<PAGE>
Exhibit 99.2
enCOMMERCE, INC. AND SUBSIDIARIES
Consolidated Financial Statements
March 31, 2000 and June 30, 1999
(With Independent Auditors' Report Thereon)
<PAGE>
enCOMMERCE, INC. AND SUBSIDIARIES
Table of Contents
Page
Independent Auditors' Report 1
Consolidated Balance Sheets 2
Consolidated Statements of Operations and Comprehensive Loss 3
Consolidated Statements of Shareholders' Equity 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6
<PAGE>
[KPMG LOGO APPEARS HERE]
500 E. Middlefield Road Telephone 650 404 5000
Mountain View, CA 94043 Fax 650 960 0566
Independent Auditors' Report
The Board of Directors
enCommerce, Inc.:
We have audited the accompanying consolidated balance sheets of enCommerce, Inc.
and subsidiaries (the Company) as of March 31, 2000 and June 30, 1999, and the
related consolidated statements of operations and comprehensive loss,
shareholders' equity, and cash flows for the nine months ended March 31, 2000,
and the year ended June 30, 1999. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of enCommerce, Inc. and
subsidiaries as of March 31, 2000 and June 30, 1999, and the results of their
operations and their cash flows for the nine months ended March 31, 2000, and
the year ended June 30, 1999, in conformity with accounting principles generally
accepted in the United States of America.
/s/ KPMG LLP
Mountain View, California
July 7, 2000
<PAGE>
enCOMMERCE, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
March 31, June 30,
Assets 2000 1999
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 33,803,369 $ 10,813,819
Accounts receivable, less allowance for doubtful accounts of $120,000
and $50,000 as of March 31, 2000 and June 30, 1999, respectively 5,352,979 3,348,511
Prepaids and other current assets 370,200 233,310
------------ ------------
Total current assets 39,526,548 14,395,640
Property and equipment, net 2,412,820 1,206,240
Other assets 504,770 102,012
------------ ------------
Total assets $ 42,444,138 $ 15,703,892
============ ============
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 1,300,204 $ 992,382
Accrued expenses 2,290,119 1,338,097
Deferred revenue 1,465,130 939,934
Current portion of notes payable -- 82,752
Current portion of capital lease obligations 213,438 150,820
Customer deposits 255,076 371,035
Income taxes payable 153,535 9,100
------------ ------------
Total current liabilities 5,677,502 3,884,120
------------ ------------
Long-term liabilities:
Notes payable, net of current portion -- 6,903
Capital lease obligations, net of current portion 476,163 549,682
Other long-term liabilities 144,960 77,594
------------ ------------
Total long-term liabilities 621,123 634,179
------------ ------------
Total liabilities 6,298,625 4,518,299
------------ ------------
Commitments and contingencies
Series D mandatorily redeemable convertible preferred stock; no par value;
4,792,086 shares authorized; 3,963,114 shares issued and outstanding 35,130,179 --
------------ ------------
Shareholders' equity:
Convertible preferred stock:
Series A; no par value; 2,798,508 shares authorized;
1,675,538 shares issued and outstanding 4,490,439 4,490,439
Series B, no par value; 2,000,000 shares authorized;
1,634,020 shares issued and outstanding 5,871,486 5,871,486
Series C, no par value; 3,614,458 shares authorized;
3,614,338 shares issued and outstanding 14,958,295 12,096,743
Common stock, $0.0003 par value; 29,263,546 shares authorized;
8,243,063 and 5,445,206 shares issued and outstanding as of 2,473 1,634
March 31, 2000 and June 30, 1999, respectively
Additional paid-in capital 10,489,840 1,915,763
Deferred compensation (8,501,926) (1,207,141)
Notes receivable (100,000) --
Accumulated other comprehensive income (loss) 11,040 (8,642)
Accumulated deficit (26,206,313) (11,974,689)
------------ ------------
Total shareholders' equity 1,015,334 11,185,593
------------ ------------
Total liabilities and shareholders' equity $ 42,444,138 15,703,892
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
enCOMMERCE, INC. AND SUBSIDIARIES
Consolidated Statements of Operations and Comprehensive Loss
<TABLE>
<CAPTION>
NINE
MONTHS ENDED YEAR ENDED
MARCH 31, JUNE 30,
2000 1999
------------ ------------
<S> <C> <C>
Revenues:
Software licenses $ 5,383,648 $ 4,488,137
Maintenance 1,052,458 332,445
Professional services 4,343,740 2,055,012
------------ ------------
Total revenues 10,779,846 6,875,594
------------ ------------
Cost of revenues:
Software licenses 91,187 89,748
Maintenance 826,519 522,900
Professional services 4,087,578 2,166,005
------------ ------------
Total cost of revenues 5,005,284 2,778,653
------------ ------------
Gross profit 5,774,562 4,096,941
------------ ------------
Operating expenses:
Research and development 6,190,255 2,842,472
Sales and marketing 11,071,651 7,024,698
General and administrative 2,990,480 2,169,779
------------ ------------
Total operating expenses 20,252,386 12,036,949
------------ ------------
Operating loss (14,477,824) (7,940,008)
Other (expense) income:
Interest expense (79,687) (56,117)
Interest income 489,912 168,830
Foreign currency exchange (10,490) (3,521)
------------ ------------
Loss before income tax expense (14,078,089) (7,830,816)
Income tax expense 153,535 9,100
------------ ------------
Net loss (14,231,624) (7,839,916)
Other comprehensive income (loss) foreign currency
translation adjustments 11,040 (8,642)
------------ ------------
Comprehensive loss $(14,220,584) $(7,848,558)
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
enCOMMERCE, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
Nine months ended March 31, 2000 and year ended June 30, 1999
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
-------------------------- ----------------------
SHARES AMOUNT SHARES AMOUNT
----------- ------------ ----------- ---------
<S> <C> <C> <C> <C>
Balances as of June 30, 1998 1,675,538 $ 4,490,439 5,026,541 $1,508
Issuance of Series B convertible preferred stock,
net of issuance costs of $60,007 1,634,020 5,871,486 -- --
Issuance of Series C convertible preferred stock,
net of issuance costs of $30,549 2,922,239 12,096,743 -- --
Issuance of common stock upon exercise of options -- -- 418,665 126
Deferred stock-based compensation related to
option grants -- -- -- --
Amortization of stock-based compensation -- -- -- --
Issuance of options to nonemployees -- -- -- --
Issuance of warrants to purchase Series B
convertible preferred stock -- -- -- --
Foreign currency translation adjustments -- -- -- --
Net loss -- -- -- --
--------- ----------- --------- ------
Balances as of June 30, 1999 6,231,797 22,458,668 5,445,206 1,634
Issuance of Series C convertible preferred stock,
net of issuance costs of $30,549 692,099 2,861,552 -- --
Issuance of common stock upon exercise of options -- -- 2,797,857 839
Deferred stock-based compensation related to
option grants -- -- -- --
Amortization of stock-based compensation -- -- -- --
Issuance of options to nonemployees -- -- -- --
Foreign currency translation adjustments -- -- -- --
Notes receivable -- -- -- --
Net loss -- -- -- --
--------- ----------- --------- ------
Balances as of March 31, 2000 6,923,896 $25,320,220 8,243,063 $2,473
========= =========== ========= ======
</TABLE>
<TABLE>
<CAPTION>
ADDITIONAL
PAID-IN DEFERRED NOTES
CAPITAL COMPENSATION RECEIVABLE
------- ------------ ----------
<S> <C> <C> <C>
Balances as of June 30, 1998 3,944 -- --
Issuance of Series B convertible preferred stock,
net of issuance costs of $60,007 -- -- --
Issuance of Series C convertible preferred stock,
net of issuance costs of $30,549 -- -- --
Issuance of common stock upon exercise of options 67,797 -- --
Deferred stock-based compensation related to
option grants 1,303,685 (1,303,685) --
Amortization of stock-based compensation -- 96,544 --
Issuance of options to nonemployees 513,297 -- --
Issuance of warrants to purchase Series B
convertible preferred stock 27,040 -- --
Foreign currency translation adjustments -- -- --
----------- ----------- ---------
Net loss -- -- --
Balances as of June 30, 1999 1,915,763 (1,207,141) --
Issuance of Series C convertible preferred stock,
net of issuance costs of $30,549 -- -- --
Issuance of common stock upon exercise of options 514,877 -- --
Deferred stock-based compensation related to
option grants 7,958,051 (7,958,051) --
Amortization of stock-based compensation -- 663,266 --
Issuance of options to nonemployees 101,149 -- --
Foreign currency translation adjustments -- -- --
Notes receivable -- -- (100,000)
Net loss -- -- --
----------- ----------- ---------
Balances as of March 31, 2000 10,489,840 (8,501,926) (100,000)
=========== =========== =========
</TABLE>
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
COOMPREHENSIVE TOTAL
INCOME ACCUMULATED SHAREHOLDERS'
(LOSS) DEFICIT EQUITY
------- ----------- -----------
<S> <C> <C> <C>
Balances as of June 30, 1998 -- (4,134,773) 361,118
Issuance of Series B convertible preferred stock,
net of issuance costs of $60,007 -- -- 5,871,486
Issuance of Series C convertible preferred stock,
net of issuance costs of $30,549 -- -- 12,096,743
Issuance of common stock upon exercise of options -- -- 67,923
Deferred stock-based compensation related to
option grants -- -- --
Amortization of stock-based compensation -- -- 96,544
Issuance of options to nonemployees -- -- 513,297
Issuance of warrants to purchase Series B
convertible preferred stock -- -- 27,040
Foreign currency translation adjustments (8,642) -- (8,642)
Net loss -- (7,839,916) (7,839,916)
------- ----------- -----------
Balances as of June 30, 1999 (8,642) (11,974,689) 11,185,593
Issuance of Series C convertible preferred stock,
net of issuance costs of $30,549 -- -- 2,861,552
Issuance of common stock upon exercise of options -- -- 515,716
Deferred stock-based compensation related to
option grants -- -- --
Amortization of stock-based compensation -- -- 663,266
Issuance of options to nonemployees -- -- 101,149
Foreign currency translation adjustments 19,682 -- 19,682
Notes receivable -- -- (100,000)
Net loss -- (14,231,624) (14,231,624)
------- ----------- -----------
Balances as of March 31, 2000 11,040 (26,206,313) 1,015,334
======= =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
enCOMMERCE, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
NINE
MONTHS ENDED YEAR ENDED
MARCH 31, JUNE 30,
2000 1999
------------ -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(14,231,624) $(7,839,916)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 773,280 394,616
Provision for doubtful accounts 70,000 40,000
Stock compensation expense 764,415 609,841
Changes in operating assets and liabilities:
Accounts receivable (2,074,468) (3,043,668)
Prepaids and other current assets (136,890) (165,722)
Accounts payable and accrued expenses 1,259,844 1,574,014
Income taxes payable 144,435 9,100
Deferred revenue 525,196 301,530
Customer deposits and long-term liabilities (48,593) (187,335)
------------ -----------
Net cash used in operating activities (12,954,405) (8,307,540)
------------ -----------
Cash flows from investing activities:
Purchase of property and equipment (1,979,860) (361,653)
Other assets (402,758) (27,157)
------------ -----------
Net cash used in investing activities (2,382,618) (388,810)
------------ -----------
Cash flows from financing activities:
Principal payments under capital leases (10,901) (50,698)
Payments under notes payable (89,655) (582,759)
Loans to officers (100,000) --
Proceeds from issuance of preferred stock 37,991,731 17,968,229
Proceeds from issuance of common stock 515,716 67,923
------------ -----------
Net cash provided by financing activities 38,306,891 17,402,695
------------ -----------
Changes in cumulative translation adjustment 19,682 (8,642)
------------ -----------
Net increase in cash and cash equivalents 22,989,550 8,697,703
Cash and cash equivalents at beginning of period 10,813,819 2,116,116
------------ -----------
Cash and cash equivalents at end of period $ 33,803,369 $10,813,819
============ ===========
Supplemental disclosures of cash flow information:
Cash paid during the period:
Interest $ 79,687 $ 56,777
============ ===========
Income taxes $ 9,100 $ --
============ ===========
Noncash investing and financing activities:
Deferred stock-based compensation $ 7,958,051 $ 1,303,685
============ ===========
Property and equipment acquired through capital leases $ -- $ 751,200
============ ===========
Warrants issued in connection with capital lease $ -- $ 27,040
============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
enCOMMERCE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2000 and June 30, 1999
(1) The Company
enCommerce, Inc. (the Company or enCommerce), incorporated in California
in January 1995, provides Internet-based portal management infrastructure
that enables secure, personalized access to a corporation's Web-based
applications. The Company's getAccess product suite enables organizations
to create a centralized Web-based e-business portal for managing
relationships with customers, strategic partners, dealers, suppliers, and
employees. During fiscal 1997, the Company changed its focus from
consulting services to software development and solution delivery. The
Company has offices in England and Japan. These offices are separately
incorporated and are wholly owned subsidiaries of the Company.
On April 18, 2000, the Company entered into an agreement to be acquired
by Entrust Technologies Inc. (Entrust). Pursuant to the agreement,
Entrust agreed to issue an aggregate of 10,250,000 shares of its common
stock in exchange for all of the outstanding capital stock, options, and
warrants of the Company. The transaction closed on June 26, 2000, and
will be accounted for as a purchase.
(2) Summary of Significant Accounting Policies
(a) Principles of Consolidation
The accompanying consolidated financial statements include the
accounts of the Company and its subsidiaries. All significant
intercompany accounts and transactions have been eliminated in
consolidation.
(b) Cash and Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.
(c) Property and Equipment
Computer equipment and related software are stated at cost and
depreciated using an accelerated method and straight-line method,
respectively, over the estimated useful lives of the assets,
generally three years. All other equipment and fixed assets are
depreciated on a straight-line basis over five years. Leasehold
improvements are amortized on the straight-line basis over the
shorter of the lease term or estimated useful life of the asset.
(d) Software Development Costs
The Company accounts for software development costs under
Statement of Financial Accounting Standards (SFAS) No. 86,
Accounting for Costs of Computer Software to Be Sold, Leased, or
Otherwise Marketed. Under SFAS No. 86, the costs associated with
software development are required to be capitalized after
technological feasibility has been established. Based on the
Company's product development process, technological feasibility
is generally established upon completion of the working model.
Costs incurred by the Company between completion of the working
model and the point at which the product is ready for general
release have been insignificant, and as a result, the Company has
not capitalized any software development costs.
6
<PAGE>
enCOMMERCE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2000 and June 30, 1999
(e) Fair Value of Financial Instruments
SFAS No. 107, Disclosures About Fair Value of Financial
Instruments, requires disclosure of fair value of certain
financial instruments. Cash and cash equivalents, accounts
receivable, and other assets, as well as accounts payable, accrued
expenses, other current liabilities, notes payable, capital lease
obligations, and deferred revenue, as reflected in the
consolidated financial statements, approximate fair value because
of the short-term maturity of these instruments.
(f) Impairment of Long-Lived Assets
The Company reviews its long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the
carrying amount of an asset to future net undiscounted cash flows
expected to be generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets
exceeds the fair value of the assets. Assets to be disposed of are
reported at the lower of their carrying amount or fair value less
cost to sell.
(g) Revenue Recognition
The Company primarily derives its revenues from software license
fees, professional services, and software product maintenance
services. The Company also derives revenue from distribution
licenses and royalties from those distributor arrangements.
Revenue from distributor licenses is recognized ratably over the
related license period, because of the distributor's rights to
receive unspecified products and upgrades.
Software License Revenues
The Company recognizes revenue in accordance with the provisions
of Statement of Position (SOP) 97-2, Software Revenue Recognition,
as amended. SOP 97-2 generally requires revenue earned on software
arrangements involving multiple elements such as software
products, upgrades, enhancements, post-contract customer support,
installation, and training to be allocated to each element based
on the relative fair values of the elements. The fair value of the
element must be based on evidence that is specific to the vendor.
If a vendor does not have evidence of the fair value for all
elements in a multiple-element arrangement, all revenue from the
arrangement is deferred until such evidence exists or until all
elements are delivered.
Revenues from perpetual software license agreements are recognized
upon shipment of the software when all of the following criteria
have been met: persuasive evidence of an arrangement exists;
delivery has occurred; the fee is fixed or determinable; and
collectibility is probable. Revenues from post-contract customer
support services are recognized ratably over the term of the
maintenance period.
7
<PAGE>
enCOMMERCE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2000 and June 30, 1999
In December 1998, the Accounting Standards Executive Committee
issued SOP98-9, Modification of SOP97-2, Software Revenue
Recognition, with Respect to Certain Transactions, which requires
recognition of revenue using the "residual method" in
multiple-element arrangements when fair value does not exist for
one or more of the delivered elements in the arrangement. Under
the "residual method," the total fair value of the undelivered
elements is deferred and subsequently recognized in accordance
with SOP97-2. The Company did not have a material change to its
accounting for revenues as a result of the provisions of SOP98-9,
which was effective for fiscal 2000.
Professional Services Revenues
Professional services revenues primarily relate to services
performed in connection with installation and implementation of
the Company's software products. Revenues are recognized as the
services are performed. The majority of professional services is
provided on the basis of time and expense. For fixed-fee services,
provision for estimated losses on projects is made during the
period in which the loss becomes probable and can be reasonably
estimated.
(h) Income Taxes
The Company uses the asset and liability method of accounting for
income taxes. Deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences
between the financial statement carrying amount of existing assets
and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled.
Valuation allowances are established when necessary to reduce
deferred tax assets to the amounts expected to be realized.
(i) Stock Option Plans
The Company accounts for its stock option plan in accordance with
the provisions of Accounting Principles Board (APB) Opinion No.25,
Accounting for Stock Issued to Employees, and related
interpretations. Accordingly, compensation expense is recorded on
the date of grant only if the current market price of the
underlying stock exceeds the exercise price. The Company adopted
SFAS No.123, Accounting for Stock-Based Compensation, which
permits entities to recognize as expense over the vesting period
the fair value of all stock-based awards on the date of grant.
SFAS No.123 also allows entities to continue to apply the
provisions of APB Opinion No.25 and provide pro forma disclosures
for employee stock option grants as if the fair value-based method
defined in SFAS No.123 had been applied. The Company has elected
to continue to apply the provisions of APB Opinion No.25 and
provide the pro forma disclosure provisions of SFAS No.123.
8
<PAGE>
enCOMMERCE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2000 and June 30, 1999
(j) Concentration of Credit Risk
The Company is exposed to credit risk in the event of default by
any of its customers to the extent of amounts recorded as accounts
receivable on the accompanying consolidated balance sheets. The
Company performs ongoing credit evaluations of its customers'
financial condition and maintains reserves for estimated credit
losses. Actual losses to date have been within management's
expectations.
For the nine months ended March 31, 2000 and year ended June 30,
1999, four customers made up approximately 42% and 62%,
respectively, of the Company's sales. As of March 31, 2000 and
June 30, 1999, three customers comprised approximately 40% and
70%, respectively, of accounts receivable.
(k) Foreign Currency Translation
The financial statements for the Company's foreign subsidiaries
are measured using the local currency as the functional currency.
Foreign assets and liabilities in the accompanying consolidated
balance sheets have been translated at the rate of exchange as of
the balance sheet date. Revenue and expenses are translated at the
average exchange rate for the year. Translation adjustments are
reported as a component of accumulated other comprehensive loss in
shareholders' equity. Foreign currency transaction gains and
losses are included in the accompanying consolidated statements of
operations and comprehensive loss.
(l) Comprehensive Income (Loss)
In June 1997, the Financial Accounting Standards Board (FASB)
issued SFAS No. 130, Reporting Comprehensive Income, which
establishes standards for reporting and disclosures of
comprehensive income and its components (revenues, expenses,
gains, and losses) in financial statements. The Company adopted
SFAS No. 130, effective July 1, 1998, and elected to display
comprehensive loss and its components in its consolidated
statement of shareholders' equity. The only component of
accumulated other comprehensive income is related to the Company's
foreign currency translation adjustment. No income taxes have been
allocated to other accumulated comprehensive income due to the
fact that the Company's investment in its foreign subsidiary has
been deemed to be essentially permanent in duration.
(m) Use of Estimates
The preparation of consolidated 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 consolidated financial statements
and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates.
9
<PAGE>
enCOMMERCE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2000 and June 30, 1999
(n) Reclassification
Certain amounts in the accompanying June 30, 1999, consolidated
financial statements have been reclassified in order to conform
with the presentation of the March 31, 2000, consolidated
financial statements.
(3) Balance Sheet Components
(a) Accounts Receivable
Accounts receivable consisted of the following:
MARCH 31, JUNE 30,
2000 1999
------------ -----------
Trade accounts receivable $ 5,251,580 $ 3,272,810
Unbilled receivables 221,399 125,701
------------ -----------
5,472,979 3,398,511
Less allowance for doubtful
accounts 120,000 50,000
------------ -----------
$ 5,352,979 $ 3,348,511
============ ===========
(b) Property and Equipment
A summary of property and equipment follows:
MARCH 31, JUNE 30,
2000 1999
------------ ------------
Computers and related equipment $ 3,243,852 $ 1,587,933
Furniture, fixtures, and equipment 319,049 199,411
Leasehold improvements 178,666 4,055
------------ -----------
3,741,567 1,791,399
Less accumulated depreciation
and amortization 1,328,747 585,159
------------ -----------
$ 2,412,820 $ 1,206,240
============ ===========
Included in fixed assets as of March 31, 2000 and June 30, 1999,
is equipment under capital leases totaling approximately $784,000
and $751,000, respectively, with related accumulated amortization
of approximately $406,000 and $156,000 for the nine months ended
March 31, 2000, and year ended June 30, 1999, respectively.
10
<PAGE>
enCOMMERCE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2000 and June 30, 1999
(c) Accrued Expenses
A summary of accrued expenses follows:
March 31, June 30,
2000 1999
----------- ----------
Accrued compensation and benefits $ 1,969,097 $ 900,648
Other accrued expenses 321,022 437,449
----------- ----------
$ 2,290,119 $1,338,097
=========== ==========
(4) Notes Payable
In September 1997, the Company entered into a loan agreement to finance
the purchase of equipment. Under the agreement, the Company borrowed
approximately $200,000 at the bank's prime rate plus 1.5%. The loan is
secured by all assets of the Company. The Company is required to make
monthly installments through August 2000 and maintain a minimum liquidity
(unrestricted cash and 50% of accounts receivable) of two times the
loan's outstanding principal balance. This loan agreement was paid in
full as of March 31, 2000.
In February 1998, the Company entered into a loan agreement that provides
for a $750,000 line of credit. The loan agreement did not contain any
financial covenants. The line of credit expired on August 13, 1999.
(5) Notes Receivable
In January 2000, the Company made two full recourse loans to officers of
the Company as evidenced by two notes for $50,000 each, at 8% interest
per year, due and payable in January 2002. Both loans are secured in part
by a pledge of the Company's common stock.
(6) Shareholders' Equity
(a) Preferred Stock
During fiscal 1998, the Company sold 1,675,538 shares of Series A
convertible preferred stock at $2.68 per share. During fiscal
1999, the Company sold 1,634,020 and 2,922,239 shares of Series B
and C convertible preferred stock, respectively, at $3.63 and
$4.15 per share, respectively. In July and August 1999, the
Company sold 692,099 additional shares of Series C preferred stock
at $4.15 per share. In July 1999, the Company sold 692,099
additional shares of Series C preferred stock at $4.15 per share.
During the nine months ended March 31, 2000, the Company sold
3,963,114 shares of Series D mandatorily redeemable convertible
preferred stock at $9.46 per share. In April 2000, the Company
sold an additional 458,971 shares of Series D mandatorily
redeemable convertible preferred stock at $9.46 per share.
11
<PAGE>
enCOMMERCE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2000 and June 30, 1999
The rights, preferences, and privileges of the Series A, B, and C
convertible preferred stock and Series D mandatorily redeemable
convertible preferred stock are as follows:
. Series A, B, C, and D shareholders are entitled to
noncumulative dividends of 8% of the original purchase
price per annum, when and if declared by the Board of
Directors, payable in preference to common stock dividends.
. Series A, B, C, and D shareholders have a liquidation
preference of $2.68, $3.63, $4.15, and $9.46 per share,
respectively, plus all declared and unpaid dividends. After
the payment of the liquidation preference to the holders of
the Series A, B, C, and D preferred stock, the remaining
assets shall be distributed ratably to the holders of the
common stock and the Series A, B, C, and D preferred stock
on a common equivalent basis, until the holders of the
Series A, B, C, and D preferred stock have received a
preferential return, which is equal to 25% of the original
purchase price as of the closing of the Series A, B, C, and
D preferred stock (as the case may be), and will increase by
an additional 25% of the original purchase price on each
anniversary of such closing, up to a maximum of 100% of the
purchase price.
. Each share of Series A, B, C, and D preferred stock
is convertible at any time at the option of the
holder into one share of common stock. Conversion of
the convertible preferred stock is automatic in the
event of an initial public offering in excess of
$30,000,000 and at an offering price of not less
than $14.19 per share. Series A, B, C, and D
shareholders are protected by certain antidilution
provisions.
. The Company could be required to redeem the Series D
mandatorily redeemable convertible preferred stock
from the holders upon receipt of written request
from holders at any time after 30 days prior to the
fifth anniversary of the original issue date of the
Series D mandatorily redeemable preferred stock.
. Each share of Series A, B, C, and D preferred stock
votes equally with shares of common stock on an as
if converted basis.
. The holders of a majority of the outstanding Series
A and D preferred stock are entitled to elect one
director.
(b) Warrants
During fiscal 1999, the Company issued a warrant to purchase 9,917
shares of Series B convertible preferred stock, in connection with a
capital lease. The warrant has an exercise price of $3.63 and expires
in June 2009. The fair value of the warrant was $27,040 as determined
by using the Black-Scholes option pricing model, with the following
assumption: 76% volatility; risk-free rate of 6.0%; and life of 10
years. The fair value of the warrant has been recorded as a discount on
the related capital lease and is being amortized over the lease term.
As of March 31, 2000, the warrant remains outstanding.
12
<PAGE>
enCOMMERCE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2000 and June 30, 1999
(c) Stock Options
The Company has authorized 29,263,546 shares of common stock for
issuance under its 1997 Stock Option Plan (the Plan). Stock
options may be granted at not less than fair market value per
share at the date of grant as determined by the Board of
Directors. Options are exercisable for 10 years and generally vest
25% after one year from date of grant and ratably per month
thereafter, over a 4-year period.
For the nine months ended March 31, 2000, and year ended June 30,
1999, the Company granted options to nonemployees. The options
vest immediately or as the option-holders perform services for the
Company. The total deferred compensation expense related to these
options as determined using the Black-Scholes option pricing model
as of March 31, 2000, and June 30, 1999, totaled approximately
$498,000 and $513,000, respectively, and is being recognized at
the date of grant, or over the expected period of benefit. For the
nine months ended March 31, 2000, and year ended June 30, 1999,
compensation expense related to nonemployee stock options totaled
$101,149 and $513,297, respectively.
The fair value of each option grant to nonemployees is measured at
each vesting date or estimated at each balance sheet date prior to
vesting of grant using the Black-Scholes option pricing model with
the following weighted-average assumptions: no dividend yield;
volatility of 76%; risk-free interest rates of 6.53% and 5.96% for
the nine months ended March 31, 2000, and year ended June 30,
1999, respectively; the contractual life of 10 years in both the
nine months ended March 31, 2000, and year ended June 30, 1999.
The weighted-average fair value of options granted to nonemployees
for the nine months ended March 31, 2000, and year ended June 30,
1999, was $8.43 and $1.87, respectively.
The Company uses the intrinsic-value method in accounting for its
employee stock-based compensation plans. As of March 31, 2000, the
Company recorded deferred stock compensation of $7,958,051 for the
difference at the grant date between the exercise price of each
stock option granted and the fair value of the underlying common
stock. This amount is being amortized over the vesting period,
generally 48 months, on a straight-line basis. Had compensation
costs been determined in accordance with SFAS No. 123, for all of
the Company's stock-based compensation plans, net loss would have
been $14,314,319 and $7,873,231 for the nine months ended March
31, 2000, and year ended June 30, 1999, respectively.
For purposes of SFAS No. 123 disclosures, the fair value of each
option granted to employees is estimated on the date of grant
using the Black-Scholes option pricing model with the following
weighted-average assumptions: no dividend yield; volatility, none;
risk-free interest rates of 5.94% and 5.25% for the nine months
ended March 31, 2000, and year ended June 30, 1999, respectively;
and expected life of four years for both the nine months ended
March 31, 2000, and year ended June 30, 1999. The weighted-average
fair value of options granted to employees for the nine months
ended March 31, 2000, and the year ended June 30, 1999, was $5.41
and $0.96 per share, respectively.
13
<PAGE>
enCOMMERCE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2000 and June 30, 1999
The following table summarizes information about stock options
outstanding under the Plan as of March 31, 2000:
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
REMAINING AVERAGE NUMBER AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE OF SHARES EXERCISE
PRICE OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE
--------------- ---------------- --------------- -------------- ---------------- --------------
<S> <C> <C> <C> <C> <C> <C>
$ 0.05 385,836 7.13 $ 0.05 13,022 $ 0.05
0.26 to 0.45 694,712 8.53 0.29 368,971 0.27
0.72 to 0.85 675,646 8.98 0.78 80,729 0.72
1.10 146,682 9.40 1.10 -- --
1.75 286,875 9.60 1.75 -- --
1.75 505,000 9.80 2.90 -- --
5.00 621,500 9.98 5.00 -- --
---------- ----------
3,316,251 462,722
========== ==========
</TABLE>
Option activity for the Plan is summarized as follows:
Stock options outstanding
-----------------------------------------
Weighted-
average
exercise
Number of price per
shares share
------------------- -------------------
Balance as of June 30, 1998 3,818,690 $ 0.15
Options granted 1,885,500 0.65
Options canceled (421,125) 0.29
Options exercised (418,665) 0.16
-----------
Balance as of June 30, 1999 4,864,400 0.31
Options granted 2,036,500 2.87
Options canceled (786,792) 0.94
Options exercised (2,797,857) 0.22
-----------
Balance as of March 31, 2000 3,316,251 1.80
===========
14
<PAGE>
enCOMMERCE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2000 and June 30, 1999
(7) Leases
The Company has entered into various operating leases for its facilities
and office equipment. The leases expire through 2004. The Company also
leases certain equipment under capital lease arrangements that expire in
2003. Future lease commitments are as follows:
<TABLE>
<CAPTION>
THREE MONTHS
ENDING CAPITAL OPERATING
JUNE 30, 2000 LEASES LEASES
------------- ---------- ----------
<S> <C> <C>
2000 $ 72,694 $ 264,319
</TABLE>
<TABLE>
<CAPTION>
Year ending
June 30,
--------------------
<S> <C> <C>
2001 $ 305,929 $1,096,062
2002 343,925 586,566
2003 129,335 389,232
2004 11,660 --
---------- ----------
Total minimum lease payments 863,543 $2,336,179
==========
Less amount representing interest 173,942
----------
Present value of minimum lease payments 689,601
Less current portion of capital lease obligations 213,438
----------
Capital lease obligations, net of current portion $ 476,163
==========
</TABLE>
In the nine months ended March 31, 2000, the Company entered into a
noncancelable sublease of certain facilities. Payments to be received
under this sublease will total $80,784 and $353,000 for the three months
ended June 30, 2000, and in fiscal 2001, respectively. The Company's rent
expense was $701,565 and $523,624 for the nine months ended March 31,
2000, and the year ended June 30, 1999, respectively.
Included in other noncurrent assets on the consolidated balance sheet as
of March 31, 2000, is $337,056 of restricted cash to support a letter of
credit provided as a security deposit on the Company's leased facility.
15
<PAGE>
enCOMMERCE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2000 and June 30, 1999
(8) Income Taxes
The components of income tax expense (benefit), as presented in the
accompanying consolidated statements of operations and comprehensive loss
for the nine months ended March 31, 2000, and year ended June 30, 1999,
are comprised of federal, state, and foreign taxes as follows:
March 31, 2000: Current Deferred Total
----------- ---------- ----------
State $ 10,263 -- $ 10,263
Foreign 143,272 143,272
----------- ---------- ----------
Total $153,535 -- 153,535
=========== ========== ==========
June 30, 1999:
State $ 1,600 -- $ 1,600
Foreign 7,500 -- 7,500
----------- ---------- ----------
Total $ 9,100 -- $ 9,100
=========== ========== ==========
The Company's reported income tax expense (benefit) for the nine months
ended March 31, 2000, and year ended June 30, 1999, differs from the
amount obtained by applying the federal statutory income tax rate of 34%
to loss before income taxes as follows:
<TABLE>
<CAPTION>
March 31, June 30,
2000 1999
------------ -----------
<S> <C> <C>
Income tax benefit at statutory rate $(4,787,944) $(2,662,500)
State tax benefit, net of federal tax benefit 10,263 1,600
Foreign tax rate differentials 32,871 2,000
Net operating loss not benefited 4,680,725 2,610,100
Qualified stock options 191,120 34,100
Meals and entertainment 26,500 23,800
------------ -----------
Actual income tax expense $ 153,535 $ 9,100
============ ===========
</TABLE>
16
<PAGE>
enCOMMERCE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2000 and June 30, 1999
The tax effects of the temporary differences that give rise to significant
portions of the deferred tax assets and liabilities as of March 31, 2000, and
June 30, 1999, are as follows:
<TABLE>
<CAPTION>
March 31, June 30,
2000 1999
------------ ----------
Deferred tax assets:
<S> <C> <C>
Net operating loss carryforwards $ 8,913,000 $3,892,000
Research credit carryforwards 739,000 306,000
Deferred revenue and other assets 330,000 253,000
Accrued liabilities not currently
deductible for tax purposes 248,000 299,000
Fixed assets 113,000 26,000
State taxes 3,000 1,000
------------ ----------
Total gross deferred tax assets 10,346,000 4,777,000
Less valuation allowance 10,207,000 4,647,000
------------ ----------
Deferred tax assets, net
of valuation allowance 139,000 130,000
Deferred tax liabilities:
Accrual to cash conversion 124,000 122,000
Other 15,000 8,000
------------ ----------
Net deferred tax assets $ -- $ --
============ ==========
</TABLE>
The net change in the total valuation allowance for the nine months ended March
31, 2000, and year ended June 30, 1999, was a net increase of $5,560,000 and
$2,714,000, respectively.
As of March 31, 2000, the Company has net operating loss carryforwards for
federal and California income tax purposes of approximately $23,548,000 and
$10,197,000, respectively. The federal net operating loss carryforwards expire
in fiscal 2020. The California net operating loss carryforwards expire in fiscal
2005.
As of March 31, 2000, the Company has research and development credit carryovers
for federal and California income tax purposes of approximately $497,000 and
$367,000, respectively. The federal research and experimental credit expires by
the year 2020. The California research and experimental credit can be carried
forward indefinitely.
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management does not believe
it is more likely than not that the deferred tax assets will be realized;
accordingly, a full valuation allowance has been established and no deferred tax
asset is shown in the accompanying consolidated balance sheets.
17
<PAGE>
enCOMMERCE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2000 and June 30, 1999
Federal and state tax laws impose substantial restrictions on the
utilization of net operating loss carryforwards in the event of an
"ownership change" for tax purposes, as defined in Section 382 of the
Internal Revenue Code. The Company has not yet determined if an ownership
change has occurred. If such an ownership change had occurred,
utilization of the net operating losses will be subject to an annual
limitation in future years.
(9) Subsequent Events
In April 2000, the Company granted nonperformance warrants to a
professional services firm to purchase 370,000 shares of preferred stock
at an exercise price of $9.46 per share. The warrants expire in three
years. Conversion of the warrants for common stock is automatic if the
Series D preferred stock is converted for any reason. The Company will
value these warrants using the fair-value method and record compensation
expense in the fourth quarter of 2000.
(10) Recent Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes accounting
and reporting standards for derivative instruments embedded in other
contracts and for hedging activities. SFAS No. 133, as amended, is
effective for all fiscal quarters of all fiscal years beginning after
June 15, 2000. The Company does not expect SFAS No.133 to have a material
effect on its consolidated financial position or results of operations.
In December 1999, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial
Statements, which provides guidance on the recognition, presentation, and
disclosure of revenue in financial statements filed with the SEC. SAB No.
101 outlines the basic criteria that must be met to recognize revenue and
provides guidance for disclosures related to revenue recognition
policies. In June 2000, the SEC issued SAB No. 101B which delays the
implementation date of SAB No. 101 until the fourth fiscal quarter of
fiscal years beginning after December 15, 1999.
In March 2000, the FASB issued FASB Interpretation (FIN) No. 44,
Accounting for Certain Transactions Involving Stock Compensation. FIN No.
44 further defines the accounting consequence of various modifications to
the terms of a previously fixed stock option or award under APB Opinion
No. 25. FIN No.44 becomes effective on July 1, 2000, but certain
conclusions in FIN No. 44 cover specific events that occur after December
15, 1998 or January 12, 2000. The Company has not completed its
evaluation of the impact of FIN No. 44 on its consolidated financial
position or results of operations.
18
