<S> <C> <C>
$1.00 130,850 $1.00
$1.00 130,850 $1.00
====== ======== =====
</TABLE>
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:
<TABLE>
December 31,
--------------------------
1999 1998
------------- ---------
<S> <C> <C> <C>
Net profit (loss) As reported $ 184,527 $(7,239,529)
Pro forma 184,527 $(7,814,319)
Basic and diluted loss
per share As reported $ (0.02) $ (0.65)
Pro forma $ (0.02) $ (0.70)
</TABLE>
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
level of outstanding options as of December 31, 1999 does support the
calculation. 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 fair value of all options granted during
the years ended December 31, 1999 was $0.51.
<PAGE>
Augment Systems, Inc.
Notes to Financial Statements
(Continued)
10. Net Loss Per Share of Common Stock
The Company follows the 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:
<TABLE>
December 31,
-----------------------------
1999 1998
----------- ---------
<S> <C> <C>
Denominator for basic and diluted loss per share:
Weighted average common stock
shares outstanding 11,898,952 11,105,306
</TABLE>
The Company's convertible preferred stock, unissued shares 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
<TABLE>
December 31,
-------------------------
1999 1998
---------- -------
Supplemental schedule of cash payments:
<S> <C> <C>
Cash paid for interest $ 7,088 $ --
Cash paid for taxes -- --
Supplemental schedule of non-cash 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
Property and equipment acquired by
capital lease obligations -- --
<PAGE>
BLOOM AND COMPANY
50 CLINTON STREET, SUITE 502
HEMPSTEAD, NY 11550
TEL 516 486-5900
FAX 516 486-5476
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, 1999 and the related statements of operations,
stockholders' deficit, and cash flows for the years ended December 31, 1999
and 1998. 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 audit
provides a reasonable basis for our report.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Augment Systems, Inc.
as of December 31, 1999, and the results of its operations and its cash
flows for the years ended December 31, 1999 and 1998, in conformity with
generally accepted accounting principles.
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.
Bloom and Company
Hempstead, NY
June 8, 2000
<PAGE>
</TABLE>
