<PAGE>
EXHIBIT 99.4
Metacode Technologies, Inc.
Financial Statements
For the Two Years Ended
December 31, 1998 and 1999 and
For the Period Ended
September 30, 2000 (unaudited)
<PAGE>
METACODE TECHNOLOGIES, INC.
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Accountants....................................... 2
Balance Sheet .......................................................... 3
Statement of Operations ................................................ 4
Statement of Shareholders' Deficit...................................... 5
Statement of Cash Flows ................................................ 6
Notes to Financial Statements .......................................... 7
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of Metacode Technologies, Inc.
In our opinion, the accompanying balance sheets and the related statements
of operations, of shareholders' deficit and of cash flows present fairly, in all
material respects, the financial position of Metacode Technologies, Inc. at
December 31, 1998 and 1999, and the results of its operations and its cash flows
for the two years then ended in conformity with accounting principles generally
accepted in the United States of America. 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 of America, which 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,
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 our opinion.
/s/ PricewaterhouseCoopers LLP.
December 21, 2000
San Jose, California
2
<PAGE>
METACODE TECHNOLOGIES, INC.
BALANCE SHEET
(in thousands)
<TABLE>
<CAPTION>
December 31, September 30,
-----------------------
1998 1999 2000
---------- ---------- -------------
ASSETS (unaudited)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 951 $ 428 $ 15
Accounts receivable, net 11 262 529
Note receivable - 50 -
Prepaid expenses and other 151 125 106
---------- ---------- -------------
Total current assets 1,113 865 650
Property and equipment, net 433 350 308
---------- ---------- -------------
Total assets $ 1,546 $ 1,215 $ 958
========== ========== =============
LIABILITIES, MANDATORILY REDEEMABLE CONVERTIBLE
PREFERRED STOCK AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 27 $ 20 $ 473
Accrued liabilities 289 358 1,046
Deferred revenue, current - 397 321
Debt, current 1,000 2,050 4,395
---------- ---------- -------------
Total current liabilities 1,316 2,825 6,235
Deferred revenue, long-term - 56 258
---------- ---------- -------------
1,316 2,881 6,493
---------- ---------- -------------
Mandatorily redeemable convertible preferred stock:
9,395 shares authorized; 5,039, 5,705 and
5,705 (unaudited) shares issued and outstanding, respectively 10,397 12,397 12,857
Commitments (Note 4)
Shareholders' deficit:
Common Stock, no par value, 25,000 shares
authorized; 8,215, 9,590 and 9,761 (unaudited)
shares issued and outstanding, respectively 922 13,088 27,445
Notes receivable from shareholders (60) (110) (110)
Unearned stock-based compensation (365) (7,891) (12,881)
Accumulated deficit (10,664) (19,150) (32,846)
---------- ---------- -------------
Total shareholders' deficit (10,167) (14,063) (18,392)
---------- ---------- -------------
Total liabilities and shareholders' deficit $ 1,546 $ 1,215 $ 958
========== ========== =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
METACODE TECHNOLOGIES, INC.
STATEMENT OF OPERATIONS
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
-------------------------- --------------------------
1998 1999 1999 2000
----------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C>
Revenue:
Licenses $ - $ 29 $ 13 $ 338
Services 10 50 21 255
----------- ----------- ----------- -----------
Total revenue 10 79 34 593
----------- ----------- ----------- -----------
Cost of revenues:
Licenses -- -- -- --
Services 27 55 24 415
----------- ----------- ----------- -----------
Total cost of revenues 27 55 24 415
----------- ----------- ----------- -----------
Gross profit (17) 24 10 178
----------- ----------- ----------- -----------
Operating expenses:
General and administrative 1,722 985 704 1,668
Sales and marketing 783 559 385 1,109
Research and development 2,999 2,358 1,800 1,147
Amortization of unearned stock-based
compensation 311 4,562 2,941 8,432
----------- ----------- ----------- -----------
Total operating expenses 5,815 8,464 5,830 12,356
----------- ----------- ----------- -----------
Loss from operations (5,832) (8,440) (5,820) (12,178)
Interest and other income (expense), net 129 (46) (22) (1,518)
----------- ----------- ----------- -----------
Net loss $ (5,703) $ (8,486) $ (5,842) $ (13,696)
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements
4
<PAGE>
METACODE TECHNOLOGIES, INC.
STATEMENT OF SHAREHOLDERS' DEFICIT
(in thousands)
<TABLE>
<CAPTION>
Notes
Common Stock Receivable Unearned
--------------------- from Stock-Based Accumulated
Shares Amount Shareholders Compensation Deficit Total
--------- --------- ------------ ------------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 7,219 $ 135 $ - $ 31 $ (4,961) $ (4,795)
Issuance of Common Stock on
exercise of stock options 208 17 - - - 17
Issuance of Common Stock
for notes receivable and other 788 63 (60) - - 3
Unearned stock-based
compensation - 707 - (707) - -
Amortization of stock-based
compensation - - - 311 - 311
Net loss - - - - (5,703) (5,703)
-------- --------- ----------- ----------- ---------- ---------
Balance at December 31, 1998 8,215 922 (60) (365) (10,664) (10,167)
Issuance of Common Stock
for notes receivable 1,000 50 (50) - - -
Issuance of Common Stock on
exercise of stock options 375 28 - - - 28
Unearned stock-based
compensation - 12,088 - (12,088) - -
Amortization of stock-based
compensation - - - 4,562 - 4,562
Net loss - - - - (8,486) (8,486)
-------- --------- ----------- ----------- ---------- ---------
Balance at December 31, 1999 9,590 13,088 (110) (7,891) (19,150) (14,063)
Issuance of Common Stock on
exercise of stock options
(unaudited) 171 27 - - - 27
Unearned stock-based
compensation (unaudited) - 13,422 - (13,422) - -
Amortization of stock-based
compensation (unaudited) - - - 8,432 - 8,432
Warrants issued for services
(unaudited) - 589 - - - 589
Warrants issued in connection
with bridge loans (unaudited) - 319 - - - 319
Net loss (unaudited) - - - - (13,696) (13,696)
-------- --------- ----------- ----------- ---------- ---------
Balance at September 30, 2000
(unaudited) 9,761 $ 27,445 $ (110) $ (12,881) $ (32,846) $ (18,392)
======== ========= =========== =========== ========== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
METACODE TECHNOLOGIES, INC.
STATEMENT OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
---------------------------- -----------------------------
1998 1999 1999 2000
---------- ---------- ---------- ----------
(unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (5,703) $ (8,486) $ (5,842) $ (13,696)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation 120 152 113 125
Amortization of stock-based compensation 311 4,565 2,941 8,432
Warrant related non-cash interest expense - - - 1,367
Issuance of Common Stock for other 3 - - -
Accretion of discount on investments (126) - - -
Provisions for doubtful accounts - 3 - 17
Changes in assets and liabilities:
Accounts receivable (11) (254) (141) (284)
Notes receivable - (50) (50) 50
Prepaid expenses and other assets - 26 40 20
Accounts payable (169) (7) 3 453
Accrued liabilities (256) 69 47 688
Deferred revenue - 454 264 124
---------- ---------- ---------- ----------
Net cash used in operating activities (5,831) (3,528) (2,625) (2,704)
---------- ---------- ---------- ----------
Cash flows from investing activities:
Proceeds from maturity of investments 5,493 - - -
Purchase of investments (1,472) - - -
Purchase of property and equipment (286) (73) (17) (81)
---------- ---------- ---------- ----------
Net cash (used in) provided by
investing activities 3,735 (73) (17) (81)
---------- ---------- ---------- ----------
Cash flows from financing activities:
Proceeds from mandatorily redeemable convertible
preferred stock, net 931 - - -
Proceeds from exercise of common stock options 17 28 4 27
Proceeds from issuance of debt 2,000 3,050 2,050 2,345
---------- ---------- ---------- ----------
Net cash provided by financing activities 2,948 3,078 2,054 2,372
---------- ---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents 852 (523) (588) (413)
Cash and cash equivalents at beginning of period 99 951 951 428
---------- ---------- ---------- ----------
Cash and cash equivalents at end of period $ 951 $ 428 $ 363 $ 15
========== ========== ========== ==========
Supplemental non-cash activity:
Issuance of mandatorily redeemable convertible
preferred stock upon conversion of debt $ 1,000 $ 2,000 $ 2,000 $ -
========== ========== ========== ==========
Common Stock issued for notes receivable $ 60 $ 50 $ - $ -
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
METACODE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
INFORMATION AS OF SEPTEMBER 30, 2000 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 AND 2000 IS UNAUDITED
NOTE 1 - THE COMPANY AND SUMMARY OF ITS SIGNIFICANT ACCOUNTING POLICIES:
The Company
Metacode Technologies, Inc. (the "Company") was incorporated in
California on June 17, 1994, and offers software products based on its
proprietary MetaCode(TM), leveraging the latest developments in database design,
object-oriented programming, on-line application processing, network navigation
and data visualization. The integrated data retrieval and knowledge synthesis
capabilities of the Company's technologies significantly reduce the time it
takes a user to organize, manage and derive added value from disparate data and
information. During 1999, the Company commenced planned principal operations and
emerged from the development stage.
Unaudited interim results
The accompanying interim financial statements as of September 30, 2000
and for the nine months ended September 30, 1999 and 2000 are unaudited. The
unaudited interim financial statements have been prepared on the same basis as
the annual financial statements and, in the opinion of management, reflect all
adjustments, which include only normal recurring adjustments, necessary to
present fairly the Company's financial position, results of operations and cash
flows for the nine months ended September 30, 1999 and 2000. The financial data
and other information disclosed in these notes to financial statements related
to these periods are unaudited. The results for the nine months ended September
30, 2000 are not necessarily indicative of the results to be expected for the
year ending December 31, 2000.
Use of estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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 reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Revenue recognition
In October 1997 and March 1998, the American Institute of Certified
Public Accountants ("AICPA") issued statement of Position No. 97-2, "Software
Revenue Recognition" ("SOP No. 97-2") and statement of Position No. 98-4,
"Deferral of the Effective Date of a Provision of SOP No. 97-2" ("SOP No.
98-4"). SOP No. 98-4 defers for one year the application of certain provisions
of SOP No. 97-2. In December 1998, the AICPA issued Statement of Position No.
98-9, "Modification of SOP No. 97-2 with Respect to Certain Transactions" ("SOP
No. 98-9"), which is effective for transactions entered into beginning April 1,
1999. SOP No. 98-9 extends the effective date of SOP No. 98-4 and provides
additional interpretive guidance. The adoption of SOP No. 97-2, SOP No. 98-4 and
SOP No. 98-9 have not had and are not expected to have a material impact on the
Company's results of operations, financial position or cash flows.
The Company's revenues are derived from licenses for its software and
related services, which include technical support, training and consulting.
Revenue is recognized for the various contract elements based upon
vendor-specific objective evidence of fair value of each element.
Revenue from license fees is recognized when persuasive evidence of an
agreement exists, delivery of the product has occurred, no significant Company
obligations with regard to implementation or integration exists, the fee is
fixed or determinable and collectibility is probable. Provisions for sales
returns are provided at the time of revenue recognition based upon estimated
returns.
7
<PAGE>
METACODE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
INFORMATION AS OF SEPTEMBER 30, 2000 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 AND 2000 IS UNAUDITED
(Continued)
Services revenue is primarily comprised of revenue from consulting fees,
maintenance contracts and training. Services revenue from consulting and
training is recognized as the service is completed. Maintenance contracts
include the right to unspecified upgrades and ongoing support. Maintenance
revenue is deferred and recognized on a straight-line basis as service revenue
over the life of the related contract.
Cash and cash equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less at the date of acquisition to be cash
equivalents. Cash equivalents consist primarily of cash on deposit with banks
and money market accounts that are stated at cost, which approximates fair
value.
Concentrations of credit risk
Financial instruments, which potentially subject the Company to a
concentration of credit risk, consist primarily of cash and cash equivalents and
accounts receivable. The Company limits its exposure to credit loss by placing
its cash and cash equivalents with a major financial institution. The Company's
accounts receivable are derived from revenue earned from customers located in
the U.S. and are denominated in U.S. dollars. The Company performs ongoing
credit evaluations of its customers' financial condition and, generally,
requires no collateral from its customers. The Company maintains an allowance
for doubtful accounts receivable based upon expected collectibility of accounts
receivable.
The following table summarizes the revenue from customers in excess of
10% of the total revenue.
Nine Months Ended
Year Ended December 31, September 30,
----------------------- -------------------
1998 1999 1999 2000
------ ------ ------ ------
(unaudited)
Company A 100% -% -% -%
Company B -% 38% 44% -%
Company C -% 27% -% -%
Company D -% 22% 24% -%
Company E -% -% 12% -%
Company F -% -% -% 39%
Company G -% -% -% 17%
Company H -% -% -% 12%
At December 31, 1999, Company B, C and D accounted for zero, 5% and 25%
of total accounts receivable.
Fair value of financial instruments
The Company's financial instruments including cash and cash equivalents,
accounts receivable and accounts payable are carried at cost, which approximates
their fair value because of the short-term maturity of these instruments. Debt
is carried at cost, which approximates fair value due to the proximity of the
implicit rates of these financial instruments and the prevailing market rates
for similar instruments.
8
<PAGE>
METACODE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
INFORMATION AS OF SEPTEMBER 30, 2000 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 AND 2000 IS UNAUDITED
(Continued)
Research and development
Expenditures incurred in the research and development of new products and
enhancements to existing products are charged to expense as incurred. Software
development costs are capitalized after technological feasibility has been
established. The period between achievement of technological feasibility, which
the Company defines as the establishment of a working model, until the general
availability of such software to customers, has been short and software
development costs qualifying for capitalization have been insignificant.
Accordingly, the Company has not capitalized any software development costs as
of December 31, 1999 and September 30, 2000 (unaudited).
Capitalization of internal-use software costs
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 98-1, "Accounting for the Cost of
Computer Software Developed or Obtained for Internal Use." SOP 98-1 is effective
for financial statements for years beginning after December 15, 1998 and
provides guidance for the accounting of computer software developed or obtained
for internal use including the requirements to capitalize specified costs and
amortization of such costs. The Company adopted the provisions of SOP 98-1 in
its fiscal years beginning January 1, 1999. To date the Company has not
capitalized any internal use software costs.
Property and equipment
Property and equipment are stated at historical cost less accumulated
depreciation and amortization. Depreciation is computed using the straight-line
method over the useful lives of the assets, generally seven years or less or the
shorter of the lease term or the useful lives of the assets, if applicable.
Impairment of long-lived assets
The Company evaluates the recoverability of its long-lived assets in
accordance with 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 requires recognition of impairment of long-lived
assets in the event the net book value of such assets exceeds the future
undiscounted cash flows attributable to such assets.
Stock-based compensation
The Company accounts for stock-based employee compensation arrangements
in accordance with provisions of Accounting Principles Board ("APB") Opinion No.
25, "Accounting for Stock Issued to Employees," and complies with the disclosure
provisions of Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock-Based Compensation". Under APB No. 25, compensation
expense is based on the difference, if any, on the date of grant between the
fair value of the Company's stock and the amount an employee must pay to acquire
the stock. The Company accounts for stock issued to non-employees in accordance
with the provisions of SFAS No. 123 and the Emerging Issues Task Force Consensus
on Issue No. 96-18.
Income taxes
Income taxes are accounted for using an asset and liability approach
which requires the recognition of taxes payable or refundable for the current
year and deferred tax liabilities and assets for the future tax consequences of
events that have been recognized in the Company's financial statements or tax
returns. The measurement of current and deferred tax liabilities and assets are
based on provisions of the enacted tax law; the effects of future changes in tax
laws or rates are not anticipated. The measurement of deferred tax assets is
reduced, if necessary, by the amount of any tax benefits that, based on
available evidence, are not expected to be realized.
9
<PAGE>
METACODE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
INFORMATION AS OF SEPTEMBER 30, 2000 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 AND 2000 IS UNAUDITED
(Continued)
Comprehensive income
Effective January 1, 1998, the Company adopted the provisions of SFAS No.
130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for
reporting comprehensive income and its components in financial statements.
Comprehensive income, as defined, includes all changes in equity (net assets)
during a period from non-owner sources. To date, the Company has not had any
transactions that are required to be reported in comprehensive income.
Recent accounting pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 133, "Accounting for Derivative and Hedging Activities," which
establishes accounting and reporting standards for derivative instruments and
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities on the balance sheet and measure those instruments
at fair value. In June 1999, the FASB issued SFAS No. 137, "Accounting for
Derivative Instruments - Deferral of the Effective Date of SFAS Statement No.
133" and in June 2000, the FASB issued SFAS No. 138, "Accounting for Certain
Derivative Instruments - an amendment of SFAS 133, Accounting for Derivative
Instruments and Hedging Activities." As a result of SFAS No. 137, SFAS No. 133
and SFAS No. 138 will be effective for all fiscal quarters of all fiscal years
beginning after June 15, 2000. The Company does not expect that the adoption of
this standard will have a material impact on its financial position and results
of operations.
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 clarifies the
application of Opinion 25 for (a) the definition of employee for purposes of
applying Opinion 25, (b) the criteria for determining whether a plan qualifies
as a noncompensatory plan, (c) the accounting consequence of various
modifications to the terms of a previously fixed stock option or award, and (d)
the accounting for an exchange of stock compensation awards in a business
combination. The Company adopted FIN 44 effective July 1, 2000. The adoption of
the provisions of FIN 44 did not have a material effect on the financial
position or results of operations of the Company.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements," which provides guidance on the recognition, presentation and
disclosure of revenue in financial filings with the SEC. SAB 101 outlines the
basic criteria that must be met to recognize revenue and provides guidance for
disclosures related to revenue recognition policies. The Company is required to
adopt SAB 101 in the fourth quarter of fiscal 2001. We evaluated the Securities
and Exchange Commission's interpretation of SAB 101 and have determined it will
not have a material effect on the financial position or results of operations of
the Company.
10
<PAGE>
METACODE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
INFORMATION AS OF SEPTEMBER 30, 2000 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 AND 2000 IS UNAUDITED
(Continued)
NOTE 2 - BALANCE SHEET COMPONENTS (IN THOUSANDS):
<TABLE>
<CAPTION>
December 31,
------------------------ September 30,
1998 1999 2000
-------- --------- --------------------
(in thousands) (unaudited)
<S> <C> <C> <C>
Accounts receivable, net:
Accounts receivable $ 11 $ 265 $ 549
Less: Allowance for doubtful accounts - (3) (20)
-------- --------- -----------
$ 11 $ 262 $ 529
======== ========= ===========
</TABLE>
There were no write-offs against the allowance for doubtful accounts for
the years ended December 31, 1998 and 1999 and for the period ended September
30, 1999 and 2000 (unaudited).
<TABLE>
<CAPTION>
December 31,
------------------------ September 30,
1998 1999 2000
-------- --------- --------------------
(in thousands) (unaudited)
<S> <C> <C> <C>
Property and equipment, net:
Computer equipment $ 390 $ 438 $ 477
Furniture and fixtures 134 134 134
Computer software 75 96 139
--------- --------- ---------
599 668 750
Less: Accumulated depreciation and amortization (166) (318) (442)
--------- --------- ---------
$ 433 $ 350 $ 308
========= ========= =========
</TABLE>
Depreciation expense was $120,000, $152,000, $113,000 (unaudited) and
$125,000 (unaudited) at December 31, 1998 and 1999 and for the period ended
September 30, 1999 and 2000, respectively.
<TABLE>
<CAPTION>
December 31,
----------------------- September 30,
1998 1999 2000
---------- --------- ---------------------
(in thousands) (unaudited)
<S> <C> <C> <C>
Accrued liabilities:
Payroll and related expenses $ - $ - $ 264
Other 289 358 782
-------- --------- ----------
$ 289 $ 358 $ 1,046
======== ========= ==========
</TABLE>
11
<PAGE>
METACODE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
INFORMATION AS OF SEPTEMBER 30, 2000 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 AND 2000 IS UNAUDITED
(Continued)
NOTE 3 - DEBT:
In August 2000, the Company entered into a financing agreement (the
"Financing Agreement") whereby a bank would extend credit up to $750,000 as a
bridge loan advance. Bridge loan advances accrue interest at a rate of prime
plus three percentage points and are payable monthly with principal due the
earlier of (i) September 30, 2000 or (ii) the closing of the Company's next
Preferred round of financing, provided, however, at Company's option and
provided that Company has received at least $275,000 in new equity and/or
Subordinated Debt from a third party, then the maturity date shall be October
30, 2000. In connection with the Financing Agreement, the Company issued to the
bank a warrant to purchase 99,351 shares of Series D Preferred Stock at $0.90588
per share. The warrant expires on August 1, 2005. The Company recorded a
$460,000 discount to the Financing Agreement for the value of the warrants,
which was recognized in 2000 as additional interest expense. The Financing
Agreement requires the Company to comply with certain financial covenants. The
Company was in compliance with all covenants at September 30, 2000. The amount
borrowed was paid in full during October 2000 (unaudited).
In June and July 2000, the Company issued $645,000 of convertible
promissory notes payable ("2000 Notes") to related parties. The 2000 Notes bear
interest at 8% and were to mature in June or July 2001 or, at the option of the
holder, shall convert into Series D Preferred Stock or such other class of
Preferred Stock issuable by the Company in the next round of qualified
financing. In connection with the issuance of the 2000 Notes, the Company issued
warrants to purchase 96,750 shares of Series D Convertible Preferred Stock
("Series D") at $1.00 per share to the holders of the warrants. The warrants
expire at the earlier of June 2004 or upon an initial public offering of the
Company's Common Stock. The Company has recorded a $404,415 discount to the
Notes for the value of the warrants, which was to be recognized over the term of
the 2000 Notes. The Company amortized $318,546 of the 2000 Notes' discount as
additional interest expense during 2000.
In 1998, the Company issued a convertible subordinated promissory note
payable ("1998 Note") to an employee of the Company totaling $2,000,000. The
note bore interest at 8.5% and was to mature one year from the date of issuance,
or at the option of the holder, converted into Preferred Stock at the same
purchase price and upon the same terms as shares of such Preferred Stock sold to
purchasers in the financing. In October 1998, $1,000,000 of the 1998 Notes was
converted into 333,333 shares of Series C Preferred Stock at three dollars
($3.00) per share. In March 1999, the remaining $1,000,000 of the 1998 Notes was
converted into 333,333 shares of Series C Preferred Stock at three dollars
($3.00) per share.
In 1999, the Company issued convertible subordinated promissory notes
payable to an employee of the Company totaling $3,050,000 ("1999 Notes"). The
notes bore interest at 8.5% and were to mature one year from issuance, or at the
option of the holder, converted into Preferred Stock at the same purchase price
and upon the same terms as shares of such Preferred Stock sold to purchasers in
the financing. In March 1999, $1,000,000 of the 1999 Notes was converted into
333,333 shares of Series C Preferred Stock at three dollars ($3.00) per share.
In 2000, the Company issued convertible subordinated promissory notes
payable to an employee of the Company totaling $850,000 ("2000 Notes"). The
notes bore interest at 8.5% and were to mature one year from issuance, or at the
option of the holder, converted into Preferred Stock at the same purchase price
and upon the same terms as shares of such Preferred Stock sold to purchasers in
the financing.
In 2000, an amendment to the outstanding 1999 Notes and 2000 Notes was
agreed upon between the Company holders of said Notes. The amendment stated
the following: (i) extension of maturity dates to June 15, 2001; and (ii) upon
a merger or consolidation with or into any other entity, or if any other
entity shall acquire all or substantially all of the capital stock or assets
of the Company, during the term of the 1999 Notes and 2000 Notes, the founder
shall have the option to convert the then outstanding principal amount and
accrued interest on the 1999 Notes and 2000 Notes for shares of Common Stock.
12
<PAGE>
METACODE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
INFORMATION AS OF SEPTEMBER 30, 2000 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 AND 2000 IS UNAUDITED
(Continued)
NOTE 4 - COMMITMENTS:
The Company leases office space and equipment under noncancelable operating
leases with various expiration dates through December 2010. Rent expense for the
year ended December 31, 1998 and 1999 and for the period ended September 30,
2000 totaled $271,000, $278,000 and $210,000 (unaudited), respectively.
Future minimum lease payments under noncancelable operating and capital
leases, including lease commitments entered into subsequent to December 31,
1999, are as follows (in thousands):
Year Ending Operating Sublease
December 31, Leases Income
------------- ------------- --------------
2000 $ 391 $ 91
2001 1,167 -
2002 1,163 -
2003 1,162 -
2004 and thereafter 8,615 -
------------- --------------
Total minimum lease payments and
sublease income $ 12,498 $ 91
------------- --------------
NOTE 5 - INCOME TAXES:
At December 31, 1998 and 1999, the Company had approximately $3.0 million
and $3.9 million, respectivley of net operating loss carryforwards available
to reduce future taxable income which expire in 2015 and 2010 for federal and
state tax purposes, respectively. Under the Tax Reform Act of 1986, the amounts
of and benefits from net operating loss carryforwards may be impaired or limited
in certain circumstances. Events which cause limitations in the amount of net
operating losses that the Company may utilize in any one year include, but are
not limited to, a cumulative ownership change of more than 50%, as defined, over
a three year period.
Deferred tax assets consist of the following (in thousands):
December 31, September 30,
------------------------
1998 1999 2000
---------- ---------- ------------
(unaudited)
Deferred tax assets:
Net operating loss carryforwards $ 3,043 $ 3,942 $ 4,350
Accruals and reserves 19 42 97
Research credits 381 624 807
Depreciation & other 574 881 504
---------- ---------- ------------
4,017 5,489 5,758
Valuation allowance (4,017) (5,489) (5,758)
---------- ---------- ------------
Net deferred tax assets $ - $ - $ -
---------- ---------- ------------
For financial reporting purposes, the Company has incurred a loss in each
year since its inception. Based on the available objective evidence, management
believes it is more likely than not that the net deferred tax assets will not be
fully realizable. Accordingly, the Company has provided for a full valuation
allowance against its net deferred tax assets at December 31, 1998, 1999 and
September 30, 2000 (unaudited), respectively.
13
<PAGE>
METACODE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
INFORMATION AS OF SEPTEMBER 30, 2000 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 AND 2000 IS UNAUDITED
(Continued)
NOTE 6 - MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK:
At December 31, 1999 and September 30, 2000 (unaudited), Mandatorily
Redeemable Convertible Preferred Stock consists of the following (in thousands):
Shares
----------------------------- Liquidation Redemption
Series Authorized Outstanding Amount Amount
------ ------------- -------------- ------------ ----------------
A 1,395 1,395 $ 1,117 $ 1,117
B 3,000 3,000 7,350 7,350
C 5,000 1,310 3,930 3,930
------------- -------------- ------------ ----------------
9,395 5,705 $ 12,397 $ 12,397
------------- -------------- ------------ ----------------
The holders of Series A, B and C have certain rights and privileges as
follows:
Voting
Each share of Series A, B and C has voting rights equal to one share of
Common Stock on an "as if" converted basis.
Dividends
Holders of Series A, B and C are entitled to receive non-cumulative annual
dividends of $0.05, $0.15 and $0.19 per share, respectively, when and if
declared by the Company's Board of Directors. Dividends on the Preferred Stock
shall be payable in preference and prior to any payment of any dividend on the
Common Stock. The holders of the Series A, B and C will also be entitled to
participate in dividends on the Common Stock, when and if declared by the Board
of Directors, based on the number of shares of Common Stock held on an as-
converted basis. No dividends have been declared from inception through
December 31, 1999 and September 30, 2000 (unaudited).
Liquidation
In the event of any liquidation, dissolution, winding up or merger where
less than 50% of the voting power is maintained of the Company, the holders of
the Series A, B and C shall be entitled to receive, prior and in preference to
any distribution to the holders of the Common Stock, an amount equal to the
$0.80, $2.45 and $3.00 per share, respectively, plus any declared but unpaid
dividends. Any amounts remaining after such distribution shall be distributed
among the holders of Common Stock.
Any acquisition of the Company, or sale of all or substantially all of the
assets, shall be treated as a liquidation and shall entitle the holders of
Preferred and Common Stock to receive at closing cash, securities or other
property as elected by the holders of Preferred and Common Stock.
Conversion
Each share of Series A, B and C is convertible at the option of the holders
into one share of Common Stock at any time, subject to adjustment for
antidilution. Each share of Series A, B and C will be automatically converted
upon an initial public offering of the Company's Common Stock with an aggregate
proceeds in excess of $7,500,000 and price per share of not less than $5.00 per
share. The Company has reserved sufficient shares of Common Stock for issuance
upon conversion of the Series A, B and C.
14
<PAGE>
METACODE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
INFORMATION AS OF SEPTEMBER 30, 2000 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 AND 2000 IS UNAUDITED
(Continued)
NOTE 7 - COMMON STOCK:
In June 1994, the Company sold 5,000,000 shares of Common Stock to its
founder in exchange for $500 of cash. Additionally, in March 1996, the Company
sold 1,850,000 shares of Common Stock to several employees for $1,850 of cash.
Under the terms of the stock purchase agreements, the Company has the right to
repurchase up to 80% of the shares of such stock at the original issue price
upon termination. The repurchase rights expire ratably over a 60 month period
thereafter with 53,333 and zero (unaudited) shares of Common Stock subject to
repurchase at December 31, 1999 and September 30, 2000, respectively.
The Company had reserved shares of Common Stock for issuance as follows (in
thousands):
<TABLE>
<CAPTION>
December 31, September 30,
1999 2000
-------------- ---------------
(unaudited)
<S> <C> <C>
Mandatorily Redeemable Convertible Preferred Stock:
Series A 1,395 1,395
Series B 3,000 3,000
Series C 5,000 5,000
Exercise of options under stock option plans 9,000 13,000
------- -------
18,395 22,395
======= =======
</TABLE>
Note receivable from shareholder
In April 1998, the Company issued 750,000 shares of Common Stock to an
officer and founder of the Company in exchange for a $60,000 note receivable.
The note bore interest at 5.7% per year. The note is collateralized by the
underlying stock and is classified as a notes receivable from shareholders in
the accompanying balance sheet at December 31, 1999 and September 30, 2000
(unaudited). There were no shares of Common Stock subject to repurchase at
December 31, 1999.
In November 1999, the Company issued 1,000,000 shares of Common Stock to an
officer of the Company in exchange for a $50,000 note receivable. The note bears
interest at the rate of 5.7% per year. The principal sum of the note and accrued
interest will become due and payable in November 2004. The notes are secured by
the underlying stock and are classified as notes receivable from shareholders in
the accompanying balance sheet at December 31, 1999 and September 30, 2000
(unaudited). There were no shares of Common Stock subject to repurchase at
December 31, 1999.
NOTE 8 - EMPLOYEE STOCK OPTION PLAN:
In February 1995, the Company adopted the 1995 Stock Option Plan (the "1995
Plan"). The Plan provides for the granting of stock options to employees and
consultants of the Company. Options granted under the Plan may be either
incentive stock options or nonqualified stock options. Incentive stock options
(ISO) may be granted only to employees (including officers and directors who are
also employees) of the Company. Nonqualified stock options may be granted to
employees and consultants of the Company.
15
<PAGE>
METACODE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
INFORMATION AS OF SEPTEMBER 30, 2000 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 AND 2000 IS UNAUDITED
(Continued)
Options under the Plan may be granted for periods of up to ten years and
at prices no less than 85% of the estimated fair value of the shares on the date
of grant as determined by the Board of Directors, provided, however, that (i)
the exercise price of an ISO shall not be less than 100% of the estimated fair
value of the shares on the date of grant and (ii) the exercise price of an ISO
granted to a 10% shareholder shall not be less than 110% of the estimated fair
value of the shares on the date of grant and are for periods not to exceed five
years. Options become exercisable at such times and under such conditions as
determined by the Board of Directors. Options generally vest over five years.
The following table summarizes the activity for the years ended December
31, 1998, 1999 and for the period ended September 30, 2000 (unaudited; shares
in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------- Nine Months Ended
1998 1999 September 30, 2000
-------------------------------------------------- -----------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------- -------- ---------- --------- -------- --------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 2,456 $ 0.12 2,884 $ 0.27 5,069 $ 0.17
Granted 1,725 0.36 4,390 0.07 3,114 0.30
Canceled (1,089) 0.11 (1,830) 0.30 (967) 0.30
Exercised (208) 0.08 (375) 0.06 (171) 0.15
--------- ---------- --------
Outstanding at end of year 2,884 0.27 5,069 0.15 7,045 0.19
========= ========== ========
Options exercisable at end of year 1,044 $ 0.18 1,718 $ 0.17 2,520 $ 0.14
========= ========== =========
Weighted average fair value of
options granted during the year $ 0.36 $ 0.07 $ 0.30
</TABLE>
The followings table summarizes information about stock options
outstanding and exercisable (shares in thousands):
<TABLE>
<CAPTION>
Options Exercisable at
Options Outstanding at December 31, 1999 December 31, 1999
------------------------------------------- ---------------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life (Years) Price Exercisable Price
----------- ------------ ------------ -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 0.05-0.08 3,675 7.6 $ 0.07 1,093 $ 0.07
$ 0.25-0.25 260 7.6 $ 0.25 147 $ 0.25
$ 0.30-0.38 1,134 8.5 $ 0.37 478 $ 0.37
------------ -----------
$ 0.38 5,069 7.9 $ 0.15 1,718 $ 0.17
============ ===========
</TABLE>
16
<PAGE>
METACODE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
INFORMATION AS OF SEPTEMBER 30, 2000 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 AND 2000 IS UNAUDITED
(Continued)
<TABLE>
<CAPTION>
Options Exercisable at
Options Outstanding at September 30, 2000 September 30, 2000
------------------------------------------ --------------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life (Years) Price Exercisable Price
------------ ------------- -------------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C>
$0.05-0.08 1,172 6.9 $ 0.07 916 $ 0.07
$0.25-0.25 58 6.9 $ 0.25 24 $ 0.25
$0.30-0.38 5,815 7.9 $ 0.33 1,580 $ 0.34
------------- -------------
7,045 7.3 $ 0.19 2,520 $ 0.14
============= =============
</TABLE>
Fair value disclosures
In determining the fair value of options granted during the periods, the
Company used the minimum value option pricing model and assumed the following:
risk free interest rates from 4.25% to 6.36%, an average expected option
life of four years, an expected volatility of 0% and zero dividend yield. The
difference between as reported and pro forma net loss was $15,000, $32,000 and
$129,000 for the years ended December 31, 1998 and 1999 and the nine months
ended September 30, 2000 (unaudited).
NOTE 9 - 401(K) PLAN:
The Company sponsors an employee savings and retirement plan intended to
qualify under section 401(k) of the Internal Revenue Code. All eligible
employees may contribute up to 20% of compensation, subject to annual
limitations, which are fully vested at all times. The company retains the
options of matching employees' contributions with a discretionary employer
contribution. To date, no employer contributions have been made.
NOTE 10 - RELATED PARTY TRANSACTIONS:
License agreement
On February 3, 1995, the Company entered into a License Agreement with
the Company's president and major shareholder, to obtain exclusive rights to
intellectual property technologies to be included in the development of its
products. The License Agreement entitled this individual to receive the
following fees and royalties:
. Fees of $50,000, contingent upon capital funding received in the
aggregate amount of $1,000,000 or greater.
. Fees of $250,000, contingent upon capital funding received in the
aggregate amount of $5,000,000 or greater.
. Fees of $100,000 for each patent filed on or before the second
anniversary of the receipt of the $5,000,000 of capital funding.
. Royalties of one percent of net revenues from the sale of the
Company's product and license loss, royalties and any other payments
under a license of the technologies.
17
<PAGE>
METACODE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
INFORMATION AS OF SEPTEMBER 30, 2000 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 AND 2000 IS UNAUDITED
(Continued)
The license fees are limited to $1,000,000 in aggregate. Capital funding
of $1,000,000 was received in 1996, and capital funding of $5,000,000 was
received in 1997. Through December 31, 1999, Mr. Schatz had received $200,000 of
the $300,000 fees due. The remaining $100,000 fees payable are included in
accrued liabilities.
Consulting services
The Company engaged the services of consulting companies affiliated with
related parties. The Company paid fees of $290,000, $75,000 and zero for the
years ended December 31, 1998, 1999 and for the period ended September 30, 2000
(unaudited). For 1998, $207,000 and $83,000 were included in general and
administrative expenses and sales and marketing expenses, respectively. For
1999, all fees were included in sales and marketing expenses. The fees for the
services performed approximated fair value.
NOTE 11 - ACQUISITION BY INTERWOVEN, INC.:
In October 2000, Interwoven acquired all of Metacode's outstanding shares
of Common Stock and Preferred Stock, at which time Metacode became a
wholly-owned subsidiary of Interwoven.
18
