Exhibit 99.1
99.1 Balance sheets of NetOps as of December 31, 1999 and December 31,
1998, and the related statements of operations, changes in
stockholders' deficit and cash flows for the years then ended.
NetOps Corporation
Financial Statements
December 31, 1999 and 1998
<PAGE>
Report of Independent Accountants
To the Board of Directors and Stockholders of
NetOps Corporation
In our opinion, the accompanying balance sheet and the related statements of
operations, changes in stockholders' deficit and of cash flows present fairly,
in all material respects, the financial position of NetOps Corporation at
December 31, 1999 and 1998, and the results of its operations and its cash flows
for the years then ended, in conformity with accounting principles generally
accepted in the United States. These financial statements are the responsibility
of the Company's management; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States, which require that we plan and perform the audits 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
The accompanying financial statements have been prepared on the assumption that
the Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has incurred losses from operations and has a
stockholders' deficiency at December 31, 1999 and expects to incur additional
operating losses and negative cash flows for the foreseeable future, which raise
substantial doubt about its ability to continue as a going concern. The
Company's plans in this regard are described in Note 2. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Stamford, Connecticut
May 17, 2000
2
<PAGE>
NetOps Corporation
Balance Sheet
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31,
1999 1998
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 1,125,200 $ 4,733,300
Accounts receivable 1,500,500 76,700
Loan receivable from employees -- 1,300
Prepaid expenses and other current assets 98,900 51,000
----------- -----------
Total current assets 2,724,600 4,862,300
Property and equipment, net (Note 4) 339,800 225,200
Long-term deposits 13,600 13,600
----------- -----------
$ 3,078,000 $ 5,101,100
=========== ===========
Liabilities, Mandatorily Redeemable Preferred Stock and
Stockholders' Deficit
Current liabilities:
Accounts payable and accrued expenses (Note 5) $ 410,400 $ 110,500
Deferred revenue 192,000 84,700
----------- -----------
Total current liabilities 602,400 195,200
----------- -----------
Commitments (Note 11)
Series A mandatorily redeemable convertible preferred stock, 1,500,000 shares
authorized, issued and outstanding at December 31, 1999 and
1998, liquidation preference of $1,866,500 at December 31, 1999 (Note 7) 1,702,600 1,504,900
----------- -----------
Series B mandatorily redeemable convertible preferred stock, 7,044,872 shares
authorized; 3,365,384 shares issued and outstanding at December 31, 1999 and
1998, liquidation preference of $6,060,100
at December 31, 1999 (Note 7) 5,878,300 5,196,600
----------- -----------
Stockholders' deficit:
Common stock, $0.01 par value, 20,000,000 shares authorized; 4,519,329 and
4,429,329 shares issued and outstanding at
December 31, 1999 and 1998, respectively (Note 8) 45,200 44,300
Additional paid-in capital 1,015,400 414,300
Deferred compensation (86,800) (14,900)
Accumulated deficit (6,079,100) (2,239,300)
----------- -----------
Total stockholders' deficit (5,105,300) (1,795,600)
----------- -----------
Total liabilities, mandatorily redeemable preferred stock
and stockholders' deficit $ 3,078,000 $ 5,101,100
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
NetOps Corporation
Statement of Operations
--------------------------------------------------------------------------------
Year ended December 31,
1999 1998
Revenues:
Software $ 1,452,100 $ --
Consulting 994,400 721,900
Hardware 53,700 52,400
----------- -----------
2,500,200 774,300
----------- -----------
Costs and expenses:
Cost of software revenues 103,900 --
Cost of consulting revenues 848,200 334,500
Cost of hardware revenues 53,700 38,500
Sales and marketing 1,205,000 375,100
General and administrative 2,566,000 1,172,900
Research and development 838,200 361,700
----------- -----------
5,615,000 2,282,700
----------- -----------
Loss from operations (3,114,800) (1,508,400)
----------- -----------
Other income (expense), net 39,700 --
Interest income 114,700 24,000
Interest expense -- (69,000)
----------- -----------
Loss before income tax (2,960,400) (1,553,400)
----------- -----------
Income tax benefit (Note 10) -- --
----------- -----------
Net loss (2,960,400) (1,553,400)
Accretion on Series A and B mandatorily redeemable
convertible preferred stock (879,400) (191,200)
----------- -----------
Net loss applicable to common stock $(3,839,800) $(1,744,600)
=========== ===========
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
NetOps Corporation
Statement of Changes in Stockholders' Deficit
For the Years Ended December 31, 1999 and 1998
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Additional
Common Stock Paid-in Deferred Accumulated
Shares Par Value Capital Compensation Deficit Total
-------------------- ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 3,887,500 $38,900 $ 60,500 $ (43,900) $ (494,700) $ (439,200)
Issuance of common stock to employees 233,250 2,300 56,000 (57,800) -- 500
Series A mandatorily redeemable convertible
preferred stock dividend 308,579 3,100 172,800 -- -- 175,900
Issuance of warrants as consideration for sales
channel partner services -- -- 125,000 -- -- 125,000
Amortization of restricted stock compensation -- -- -- 86,800 -- 86,800
Accretion of Series A mandatorily redeemable
convertible preferred stock to redemption value -- -- -- -- (174,900) (174,900)
Accretion of Series B mandatorily redeemable
convertible preferred stock to redemption value -- -- -- -- (16,300) (16,300)
Net loss -- -- -- -- (1,553,400) (1,553,400)
--------- ------- ---------- --------- ----------- -----------
Balance at December 31, 1998 4,429,329 44,300 414,300 (14,900) (2,239,300) (1,795,600)
--------- ------- ---------- --------- ----------- -----------
Issuance of common stock to employees 90,000 900 139,500 (140,400) -- --
Issuance of warrants as consideration for sales
channel partner services -- -- 461,600 -- -- 461,600
Amortization of restricted stock compensation -- -- -- 68,500 -- 68,500
Accretion of Series A mandatorily redeemable
convertible preferred stock to redemption value -- -- -- -- (197,700) (197,700)
Accretion of Series B mandatorily redeemable
convertible preferred stock to redemption value -- -- -- -- (681,700) (681,700)
Net loss -- -- -- -- (2,960,400) (2,960,400)
--------- ------- ---------- --------- ----------- -----------
Balance at December 31, 1999 4,519,329 $45,200 $1,015,400 $ (86,800) $(6,079,100) $(5,105,300)
========= ======= ========== ========= =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
NetOps Corporation
Statement of Cash Flows
Increase (Decrease) in Cash and Cash Equivalents
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31,
1999 1998
<S> <C> <C>
Cash flows from operating activities:
Net loss $(2,960,400) $(1,553,400)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation 137,000 66,800
Issuance of warrants as consideration for services 461,600 125,000
Amortization of deferred compensation 68,500 87,300
Changes in operating assets and liabilities:
Accounts receivable (1,423,800) (46,800)
Loan receivable from employees 1,300 12,200
Prepaid expenses and other assets (47,900) (36,900)
Accounts payable and accrued expenses 299,900 (42,800)
Deferred revenue 107,300 (56,400)
----------- -----------
Net cash used in operating activities (3,356,500) (1,445,000)
----------- -----------
Cash flows from investing activities:
Proceeds from bridge note -- 600,000
Repayment of bridge note -- (350,000)
Purchase of property and equipment (251,600) (219,000)
----------- -----------
Net cash provided by (used in) investing activities (251,600) 31,000
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of preferred stock, net of issuance costs -- 4,930,300
----------- -----------
Net cash provided by financing activities -- 4,930,300
----------- -----------
Net increase (decrease) in cash and cash equivalents (3,608,100) 3,516,300
Cash and cash equivalents, beginning of year 4,733,300 1,217,000
----------- -----------
Cash and cash equivalents, end of year $ 1,125,200 $ 4,733,300
=========== ===========
Supplemental disclosure of noncash financing activities:
During 1998, the Company converted the remaining unpaid $250,000 of a bridge
note into 160,256 shares of Series B Preferred Stock (Note 6)
During 1999, the Company accreted $197,600 and $681,700 to the redemption
value of the Series A and Series B Preferred Stock, respectively. During
1998, the Company accreted $174,900 and $16,300 to the redemption value of
the Series A and Series B Preferred Stock, respectively
Supplemental disclosures of cash flows:
Income taxes paid $ 12,500 $ 2,300
=========== ===========
Interest paid $ -- $ 69,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
NetOps Corporation
Notes to Financial Statements
--------------------------------------------------------------------------------
1. Nature of the Business
NetOps Corporation (the "Company") was incorporated in 1994 in
Connecticut. In October 1997, the Company changed its state of
incorporation to Delaware. The Company develops and markets software and
services for network-level validation and testing, infrastructure health
monitoring and analysis, and enhanced real-time fault detection.
2. Basis of Presentation
The financial statements have been prepared on a going-concern basis,
which contemplates realization of assets and liquidation of liabilities in
the ordinary course of business. The Company will require additional funds
to meet planned obligations over the next twelve months and is seeking to
raise such amounts through the private sale of its equity securities. The
Company may, however, also seek to raise capital through public offerings,
collaborative arrangements with corporate sources, or other sources of
financing. There can be no assurance that such additional financing, if at
all available, can be obtained on terms acceptable to the Company.
Continuance of the Company as a going concern is dependent upon, among
other things, the Company's ability to obtain adequate long-term
financing, the acceptance of the Company's software products in the
marketplace, and its attainment of profitable operations. These financial
statements do not include any adjustments relating to the recoverability
of the carrying amount of recorded assets or the amounts of liabilities
that might result from the outcome of this uncertainty.
3. Summary of Significant Accounting Policies
Cash and Cash Equivalents
For purposes of reporting cash flows, the Company considers its short
term, highly liquid investments with original maturities of three months
or less to be cash equivalents. The Company invests its excess cash in an
overnight money market account. Accordingly, the investments are subject
to minimal credit and market risk. At December 31, 1999 and 1998, the
Company had $1,125,200 and $4,733,300, respectively, in a money market
account.
Revenue Recognition and Deferred Revenue
The Company generates the majority of its revenue from the license sale of
its AutoDetect and Visionary software. The Company also derives revenue
from consulting services performed for the analysis and interpretation of
data generated by the Company's network fault detection software installed
at customer sites.
Software revenue is recognized in accordance with AICPA Statement of
Position 97-2, "Software Revenue Recognition" ("SOP 97-2"). Under SOP
97-2, the Company recognizes software license revenue when a noncancelable
license agreement has been executed, fees are fixed and determinable, the
software has been delivered, accepted by the customer if acceptance is
required by the contract and other than perfunctory, and collection is
considered probable. The Company generally recognizes license revenue on
delivery of the software unless there is significant
7
<PAGE>
NetOps Corporation
Notes to Financial Statements
--------------------------------------------------------------------------------
uncertainty about customer acceptance, in which case the Company delays
recognition of the related revenue until the software is accepted by the
customer.
Maintenance revenues are recognized ratably over the maintenance period.
Revenues from implementation and training services are recognized as
services are performed.
Revenue from consulting services contracts is deferred and recognized
ratably over the contractual period the services are provided.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using
the double declining balance method over the estimated useful lives of the
assets. Maintenance and repair costs are expensed as incurred. The Company
has adopted the provisions of Statement of Position ("SOP") 98-1,
"Accounting for the Cost of Computer Software Developed or Obtained for
Internal Use." This statement requires capitalization of certain costs
incurred in the development of internal-use software. The Company
periodically reviews the carrying value of its fixed assets to assess
recoverability based upon future expectations of non-discounted cash flows
from operations.
Research and Development and Software Development Costs
The Company incurs costs to develop computer software to be marketed to
customers. In accordance with Statement of Financial Accounting Standards
("SFAS") No. 86, "Accounting for the Costs of Computer Software to be
Sold, Leased or Otherwise Marketed," the Company has evaluated the
establishment of technological feasibility of its various products during
the development phase. The time period during which costs could be
capitalized from the point of technological feasibility until the time of
general product release is very short and, consequently, these costs are
expensed as incurred as the amounts that could be capitalized are not
material to the Company's financial position.
Concentration of Credit Risk and Significant Customers
Financial instruments which potentially expose the Company to
concentration of credit risk consist primarily of trade accounts
receivable. The Company sells its services to various companies in the
United States across several industries. The Company performs ongoing
credit evaluations of its customers to ensure reserves for potential
credit losses are not warranted.
For the year ended December 31, 1999, the Company's two most significant
customers accounted for approximately 68% and 15% of the Company's net
revenues, respectively. No other customer exceeded 10% of net revenues. At
December 31, 1999, one customer accounted for 94% of the Company's
outstanding accounts receivable.
8
<PAGE>
NetOps Corporation
Notes to Financial Statements
--------------------------------------------------------------------------------
For the year ended December 31, 1998, the Company's three most significant
customers accounted for approximately 23%, 12% and 10% of the Company's
net revenues, respectively. No other customer exceeded 10% of net
revenues. No customer exceeded more than 10% of the accounts receivable
balance at December 31, 1998.
Financial Instruments
The carrying amounts of the Company's financial instruments, which include
cash, accounts receivable, accounts payable and accrued expenses,
approximate their fair value due to the short term nature of the assets
and liabilities.
Employee Stock Compensation
The Company's Long Term Incentive Plan (Note 8), consisting of stock
grants to employees, is accounted for in accordance with Accounting
Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to
Employees." The Company has adopted the disclosure requirements of
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting
for Stock-Based Compensation."
Segment Information
In 1998, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 131, "Disclosures About Segments of an Enterprise and Related
Information." SFAS No. 131 supersedes SFAS No. 14, "Financial Reporting
for Segments of a Business Enterprise," replacing the "industry segment"
approach with the "management" approach. The management approach
designates the internal organization that is used by management for making
operating decisions and assessing performance as the source of the
Company's reportable segments. The Company operates in one segment:
software and services for network-level validation, testing, analysis, and
fault detection. SFAS No. 131 also requires disclosures about products and
services, geographic areas, and major customers. The adoption of SFAS No.
131 had no impact on the Company's financial statements for the periods
presented.
Comprehensive Income
The Company has adopted the accounting treatment prescribed by Statement
of Financial Accounting Standards ("SFAS") No. 130, "Comprehensive
Income." The adoption of this statement had no material impact on the
Company's financial statements for the periods presented.
Recently Issued Accounting Pronouncement
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving
Stock Compensation - an interpretation of APB Opinion No. 25" ("FIN 44").
FIN 44 clarifies the application of APB Opinion No. 25 and among other
issues clarifies the following: the definition of an employee for purposes
of applying APB Opinion No. 25, the criteria for determining whether a
plan qualifies as a noncompensatory plan, the accounting consequence of
various modifications to the terms of previously fixed stock options or
awards, and the accounting for an exchange of stock compensation awards in
a business combination. FIN 44 is effective July 1, 2000, but certain
conclusions in FIN 44 cover specific events that occurred after either
December 15, 1998 or January 12, 2000. The Company is currently evaluating
the impact of FIN 44 on its results of operations and financial position.
9
<PAGE>
NetOps Corporation
Notes to Financial Statements
--------------------------------------------------------------------------------
Use of Estimates
The preparation of the Company's financial statements in conformity with
generally accepted accounting principles requires management to make
certain estimates and assumptions that affect the reported amounts of
assets, liabilities, revenues and expenses at and during the reporting
periods of the financial statements. Actual results could differ from
these estimates.
Reclassifications
Certain prior year's amounts have been reclassified to conform to the
current year's presentation.
4. Property and Equipment
Property and equipment consist of the following:
Estimated
December 31, useful life
1999 1998 (years)
Computer hardware $ 349,200 $ 200,400 5
Computer software 85,000 22,300 3
Office furniture and equipment 97,500 85,300 7
Leasehold improvements 70,300 42,400 Life of lease
--------- ---------
602,000 350,400
Accumulated depreciation (262,200) (125,200)
--------- ---------
$ 339,800 $ 225,200
========= =========
Depreciation expense for the years ended December 31, 1999 and 1998 was
$137,000 and $66,800, respectively.
10
<PAGE>
NetOps Corporation
Notes to Financial Statements
--------------------------------------------------------------------------------
5. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses are composed of the following:
December 31,
1999 1998
Accounts payable $181,000 $ 65,600
Accrued bonuses 128,400 7,600
Accrued sales commissions 59,400 2,500
Accrued audit fees 30,000 24,300
Other accrued expenses 11,600 10,500
-------- --------
$410,400 $110,500
======== ========
6. Bridge Note
In October 1998, the Company received a $600,000 bridge note from certain
shareholders. As consideration for the bridge note, the Company granted
the shareholders warrants to purchase shares of the Company's common
stock. The number of warrants and the exercise price was to be determined
based on the duration the bridge note was outstanding. The estimated fair
value of the warrants was not material, therefore, no value was ascribed
to the warrants for financial reporting purposes. In connection with the
issuance of the Series B Preferred Stock (Note 7), the Company converted
$250,000 of the bridge note into 160,256 shares of Series B Preferred
Stock. The remaining $350,000 of the loan was paid back in cash. In
addition, the Company exercised its option to buy back the rights to the
warrants by paying $69,000 in interest on the note to cover the period
from issuance to conversion.
7. Preferred Stock
In October 1997, the Company issued 1,500,000 shares of its Series A
Mandatorily Redeemable Convertible Preferred Stock ("Series A Preferred
Stock") at a purchase price of $1.00 per share. Net proceeds as a result
of the sale totaled $1,463,500.
In December 1998, the Company issued 3,205,128 shares of its Series B
Mandatorily Redeemable Convertible Preferred Stock ("Series B Preferred
Stock") at a purchase price of $1.56 per share. Net proceeds as a result
of the sale totaled $4,930,300. In addition, the Company converted
$250,000 of its bridge loan (Note 6) into 160,256 shares of Series B
Preferred Stock.
The purchaser of the Series B preferred stock has the option, exercisable
at its sole discretion, to purchase an additional 3,504,274 shares at a
purchase price of $1.56 per share. This option shall terminate upon the
earlier of five years or certain business performance criteria being met
by the Company.
11
<PAGE>
NetOps Corporation
Notes to Financial Statements
--------------------------------------------------------------------------------
The Series A Preferred Stock and Series B Preferred Stock (the "Preferred
Stock") have the following characteristics:
Conversion Rights
The Series A and Series B Preferred Stock are convertible, at the option
of the holder, into common stock of the Company at a conversion price
currently equal to $0.57 and $1.56 per share, respectively, which may be
adjusted in accordance with certain anti-dilution and performance
provisions. The Preferred Stock will automatically convert into common
stock upon the closing of an initial public offering, from which net
proceeds equal or exceed $25,000,000 at a price per share equal to or
greater than a price currently equal to $6.24 per share or upon the
affirmative vote of at least 50% of the Preferred Stockholders.
Voting rights
Holders of the Preferred Stock are entitled to vote upon any matter
submitted to the stockholders for a vote. Each share of preferred stock
shall have one vote for each full share of common stock into which the
respective share of preferred stock would be convertible on the record
date of the vote.
Dividends
The holders of the Series A and Series B Preferred Stock are entitled to
dividends at the rate of $0.10 and $0.156, respectively, per share per
annum. These dividends accrue and are cumulative from the date of
issuance. This cumulative dividend is being recorded by a charge to
accumulated deficit and an increase to the carrying values of the
Preferred Stock. Dividends are payable in the form of cash or in
additional shares of common stock at the stockholder's option. The state
in which the Company is incorporated does not preclude companies from
accruing dividends when a stockholders' deficit exists.
Liquidation
In the event of any liquidation, dissolution or winding up of the Company,
the holders of the Series A and Series B Preferred Stock shall be entitled
to receive, prior to and in preference to the holders of the common stock,
an amount equal to $1.00 and $1.56 per share, respectively, plus any
accrued but unpaid dividends. In addition, the Preferred Stockholders
shall receive an amount of cash such that the compounded internal rate of
return of the Preferred Stock is 10% per annum.
Redemption rights
Based upon the following redemption schedule, the majority of the Series A
and Series B Preferred Stockholders shall have the right to cause the
Company to redeem the then outstanding Series A and Series B Preferred
Stock at a price currently equal to $1.00 and $1.56 per share,
respectively, plus any accrued but unpaid dividends as follows:
12
<PAGE>
NetOps Corporation
Notes to Financial Statements
--------------------------------------------------------------------------------
Cumulative
redemption amount
Redemption date Series A Series B
October 16, 2002 $ 719,800 $2,519,400
October 16, 2003 1,583,600 5,542,700
October 16, 2004 2,613,000 9,145,500
The excess of the estimated redemption value over the carrying value
is being accreted through periodic charges to accumulated deficit
over the life of the instrument.
Other Rights
The Company must first obtain the approval of at least two thirds of
the Preferred Stockholders to amend the certificate of incorporation
or to execute certain transactions if such actions would adversely
affect any of the rights, preferences or privileges or shares of the
Preferred Stock.
8. Common Stock
Each share of common stock entitles the holder to one vote on all matters
submitted to a vote of the Company's stockholders. Common stockholders are
entitled to receive dividends, if any, as may be declared by the board of
directors, subject to any preferential dividend rights of the preferred
stockholders.
At December 31, 1999, the Company had 7,754,808 shares of its common stock
reserved for issuance upon conversion of the Series A and Series B
Preferred Stock, for the exercise of outstanding warrants and for awards
to be granted and exercised under the Company's long-term incentive plan.
During 1998, the Company entered into an agreement with a sales channel
partner (the "Partner") whereby the Company will pay the Partner 15% of
sales generated by the Partner and the Partner will provide certain
marketing support services. In addition, the Company issued warrants to
purchase 1,059,176 shares of the Company's common stock to the Partner.
The warrants have an exercise price of $1.00 per share, are exercisable
over an eighteen-month period, and have a term of five years.
The amount and terms of the warrants issued to the Partner are subject to
certain anti-dilution and performance provisions. As a result, the warrant
agreement was amended upon the issuance of the Series B Preferred Stock
and the number of warrants was increased to 1,258,866 and the exercise
price was changed to $0.57 per share.
The fair value of these warrants is being measured as the warrants vest
and are earned. During 1998, the estimated fair value of the warrants
earned was $125,000 which was expensed during 1998. The fair value of the
warrants was determined using the Black-Scholes option pricing model with
the following assumptions: 40% volatility; risk free interest rate of
5.625%; and an expected life of 3 years.
13
<PAGE>
NetOps Corporation
Notes to Financial Statements
--------------------------------------------------------------------------------
In 1999, the remaining 419,622 warrants with a fair value of $461,600
vested and were expensed. The fair value of the warrants was determined
using the Black-Scholes option pricing model with the following
assumptions: 40% volatility; risk free interest rate of 6.3%; and an
expected life of 3 years. See Note 12 for a further discussion.
9. Long-Term Incentive Plan
During 1997, the stockholders approved the Long-Term Incentive Plan (the
"Plan"), an equity incentive program which provides for the granting of
the Company's common stock, stock appreciation rights, warrants and
nonqualified stock options to employees, contractors, directors and other
service providers and incentive stock options to employees and directors
of the Company. Under the Plan, stock option grants may remain exercisable
for a period no later than ten years from the date of the grant and are
payable either in cash, common stock or a combination of both.
Stock appreciation rights entitle the holder to surrender to the Company a
portion or all of the unexercised related stock options and to receive
cash or shares of common stock of a value equal to the amount by which the
fair market value of each share on the date of exercise exceeds the
exercise price of the related stock option. Stock appreciation rights are
exercisable at the same time and with regard to the same number of shares
as the related stock option is exercisable. In no event may the cash
portion of such payment exceed 50% of the total amount due. As of December
31, 1999, no stock appreciation rights had been granted.
Restricted stock awards are subject to forfeiture unless the recipient
remains employed with the Company for a minimum period or the Company
achieves specified performance based goals. The period in which the
restricted stock remains subject to forfeiture shall not be less than one
year or not more than ten years. Generally, the restricted stock awards
remain subject to forfeiture over two years in six month intervals.
Stock options entitle the recipient to purchase shares of common stock of
the Company at a stated price on the date of grant for a predetermined
period of time, but in no event may any portion of a stock option be
exercisable later than ten years from the date of grant. Generally, the
stock option awards vest over a two to four-year period.
Employee warrants under the plan shall be issued at the exercise price of
not less than the fair market value per share on the date of issuance. No
warrants may be exercisable later than ten years from the date of grant.
The purchase price of shares purchased, pursuant to any warrant exercise
shall be paid in cash. As of December 31, 1999, no warrants had been
issued to employees.
The Plan is administered by the Board of Directors, who determines the
fair market value of the common stock at the date of grant and the vesting
period for the shares issued under the Plan. There are 2,722,558 shares
specifically reserved for issuance under the plan. All instruments issued
under the Plan are subject to restrictions on the sale or transfer on the
part of the holder.
14
<PAGE>
NetOps Corporation
Notes to Financial Statements
--------------------------------------------------------------------------------
All activity under the Plan during 1999 and 1998 related to restricted
stock awards and stock options. Activity under the plan is summarized as
follows:
<TABLE>
<CAPTION>
Restricted Stock Stock Options
----------------------- ---------------------------------
Weighted Weighted Weighted
average average average
Number of grant date Number of grant date exercise
shares fair value shares fair value price
<S> <C> <C> <C> <C> <C>
Outstanding at December 31, 1997 218,750 -- -- -- --
Granted 233,250 $0.25 -- -- --
Exercised -- -- -- -- --
Forfeited -- -- -- -- --
------- ---------
Outstanding at December 31, 1998 452,000 $0.25 -- -- --
Granted 90,000 $1.56 1,630,558 $1.56 $1.56
Exercised -- -- -- -- --
Forfeited -- -- -- -- --
------- ---------
Outstanding at December 31, 1999 542,000 $0.47 1,630,558 $1.56 $1.56
======= =========
</TABLE>
At December 31, 1999, 61,250 restricted stock shares remain subject to
forfeiture.
The following table summarizes information about options outstanding and
exercisable at December 31, 1999:
Outstanding
---------------------------------------
Average Number of Number of
Exercise Remaining Options Options
Price Life Outstanding Exercisable
(in years)
$1.56 9 1,630,558 26,500
During 1999, 1,630,558 options were granted at an exercise price equal to
the grant date fair value of $1.56.
The Company applies APB No. 25, "Accounting for Stock Issued to
Employees," and related interpretations in accounting for the plan. Total
compensation expense recognized during 1999 and 1998 related to stock
options and stock grants under the plan was $68,500 and $86,800,
respectively.
Compensation expense under the plan if determined based upon the fair
value at the grant date of the awards, consistent with the methodology
prescribed under SFAS No. 123, "Accounting for
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NetOps Corporation
Notes to Financial Statements
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Stock Based Compensation," would have been $827,200 and $53,300 for the
years ended December 31, 1999 and 1998, respectively.
The following weighted average assumptions are included in the estimated
grant date fair value calculations for the Company's stock option and
restricted share awards:
Year ended
December 31,
1999 1998
Expected dividend yield 0.0% 0.0%
Expected stock price volatility 0.0% 0.0%
Risk free interest rate 6.3% 5.6%
Expected life (years) 5 5
10. Income Taxes
The deferred tax provision was determined under the asset and liability
approach. Deferred tax assets and liabilities were recognized on
differences between the book and tax basis of assets and liabilities using
presently enacted tax rates. The provision for income taxes was the sum of
the amount of income tax paid or payable for the year as determined by
applying the provisions of enacted tax laws to the taxable income for that
year and the net change during the year in the Company's deferred tax
assets and liabilities.
The Company had a net deferred tax asset at December 31, 1999 and 1998 of
approximately $2,011,800 and $798,000, respectively. The net deferred tax
asset primarily represented the tax benefit of operating loss
carryforwards. At December 31, 1999, the Company had net operating loss
carryforwards of approximately $2,011,800, which will expire in 2012
through 2019. The Company has provided a valuation allowance for the full
amount of the deferred tax assets in excess of the deferred tax liability
since management has not determined the realization of these future
benefits to be more likely than not.
There is substantial evidence to suggest that changes in ownership
attributable to the Company's December 1998 issuance of Preferred Stock
constitute an "ownership change" under Internal Revenue Code Section 382.
If such ownership change has occurred, the Company will be limited in its
utilization of net operating losses to approximately $700,000 annually.
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NetOps Corporation
Notes to Financial Statements
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11. Commitments
The Company has entered into noncancelable operating leases for office
space. The Company's future minimum lease commitments under these leases
are as follows:
Amount
2000 $ 158,700
2001 165,300
2002 139,800
2003 139,800
2004 --
---------
Total minimum lease payments $ 603,600
=========
Rent expense under the noncancelable operating leases was approximately
$152,900 and $41,600 for the years ended December 31, 1999 and 1998,
respectively.
12. Subsequent Event
On February 14, 2000, the Company terminated its relationship with its
sales channel partner (Note 8). The partner accepted that it had failed to
fulfill certain of its obligations under the terms of the contract and
agreed to cancel the warrants. All warrants were returned unexercised.
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