<PAGE>
EXHIBIT 20.1
|---------------------------------------------------------
|| PRIO, INC.
|| (Formerly SaveSmart, Inc.)
|| (A Development Stage Company)
|| Financial Statements for the Years Ended
|| Ended December 31, 1999 and 1998 and the Period from
|| July 21, 1994 (Inception) to December 31, 1999
|| and Independent Auditors' Report
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of Prio Inc. (formerly SaveSmart,
Inc.)
We have audited the accompanying balance sheet of Prio Inc. (the "Company,"
formerly known as SaveSmart, Inc., a development stage company) as of December
31, 1999, and the related statements of operations, shareholders' deficiency,
and cash flows for the year then ended, and for the period from July 21, 1994
(inception) to December 31, 1999. 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 audit. The Company's
financial statements as of and for the year ended December 31, 1998, and for the
period from July 21, 1994 (inception) through December 31, 1998 were audited by
other auditors whose report, dated April 2, 1999, expressed an unqualified
opinion on those statements. The financial statements for the period from July
21, 1994 (inception) through December 31, 1998 reflect total revenues and net
loss of $83,000 and $26,944,000, respectively, of the related cumulative totals
through December 31, 1999. The other auditors' report has been furnished to us,
and our opinion, insofar as it relates to the amounts included for such prior
period, is based solely on the report of such other auditors.
We conducted our audit 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 audit and the report of
other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audit and the report of other auditors, such
financial statements present fairly, in all material respects, the financial
position of the Company as of December 31, 1999, and the results of its
operations and its cash flows for the year then ended, and for the period from
July 21, 1994 (inception) to December 31, 1999, in conformity with accounting
principles generally accepted in the United States of America.
/s/ DELOITTE & TOUCHE LLP
San Jose, California
March 17, 2000
(March 31, 2000 as to the last sentence of the first paragraph on page 13 of
Note 4)
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Prio, Inc.:
We have audited the balance sheet of Prio, Inc. (the Company), formerly
SaveSmart, Inc., (a development stage enterprise) as of December 31, 1998, and
the related statements of operations, shareholders' deficiency, and cash flows
for the year then ended and for the period from July 21, 1994 (inception) to
December 31, 1998. 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 in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Prio, Inc. (a development stage
enterprise) as of December 31, 1998, and the results of its operations and its
cash flows for the year then ended and for the period from July 21, 1994
(inception) to December 31, 1998, in conformity with generally accepted
accounting principles.
/s/ KPMG LLP
Mountain View, California
April 2, 1999
<PAGE>
PRIO, INC.
(Formerly SaveSmart, Inc.)
(A Development Stage Company)
BALANCE SHEETS
DECEMBER 31, 1999 AND 1998 (In thousands, except share amounts)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS 1999 1998
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 8,529 $ 24,813
Short-term investments - 2,142
Accounts and unbilled receivable - net of $25,000 allowance in 1999 124 -
Prepaid expenses and other current assets 386 288
-------- --------
Total current assets 9,039 27,243
INVESTMENT IN AFFILIATE 259 273
PROPERTY AND EQUIPMENT (Net) 3,496 2,887
OTHER ASSETS 221 262
-------- --------
TOTAL $ 13,015 $ 30,665
======== ========
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
Accounts payable $ 945 $ 2,151
Accrued expenses 1,764 1,584
Deferred revenue 217 -
Other current liabilities 114 40
Current portion of long-term debt 1,042 1,058
-------- --------
Total current liabilities 4,082 4,833
LONG-TERM DEBT 614 698
OTHER LONG-TERM LIABILITIES 71 128
-------- --------
Total liabilities 4,767 5,659
-------- --------
COMMITMENTS AND CONTINGENCIES (Note 6)
REDEEMABLE CONVERTIBLE PREFERRED STOCK, No par value; 20,000,000 shares
authorized; 16,713,665 shares issued and outstanding (liquidation preference of $52,405,219) 69,387 51,745
-------- --------
SHAREHOLDERS' DEFICIENCY
Common stock, no par value; 40,000,000 shares authorized; 5,381,414 and
5,199,044 shares issued and outstanding in 1999 and 1998, respectively 3,143 491
Deferred compensation (1,450) (240)
Notes receivable from shareholders (10) (46)
Accumulated deficit during development stage (62,822) (26,944)
-------- --------
Total shareholders' deficiency (61,139) (26,739)
-------- --------
TOTAL $ 13,015 $ 30,665
-------- --------
</TABLE>
See notes to financial statements.
<PAGE>
PRIO, INC.
(Formerly SaveSmart, Inc.)
(A Development Stage Company)
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999 AND 1998 AND CUMULATIVE
FROM JULY 21, 1994 (INCEPTION) TO DECEMBER 31, 1999 (In thousands)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period from
July 21,
1994
Year Ended December 31, (Inception) to
------------------------ December 31,
1999 1998 1999
<S> <C> <C> <C>
REVENUE $ 483 $ 9 $ 566
COST OF REVENUES 2,009 696 2,779
-------- -------- --------
GROSS PROFIT (1,526) (687) (2,213)
OPERATING EXPENSES:
Research and development 8,126 6,323 20,627
Sales and marketing expenses 6,305 4,497 10,802
General and administrative expenses 2,899 2,802 12,419
Knight-Ridder warrants expense 17,652 - 17,652
-------- -------- --------
Total operating expenses 34,982 13,622 61,500
-------- -------- --------
OPERATING LOSS (36,508) (14,309) (63,713)
OTHER INCOME (EXPENSES):
Interest income - net 642 167 907
Other expense - net (12) (8) (16)
-------- -------- --------
Total other income - net 630 159 891
-------- -------- --------
NET LOSS $(35,878) $(14,150) $(62,822)
======== ======== ========
</TABLE>
See notes to financial statements.
<PAGE>
PRIO, INC.
(Formerly SaveSmart, Inc.)
(A Development Stage Company)
STATEMENTS OF SHAREHOLDERS' DEFICIENCY
PERIOD FROM JULY 21, 1994 (INCEPTION) TO DECEMBER 31, 1999 (In thousands)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Notes
Receivable
Common Stock from
---------------- Deferred Share-
Shares Amount Compensation holders
<S> <C> <C> <C> <C>
Issuance of common stock to founders for notes receivable 3,000 $ 45 $ - $ (45)
Common stock subscribed 113
Net loss
----- ---- ----- -----
BALANCES, December 31, 1994 3,113 45 - (45)
Common stock subscribed 913
Net loss
----- ---- ----- -----
BALANCES, December 31, 1995 4,026 45 - (45)
Issuance of common stock for cash and notes receivable 1,830 143 (80)
Net loss
----- ---- ----- -----
BALANCES, December 31, 1996 5,856 188 - (125)
Issuance of common stock for notes receivable and services performed 79 57 (32)
Repayment of notes receivable from shareholders 3
Repurchase of common stock (304) (18) 18
Issuance of options for deferred services 28 (28)
Net loss
----- ---- ----- -----
BALANCES, December 31, 1997 5,631 $255 $ (28) $(136)
</TABLE>
<TABLE>
<CAPTION>
Deficit
Accumulated Total
Stock During the Shareholders'
Subscribed Development Stage Deficiency
<S> <C> <C> <C>
Issuance of common stock to founders for notes receivable $ - $ - $ -
Common stock subscribed 6 6
Net loss (154) (154)
------- ------- --------
BALANCES, December 31, 1994 6 (154) (148)
Common stock subscribed 45 45
Net loss (506) (506)
------- ------- --------
BALANCES, December 31, 1995 51 (660) (609)
Issuance of common stock for cash and notes receivable (51) 12
Net loss (3,851) (3,851)
------- ------- --------
BALANCES, December 31, 1996 - (4,511) (4,448)
Issuance of common stock for notes receivable and services performed 25
Repayment of notes receivable from shareholders 3
Repurchase of common stock -
Issuance of options for deferred services -
Net loss (8,283) (8,283)
------- -------- --------
BALANCES, December 31, 1997 $ - $(12,794) $(12,703)
</TABLE>
<PAGE>
PRIO, INC.
(Formerly SaveSmart, Inc.)
(A Development Stage Company)
STATEMENTS OF SHAREHOLDERS' DEFICIENCY
PERIOD FROM JULY 21, 1994 (INCEPTION) TO DECEMBER 31, 1999 (In thousands)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Notes
Receivable
Common Stock from
------------------- Deferred Share-
Shares Amount Compensation holders
<S> <C> <C> <C> <C>
BALANCES, December 31, 1997 5,631 $ 255 $ (28) $(136)
Issuance of common stock for services performed 35 35
Repayment of notes receivable from shareholders 48
Repurchase of common stock (467) (42) 42
Issuance of options for services performed 27
Issuance of options for deferred services 216 (216)
Amortization of deferred services 4
Net loss
----- ------ ------- -----
BALANCES, December 31, 1998 5,199 491 (240) (46)
Issuance of common stock for services performed 156 764
Issuance of common stock for cash 32 42
Repayment of notes receivable from shareholders 34
Repurchase of common stock (6) (2) 2
Noncash compensation for issuance of options to employees 2,015 (2,015)
Cancellation of options for deferred services (167) 167
Amortization of deferred services 638
Net loss
----- ------ ------- -----
BALANCES, December 31, 1999 5,381 $3,143 $(1,450) $ (10)
===== ====== ======= =====
</TABLE>
<TABLE>
<CAPTION>
Deficit
Accumulated Total
Stock During the Shareholders
Subscribed Development Stage Deficiency
<S> <C> <C> <C>
BALANCES, December 31, 1997 $ - $(12,794) $(12,703)
Issuance of common stock for services performed 35
Repayment of notes receivable from shareholders 48
Repurchase of common stock -
Issuance of options for services performed 27
Issuance of options for deferred services -
Amortization of deferred services 4
Net loss (14,150) (14,150)
------ -------- --------
BALANCES, December 31, 1998 - (26,944) (26,739)
Issuance of common stock for services performed 764
Issuance of common stock for cash 42
Repayment of notes receivable from shareholders 34
Repurchase of common stock -
Noncash compensation for issuance of options to employees -
Cancellation of options for deferred services -
Amortization of deferred services 638
Net loss (35,878) (35,878)
------ -------- --------
BALANCES, December 31, 1999 $ - $(62,822) $(61,139)
====== ======== ========
See notes to financial statements. (Concluded)
</TABLE>
<PAGE>
PRIO, INC.
(Formerly SaveSmart, Inc.)
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999 AND 1998 AND CUMULATIVE FOR THE PERIOD FROM
JULY 21, 1994 (INCEPTION) TO DECEMBER 31, 1999 (In thousands)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period from
July 21,
Years Ended 1994
December 31, (Inception) to
----------------------- December 31,
1999 1998 1999
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(35,878) $(14,150) $(62,822)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 1,447 560 2,416
Loss on disposal of property and equipment 6 115 343
Noncash stock compensation expense 18,290 27 19,033
Issuance of common stock for services 764 35 824
Write down of inventory to net realizable value - - 1,101
Equity in losses (earnings) of investee 14 (68) (54)
Gain on disposal of interest in investee - (35) (35)
Changes in operating assets and liabilities, net of effects from
acquisition of businesses:
Inventory - - (101)
Accounts and unbilled receivable (124) 25 (124)
Prepaid expenses, other current assets and other assets (76) (420) (813)
Accounts payable and accrued expenses (1,026) 2,864 2,719
Deferred revenue 217 - 217
Other current liabilities 74 40 114
Other long-term liabilities (57) 128 71
-------- -------- --------
Net cash used in operating activities (16,349) (10,879) (37,111)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from (purchases of) short-term investment 2,142 (2,142) -
Advances to investee - (40) (40)
Decrease in cash of previously consolidated subsidiary - (110) (110)
Acquisition of property and equipment, net (1,735) (2,737) (5,597)
-------- -------- --------
Net cash provided by (used in) investing activities 407 (5,029) (5,747)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of notes payable and equipment lease line (662) (461) (1,198)
Proceeds from notes payable and equipment lease line 550 909 4,419
Repayment of equipment financing and capital lease obligations (296) (151) (512)
Proceeds from notes payable to related party - - 750
Proceeds from issuance of common stock 42 - 54
Net proceeds from issuance of convertible preferred stock (10) 28,773 47,488
Proceeds from subscribed stock - - 301
Payments received on notes receivable from shareholders 34 48 85
-------- -------- --------
Net cash provided by (used in) financing activities (342) 29,118 51,387
-------- -------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (16,284) 13,210 8,529
CASH AND CASH EQUIVALENTS, Beginning of period 24,813 11,603 -
-------- -------- --------
CASH AND CASH EQUIVALENTS, End of period $ 8,529 $ 24,813 $ 8,529
======== ======== ========
</TABLE>
(Continued)
<PAGE>
PRIO, INC.
(Formerly SaveSmart, Inc.)
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, AND 1998 AND CUMULATIVE FOR THE PERIOD FROM
JULY 21, 1994 (INCEPTION) TO DECEMBER 31, 1999
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period from
Years Ended July 21, 1994
December 31, (Inception) to
----------------- December 31,
1999 1998 1999
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $ 132 $ 110 $ 279
Non cash financing and investing activities:
Issuance of convertible preferred stock for inventory - - 1,000
Issuance of convertible preferred stock upon conversion of note and
accrued interest payable - - 2,253
Issuance of stock under subscription rights - - 301
Property and equipment acquired under equipment financing and capital lease obligations 308 198 1,023
Issuance of stock for notes receivable - - 125
Repurchase of common stock in exchange for forgiveness of note receivable
from shareholders 2 42 62
Issuance of warrants and options for deferred services 2,015 216 2,259
Conversion of note payable as considered for interest in
previously consolidated subsidiary - 250 250
Cancellation of options for deferred services 167 - 167
Compensation expense for Series E warrants 17,652 - 17,652
</TABLE>
See notes to financial statements. (Concluded)
<PAGE>
PRIO, INC.
(Formerly SaveSmart, Inc.)
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999 AND 1998 AND PERIOD FROM JULY 21, 1994 (INCEPTION)
TO DECEMBER 31, 1999
--------------------------------------------------------------------------------
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company - Prio, Inc. (the Company) was incorporated in California in
July 1994. The Company's service provides internet sites with proprietary
and seamless promotions infrastructure, which enables retailers and
merchants to target promotions to consumers on the internet through the
delivery of rebate offers redeemable at either on-line or physical stores.
The Company was formerly known as SaveSmart, Inc. but changed its name to
Prio, Inc. effective in April 1999. The Company is in the development stage
and as such has not generated any significant revenues from operations.
Basis of Presentation - Prior to 1998, the Company had a wholly owned
subsidiary, DataSmart India Private Limited (DSIPL). In May 1998, DataCard
Corporation (DataCard) exercised its rights to convert a $250,000 note
payable from the Company into a 50% ownership interest in DSIPL. As a
result of this transaction, the Company no longer holds a controlling
interest in DSIPL and, accordingly, the Company's investment in DSIPL has
been reported as investment in affiliate and accounted for under the equity
method of accounting in accordance with Accounting Principles Board ("APB")
Opinion No. 18, "The Equity Method of Accounting for Investments in Common
Stock," as of and for the year ended December 31, 1999 and 1998. The
Company's proportionate share of the earnings of DSIPL, according to the
joint venture agreement, is recorded in other income in the statement of
operations for the years ended December 31, 1999 and 1998.
Cash and Cash Equivalents - The Company considers all highly liquid
investments with remaining maturities of 90 days or less at the date of
acquisition to be cash equivalents. The Company is exposed to credit risk
in the event of default by financial institutions or the issuers of these
investments to the extent of the amounts recorded on the balance sheets in
excess of amounts that are insured by the FDIC. Cash equivalents consisted
of money market funds, auction rate preferred securities and commercial
paper as of December 31, 1999 and 1998.
Accounting for Certain Investments in Debt Securities - The Company
classifies its investments in debt securities as "available-for-sale."
Available-for-sale securities are carried at amortized cost, which
approximates fair market value.
Financial Instruments and Concentration of Credit Risk - The carrying value
of the Company's financial instruments, including cash and cash
equivalents, short-term investments, and notes payable approximates fair
market value. Financial instruments that subject the Company to
concentrations of credit risk consist of cash and cash equivalents.
Estimates and Certain Significant Risks and Uncertainties - The preparation
of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements
and the reported amounts of expenses during the reporting period. Actual
results could differ from these estimates.
The Company is in the development stage and operates in a rapidly changing
environment that involves a number of risks, some of which are beyond the
Company's control, that could have a material adverse effect on the
Company's business, operating results and financial condition. These risks
include the uncertainty of revenues and operating results; risk of timely
<PAGE>
and successful development of technology; dependence on merchant acquiring
banks, strategic partners, aggregators and processors; compliance with
credit card regulations; risk of capacity constraints, limited redundant
systems and system development risks; electronic security risks; market
acceptance of the Company's services; dependence on the internet, growth in
electronic commerce and internet infrastructure development; rapid
technological change; competition; lengthy implementation cycle;
intellectual property; dependence on key employees and consultants;
management of growth; and ability to obtain additional financing.
Property and Equipment - Property and equipment are stated at cost.
Equipment under capital leases is stated at the present value of minimum
lease payments at the inception of the lease. Depreciation and amortization
of property and equipment is provided using the straight-line method over
the estimated useful lives of the respective assets, generally three years.
Leasehold improvements are amortized using the straight-line method over
the shorter of the lease term or the estimated useful life of the assets.
Whenever events or changes in circumstances indicate that the carrying
amount of property or equipment may not be recoverable, recoverability is
measured by comparison of the carrying amount to future net cash flows the
property and equipment are expected to generate. 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 property and equipment
exceeds its fair market value. To date, the Company has made no adjustments
to the carrying values of its long-lived assets.
Income Taxes - The Company utilizes the asset and liability method of
accounting for income taxes. Under this method, deferred tax assets and
liabilities are determined based on the difference between the financial
statement and tax bases of assets and liabilities using enacted tax rates
in effect for the year in which the differences are expected to affect
taxable income. Valuation allowances are established when necessary to
reduce deferred tax assets to the amounts expected to be recovered.
Revenue Recognition - Revenue consists primarily of hosting and license
fees which are recognized over the contract period in which the services
are provided. Payments received in advance are deferred until the period in
which the services are rendered.
Stock-Based Compensation - The Company accounts for stock-based
compensation using the intrinsic value method prescribed in APB Opinion No.
25 ("APB No. 25"), "Accounting for Stock Issued to Employees." Accordingly,
no accounting recognition is given to stock options granted at fair market
value until they are exercised. Compensation expenses related to employee
stock options is recorded if, on the date of grant, the fair value of the
underlying stock exceeds the exercise price.
Recently Adopted Accounting Standards - In March 1998, the American
Institute of Certified Public Accountants issued Statement of Position No.
98-1, "Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use." This standard requires companies to capitalize
qualifying computer software costs, which are incurred during the
application development stage and amortize them over the software's
estimated useful life. Adoption of this standard in 1999 did not have a
material impact on the Company's financial position, results of operations
or cash flows.
Recently Issued Accounting Standard - In June 1998, the Financial
Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement requires companies to
record derivatives on the balance sheet as assets or liabilities, measured
at fair value. Gains or losses resulting from changes in the values of
those derivatives would be accounted for depending on the use of the
derivative and whether it qualifies for hedge accounting. SFAS No. 133
will be effective for the Company's fiscal year ending December 31, 2001.
The Company is currently evaluating what impact, if any, SFAS No. 133 may
<PAGE>
have on its financial statements.
Reclassification - Certain 1998 and prior period amounts have been
reclassified to conform with the 1999 presentation. Such reclassifications
had no impact on the net loss or shareholders' deficiency of prior periods.
2. PROPERTY AND EQUIPMENT
Property and equipment as of December 31 consist of the following (in
thousands):
1999 1998
Computer equipment and software $ 4,778 $2,928
Office equipment 125 109
Furniture and fixtures 186 186
Leasehold improvements 584 417
------- ------
Total 5,673 3,640
Accumulated depreciation and amortization (2,177) (753)
------- ------
Furniture and equipment, net $ 3,496 $2,887
======= ======
Property and equipment includes computer equipment and software under
capital leases of $517,000 and $209,000 and related accumulated
amortization of $209,000 and $103,000 as of December 31, 1999 and 1998,
respectively.
3. LONG-TERM DEBT
The Company's long-term debt as of December 31 consists of (in thousands):
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Demand note payable $ 250 $ 250
Equipment lease line 1,218 1,186
Loan related to joint venture - 144
Equipment financing and capitalized leases (Note 6) 188 176
Current portion (1,042) (1,058)
------- -------
Long-term portion $ 614 $ 698
======= =======
</TABLE>
In January 1996, the Company executed a demand note with a commercial
entity in the amount of $250,000, which is the amount outstanding as of
December 31, 1999. The note bears interest at LIBOR (5.82% as of December
31, 1999) plus 1% per annum, and the full principal amount plus interest is
due on demand. The note may be converted into shares of the Company's
preferred stock at the then prevailing conversion or market price, until
the note is paid in full. In January 2000, the Company exercised its right
to repay the demand note in accordance with the terms of the note payable
(the "Terms"), by sending a check for full amount of principal and accrued
interest. Lender attempted to reject the repayment on the grounds that it
had attempted to convert the note in early 1998. Management believes that
such lender's claim is without merit based on the Terms and intends to
defend its claim vigorously.
In June 1997, the Company entered into a loan and security agreement (the
"Agreement," as amended in September 1998) with Phoenix Leasing
<PAGE>
Incorporated. The Agreement provides the Company with available borrowings
not to exceed $2,124,000, in aggregate, $2,099,000 of which was drawn
through December 31, 1999. Principal and interest are due in 36 equal
monthly installments with a final payment equal to 15% of the original
principal amount due on the 37th month from the time of the borrowing. The
notes bear interest at effective rates ranging from 15.0% to 16.4% per
annum. Principal repayments for the borrowings are due as follows: 2000,
$607,000; 2001, $561,000; and 2002, $50,000.
In October 1997, the Company entered into a joint venture agreement (the
Joint Agreement) with DataCard to form DSIPL. Pursuant to the terms of the
Joint Agreement, DSIPL will perform development services for DataCard and
the Company. In connection with the Joint Agreement, DataCard loaned the
Company $500,000, the proceeds of which were used by the Company to fund
DSIPL. DataCard had the option to convert $250,000 of the notes payable
into 50% ownership interest in DSIPL, which was exercised by DataCard in
May 1998. The remaining amount of the note of $144,000 was paid in full
during 1999.
4. REDEEMABLE CONVERTIBLE PREFERRED STOCK AND SHAREHOLDERS' EQUITY
Redeemable Convertible Preferred Stock
The Company has authorized 20,000,000 shares of preferred stock and has
designated 1,500,000, 3,150,000, 1,141,110, 2,325,000, 4,325,000 and
6,913,950 shares of Series A, B, C, D, E and F redeemable convertible
preferred stock, respectively. As of December 31, 1999 and 1998, there were
issued and outstanding 1,500,000, 3,150,000, 1,141,110, 2,145,631,
2,962,966 and 5,813,958 shares of Series A, B, C, D, E and F redeemable
convertible preferred stock, respectively.
The rights, preferences, privileges, and restrictions of the redeemable
convertible preferred stock are as follows:
. The holders of Series A, B, C, D, E and F redeemable convertible
preferred stock are entitled to receive noncumulative annual dividends
of 8% of the original issue price ($0.3333, $1.00, $3.33, $3.71, $4.05,
and $4.30 for Series A, B, C, D, E and F, respectively), when and if
declared by the Company's Board of Directors, subject to certain
adjustments for antidilution. Dividends are paid in preference and
priority to any payments of dividends to common stock shareholders.
. The liquidation preference for Series A, B, C, D, E and F redeemable
convertible preferred stock is $0.33, $1.00, $3.33, $3.71, $4.05, and
$4.30 per share, respectively, plus all declared and unpaid dividends
subject to certain adjustments for antidilution. If the assets are
insufficient to make payment in full to all preferred stock
shareholders, assets will be distributed ratably among the preferred
stock shareholders in proportion to the full amounts to which they would
otherwise be respectively entitled. Any remaining assets shall be
distributed ratably among the common and preferred stock shareholders on
an "as if converted" basis.
. The preferred stock may be redeemed in three annual installments at any
time after December 11, 2003, at the request of the holders of at least
the majority of the then outstanding shares of preferred stock, voting
together as a single class, at a price equal to the original issuance
price, subject to certain adjustments for antidilution.
. Each series of preferred stock is convertible, at the option of the
holder, into fully paid shares of common stock. For the Series A, B, E
and F preferred stock, the conversion rate is currently 1.0:1.0 and is
based on the original purchase price, subject to certain adjustments for
antidilution. For the Series C and D preferred stock, the conversion
rate is currently 1:1.003 and 1:1.005, respectively, subject to certain
adjustments for antidilution.
<PAGE>
. The preferred stock automatically converts to common stock upon the
closing of an underwritten public offering of shares of the Company's
common stock resulting in total proceeds of at least $15,000,000 and
with a minimum share price of $8.60 per share.
. The holders of preferred stock have voting rights on an "as if
converted" basis.
Stock-Based Compensation
In connection with options and warrants to purchase common and preferred
stock granted to employees and nonemployees alike, a summary of recorded
deferred stock compensation and amortization thereof follows (in
thousands):
<TABLE>
<CAPTION>
Stock-Based
Compensation Expense
-----------------------
Deferred Period from
Compensation July 21,
Years Ended Years Ended 1994
December 31, December 31, (Inception) to
------------------ ---------------- December 31,
1999 1998 1999 1998 1999
<S> <C> <C> <C> <C> <C>
Warrants granted to:
American Express $ - $ - $ - $ - $ 716
Knight Ridder - - 17,652 - 17,652
Microsoft - - - - -
Options granted to:
Microsoft - 28 6 - 6
Nonemployees - 216 32 27 59
Employees 2,015 - 600 - 600
------ ---- ------- --- -------
$2,015 $244 $18,290 $27 $19,033
====== ==== ======= === =======
</TABLE>
Warrants
In November 1997, the Company issued warrants to purchase 1,328,772 shares
of Series D preferred stock at $3.71 per share to American Express Travel
Related Services Company, Inc. ("American Express") in connection with a
marketing agreement. The warrants were exercisable upon issuance and expire
at the earlier of eight months after the launch of the test marketing
program, as specified in the marketing agreement, or ten months from the
date of issuance. The Company recorded general and administrative expenses
during 1997 of $716,000 based on the fair market value of the warrants at
date of issuance using the Black-Scholes option pricing model with the
following assumptions: dividend yield of 0%; expected volatility of 34%;
contractual life of three years; and risk-free interest rate of 5.51%.
During 1998, American Express exercised the warrants for total net proceeds
to the Company of $4,850,000.
In December 1997, the Company issued warrants to purchase 1,234,568 shares
of Series E preferred stock at an initial price of $4.05 per share
(thereafter at fair market value as defined in the warrant agreement) in
connection with a marketing agreement with Microsoft Corporation
("Microsoft"). The warrants become exercisable over a maximum 48-month
period based on achievement of performance milestones, as defined in the
warrant agreement. No value has been ascribed to the warrants, as no
performance milestones were achieved on December 31, 1999. In December
1999, Microsoft waived its right to exercise the warrants assuming that the
merger with InfoSpace.com, Inc. ("InfoSpace") (Note 9) is consummated and
the service, as defined by the marketing agreement, would not have been
launched, on or prior to May 31, 2000.
In December 1998, the Company issued warrants to purchase 1,099,992 shares
of Series F preferred stock at an initial price of $4.30 per share
<PAGE>
(thereafter at fair market value as defined in the warrant agreement) in
connection with a marketing agreement with Knight-Ridder, Inc. The warrants
become exercisable over a maximum 48-month period, based on achievement of
performance milestones and other criteria as defined in the warrant
agreement. In 1999, the Company recorded Knight-Ridder warrants expense for
all of warrants issued, of which 274,998 were unvested as of December 31,
1999, of $18 million based on the fair value of these warrants using the
Black-Scholes option pricing model with the following assumptions: dividend
yield of 0%; expected volatility of 75%; contractual life of nine years;
and risk-free interest rate of 6.37%. The compensation cost for the
unvested warrants to purchase 274,998 shares of Series F preferred stock
was re-measured when vesting occurred and additional warrants expense of
$2,888,000 was recognized on March 31, 2000.
Stock Options
In December 1997, the Company granted 100,000 options, outside of the 1997
Equity Incentive Plan, to purchase common stock at $1.00 per share to
Microsoft in connection with a marketing agreement. Such options are
exercisable in four equal annual installments upon written notification and
expire 90 days after the options become exercisable. Such options were
valued based on the fair market value of the options at the date of grant
using the Black-Scholes option pricing model with the following
assumptions: dividend yield of 0%; expected volatility of 34%; contractual
lives of one to five years; and risk-free interest rate of 5.7%. In
December 1997, the Company recorded deferred services expense of $28,000
related to such options. Such deferred expense is being recognized over the
four-year term of the marketing agreement. As with the Series E preferred
stock warrants, in December 1999, Microsoft waived its right to exercise
the remaining annual installments of 75,000 options if the assumptions
described above materialize on or before May 31, 2000.
Stock Plan
In May 1999, the Company amended the 1997 Equity Incentive Plan (the "1997
Plan"). Pursuant to the 1997 Plan, the Company's Board of Directors may
grant incentive stock options to employees, and nonstatutory stock options,
stock bonuses, or rights to purchase restricted stock to employees,
directors, and consultants (as defined in the 1997 Plan).
Options vest at such times as determined by the Board of Directors, which
will provide for vesting of at least 20% per year, and expire no more than
ten years from the date of grant. Option grants may provide for the early
exercise of unvested shares. Such unvested shares shall be subject to
repurchase under certain conditions (defined in the 1997 Plan). The rights
to repurchase lapse at a minimum of 20% per year over 5 years from the date
of the option grant.
In December 1998, the Company granted 45,500 options to the employees of
DSIPL to purchase common stock at an exercise price of $2.00 per share. The
options vest ratably over 36 months and expire ten years from the date of
grant. Such options were valued based on the fair market value of the
options at date of grant using the Black-Scholes option pricing model with
the following assumptions: dividend yield of 0%; expected volatility of
34%; contractual life of ten years; and risk-free interest rate of 4.7%. As
of December 31, 1998, the Company had recorded deferred services expense of
$216,000 related to such options. Such deferred expenses is being
recognized over the three-year vesting period of the options.
As discussed in Note 1, the Company applies APB No. 25 in accounting for
the 1997 Plan. Accordingly, no compensation cost is recognized for fixed
stock options granted to employees at fair value except to the extent that
the exercise price of an option is less than the fair value of the
underlying common stock as of the grant date of each stock option.
In 1999, in connection with certain compensatory options granted to
employees, the Company recorded deferred compensation of $2,015,000 and
<PAGE>
amortized $600,000 of such amount as stock-based compensation expense.
Disclosure of pro forma information regarding net loss is required by SFAS
No. 123, "Accounting for Stock-Based Compensation." The pro forma net loss
has been determined as if the Company had accounted for its employee fixed
stock options under the fair value method of SFAS No. 123. The fair value
of the Company's employee fixed stock options was estimated at the date of
grant using the minimum value method and the following assumptions for both
1999 and 1998: risk-free interest rate of 6% in 1999 and between 4.4% and
6.3% in 1998; no dividend yield; and an average expected life of four
years.
Had compensation cost for the Company's stock-based compensation plan been
determined in a manner consistent with the fair value approach described in
SFAS No. 123, the Company's net losses as reported would have been
increased to $36,222,000, $14,208,000, and $63,237,000 for the years ended
December 31, 1999 and 1998 and for the period from July 21, 1994
(inception) to December 31, 1999, respectively.
A summary of activity for the 1997 Plan follows:
<TABLE>
<CAPTION>
Options Average
Available Options Exercise
for Grant Outstanding Price
<S> <C> <C> <C>
Balances, January 1, 1997 - - $ -
Authorized 1,482,227 - 1.00
Granted (weighted average fair value of $0.21) (659,750) 659,750 1.00
---------- ---------
Balances, December 31, 1997 (24,125 vested at
a weighted average price of $1.00 per share) 822,477 659,750 1.00
Authorized 1,711,677 - -
Granted (weighted average fair value of $0.19) (2,254,000) 2,254,000 1.02
Canceled 660,085 (660,085) 1.00
---------- ---------
Balances, December 31, 1998 (294,514 vested at
a weighted average price of $1.00 per share) 940,239 2,253,665 1.02
Authorized 1,250,000 - -
Granted (weighted average fair value of $2.71) (990,675) 990,675 3.24
Canceled 246,771 (246,771) 1.37
Exercised - (26,604) 1.04
---------- ---------
Balances, December 31, 1999 1,446,335 2,970,965 $1.73
========== =========
</TABLE>
The following table summarizes information about options outstanding as of
December 31, 1999:
<TABLE>
<CAPTION>
Options
Outstanding
--------------------------------------- Options Exercisable
Weighted ---------------------
Average Weighted Weighted
Number of Remaining Average Number Average
Exercise Options Contractual Exercise of Exercise
Price Outstanding Life (Years) Price Options Price
<S> <C> <C> <C> <C> <C>
$ 1.00 1,996,425 7.49 $ 1.00 892,956 $ 1.00
2.00 40,499 8.96 2.00 21,795 2.00
2.15 475,916 9.32 2.15 24,015 2.15
2.60 355,500 9.73 2.60 2,590 2.60
10.97 102,625 9.82 10.97 - 10.97
--------- -------
$1.00 - $10.97 2,970,965 8.15 $ 1.73 941,356 $ 1.06
========= =======
</TABLE>
5. 401(k) RETIREMENT PLAN
The Company has a 401(k) defined contribution employee benefit plan that
became effective in January 1996. Employees become eligible to participate
<PAGE>
in the 401(k) plan upon employment, assuming other eligibility requirements
are also satisfied. The 401(k) plan allows for employee contributions and
discretionary matching employer contributions. Total annual contribution
may not exceed dollar limitations established by the Internal Revenue
Service. The Company made no contributions to the 401(k) plan for the years
ended December 31, 1999 and 1998 and for the period from July 21, 1994
(inception) to December 31, 1999.
6. LEASE COMMITMENTS
Operating Leases
During 1998, the Company entered into a noncancelable operating lease for
its new facility in Mountain View, California, expiring in April 2003 and
has entered into a sublease for a portion of the new facility that expires
in August 2000. In addition, the Company has a noncancelable operating
lease for office equipment expiring in June 2001.
Future minimum lease payments under noncancelable operating leases, net of
sublease payments, as of December 31, 1999, are as follows (in thousands):
<TABLE>
<CAPTION>
Minimum Minimum Net Minimum
Year Ending Lease Sublease Lease
December 31, Payments Payments Payments
<S> <C> <C> <C>
2000 $ 842 $(195) $ 647
2001 874 - 874
2002 907 - 907
2003 344 - 344
------ ----- ------
$2,967 $(195) $2,772
====== ===== ======
</TABLE>
Total rent expense for all operating leases was $560,000, $669,000 and
$1,506,000 for the years ended December 31, 1999 and 1998, and for the
period from July 21, 1994 (inception) to December 31, 1999, respectively,
net of sublease income of $494,000, $217,000, and $711,000, respectively.
Capital Leases
The Company has entered into capital leases for various equipment. The
future minimum lease payments under capital leases are as follows (in
thousands):
Year Ending
December 31,
2000 $197
2001 2
----
199
Amounts representing interest (11)
----
Present value of minimum lease payments $188
====
7. INCOME TAXES
The Company has net deferred tax assets of $26,346,000 and $12,109,000 as
of December 1999 and 1998, respectively. Deferred tax assets relate
<PAGE>
primarily to deferred start-up costs, warrants, options, net operating loss
carryforwards, and general business credit carryforwards. As of December
31, 1999 and 1998, the net deferred tax assets were fully offset by a
valuation allowance due to the uncertainty of the Company's ability to
realize such assets. The net change in the total valuation allowance was an
increase of $14,237,000 and $9,265,000 for the years ended December 31,
1999 and 1998, respectively.
As of December 31, 1999, the Company has federal net operating loss
carryforwards of $20,750,000, which will expire from 2009 through 2019. As
of December 31, 1999, the Company has California net operating loss
carryforwards of $21,033,000, which will expire from 2001 through 2004. The
Company also has available federal research tax credit carryforwards of
$1,120,000 as of December 31, 1999. If not utilized, the federal credits
will expire from 2011 through 2019. The Company has available California
research tax credit and manufacturing investment credit carryforwards of
$693,000 as of December 31, 1999, which carryforward indefinitely.
Federal and California 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. As discussed in Note 9, Subsequent Event, the
Company was acquired in February 2000. This will result in ownership
change. As of the date of acquisition, the availability of the Company's
tax attributes consisting primarily of net operating loss carryforwards and
credit carryforwards will be limited.
8. RELATED PARTY TRANSACTIONS
In 1999 and 1998, the Company advanced to its affiliate $325,000 and
$175,000, respectively. Payments which are due in 13 installments, as
defined in the advance agreement, through December 2001, are applied
against amounts due affiliate for consulting services provided by the
affiliate to the Company. The total expense for such consulting services
amounted to $100,000, $270,000, and $446,000 for the years ended December
31, 1999 and 1998 and for the period from July 21, 1994 (inception) to
December 31, 1999, respectively.
The outstanding current portion of the advance is $187,000 and $100,000 as
of December 31, 1999 and 1998, respectively. The long-term portion of
$50,000 as of December 31, 1999 is included in Other Assets.
9. SUBSEQUENT EVENT
On February 15, 2000, the Company was acquired by InfoSpace for 5,293,456
shares of InfoSpace common stock including the assumption of all of the
Company's outstanding warrants and employee stock options.
* * * * *
