<PAGE>
Exhibit 99.2
REPORT OF INDEPENDENT AUDITORS'
To the Board of Directors and Shareholders of Post Communications, Inc.:
In our opinion, the accompanying balance sheets and the related statements of
operations, of mandatorily redeemable convertible preferred stock and
stockholders' deficit and of cash flows present fairly, in all material
respects, the financial position of Post Communications, Inc. (the "Company") at
December 31, 1998 and 1997 and the results of its operations and its cash flows
for the years ended December 31, 1998 and 1997, in conformity with generally
accepted accounting principles. 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
audit of these financial statements in accordance with generally accepted
auditing standards 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 the opinion expressed above.
July 1, 1999, except Note 9, which is as of October 1, 1999
<PAGE>
<TABLE>
<CAPTION>
BALANCE SHEET
------------------------------------------------------------------------------------------------------------------------------------
ASSETS December 31,
1998 1997
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 478,000 $ 248,000
Short term investments 249,000 1,922,000
Accounts receivable 108,000 25,000
Deposits 56,000 -
Prepaid expenses and other current assets 52,000 15,000
-------------------- ----------------------
Total current assets 943,000 2,210,000
Property and equipment, net 543,000 278,000
-------------------- ----------------------
Total assets $ 1,486,000 $ 2,488,000
==================== ======================
Liabilities, Mandatorily Redeemable Convertible
Preferred Stock and Stockholders' Deficit
Current liabilities:
Bank borrowings, current $ 556,000 $ -
Accounts payable 173,000 26,000
Accrued expenses 132,000 27,000
Deferred revenue 66,000 31,000
Capital lease obligations, current 119,000 -
-------------------- ----------------------
Total current liabilities 1,046,000 84,000
-------------------- ----------------------
Noncurrent liabilities:
Bank borrowings, long-term 80,000 -
Notes payable- related party 1,500,000 -
Capital lease obligations, long-term 328,000 -
-------------------- ----------------------
Total noncurrent liabilities 1,908,000 -
-------------------- ----------------------
Total liabilities 2,954,000 84,000
-------------------- ----------------------
Commitments (Note 5)
Mandartorily Redeemable Preferred Stock:
Mandatorily Redeemable Convertible Preferred Stock:
$0.0001 par value; 10,000,000 shares authorized:
2,681,290 issued and outstanding 3,539,000 3,539,000
Stockholders' deficit:
Common stock: $0.0001 par value; 20,000,000 shares
authorized: 2,723,846 and 1,689,200 shares issued
and outstanding, respectively - -
Additional paid-in capital 239,000 104,000
Stock subscription receivable (68,000) -
Accumulated deficit (5,178,000) (1,239,000)
-------------------- ----------------------
Total shareholders' deficit (5,007,000) (1,135,000)
-------------------- ----------------------
Total liabilities, mandatorily redeemable preferred
convertible stock and stockholders' deficit $ 1,486,000 $ 2,488,000
==================== ======================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
<CAPTION>
POST COMMUNICATIONS, Inc.
Statements of Operations
-------------------------------------------------------------------------------------------------------------------------------
Year Ended
December 31,
1998 1997
<S> <C> <C>
Revenue $ 1,084,000 $ -
Operating expenses:
Project personnel 1,253,000 -
Technology development 1,048,000 529,000
Sales and marketing 763,000 153,000
General and administrative 1,216,000 293,000
Recruiting 363,000 55,000
Other 356,000 -
---------------------------------
Total operating expenses 4,999,000 1,030,000
---------------------------------
Loss from operations (3,915,000) (1,030,000)
Interest expense, net (24,000) (59,000)
---------------------------------
Net Loss $ (3,939,000) $ (1,089,000)
=================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
<CAPTION>
Statement of Mandatorily Redeemable Covertible Preferred Stock and Stockholders' Deficit
------------------------------------------------------------------------------------------------------------------------------------
Mandatorily Redeemable
Convertible Additional Stock
Preferred Stock Common Stock Paid-In Subscription
Shares Amount Shares Amount Capital Receivable
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1996 - $ - 1,274,500 - $ 2,000 $ -
Issuance of Common Stock for
cash at $0.01 per share - - 406,700 - 5,000 -
Issuance of Series A Mandatorily
Redeemable Convertible
Preferred Stock at $1.32 per share 2,272,199 2,999,000 - - - -
Issuance of Series A Mandatorily
Redeemable Convertible Preferred Stock
upon note conversion at $1.32 per share 409,091 540,000 - - - -
Warrants issued with convertible notes - - - - 72,000 -
Exercise of stock options - - 8,000 - 1,000 -
Compensation expense related to stock options - - - - 24,000 -
Net loss - - - - - -
---------- ------------ ----------- ------- ----------- -----------
Balances at December 31, 1997 2,681,290 3,539,000 1,689,200 - 104,000 -
Issuance of Common Stock for cash
at $0.13 per share - - 113,898 - 15,000 -
Exercise of stock options for stock
subscription receivable - - 647,000 - 87,000 (87,000)
Payments on stock subscription receivable - - - - - 19,000
Exercise of stock options - - 273,748 - 33,000 -
Net loss - - - - - -
---------- ------------ ----------- ------- ----------- -----------
Balances at December 31, 1998 2,681,290 $3,539,000 2,723,846 $- $239,000 $(68,000)
========== ============ =========== ======= =========== ===========
Total
Accumulated Stockholders'
Deficit Deficit
<S> <C> <C>
Balances at December 31, 1996 $ (150,000) $ (148,000)
Issuance of Common Stock for
cash at $0.01 per share - 5,000
Issuance of Series A Mandatorily
Redeemable Convertible - -
Preferred Stock at $1.32 per share - -
Issuance of Series A Mandatorily
Redeemable Convertible Preferred Stock
upon note conversion at $1.32 per share - -
Warrants issued with convertible notes - 72,000
Exercise of stock options - 1,000
Compensation expense related to stock options - 24,000
Net loss (1,089,000) (1,089,000)
------------ -----------
Balances at December 31, 1997 (1,239,000) (1,135,000)
Issuance of Common Stock for cash
at $0.13 per share - 15,000
Exercise of stock options for stock
subscription receivable - -
Payments on stock subscription receivable - 19,000
Exercise of stock options - 33,000
Net loss (3,939,000) (3,939,000)
------------ -----------
Balances at December 31, 1998 $(5,178,000) $(5,007,000)
============ ===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
POST COMMUNICATIONS, INC.
Statement of Cash Flows
------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
1998 1997
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (3,939,000) $ (1,089,000)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 150,000 18,000
Compensation expense related to stock options - 24,000
Interest expense related to warrants - 72,000
Changes in current assets and liabilities:
Accounts receivable (83,000) (25,000)
Deposits, prepaid expenses and other current assets (93,000) (12,000)
Accounts payable 147,000 11,000
Accrued expenses 105,000 27,000
Deferred revenue 35,000 31,000
---------------- -------------------
Net cash used in operating activities (3,678,000) (943,000)
---------------- -------------------
Cash flows from investing activities:
Purchase of property and equipment (218,000) (284,000)
Purchase of short term investments - (1,922,000)
Proceeds from sale of short term investments 1,673,000 -
---------------- ------------------
Net cash provided by (used in) investing activities 1,455,000 (2,206,000)
---------------- ------------------
Cash flows from financing activities:
Proceeds from notes payable 1,500,000 -
Proceeds from bank borrowings 650,000 -
Principal payments on bank borrowings (14,000) -
Proceeds from capital lease 279,000 -
Principal payments on capital leases (29,000) -
Proceeds from issuance of Series A Mandatorily Redeemable
Convertible Preferred Stock, net of issuance costs - 2,999,000
Proceeds from issuance of convertible notes payable - 340,000
Proceeds from issuance of Common Stock 15,000 5,000
Proceeds from issuance of Common Stock under stock option plans 33,000 1,000
Proceeds from stock subscription receivable 19,000 -
---------------- ------------------
Net cash provided by financing activities 2,453,000 3,345,000
---------------- ------------------
Net increase in cash and cash equivalents 230,000 196,000
Cash and cash equivalents at beginning of period 248,000 52,000
---------------- -----------------
Cash and cash equivalents at end of period $ 478,000 $ 248,000
================ =================
Supplemental non-cash financing activity:
Conversion of convertible notes payable to
Series A Mandatorily Redeemable Convertible Preferred Stock $ - $ 540,000
================ ===============
Property and equipment acquired under capital lease $ 197,000 $ -
================ ===============
Exercise of common stock options for stock
subscription receivable $ 87,000 $ -
================ ===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
POST COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1998
--------------------------------------------------------------------------------
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
An early innovator in the development of email marketing, Post Communications,
Inc., (the "Company") delivers a range of email marketing services to help
client companies build customer relationships, from periodic email campaigns
to ongoing customer acquisition and loyalty programs. The Company's email
marketing experts can design, implement, and operate innovative and effective
email programs for clients- whether they are internet- dependent e-businesses
or more traditional companies expanding their e-marketing strategies.
Use of Estimates
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
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Cash Equivalents
The Company considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents. At December 31, 1998
and 1997, $474,000 and $237,000, respectively, of money market funds, the
fair value of which approximates cost, are included in cash and cash
equivalents.
Short-term Investments
The Company classifies all short-term investments as available-for-sale in
accordance with Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." The
Company places its short-term investments primarily in commercial paper. At
December 31, 1998, the estimated fair value of the investments approximated
their cost, and the amount of gross unrealized gains and losses were not
significant.
Fair value of financial instruments
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments," defines the fair value of a financial
instrument as the amount at which the instrument could be exchanged in a
current transaction between willing parties. The following methods and
assumptions were used to estimate the fair value of the Company's financial
instrument:
The carrying amounts for cash and cash equivalents, restricted cash, accounts
receivable, accounts payable, and debt instruments approximate their
respective fair values because of the short-term maturity of these items.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist primarily of cash and cash equivalents.
The Company limits its exposure to loss by placing cash and cash equivalents
with high credit quality financial institutions.
At December 31, 1998, two customers accounted for 34% and 58% of total
revenue. At December 31, 1997, no customers accounted for greater than 10% of
total revenue. At the December 31, 1998, three customers accounted for
<PAGE>
48%, 23% and 20% of total accounts receivable. At December 31, 1997, one
customer accounted for the total accounts receivable.
Capitalized software development costs
Software development costs are included in research and development and are
expensed as incurred. After technological feasibility is established,
material software development costs are capitalized. The capitalized cost
is then amortized on a straight-line basis over the estimated product life,
or on the ratio of current revenues to total projected product revenues,
whichever is greater. To date, the period between achieving technological
feasibility, which the Company has defined as the establishment of a working
model which typically occurs when the beta testing commences, and the general
availability of such software has been short and software development costs
qualifying for capitalization have been insignificant. Accordingly, the
Company has not capitalized any software development costs. Software
development costs expensed during 1998 and 1997 amounted to $33,000 and
$13,000, respectively.
Revenue Recognition
Revenue on contracts is recognized over the period of each engagement,
primarily using the percentage- of-completion method. Labor hours incurred is
generally used as the measure of progress towards completion. Customer
billing occurs in accordance with contract term. Customer advances and
amounts billed to customers in excess of revenue recognized are recorded as
deferred revenue. Amounts recognized as revenue in advance of billing
(typically under percentage-of-completion accounting) are recorded as unbilled
receivable.
Income Taxes
The Company accounts for income taxes under the liability method, which
requires, among other things, that deferred income taxes be provided for
temporary differences between the tax bases of the Company's assets and
liabilities and their financial statement reported amounts. In addition,
deferred tax assets are recorded for the future benefit of utilizing net
operating losses and research and development credit carryforwards. A
valuation allowance is provided against deferred tax assets unless it is more
likely that not that they will be realized.
Project personnel
Project personnel expenses are the direct payroll and payroll expenses costs
of the employees that work on client projects.
Technology development
Technology development, expenditures for research and development, are
expensed as incurred.
Other
Other expenses consist primarily of professional development and computer
maintenance expenses.
Property and equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets,
generally 3 to 5 years, or the lease term of the respective assets.
Stock-based compensation
The Company accounts for stock-based employee compensation arrangements in
accordance with provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," ("APB No. 25") and complies with
the disclosure provisions of Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" ("SFAS No. 123").
<PAGE>
2. Balance Sheet Components
December 31,
1998 1997
Accounts receivable:
Accounts receivable $ 64,000 $ 25,000
Unbilled fees and services 44,000
-------- --------
108,000 25,000
-------- --------
Property and equipment, net:
Computer software 73,000 -
Computer equipment 432,000 226,000
Furniture and fixtures 209,000 73,000
-------- --------
714,000 299,000
Less: Accumulated depreciation and amortization (171,000) (21,000)
-------- -------
543,000 278,000
-------- -------
Accrued expenses:
Accrued payable 41,000 -
Accrued vacation 91,000 27,000
-------- -------
$ 132,000 $ 27,000
======== =======
3. Income Taxes
No provisions for federal or state income taxes have been recorded as the
Company has incurred federal and state operating losses on a cumulative basis
for the years ended December 31, 1998 and 1997 of approx imately $4,921,000
and $1,100,000 respectively, for federal and state purposes.
At December 31, 1998 and 1997, deferred tax assets of approximately
$2,018,000 and $550,000, respectively, consisted primarily of federal and
state net operating loss carryforwards, which expire in varying amounts
beginning in 2001 for federal and 2004 for state purposes. Management
believes that, based on a number of factors, it is more likely than not that
the deferred tax assets will not be utilized, such that a full valuation
allowance has been recorded. 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.
4. Borrowings
Convertible promissory notes
On various dates during 1996 and 1997, the Company issued, convertible
promissory notes with detachable warrants with an aggregate principal value of
$540,000 and interest rates ranging from 5.8% and 6.23%. The principal value
of these notes was converted into 409,091 shares of Series A Mandatorily
Redeembable Convertible Preferred Stock in September 1997.
Equipment Lease Line
At December 31, 1998, the Company had a $500,000 equipment financing line with
a leasing agency, which had a drawdown period from December 31, 1997 to
December 19, 1998. The equipment financing line is collateralized by the
assets of the Company. The financing line has a payment schedule of 48
months and bears interest at a rate of 8.75% per annum. At December 31,
1998, the Company had drawndown $476,000 under the equipment financing line
and the total outstanding balance was $447,000.
<PAGE>
Line of Credit
In November 1997, the Company entered into a line of credit agreement with a
bank which provides for working capital advances through May 1999 of up to
$750,000. Interest on borrowings is set at the bank's prime rate, plus 0.5%.
At December 31, 1998, the prime rate was 7.75%. In July 1998, the Company
amended the Loan and Security Agreement, which limited use of the remaining
credit line to equipment purchases made only on or prior to September 19,
1998. The total draw down on the line of credit at June 1998 under the
original agreement was $500,000, and the Company had additional draw down of
$150,000 as equipment advances under the advances under the amended agreement.
The amended agreement requires unpaid principal balance of the equipment
advances to be repaid in 33 equal monthly payments of the principal plus
interest, commencing on September 19, 1998. The Company made total payments
of $14,000 towards the outstanding balance of the equipment advances as of
December 31, 1998. The assets of the Company are pledged as collateral for
the line of credit. Under the line of credit, the Company is required to
maintain certain covenants. At December 31, 1998, the Company was in
compliance with all such covenants.
Note Payable- related party
Note payable consists of amounts payable to a lender and the use of the
proceeds is restricted to working capital expenditures. The lender is also a
common stockholder. Under the Loan and Security agreement, the loan is
required to be repaid over 24 months commencing on January 1, 2000. The
assets of the Company are pledged as collateral for the notes payable. Under
the note payable, the Company is required to maintain certain covenants. At
December 31, 1998, the Company was in compliance with all such covenants.
The aggregate annual maturities of long term debt is as follows:
1999 $ 675,000
2000 924,000
2001 894,000
2002 90,000
2003 -
Thereafter -
----------
$2,583,000
==========
5. Commitments
Leases
The Company leases office space and equipment under noncancelable operating
and capital leases with various expiration dates through December of 1998.
Rent expense for the year ended December 31, 1998 and 1997 was $225,000 and
$45,000, respectively.
Future minimum lease payments under noncancelable operating and capital
leases entered into subsequent to December 31, 1998 are as follows:
Year Ended Capital Operating
December 31, Leases Leases
1999 $ 158,000 $ 448,000
2000 172,000 447,000
2001 172,000 294,000
2002 60,000 -
2003 - -
Thereafter - -
--------- ----------
Total minimum lease payments 562,000 $1,189,000
Less: amount representing interest (115,000) ==========
---------
Present value of capital lease obligation 447,000
Less: current portion (119,000)
---------
Long-term portion of capital lease obligations $ 328,000
=========
<PAGE>
6. Mandatorily Redeemable Convertible Preferred Stock
Mandatorily Redeemable Convertible Preferred Stock ("Convertible Preferred")
at December 31, 1998, consist of the following, except for shares authorized,
which reflect the Articles of Incorporation as amended in May 1999:
Proceeds
Net of
Shares Liquidation Issuance
Authorized Outstanding Amount Costs
A 3,000,000 2,681,289 $3,539,000 $3,539,000
B 5,200,000
Undesignated 1,800,000 - - -
---------- --------- ---------- ----------
Total 10,000,000 2,681,000 $3,539,000 $3,539,000
========== ========= ========== ==========
In May 1999, the Company issued 3,544,823 shares of $0.0001 par value Series B
Mandatorily Redeemable Convertible Preferred Stock and received proceeds net
of issuance costs totaling $4,600,000.
The holders of convertible preferred have various rights and preferences as
follows:
Voting
Each share of Convertible Preferred has voting rights equal to an equivalent
number of shares of Common Stock into which it is convertible and votes
together as one class with the Common Stock.
As long as at least a majority of shares of Convertible Preferred remain
outstanding, the Company must obtain approval from a majority of the holders
of Convertible Preferred in order to alter the articles of incorporation as
related to Convertible Preferred, change the authorized number of shares of
Convertible Preferred, repurchase any shares of Preferred or Common Stock
other than shares subject to the right of repurchase by the Company, change
the authorized number of Directors, authorize a dividend on the Common Stock,
effect a merger, consolidation or sale of assets where the existing
shareholders retain less than 50% of the voting stock of the surviving entity
or authorize any other equity securities or issue or obligate itself to issue
any capital stock or any equity security other than the issuance of stock
under the Company's stock plans.
Dividends
Holders of Convertible Preferred are entitled to receive noncumulative
dividends at the per annum rate of $0.11 per share, respectively, when and if
declared by the Board of Directors. The holders of Convertible Preferred will
also be entitled to participate in dividends on Common Stock, when and if
declared by the Board of Directors, based on the number of shares of Common
Stock held on an as-if converted basis. No dividends on Convertible Preferred
Stock or Common Stock have been declared by the Board from inception through
December 31, 1998.
Liquidation
In the event of any liquidation, dissolution or winding up of the Company
including the acquisition of the Company by means of any transactions or
series of transactions that result in the transfer of 50% or more of the
outstanding voting power of the company or the sale of substantially all of
the assets of the company, unless the holders of at least a majority of the
Convertible Preferred then outstanding shall determine otherwise, the holders
of Convertible Preferred are entitled to receive an amount of $1.32 per share
plus any declared but unpaid dividends prior to and in preference to any
distribution to the holders of common stock. Upon completion of such
distribution, any remaining assets of the Company shall be distributed among
the holders of Convertible Preferred and Common Stock pro rata based upon the
number of shares of Common Stock held by each (assuming full conversion of all
Convertible Preferred) until the Convertible Preferred holders have received
an aggregate of $3.30 per share; thereafter, the holders of the Common Stock
shall receive all remaining assets pro rata based upon the number of shares
held by each.
<PAGE>
Conversion
Each share of Convertible Preferred is convertible, at the option of the
holder, according to a conversion ratio, subject to adjustment for
dilution. Initially, the conversion feature is set at one share of
convertible preferred to one share of Common Stock. Each share of
Convertible Preferred automatically converts into the number of shares of
Common Stock into which such shares are convertible at the then effective
conversion ratio upon: (1) the closing of a public offering of Common Stock
at a per share price of at least $6.60 per share with gross proceeds of at
least $15,000,000 in the aggregate or (2) the consent of the holders of the
majority of Convertible Preferred.
At December 31, 1998, the Company reserved 3,000,000 shares of Common Stock
for the conversion of Convertible Preferred.
Redemption
Upon written notice of at least a majority of the holders of Convertible
Preferred, at any time subsequent to September 30, 2004, the Company must
redeem a specified percentage of Convertible Preferred Stock at a price
equal to $1.32 per share, plus all declared but unpaid dividends on such
shares. The redemption amount shall be payable in cash in four annual
installments beginning on the redemption date.
Warrants for Convertible Preferred Stock
In connection with the establishment of line of credit with a bank, the
Company issued a warrant to purchase 5,682 shares of Series A Stock for
$1.32 per share in January 1998. This warrant will expire on January 5,
2003. The Company, using the Black-Scholes option pricing model, determined
that the fair value of the warrant at the date of issuance was nominal.
In connection with the issuance of convertible promissory notes, the
Company issued warrants to purchase 155,739 shares of Series A Stock for
$1.32 per share during the year ended December 31, 1997. These warrants
will expire on the earlier of April 30, 2001, or the closing of an initial
public offering of the Company's Common Stock, or the sale of all or
substantially all of the assets of the Company or the merger of the Company
with any other entity. The Company determined that the fair value of the
warrants were $0.46 per share at the date of grant. Accordingly, the
Company recorded $72,000 in additional interest expense and additional paid
in capital associated with these warrants.
7. Common Stock
The Company's Articles of Incorporation, as amended, authorize the Company
to issue 20,000,000 shares of $0.0001 par value Common Stock. Under the
terms of the Stock Purchase Plan, certain stock purchase agreements with
the founder and certain executives, the Company has the right to repurchase
shares of Common Stock at the original issuance price in certain
circumstances. The purchase rights lapse generally over a four year period.
At December 31, 1998 and 1997, there were 844,467 and 1,076,458 shares,
respectively, subject to repurchase.
8. Stock Option Plan
In November 1997, the Company adopted the 1997 Stock Option Plan (the
"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 Company employees (including
officers and directors who are also employees). Nonqualified stock options
("NSO") may be granted to Company employees and consultants. The Company
has reserved 1,571,500 shares of Common Stock for issuance under the Plan.
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 and NSO shall not be less than 100%
and 85% of the estimated fair value of the shares on the date of grant,
respectively, and (ii) the exercise price of an ISO and NSO granted to a
10% shareholder shall not be less than 110% of the estimated fair value of
the shares on the date of grant, respectively. Options are exercisable
immediately subject to repurchase options held by the Company which lapse
over a maximum period of 4 years at such times and under such conditions as
determined by the Board of Directors. To date, options granted generally
vest over four years.
<TABLE>
<CAPTION>
Weighted
Available Average
for Options Exercise
Grant Outstanding Price
<S> <C> <C> <C>
Shares authorized 1,171,000 - $ -
Options granted (189,575) 189,575 0.13
Options exercised - (8,000) 0.13
Options canceled - - -
---------- ----------
Balance at December 31, 1997 981,425 181,575 0.13
Shares authorized 400,500 - -
Options granted (1,368,972) 1,368,972 0.13
Options exercised - (920,748) 0.13
Options canceled 140,667 (140,667) 0.13
Options repurchased 149,700 (149,700) 0.13
---------- ----------
Balance at December 31, 1998 303,320 339,432 $0.13
========== ==========
</TABLE>
<TABLE>
<CAPTION>
Options Vested
Options Outstanding at December 31, 1998 and Exercisable at
---------------------------------------- December 31, 1998
Weighted ----------------------
Average Weighted Weighted
Range of Remaining Average Number Average
Exercise Number Contractual Exercise Vested and Exercise
Price Outstanding Life Price Outstanding Price
<S> <C> <C> <C> <C> <C>
$0.13 339,432 9.49 years $0.13 50,736 $0.13
- -
------- ------
339,432 50,736
======= ======
</TABLE>
Fair value disclosures
Had compensation cost for the Company's stock-based compensation plan been
determined based on the fair value at the grant dates for the awards under a
method prescribed by SFAS No. 123, the Company's net loss would not have been
materially effected.
The Company calculated the fair value of each option grant on the date of
grant using the Black-Scholes pricing method with the following assumptions:
dividend yield at 0%; weighted average expected option term of 4 years;
average risk free interest rates of 4.68% and 6.14% for the years ended
December 31, 1998 and 1997, respectively. The weighted average fair value of
options granted during 1998 and 1997 was $0.02 and $0.03 per share,
respectively.
Options granted to nonemployees
During the year ended December 31, 1998, the Company granted 64,072 shares of
Common Stock to consultants in conjunction with services performed. The
Company, using the Black-Scholes option pricing model, determined that the
fair value of the options at the date of issuance was nominal.
In November 1998, the Company agreed to permit a lender to purchase 113,898
shares of Common Stock at $0.13 per share. The lender exercised this right in
November 1998. The Company using the Black-Scholes option pricing model,
determined that the fair value of the right at the date of issuance was
nominal.
During the year ended December 31, 1997, the Company granted options to
purchase 91,575 shares of Common Stock to consultants in conjunction with
services performed. The Company recorded expense totaling $24,000 during this
period based upon the estimated fair value of the options or the services
performed.
9. Subsequent Events
Convertible promissory notes
During March and April of 1999, the Company issued, convertible promissory
notes with detachable warrants with an aggregate principal value of
$1,251,000 and interest rate of 7.75% per annum. The principal value of these
notes as well as $14,000 of accrued interest payable, was converted into
958,583 shares of Series B Mandatorily Redeemable Convertible Preferred Stock
in May 1999.
The warrants are to purchase 606,846 shares of Series B Stock for $1.32 per
share. These warrants will expire on March 12, 2002. The Company, using the
Black-Scholes option pricing model, recorded $188,000 in additional interest
expense and additional paid in capital associated with these warrants.
Stock Option Plan
In May 1999, the Board of Directors amended the 1997 Stock Option Plan (the
"Plan") to increase the maximum number of shares of Common Stock authorized
for issuance over the term of the Plan by 1,886,805 shares, from 1,571,500 to
3,458,305 shares.
Equipment lease line - related party
On September 1999, the Company entered into an equipment lease agreement with
a lender for $1,000,000 equipment financing line. The lender is also a common
stockholder. The lease line has a drawdown period from October 1, 1999 to
July 31, 2000 is secured by the assets of the Company. The financing line has
a payment schedule of 36 months and bears interest at a rate of 8.25% per
annum. At October 1, 1999, the Company has drawn down $551,000 under the
equipment financing line and the same balance is outstanding. Under the
equipment lease line, the Company is required to maintain certain covenants.
In connection the with the $1,000,000 equipment lease line, the Company
issued a warrant to purchase 37,878 shares of Series B Preferred Stock for
$1.32 per share. This warrant will expire on August 31, 2005. The Company,
using the Black-Scholes option pricing model, recorded $34,000 in additional
interest expense and additional paid in capital associated with this warrant.
