ONVANTAGE, INC.
---------------
(A DEVELOPMENTAL STAGE ENTERPRISE)
FINANCIAL STATEMENTS AND
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
DECEMBER 31, 1999
<PAGE>
C O N T E N T S
PAGE
-----
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS........................ F-2
FINANCIAL STATEMENTS
Balance Sheet as of December 31, 1999................................ F-3
Statement of Operations for the period February 25, 1999
(date of inception) to December 31, 1999........................... F-4
Statement of Stockholders' Deficit for the period February 25, 1999
(date of inception) to December 31, 1999........................... F-5
Statement of Cash Flows for the period February 25, 1999
(date of inception) to December 31, 1999........................... F-6
Notes to Financial Statements........................................ F-7
Balance Sheets as of June 30, 1999 and 2000.......................... F-16
Statements of Operations for the periods ended June 30,
1999 and 2000...................................................... F-17
Statement of Stockholders' Deficit for the six months
ended June 30, 2000................................................ F-18
Statements of Cash Flows for the periods ended
June 30, 1999 and 2000............................................. F-19
Notes to Interim Financial Statements................................ F-20
<PAGE>
Report of Independent Certified Public Accountants
--------------------------------------------------
Board of Directors
Onvantage, Inc.
We have audited the accompanying balance sheet of Onvantage, Inc. (a
developmental stage enterprise) as of December 31, 1999, and the related
statements of operations, stockholders' deficit, and cash flows for the period
February 25, 1999 (date of 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.
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 provides 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 Onvantage, Inc. (a
developmental stage enterprise) as of December 31, 1999, and the results of its
operations and its cash flows for the period February 25, 1999 (date of
inception) to December 31, 1999, in conformity with accounting principles
generally accepted in the United States of America.
/s/ Grant Thornton LLP
San Jose, California
July 17, 2000
F-2
<PAGE>
<TABLE>
ONVANTAGE, INC.
(A DEVELOPMENTAL STAGE ENTERPRISE)
BALANCE SHEET
DECEMBER 31, 1999
ASSETS
CURRENT ASSETS:
<S> <C>
Cash and cash equivalents $ 14,800
Prepaid expenses and deposits 14,573
--------------
Total current assets 29,373
PROPERTY AND EQUIPMENT, net 66,668
OTHER ASSETS 5,143
--------------
$ 101,184
==============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable $ 355,809
Accrued liabilities 9,851
Accrued interest payable 22,819
Related party notes payable 1,089,413
--------------
Total current liabilities 1,477,892
COMMITMENTS AND CONTINGENCIES -
STOCKHOLDERS' DEFICIT
Preferred stock Series A, $0.0001 par value, 10,000,000 shares
authorized; 7,500,000 issued and outstanding
(aggregate liquidation preference of $492,750) 750
Common stock, $0.0001 par value, 100,000,000 shares authorized;
12,577,500 shares issued and outstanding 1,258
Additional paid-in capital 533,164
Accumulated deficit during development stage (1,911,880)
--------------
Total stockholders' deficit (1,376,708)
--------------
$ 101,184
==============
</TABLE>
See accompanying notes to the financial statements.
F-3
<PAGE>
<TABLE>
ONVANTAGE, INC.
(A DEVELOPMENTAL STAGE ENTERPRISE)
STATEMENT OF OPERATIONS
FEBRUARY 25, 1999 (DATE OF INCEPTION) TO DECEMBER 31, 1999
OPERATING EXPENSES
<S> <C>
Research and development $ 1,135,546
Selling, general and administrative (including
noncash compensation expense of $29,843) 753,332
-------------
Total operating expenses 1,888,878
-------------
OPERATING LOSS (1,888,878)
Interest expense (23,002)
-------------
NET LOSS $ (1,911,880)
=============
</TABLE>
See accompanying notes to the financial statements.
F-4
<PAGE>
<TABLE>
ONVANTAGE, INC.
(A DEVELOPMENTAL STAGE ENTERPRISE)
STATEMENT OF STOCKHOLDERS' DEFICIT
CUMULATIVE FROM FEBRUARY 25, 1999 (DATE OF INCEPTION) TO DECEMBER 31, 1999
<CAPTION>
Preferred Stock
Series A Common Stock Additional Total
--------------------- --------------------- Paid-in Accumulated Stockholders'
Shares Amount Shares Amount Capital Deficit Deficit
--------- ------- -------- -------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Issuance of common stock for
services and cash at $0.001 per
share in June, August, September
and November 1999 - $ - 735,000 $ 74 $ 24,880 $ - $ 24,954
Conversion of related party note
payable to preferred and
common stock in August 1999 7,500,000 750 5,180,000 518 496,662 - 497,930
Issuance of common stock to
affiliates in August 1999 for
cash at $0.001 per share - - 2,320,000 232 2,088 - 2,320
Issuance of common stock under stock
arrangements with employees and
advisors for cash at $0.001 per
share in August and October 1999 - - 4,342,500 434 9,534 - 9,968
Net loss for the period - - - - - (1,911,880) (1,911,880)
--------- -------- ---------- --------- ---------- ----------- ------------
Balances, December 31, 1999 7,500,000 $ 750 12,577,500 $ 1,258 $ 533,164 $(1,911,880) $ (1,376,708)
========= ======== ========== ========= ========== =========== ============
</TABLE>
See accompanying notes to the financial statements.
F-5
<PAGE>
<TABLE>
ONVANTAGE, INC.
(A DEVELOPMENTAL STAGE ENTERPRISE)
STATEMENT OF CASH FLOWS
FEBRUARY 25, 1999 (DATE OF INCEPTION) TO DECEMBER 31, 1999
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (1,911,880)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 19,555
Stock-based compensation expense 29,843
Changes in assets and liabilities:
Prepaid expenses (14,573)
Accounts payable 355,809
Accrued liabilities 9,851
Accrued interest expense 22,819
--------------
Net cash used in operating activities (1,488,576)
--------------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property and equipment (68,545)
Acquisition of other assets (22,821)
--------------
Net cash used in investing activities (91,366)
--------------
CASH FLOWS FROM FINANCING ACTIVITIES
Related party borrowings 1,587,343
Issuance of common stock for cash 7,399
--------------
Net cash provided by financing activities 1,594,742
--------------
Net increase in cash and cash equivalents 14,800
Cash and cash equivalents at beginning of period -
--------------
Cash and cash equivalents at end of period $ 14,800
==============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest $ -
Cash paid for taxes $ -
SUPPLEMENTAL DISCLOSURE OF NON CASH INVESTING AND FINANCING ACTIVITIES:
During 1999, the Company converted $5,180 and $492,750 of related
party borrowings into 5,180,000 shares of common and 7,500,000
shares of preferred stock.
</TABLE>
See accompanying notes to the financial statements.
F-6
<PAGE>
ONVANTAGE, INC.
(A DEVELOPMENTAL STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
CUMULATIVE FROM FEBRUARY 25, 1999 (DATE OF INCEPTION) TO DECEMBER 31, 1999
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
The Company
-----------
Onvantage, Inc. (the "Company" or "Onvantage") was incorporated in the
state of Delaware on February 25, 1999. The Company is an Internet software
and marketing company, that through Onvantage's Microportal technology,
will allow selected customers, known as "Affinity Partners," to offer free
or customer subsidized Internet Service Provider ("ISP") service. Affinity
Partners will be able to offer value oriented opportunities through the
Affinity Partner's own personalized, branded Microportal (licensed from and
powered by Onvantage), allowing them to maximize the value of their
existing customer base.
Since the Company's inception, management has devoted its efforts to
activities such as financial planning, raising capital, and research and
development activities. The Company anticipates that a portion of its
ongoing operations will continue to include research and development
activities. Research and development expenditures were $1,135,546 in 1999.
In May 2000, the Company entered into an Agreement of Merger and Plan of
Reorganization by and among Zstar Enterprises, Inc. ("Zstar"), and
Onvantage (the "Merger"). The Merger provides for exchange of common stock
in which all Onvantage common shareholders will receive stock representing
63.11% of Zstar in exchange for all the outstanding shares of Onvantage.
The Merger provides that Zstar make a private offering of 625,000 units at
$6.00 per unit (the "Offering"). Each unit will be comprised of one share
of common stock of Zstar and one purchase warrant ("Purchase Warrant").
Each Purchase Warrant will entitle the holder to acquire one share of
common stock in Zstar for $6.00 for a period of two years from the closing
of the Merger. If not exercised prior the Purchase Warrants are
automatically callable 15 days after the completion of any of the following
performance milestones: (a) at least 1,000 users of the Company's
Microportal technology by a significant national company, (b) at least
5,000 users of the Company's Microportal technology by a national company
with a presence in at least 25 states, or (c) at least 10,000 users of the
Company's Microportal technology by a regional company.
In May 2000, the Company executed a Convertible Promissory Note Payable to
Zstar ("Zstar Note") that provides for the borrowing of up to $3,750,000 in
connection with the Merger. The Zstar Note provides for interest at 10% per
annum, with a minimum cumulative interest payment of $10,000. During May
2000, the Company borrowed $750,000 under the Zstar Note. All unpaid
principal and interest on the Zstar Note is due on December 31, 2002. If
payment of principal and interest is not paid on the maturity date, a late
charge equal to 2.00% per annum on the delinquent amount is also assessed.
The Zstar Note provides for a security interest in all of the Company's
assets. The Zstar Note and accrued interest was converted into shares of
the Company's common stock at the time of the closing of the Merger as
provided in the Zstar Note.
In July 2000, the Company completed the Merger with Zstar. The acquisition
will be accounted for as a reverse acquisition whereby the Company was
deemed to be the "accounting acquirer" under the guidance in Staff
Accounting Bulletin No. 97. At the time of the merger, Zstar was a
non-operating shell as all of its previous operations had been disposed of.
The Company believes that the proceeds realized in the Merger ($3,750,000)
along with the expected proceeds from the exercise of the Purchase Warrants
($3,750,000) will be sufficient to fund operations to December 31, 2000. In
order for operations to continue through December 31, 2001, the Company may
need to raise additional capital through debt or equity financing. The
ultimate success of the Company will depend on realizing revenues and
generating income from operations.
F-7
<PAGE>
ONVANTAGE, INC.
(A DEVELOPMENTAL STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
CUMULATIVE FROM FEBRUARY 25, 1999 (DATE OF INCEPTION) TO DECEMBER 31, 1999
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Cash and Equivalents
--------------------
The Company considers all highly liquid monetary instruments with an
original maturity of three months or less from the date of purchase to be
cash equivalents.
Property and Equipment
----------------------
Property and equipment are recorded at cost and depreciated using the
straight-line method over their useful lives. The estimated useful lives
for machinery, equipment and software are three to five years.
Research and Development
------------------------
Costs incurred internally in creating computer software are charged to
expense when incurred as research and development until technological
feasibility has been established for the product. Technological feasibility
is established upon completion of a detail program design or upon
completion of a working model. Thereafter, all software production costs
are capitalized and subsequently reported at the lower of unamortized cost
or net realizable value. Capitalized costs are amortized based on current
and future revenue for each product with an annual minimum equal to the
straight-line amortization over the remaining estimated economic life of
the product. As of December 31, 1999, the Company has not capitalized any
computer development costs.
The Company recognizes Web site development costs in accordance with
Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." As such, the Company
expenses all costs incurred that relate to the planning and post
implementation phases of development. Costs incurred in the development
phase are capitalized and recognized over the product's estimated useful
life if the product is expected to have a useful life beyond one year.
Costs associated with repair or maintenance of the existing site or the
development of Web site content are included in research and development
expenses in the accompanying statements of operations.
Income Taxes
------------
The Company accounts for income taxes using the asset and liability method
in accordance with Statement of Financial Accounting Standards ("SFAS") No.
109. Under this method, deferred tax liabilities and assets 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 reverse.
Stock-based Compensation
------------------------
The Company accounts for stock-based awards to employees using the
intrinsic value method in accordance with Accounting Principles Board
("APB") No. 25, "Accounting for Stock Issued to Employees." Compensation
expense related to employee stock options is recorded if, on the date of
grant, the fair value of the underlying stock exceeds the exercise price.
F-8
<PAGE>
ONVANTAGE, INC.
(A DEVELOPMENTAL STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
CUMULATIVE FROM FEBRUARY 25, 1999 (DATE OF INCEPTION) TO DECEMBER 31, 1999
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Fair Value of Financial Instruments
-----------------------------------
The fair value of cash and cash equivalents and accounts payable
approximate carrying value due to the short term nature of such
instruments. The fair value of the related party notes payable is not
determinable due to the related party nature of the instrument.
NOTE 2 - PROPERTY AND EQUIPMENT, NET
<TABLE>
Property and equipment are as follows:
<CAPTION>
December 31,
1999
------------------
<S> <C>
Machinery, equipment and purchased software $ 68,545
Less accumulated depreciation (1,877)
------------------
$ 66,668
==================
</TABLE>
NOTE 3 - RELATED PARTY NOTES PAYABLE
Related party notes payable includes an unsecured convertible promissory
note payable to the Company's founder with a principal balance of
$1,089,413 as of December 31, 1999. The related party notes payable are due
in August 2000. Interest on the note is at 8% per annum.
The note provided for $5,180 and $492,750 of the outstanding principal and
accrued interest to be converted into 5,180,000 shares of common stock and
7,500,000 shares of Series A preferred stock. In August 1999, these amounts
were converted. The outstanding principal balance can be converted into
preferred shares upon a qualified equity financing as defined in the
convertible promissory note.
The common stock issued upon conversion of the related party note payable
is subject to a Founder's Restricted Stock Purchase Agreement ("Founder's
Agreement"). The Founder's Agreement provides that before any of these
shares are permitted to be sold or otherwise transferred, the Company shall
have the right of first refusal to purchase the shares. This right of first
refusal terminates immediately upon the completion of certain transactions
specified in the Founder's Agreement. The Founder's Agreement also provides
that these shares are subject to repurchase rights in favor of the Company
which are released 25% upon date of grant and the remaining shares ratably
over three years. The Founder's Agreement provides that in the event of
voluntary or involuntary termination before all of the shares are released
from the Company's repurchase option, the Company shall have an
irrevocable, exclusive option for 90 days from the date of termination to
purchase all unreleased shares at the original purchase price.
F-9
<PAGE>
ONVANTAGE, INC.
(A DEVELOPMENTAL STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
CUMULATIVE FROM FEBRUARY 25, 1999 (DATE OF INCEPTION) TO DECEMBER 31, 1999
NOTE 3 - RELATED PARTY NOTE PAYABLE (CONTINUED)
Upon a change in control, 25% of the shares shall be released from the
repurchase option on the date the change of control is consummated. A
change in control is defined as follows: (a) the acquisition of 50% or more
of the total voting power of the Company's outstanding voting securities
other than in a private financing transaction approved by the Board of
Directors, (b) the sale or exchange of all of the stock of the Company, (c)
a merger or consolidation in which the shareholders of the Company do not
retain a majority of the beneficial interest in the voting stock after the
transaction, or (d) the sale or disposition of all or substantially all of
the Company's assets. The balance of the shares subject to the repurchase
option shall continue to be released on the same schedule as existed prior
to the change in control.
In addition the Founder's Agreement provides for an additional release of
25% of the shares upon the termination of employment as a result of death
or disability and 100% release of the unreleased shares in the event of
termination other than for cause within one year after a change in control.
The preferred stock issued upon conversion of the related party note
payable is subject to a Fully Vested Restricted Stock Purchase Agreement.
The Fully Vested Restricted Stock Purchase Agreement provides that before
any of these shares are permitted to be sold or otherwise transferred the
Company shall have the right of first refusal to purchase the shares. This
right of first refusal terminates immediately upon the completion of the
acquisition of the Company by another entity by means of a merger or
consolidation of the Company with or into another corporation in which the
stockholders of the Company own less than 50% of the voting securities of
the surviving entity, the sale of all or substantially all of the assets of
the Company or the date of the first sale of common stock of the Company to
the general public pursuant to a registration statement filled with and
declared effective by the Securities and Exchange Commission under the
Securities Act of 1933.
NOTE 4 - INCOME TAXES
No provision for federal and state income taxes has been recorded as the
Company has incurred net operating losses since inception. The primary
difference between the statutory federal tax rate of 34% and the Company's
effective tax rate is the result of the valuation allowance provided
against the deferred tax assets. The following table sets forth the primary
components of deferred tax assets at December 31, 1999:
<TABLE>
<S> <C>
Net operating loss and credit carryforwards $ 708,000
Valuation allowance (708,000)
------------
$ -
============
</TABLE>
At December 31, 1999, the Company fully provided a valuation allowance
against its net deferred tax assets. The valuation allowance was increased
by $708,000 during the period ended December 31, 1999. The Company believes
sufficient uncertainty exists regarding the realizability of the deferred
tax assets such that a full valuation allowance is required. At December
31, 1999, the Company had approximately $1,800,000 of federal net operating
loss carryforwards for tax reporting purposes available to offset future
taxable income; such carryforwards will expire beginning in 2019.
Additionally, the Company has approximately $900,000 of California net
operating loss carryforwards for tax reporting purposes which will expire
beginning in 2004.
F-10
<PAGE>
ONVANTAGE, INC.
(A DEVELOPMENTAL STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
CUMULATIVE FROM FEBRUARY 25, 1999 (DATE OF INCEPTION) TO DECEMBER 31, 1999
NOTE 5 - STOCK OPTION PLAN
In August 1999, the Board of Directors approved and the Company adopted the
1999 Stock Plan (the "Plan"). Under the Plan, the Company may grant options
to purchase 6,700,000 shares of common stock to officers, employees and
consultants. The Plan generally provides that exercise prices for employees
will not be less than the fair market value per share on the date the
option is granted, or 110% of the fair market value in the case of an
option granted to any employee who, at the time of grant, owns or is deemed
to own more than 10% of the total combined voting power of all classes of
stock of the Company. The Plan generally provides that exercise prices for
services providers will not be less than 85% of the fair market value per
share on the date the option is granted, or 110% of the fair market value
in the case of an option granted to any service provider who, at the time
of grant, owns or is deemed to own more than 10% of the total combined
voting power of all classes of stock of the Company. These options
generally expire 10 years from the date of grant and vest over a period of
five years.
The Plan also provides that stock purchase rights may be issued either
alone, in addition to, or in tandem with other awards granted under the
Plan. Stock purchase rights are issued upon execution of Restricted Stock
Purchase Agreements. The Restricted Stock Purchase Agreements grant the
Company a repurchase option exercisable upon the voluntary or involuntary
termination of services. The purchase price for shares repurchased under
the Restricted Stock Purchase Agreement is the original price paid for the
shares. The Restricted Stock Purchase Agreements generally provide for the
release of the repurchase option as follows:
25% at the date of grant and the remaining 75% monthly over three years.
During 1999, the Company issued 4,342,500 shares of common stock under the
Plan. As of December 31, 1999, there were no options or stock purchase
rights outstanding and 2,357,500 shares were available for grant under the
Plan.
SFAS No. 123, "Accounting for Stock-Based Compensation," requires the
disclosure of pro forma net income (loss) and income (loss) per share had
the Company adopted the fair value method prescribed in SFAS No. 123. Under
SFAS No. 123, the fair value of stock-based awards to employees is
calculated through the use of option pricing models, even though such
models were developed to estimate the fair value of freely tradable, fully
transferable options without vesting restrictions, which significantly
differ from the Company's stock option awards.
The Company's calculation of the fair value of employee grants were made
using the minimum value method with the following weighted average
assumptions. The weighted average minimum value per option as of the date
of grant for options granted during 1999 was $0.001.
<TABLE>
<CAPTION>
Period Ended
December 31,
1999
------------------
<S> <C>
Dividend yield 0.00
Risk free interest rate 0.50
Expected term, in years 0.08
</TABLE>
If the computed minimum values of the Company's stock-based awards to
employees had been amortized to expense over the vesting period of the
awards as specified under SFAS No. 123, there would be no significant
effect on the net loss for the period.
F-11
<PAGE>
ONVANTAGE, INC.
(A DEVELOPMENTAL STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
CUMULATIVE FROM FEBRUARY 25, 1999 (DATE OF INCEPTION) TO DECEMBER 31, 1999
NOTE 6 - STOCKHOLDERS' EQUITY
Preferred Stock
---------------
Dividends
Preferred shares are entitled to preferential non-cumulative dividends at
$0.04 per share per year, if and when declared by the Board of Directors.
Liquidation Preference
In the event of a distribution of the Company's assets on dissolution, sale
of its property, or liquidation, the preferred shares receive $0.0657 per
share plus all declared and unpaid dividends.
Conversion
Preferred shares may be converted by the holder into common shares at any
time or upon closing of a firm commitment underwritten public offering
pursuant to an effective registration statement under the Securities Act of
1933, covering the offer and sale of shares of Common Stock for the account
of the Company to the public with a minimum aggregate gross offering price
of $20,000,000.
The number of common shares into which each preferred share may be
converted is determined by dividing $0.0657 by the Series A Conversion
Price in effect at the time of conversion. The Series A Conversion Price is
$0.0657 per share of common stock and is adjusted for certain transactions
from time to time to adjust for the effects of a subdivision or combination
of its outstanding common shares. As of December 31, 1999, each share of
preferred stock is convertible into one share of common stock.
Voting Rights
Preferred shares vote the number of shares of common stock into which the
share of preferred could be converted at the record date. Each share of
common stock issued and outstanding has one vote on most issues presented
to stockholders for action.
Common Stock
------------
In June and November 1999, the Company issued 175,000 and 50,000 shares,
respectively, of the Company's Common Stock to various advisor's of the
Company, at the purchase price of $0.001 per share for an aggregate
purchase price of $175 and $50, respectively. Consideration for these
shares also included services valued at $5,836 and $1,669 in June and
November 1999, respectively. These shares were issued pursuant to a fully
vested restricted stock purchase agreement (the "Restricted Common Stock
Purchase Agreement"). The Restricted Common Stock Purchase Agreement
provides that before any of these shares are permitted to be sold or
otherwise transferred the Company shall have a right of first refusal to
purchase the shares. This right of first refusal terminates immediately
upon the completion of certain transactions specified in the Restricted
Common Stock Purchase Agreement.
F-12
<PAGE>
ONVANTAGE, INC.
(A DEVELOPMENTAL STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
CUMULATIVE FROM FEBRUARY 25, 1999 (DATE OF INCEPTION) TO DECEMBER 31, 1999
NOTE 6 - STOCKHOLDERS' EQUITY (CONTINUED)
In August and September 1999, the Company also issued 2,320,000 and 510,000
shares, respectively, to affiliates of the Company's Chief Executive
Officer and various other Company advisors at the purchase price of $0.001
per share for an aggregate purchase price of $2,830. Consideration for the
shares issued to advisors also included services valued at $22,338 in
September 1999. These shares were issued pursuant to restricted stock
purchase agreements. These shares are subject to a repurchase option which
are generally released 25% upon date of grant and the remaining shares
ratably over three years. These restricted stock purchase agreements also
provide that in the event of voluntary or involuntary termination of
employment by or service to the Company before all of the shares are
released from the Company's repurchase option, the Company shall have an
irrevocable, exclusive option for 90 days from the date of termination to
purchase all unreleased shares at the original purchase price. These
restricted stock purchase agreements also provide that before any of these
shares are permitted to be sold or otherwise transferred the Company shall
have a right of first refusal to purchase the shares. This right of first
refusal terminates immediately upon the completion of certain transactions
specified in the restricted stock purchase agreements.
Warrants
--------
In November 1999, the Company issued warrants to purchase 5,000 shares of
the Company's common stock to two independent contractors for services.
These warrants are immediately exercisable and expire on November 2004 or
immediately prior to the closing of the sale of issuance of shares of
common stock pursuant to the Company's initial underwritten public offering
of the Company's securities. The exercise prices of the warrants are $5.00
per share, subject to adjustment for certain conditions and events as
provided in the warrant agreement. The value of the warrants at the date of
issuance was not significant.
NOTE 7 - COMMITMENTS, CONTINGENCIES AND CONCENTRATIONS
Related Party Leases
--------------------
During the period ended December 31, 1999, the Company subleased office
space from Media Arts Group, Inc., a company in which Onvantage's Chief
Executive Officer is a member of the Board of Directors, under a month to
month agreement. The office space is leased by Media Arts Group, Inc., from
a third party lessor. Total rent expense under this sublease agreement was
$24,700 for the period ended December 31, 1999.
If the Company continues its sublease from Media Arts Group, Inc. for the
duration of the lease with the third party lessor, the minimum rental
commitments are as follows:
<TABLE>
<CAPTION>
Year Ended
December 31,
------------
<S> <C>
2000 $ 189,500
2001 189,500
2002 94,700
---------
Total minimum payments required $ 473,700
=========
</TABLE>
F-13
<PAGE>
ONVANTAGE, INC.
(A DEVELOPMENTAL STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
CUMULATIVE FROM FEBRUARY 25, 1999 (DATE OF INCEPTION) TO DECEMBER 31, 1999
NOTE 7 - COMMITMENTS, CONTINGENCIES AND CONCENTRATIONS (CONTINUED)
Concentrations
--------------
During the period ended December 31, 1999, the Company entered into an
agreement for online development services with an Internet professional
services firm. Research and development expenses for the period ended
December 31, 1999 under this agreement were approximately $946,000. Prior
to completion of the online development services a former employee of the
Internet professional services firm was hired as an independent contractor.
Consulting expenses, for this independent contractor, for the period ended
December 31, 1999 was approximately $103,000.
NOTE 8 - SUBSEQUENT EVENTS
Related Party Note Payable
--------------------------
During the six months ended June 30, 2000, the Company received additional
net advances of approximately $1,060,000 on the related party note payable.
Options
-------
In January, February and May 2000, the Company issued 576,000 options to
purchase the Company's common stock at $2.00 per share under the Plan to
the Company's employees.
In June 2000, the Company issued 285,000 options to purchase the Company's
common stock at $3.00 per share under the Plan to the Company's employees.
Warrants
--------
In February 2000, the Company entered into two independent contractor
agreements for the development of software applications. In connection with
these agreements the Company issued warrants to purchase 80,000 shares of
the Company's common stock at $2.00 per share. The value of the warrants at
the date of issuance was not significant.
In February 2000, the Company entered into an independent contractor
agreement for the development of the Microportal application. The
independent contractor agreement provides for compensation at specified
hourly rates not to exceed total fees of $32,000. The independent
contractor agreement also provides for the issuance of warrants to purchase
up to 250,000 shares of the Company's common stock at $0.001 per share upon
completion of specific milestones as specified in the independent
contractor agreement. An initial grant of 100,000 warrants became vested
and exercisable upon execution of the independent contractor agreement. The
remaining warrants are granted and vest based upon completion of each
specific milestone. The value of the warrants at the date of issuance was
not deemed significant.
F-14
<PAGE>
ONVANTAGE, INC.
(A DEVELOPMENTAL STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
CUMULATIVE FROM FEBRUARY 25, 1999 (DATE OF INCEPTION) TO DECEMBER 31, 1999
NOTE 8 - SUBSEQUENT EVENTS (CONTINUED)
Lease Commitments
-----------------
In July 2000, the Company entered into lease agreements, in addition to the
office space subleased from Media Arts Group, Inc., for administrative and
sales offices, and computer equipment. Some of the operating leases provide
that the Company pay taxes, maintenance, insurance and other occupancy
expense applicable to leased premises. Generally, the leases provide for
renewal for various periods at stipulated rates.
Minimum lease payments are as follows:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
--------- ---------
<S> <C> <C>
2000 $ 36,000 $ 83,800
2001 86,500 201,100
2002 78,600 201,100
2003 - 201,100
--------- ---------
Future minimum lease payments 201,100 $ 687,100
Amounts representing interest 13,500 =========
---------
Present value of net minimum lease payments $ 187,600
=========
</TABLE>
Advertising and Operating Agreements
------------------------------------
In March 2000, the Company secured a co-marketing agreement with AT&T to
jointly sell its private-labeled Internet access offering in conjunction with
AT&T's wholesale ISP services. The joint offering enables Onvantage to provide
turnkey, private-labeled Internet access to its business customers. The
Company's product is presented by AT&T's sales force as a bundled service with
AT&T's wholesale ISP offering.
F-15
<PAGE>
<TABLE>
ONVANTAGE, INC.
(A DEVELOPMENTAL STAGE ENTERPRISE)
BALANCE SHEETS
<CAPTION>
June 30, June 30,
1999 2000
----------------- ---------------
(unaudited)
-----------------------------------
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 50,175 $ 186,739
Prepaid expenses and deposits - 44,282
----------------- ---------------
Total current assets 50,175 231,021
PROPERTY AND EQUIPMENT, net - 95,071
OTHER ASSETS 5,000 13,362
----------------- ---------------
$ 55,175 $ 339,454
================= ===============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable $ - $ 90,633
Accrued interest payable 7,721 105,125
Related party notes payable 207,635 2,149,409
Zstar note payable - 750,000
----------------- ---------------
Total current liabilities 215,356 3,095,167
COMMITMENTS AND CONTINGENCIES - -
STOCKHOLDERS' DEFICIT
Preferred stock Series A, $0.0001 par value, 10,000,000 shares
authorized; 7,500,000 issued and outstanding
(aggregate liquidation preference of $492,750) - 750
Common stock, $0.0001 par value, 100,000,000 shares authorized;
175,000 and 12,440,000 shares issued and outstanding at
June 30, 1999 and June 30, 2000, respectively 18 1,244
Additional paid-in capital 5,993 558,028
Accumulated deficit during development stage (166,192) (3,315,735)
----------------- ---------------
Total stockholders' deficit (160,181) (2,755,713)
----------------- ---------------
$ 55,175 $ 339,454
================= ===============
</TABLE>
See accompanying notes to the financial statements.
F-16
<PAGE>
<TABLE>
ONVANTAGE, INC.
(A DEVELOPMENTAL STAGE ENTERPRISE)
STATEMENTS OF OPERATIONS
<CAPTION>
Cumulative
from
February 25, February 25,
1999 (date of Six Months 1999 (date of
inception) to Ended inception) to
June 30, June 30, June 30,
1999 2000 2000
-------------------- ------------------ --------------------
(unaudited)
------------------------------------------------------------------
OPERATING EXPENSES
<S> <C> <C> <C>
Research and development $ 58,528 $ 328,969 $ 1,464,515
Selling, general and administrative (including
noncash compensation expense of $5,836 and $0
for the period ended June 30, 1999 and 2000,
respectively, and $29,843 for the cumulative period
from February 25, 1999 (date of inception) to
June 30, 2000) 99,943 991,139 1,744,471
-------------------- ------------------ --------------------
Total operating expenses 158,471 1,320,108 3,208,986
-------------------- ------------------ --------------------
OPERATING LOSS (158,471) (1,320,108) (3,208,986)
Interest expense (7,721) (83,747) (106,749)
-------------------- ------------------ --------------------
NET LOSS $ (166,192) $ (1,403,855) $ (3,315,735)
==================== ================== ====================
</TABLE>
See accompanying notes to the financial statements.
F-17
<PAGE>
<TABLE>
ONVANTAGE, INC.
(A DEVELOPMENTAL STAGE ENTERPRISE)
STATEMENT OF STOCKHOLDERS' DEFICIT
FOR THE SIX MONTHS ENDED JUNE 30, 2000
<CAPTION>
Preferred Stock
Series A Common Stock Additional Total
--------------------- --------------------- Paid-in Accumulated Stockholders'
Shares Amount Shares Amount Capital Deficit Deficit
--------- -------- -------- -------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, January 1, 2000 7,500,000 $ 750 12,577,500 $ 1,258 $ 533,164 $ (1,911,880) $ (1,376,708)
Issuance of common stock for cash
at $0.001 per share in
January 2000 (unaudited) - 539,000 54 485 - 539
Repurchase of common stock issued
under stock arrangements with
employees and advisors in March
2000 (unaudited) - - (689,000) (69) (620) - (689)
Issuance of common stock for cash at
$2.00 per share in April 2000
(unaudited) - - 12,500 1 24,999 - 25,000
Net loss for the six months ended
June 30, 2000 (unaudited) - - - - - (1,403,855) (1,403,855)
--------- --------- ---------- --------- --------- ------------ ------------
Balances, June 30, 2000 (unaudited) 7,500,000 $ 750 12,440,000 $ 1,244 $ 558,028 $ (3,315,735) $ (2,755,713)
========= ========= ========== ========= ========= ============ ============
</TABLE>
See accompanying notes to the financial statements.
F-18
<PAGE>
<TABLE>
ONVANTAGE, INC.
(A DEVELOPMENTAL STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS
<CAPTION>
Cumulative
from
February 25, February 25,
1999 (date of Six Months 1999 (date of
inception) to Ended inception) to
June 30, June 30, June 30,
1999 2000 2000
--------------- ---------------- ------------------
(unaudited)
--------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (166,192) $ (1,403,855) $ (3,315,735)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization - 6,033 25,588
Stock-based compensation expense 5,836 - 29,843
Changes in assets and liabilities:
Prepaid expenses - (29,709) (44,282)
Accounts payable - (265,176) 90,633
Accrued liabilities - (9,851) -
Accrued interest expense 7,721 82,306 105,125
--------------- ------------- --------------
Net cash used in operating activities (152,635) (1,620,252) (3,108,828)
--------------- ------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property and equipment - (33,655) (102,200)
Acquisition of other assets (5,000) (9,000) (31,821)
--------------- ------------- --------------
Net cash used in investing activities (5,000) (42,655) (134,021)
--------------- ------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of Z Star note payable - 750,000 750,000
Related party borrowings 207,635 1,233,996 2,821,339
Issuance of common stock for cash 175 25,539 32,938
Principal payments on related party borrowings - (174,000) (174,000)
Repurchase of common stock - (689) (689)
--------------- ------------- --------------
Net cash provided by financing activities 207,810 1,834,846 3,429,588
--------------- ------------- --------------
Net increase in cash and cash equivalents 50,175 171,939 186,739
Cash and cash equivalents at beginning of period - 14,800 -
--------------- ------------- --------------
Cash and cash equivalents at end of period $ 50,175 $ 186,739 $ 186,739
=============== ============== ==============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest $ - $ - $ -
Cash paid for taxes $ - $ - $ -
SUPPLEMENTAL DISCLOSURE OF NON CASH INVESTING AND FINANCING ACTIVITIES:
During 1999, the Company converted $5,180 and $492,750 of related party borrowings
into 5,180,000 shares of common and 7,500,000 shares of preferred stock.
</TABLE>
See accompanying notes to the financial statements.
F-19
<PAGE>
ONVANTAGE, INC.
(A DEVELOPMENTAL STAGE ENTERPRISE)
NOTES TO INTERIM FINANCIAL STATEMENTS
JUNE 30, 2000
NOTE 1- SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited financial statements have been prepared in
accordance with accounting principles generally accepted in the United
States of America for interim information. The information at June 30, 2000
and for the period February 25, 1999 (date of inception) to June 30, 1999
and the six months ended June 30, 2000 includes all adjustments that the
management of the Company believes are necessary for a fair presentation
for the results of the periods presented.
Results for any interim period are not necessarily indicative of the
results for any future interim period or for the entire year. The
accompanying financial statements and notes thereto should be read in
conjunction with the Company's audited financial statements and notes
thereto for the period February 25, 1999 (date of inception) to December
31, 1999.
NOTE 2 - PROPERTY AND EQUIPMENT, NET
<TABLE>
Property and equipment are as follows:
<CAPTION>
June 30,
2000
--------------------
(unaudited)
<S> <C>
Machinery, equipment and purchased software $ 102,200
Less accumulated depreciation (7,129)
--------------------
$ 95,071
====================
</TABLE>
NOTE 3 - RELATED PARTY NOTES PAYABLE
During the six months ended June 30, 2000, the Company received additional
net advances of approximately $1,060,000 on the related party note payable.
NOTE 4 - STOCKHOLDERS' EQUITY
<TABLE>
During the six months ended June 30, 2000, we issued the following equity
instruments:
<CAPTION>
DESCRIPTION Options Warrants
------------- --------------
<S> <C> <C>
Balance as of January 1, 2000 - 5,000
Issuance for services - 180,000
Grants under stock option plan 861,000 -
------------- --------------
Balance as of June 30, 2000 861,000 185,000
============= ==============
</TABLE>
F-20
<PAGE>
ONVANTAGE, INC.
(A DEVELOPMENTAL STAGE ENTERPRISE)
NOTES TO INTERIM FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2000
NOTE 5 - COMMITMENTS, CONTINGENCIES AND CONCENTRATIONS
Lease Commitments
-----------------
In July 2000, the Company entered into lease agreements, in addition to the
office space subleased from Media Arts Group, Inc., for administrative and
sales offices, and computer equipment. Some of the operating leases provide
that the Company pay taxes, maintenance, insurance and other occupancy
expense applicable to leased premises. Generally, the leases provide for
renewal for various periods at stipulated rates.
Minimum lease payments are as follows:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
--------------- -------------
<S> <C> <C>
2000 $ 36,000 $ 83,800
2001 86,500 201,100
2002 78,600 201,100
2003 - 201,100
--------------- -------------
Future minimum lease payments 201,100 $ 687,100
Amounts representing interest 13,500 =============
---------------
Present value of net minimum lease payments $ 187,600
===============
</TABLE>
Advertising and Operating Agreements
------------------------------------
In March 2000, the Company secured a co-marketing agreement with AT&T to
jointly sell its private-labeled Internet access offering in conjunction
with AT&T's wholesale ISP services. The joint offering enables Onvantage to
provide turnkey, private-labeled Internet access to its business customers.
The Company's product is presented by AT&T's sales force as a bundled
service with AT&T's wholesale ISP offering.
