<PAGE>
EXHIBIT 99.1
Financial Statements
MoreCom, Inc.
(A Development Stage Corporation)
FOR THE YEARS ENDED
DECEMBER 31, 1999 AND 1998, THE
PERIOD SEPTEMBER 15, 1997 (DATE OF
INCEPTION) TO DECEMBER 31, 1997 AND
THE PERIOD SEPTEMBER 15, 1997 (DATE
OF INCEPTION) TO DECEMBER 31, 1999
WITH REPORT
OF INDEPENDENT AUDITORS
<PAGE>
MoreCom, Inc.
(A Development Stage Corporation)
Financial Statements
For the years ended December 31, 1999 and
1998, the period ended September 15, 1997
(date of inception) to December 31, 1997 and
the period September 15, 1997
(date of inception) to December 31, 1999
<TABLE>
<CAPTION>
CONTENTS
<S> <C>
Report of Independent Auditors.................................................1
Audited Financial Statements
Balance Sheets.................................................................2
Statements of Operations.......................................................3
Statements of Stockholders' Equity.............................................4
Statements of Cash Flows.......................................................5
Notes to Financial Statements..................................................6
</TABLE>
<PAGE>
Report of Independent Auditors
The Board of Directors
MoreCom, Inc.
We have audited the accompanying balance sheets of MoreCom, Inc. (a development
stage corporation) as of December 31, 1999 and 1998, and the related statements
of operations, stockholders' equity, and cash flows for each of the two years
then ended, the period September 15, 1997 (date of inception) to December 31,
1997 and the period September 15, 1997 (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 audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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 MoreCom, Inc. at December 31,
1999 and 1998, and the results of its operations and its cash flows for each of
the two years then ended, the period September 15, 1997 (date of inception) to
December 31, 1997, and the period September 15, 1997 (date of inception) to
December 31, 1999 in conformity with accounting principles generally accepted in
the United States.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
March 23, 2000
1
<PAGE>
MoreCom, Inc.
(A Development Stage Corporation)
Balance Sheets
(in thousands, except per share data)
<TABLE>
<CAPTION>
December 31
1999 1998
--------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 7,735 $ 1,183
Other 11 --
Total current assets 7,746 1,183
Property and equipment, net 379 355
Other 17 17
--------------------------
Total assets $ 8,142 $ 1,555
==========================
LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities:
Accounts payable $ 100 $ 123
Accrued expenses 646 --
--------------------------
Total current liabilities 746 123
Long-term debt 150 135
--------------------------
Total liabilities 896 258
Stockholders' equity:
Preferred stock, $.001 par value:
Authorized shares - 50,000
Series A: Authorized shares - 2,136
Issued and outstanding shares - 2,136 and 1,643 2 2
(liquidation preference of $671 )
Series B: Authorized shares - 3,965
Issued and outstanding shares - 3,965 and 3,448 4 3
(liquidation preference of $1,750)
Series E: Authorized shares - 667
Issued and outstanding shares - 667 and 667 1 1
(liquidation preference of $500)
Series F: Authorized shares - 3,589
Issued and outstanding shares - 3,589 and 0 4 --
(liquidation preference of $5,000)
Series G: Authorized shares - 3,000
Issued and outstanding shares - 3,000 and 0 3 --
(liquidation preference of $5,000 )
Common stock, $.001 par value:
Class A: Authorized shares - 97,000
Issued and outstanding shares - 6,338 6 6
Class B: Authorized shares - 3,000
Issued and outstanding shares - 3,000 3 3
Additional paid-in capital 13,688 3,691
Unearned compensation (15) (30)
Deficit accumulated during the development stage (6,450) (2,379)
--------------------------
Total stockholders' equity 7,246 1,297
--------------------------
Total liabilities and stockholders' equity $ 8,142 $ 1,555
==========================
</TABLE>
SEE ACCOMPANYING NOTES.
2
<PAGE>
MoreCom, Inc.
(A Development Stage Corporation)
Statements of Operations
(in thousands)
<TABLE>
<CAPTION>
September 15, 1997 September 15, 1997
(date of (date of
inception) through inception) through
Year ended December 31, December 31, December 31,
1999 1998 1997 1999
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Costs and expenses:
Research and development $ 2,357 $ 1,327 $ 153 $ 3,837
General and administrative 1,804 835 120 2,759
-----------------------------------------------------------------------------
Operating loss (4,161) (2,162) (273) (6,596)
Other income 90 51 5 146
-----------------------------------------------------------------------------
Net loss $ (4,071) $ (2,111) $ (268) $ (6,450)
=============================================================================
Net loss per common share - basic and
diluted $ (0.44) $ (0.26) $ (0.06) $ (0.79)
=============================================================================
Weighted average common shares
outstanding - basic and diluted $ 9,388,000 $ 8,063,912 $ 4,370,000 $ 8,147,297
=============================================================================
</TABLE>
SEE ACCOMPANYING NOTES.
3
<PAGE>
MoreCom, Inc.
(A Development Stage Corporation)
Statement of Stockholders' Equity
(in thousands)
<TABLE>
<CAPTION>
Series A Series B Series E
Convertible Convertible Convertible
Preferred Preferred Preferred
Stock Stock Stock
----------------------------------------------------
<S> <C> <C> <C>
Balance at September 15, 1997 (date of inception) $ -- $ -- $ --
Issuance of common stock
4,370 shares at $.001 per share on
September 15, 1997 -- -- --
Net loss -- -- --
----------------------------------------------------
Balance at December 31, 1997 -- -- --
Issuance of common stock
Exchange of 3,000 Shares of Series B for Series A -- -- --
2,730 shares at $.001 per share on February 9, 1998 -- -- --
2,238 shares at $.48 per share on June 8, 1998, including 520
shares issued upon conversion of debt -- -- --
Issuance of Series A Convertible Preferred Stock -- -- --
1,643 shares at $.35 per share on January 1, 1998 2 -- --
Issuance of Series B Convertible Preferred Stock
3,448 shares at $.435 per share on January 1, 1998 -- 3 --
Issuance of Series E Preferred Stock
667 shares at $.75 per share on August 17, 1998 -- -- 1
Issuance of Common Stock Options -- -- --
Compensation expense -- -- --
Net loss -- -- --
----------------------------------------------------
Balance at December 31, 1998 2 3 1
Conversion of Series C Preferred Stock Warrants into 493 shares of
Series A Preferred Stock -- -- --
Conversion of Series D Preferred Stock Warrants into 517 shares
of Series B Preferred Stock -- 1 --
Issuance of Series F Preferred Stock
3,589 shares at $1.389 per share on November 17, 1999 -- -- --
Issuance of Series G Preferred Stock
3,000 shares at $1.667 per share on November 17, 1999 -- -- --
Issuance of Common Stock Options 20 (20) --
Compensation expense -- -- --
Net loss -- -- --
====================================================
Balance at December 31, 1999 $ 2 $ 4 $ 1
<CAPTION>
Series F Series G
Convertible Convertible Series A
Preferred Preferred Common
Stock Stock Stock
----------------------------------------------------
Balance at September 15, 1997 (date of inception) $ -- $ -- $ --
Issuance of common stock
4,370 shares at $.001 per share on
September 15, 1997 -- -- 4
Net loss -- -- --
----------------------------------------------------
Balance at December 31, 1997 -- -- 4
Issuance of common stock
Exchange of 3,000 Shares of Series B for Series A -- -- (3)
2,730 shares at $.001 per share on February 9, 1998 -- -- 3
2,238 shares at $.48 per share on June 8, 1998, including 520
shares issued upon conversion of debt -- -- 2
Issuance of Series A Convertible Preferred Stock -- -- --
1,643 shares at $.35 per share on January 1, 1998 -- -- --
Issuance of Series B Convertible Preferred Stock
3,448 shares at $.435 per share on January 1, 1998 -- -- --
Issuance of Series E Preferred Stock
667 shares at $.75 per share on August 17, 1998 -- -- --
Issuance of Common Stock Options -- -- --
Compensation expense -- -- --
Net loss -- -- --
----------------------------------------------------
Balance at December 31, 1998 -- -- 6
Conversion of Series C Preferred Stock Warrants into 493 shares of
Series A Preferred Stock -- -- --
Conversion of Series D Preferred Stock Warrants into 517 shares
of Series B Preferred Stock -- -- --
Issuance of Series F Preferred Stock
3,589 shares at $1.389 per share on November 17, 1999 4 -- --
Issuance of Series G Preferred Stock
3,000 shares at $1.667 per share on November 17, 1999 -- 3 --
Issuance of Common Stock Options --
Compensation expense -- -- --
Net loss -- -- --
====================================================
Balance at December 31, 1999 $ 4 $ 3 $ 6
<CAPTION>
Additional
Series B Paid-In Unearned
Common Stock Capital Compensation
----------------------------------------------------
Balance at September 15, 1997 (date of inception) $ -- $ -- $ --
Issuance of common stock
4,370 shares at $.001 per share on
September 15, 1997 -- -- --
Net loss -- -- --
----------------------------------------------------
Balance at December 31, 1997 -- -- (268)
Issuance of common stock
Exchange of 3,000 Shares of Series B for Series A 3 -- --
2,730 shares at $.001 per share on February 9, 1998 -- -- --
2,238 shares at $.48 per share on June 8, 1998, including 520
shares issued upon conversion of debt -- 1,072 --
Issuance of Series A Convertible Preferred Stock
1,643 shares at $.35 per share on January 1, 1998 -- 573 --
Issuance of Series B Convertible Preferred Stock
3,448 shares at $.435 per share on January 1, 1998 -- 1,497 --
Issuance of Series E Preferred Stock
667 shares at $.75 per share on August 17, 1998 -- 499 --
Issuance of Common Stock Options -- 50 (50)
Compensation expense -- -- 20
Net loss -- -- --
----------------------------------------------------
Balance at December 31, 1998 3 3,691 (30)
Conversion of Series C Preferred Stock Warrants into 493 shares of
Series A Preferred Stock -- -- --
Conversion of Series D Preferred Stock Warrants into 517 shares
of Series B Preferred Stock -- (1) --
Issuance of Series F Preferred Stock
3,589 shares at $1.389 per share on November 17, 1999 -- 4,981 --
Issuance of Series G Preferred Stock
3,000 shares at $1.667 per share on November 17, 1999 -- 4,997 --
Issuance of Common Stock Options
Compensation expense 35 -- 35
Net loss -- -- --
====================================================
Balance at December 31, 1999 $ 3 $ 13,688 $ (15)
Deficit
Accumulated
During the
Development
Stage Total
--------------------------------
Balance at September 15, 1997 (date of inception) $ -- $ --
Issuance of common stock
4,370 shares at $.001 per share on
September 15, 1997 -- 4
Net loss (268) (268)
--------------------------------
Balance at December 31, 1997 (264)
Issuance of common stock
Exchange of 3,000 Shares of Series B for Series A -- --
2,730 shares at $.001 per share on February 9, 1998 -- 3
2,238 shares at $.48 per share on June 8, 1998, including 520
shares issued upon conversion of debt -- 1,074
Issuance of Series A Convertible Preferred Stock
1,643 shares at $.35 per share on January 1, 1998 -- 575
Issuance of Series B Convertible Preferred Stock
3,448 shares at $.435 per share on January 1, 1998 -- 1,500
Issuance of Series E Preferred Stock
667 shares at $.75 per share on August 17, 1998 -- 500
Issuance of Common Stock Options -- --
Compensation expense -- 20
Net loss (2,111) (2,111)
--------------------------------
Balance at December 31, 1998 (2,379) 1,297
Conversion of Series C Preferred Stock Warrants into 493 shares of
Series A Preferred Stock -- --
Conversion of Series D Preferred Stock Warrants into 517 shares
of Series B Preferred Stock -- --
Issuance of Series F Preferred Stock
3,589 shares at $1.389 per share on November 17, 1999 -- 4,985
Issuance of Series G Preferred Stock
3,000 shares at $1.667 per share on November 17, 1999 -- 5,000
Issuance of Common Stock Options
Compensation expense
Net loss (4,071) (4,071)
--------------------------------
Balance at December 31, 1999 $ (6,450) $ 7,246
================================
</TABLE>
SEE ACCOMPANYING NOTES.
4
<PAGE>
MoreCom, Inc.
(A Development Stage Corporation)
Statements of Cash Flows
(in thousands, except per share data)
<TABLE>
<CAPTION>
September 15,
September 15, 1997 (date of
1997 (date of inception)
Year ended inception) through
December 31, through December December
1999 1998 31, 1997 31, 1999
------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $ (4,071) $ (2,111) $ (268) $ (6,450)
Adjustments to reconcile net loss to net cash used in
operating activities:
Stock based compensation expense 35 20 -- 55
Depreciation 176 83 37 296
Changes in assets and liabilities:
Other current assets (11) -- -- (11)
Other assets -- (9) (8) (17)
Accounts payable (23) 65 58 100
Accrued expenses 646 -- -- 646
------------------------------------------------------------------
Net cash used in operating activities (3,248) (1,952) (181) (5,381)
------------------------------------------------------------------
INVESTING ACTIVITIES
Purchase of property and equipment (200) (143) (82) (425)
------------------------------------------------------------------
Net cash used in investing activities (200) (143) (82) (425)
------------------------------------------------------------------
FINANCING ACTIVITIES
Proceeds from issuance of debt 15 160 550 725
Proceeds from issuance of common stock -- 827 4 831
Proceeds from issuance of preferred stock, net 9,985 2,000 -- 11,985
------------------------------------------------------------------
Net cash provided by financing activities 10,000 2,987 554 13,541
------------------------------------------------------------------
Net increase in cash and equivalents 6,552 892 291 7,735
Cash and cash equivalents, beginning of period 1,183 291 -- --
------------------------------------------------------------------
Cash and cash equivalents, end of period $ 7,735 $ 1,183 $ 291 $ 7,735
==================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Liabilities incurred for property and equipment $ -- $ -- $ 250 $ 250
Conversion of debt to common stock -- 250 -- 250
Conversion of debt to preferred stock -- 575 -- 575
</TABLE>
SEE ACCOMPANYING NOTES.
5
<PAGE>
MoreCom, Inc.
(A Development Stage Corporation)
Notes to Financial Statements
December 31, 1999
1. BUSINESS
DEVELOPMENT STAGE CORPORATION
MoreCom, Inc. (the Company), a development stage corporation, was incorporated
in Pennsylvania on September 15, 1997 to provide the technology and products to
integrate entertainment quality digital video with internet content on
television sets. While principal operations have commenced, there has not been
any revenue derived from such operations. The majority of the Company's efforts
have been devoted to research and development, raising capital, and recruiting
personnel.
2. ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment has been recorded at cost and is being depreciated on the
straight-line basis over estimated useful lives of three to five years.
ADVERTISING COSTS
Costs related to advertising are charged to expense as incurred. Advertising
expense was approximately $549,000, $91,000 and $0 for the years ended December
31, 1999 and 1998 and for the period September 15, 1997 to December 31, 1997.
RESEARCH AND DEVELOPMENT
Research and development costs including software development costs are expensed
as incurred, as the Company's technology has not yet reached technological
feasibility.
ACCOUNTING FOR STOCK-BASED COMPENSATION
Statement of Financial Accounting Standards No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION," (SFAS No. 123) provides companies with a choice to follow the
provisions of SFAS No. 123 in determination of stock-based compensation expenses
or to continue with the provisions of Accounting Principles Board Opinion No.
25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, (APB No. 25). The Company
continues to follow APB No. 25 and has provided pro forma disclosures as
required by SFAS No. 123.
6
<PAGE>
2. ACCOUNTING POLICIES (CONTINUED)
NET LOSS PER SHARE
Basic net loss per common share is calculated by dividing net loss by weighted
average number of common shares outstanding for the period. Diluted net loss per
common share reflects the potential dilution of securities by including other
common stock equivalents, including stock options, convertible preferred stock
and warrants to purchase common stock in the weighted average number of common
shares outstanding for the period, if dilutive. Due to their anti-dilutive
effect, dilutive securities were excluded from the computation of diluted net
loss per common share for the years ended December 31, 1999 and 1998, the period
September 15, 1997 (date of inception) to December 31, 1997 and the period
September 15, 1997 (date of inception) to December 31, 1999.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company has the following financial instruments: cash and cash equivalents,
accounts payable, accrued expenses and notes payable. The carrying value of
these instruments approximates their fair value.
3. PROPERTY AND EQUIPMENT
Property and equipment are comprised of the following:
<TABLE>
<CAPTION>
December 31,
1999 1998
------------------------
(in thousands)
<S> <C> <C>
Equipment $ 654 $ 457
Furniture and Fixtures 21 18
------------------------
675 475
Less accumulated depreciation and amortization 296 120
------------------------
$ 379 $ 355
========================
</TABLE>
4. LONG-TERM DEBT
In March 1998, the Company executed a note payable with the Ben Franklin
Technology Center ("BFTC") that provided funds for the Company under the
emerging company investment funding program. The BFTC approved the disbursement
of $150,000 in funds for the Company's development of software and hardware.
The note payable requires the Company to pay 3% of revenues up to a cumulative
repayment amount for each year with a maximum cumulative repayment of $450,000
through April 1, 2006. At any time during the repayment period, the Company can
prepay all of its obligations related to the BFTC note payable by paying the
original $150,000 funding, plus the cumulative repayment amount for the year
during which the prepayment occurs less all prior repayments. If the Company
were to retire the note before April 1, 2000, they would be required to pay
$161,000.
To secure the note payable, the Company has granted the BFTC a first security
interest and first lien on the Company's technology.
7
<PAGE>
5. CONVERTIBLE PREFERRED STOCK
The principal terms of each outstanding series of convertible Preferred Stock
are similar in nature, unless disclosed in this note. If and when Common Stock
dividends are declared by the Board of Directors of the Company, holders of the
Preferred Stock will be entitled to receive dividends based on the number of
shares of Common Stock that the Preferred Stock are convertible into. All
dividends declared upon the Preferred Stock will be declared pro rata for the
Common Stock, based on the number of shares of Common Stock into which shares of
Preferred Stock may be converted. In the event of any liquidation, dissolution
or winding up of the affairs of the Company, holders of the Series F and G
Preferred Stock will receive the original issuance price and have preference
over all other stockholders, including the holders of the Series A, B and E
Preferred Stock. The Series A and B Preferred Stock will be entitled to receive
an amount equal to the original issuance price plus 8% per annum compounded
annually, from the original issuance date. Holders of the Series E Preferred
Stock will be entitled to receive the original issuance price without the 8%
preference. Thereafter, the holders of the Preferred Stock will participate in
the distribution of the remaining assets of the Company on a pro rata basis with
Common Stockholders based on the number of shares of Common Stock that the
Preferred Stock are convertible into. If the total amount distributed exceeds
300% of the original issuance price, the preference will not be paid with
respect to any such series of Preferred Stock. If amounts for distribution are
not sufficient to pay the preferences, then assets will be distributed to the
holders of the Series F and G Preferred Stock on a pro rata basis.
Each share of Preferred Stock shall vote as one class with the holders of Common
Stock, based upon the number of shares of Common Stock into which such shares of
Preferred Stock may be converted. The holders of the Series A and B Preferred
Stock are entitled to elect two members of the Board of Directors; the holders
of the Series G Preferred Stock are entitled to elect one director; the holders
of Common Stock are entitled to elect four directors. The holders of the Series
E and F Preferred Stock do not participate in the election of directors of the
Company. In connection with the issuance of the Series A and Series B Preferred
Stock in 1998, the Company issued warrants to purchase shares of Series C and
Series D Preferred Stock. In 1999 the warrants were exchanged for 493,000 and
517,000 shares of Series A and Series B Preferred Stock, respectively. The
holders of the Preferred Stock have the right at any time to convert their
shares into Class A Common Stock at the rate of one share of common for each
share of Preferred Stock. Upon the consummation of a public offering of shares
of Common Stock of the Company
generating net proceeds to the Company of at least $8 million and reflecting an
entity valuation of at least $40 million, all shares of Preferred Stock then
outstanding will automatically be converted into shares of Common Stock.
6. STOCK OPTIONS
The Company adopted a stock option plan (the "Plan") effective January 21, 1998
whereby stock options to purchase shares of the Company's common stock may be
granted to employees, directors and consultants. The Plan is administered by the
Plan Administration Committee (the Committee), a sub-committee of the Board of
Directors. The Committee determines the number, exercise price and vesting
period of options granted under the Plan.
Current outstanding options generally vest over periods ranging from the grant
date to four years. Options become exercisable either upon vesting or upon the
earlier to occur of the closing of an initial public offering, 10 years from the
date of grant or a change in control, as defined in the Plan. Upon termination
of employment, non-vested options expire. Vested options expire 10 years from
the date of grant if not exercised.
Pro forma information regarding net income as if the Company had accounted for
its employee stock options under the fair value method is required by SFAS 123.
The fair value of the options was estimated at the date of grant using the
minimum value method option pricing model with the following weighted
8
<PAGE>
6. STOCK OPTIONS (CONTINUED)
average assumptions for 1999 and 1998: risk free interest rate of 6%; a dividend
yield of 0%, and a weighted average expected life of the options of 4 years.
The minimum value method option pricing model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair market value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. Had 1999 and 1998
compensation costs for the Company's stock option plan been determined in
accordance with the methodology of SFAS 123, the impact on the Company's
financial results would have been an increase to the net loss and the net loss
per common share of $21,000 and $31,000 and $- and $.01 for the years ended
December 31, 1999 and 1998, respectively.
Of the options granted during 1998 and 1999, 130,000 and 45,000, respectively,
were issued to non-employee advisors. The fair value of these options of $50,000
and $20,000 was recorded as deferred compensation in 1998 and 1999,
respectively, and is being amortized over the two-year vesting period.
Compensation expense of $35,000 and $20,000 was recorded in 1999 and 1998,
respectively.
The following table summarizes all stock option activity under the Plan:
<TABLE>
<CAPTION>
Common Shares
under Options Option
Granted Price per
Share
-------------- --------------
<S> <C> <C>
Balance at January 1, 1998 - -
Granted - 1998 1,441,000 0.01 - 0.75
Exercised - 1998 - -
Canceled - 1998 (47,000) 0.10
-------------- --------------
Outstanding at December 31, 1998 1,394,000 0.01 - 0.75
Granted - 1999 936,700 0.75 - 1.67
Exercised - 1999 - -
Canceled - 1999 (375,000) 0.01 - 0.75
-------------- --------------
Outstanding at December 31, 1999 1,955,700 $0.01 - 1.67
============== ==============
Exercisable at December 31, 1999 404,750
==============
Available for grant at December 31, 1999 1,044,300
==============
</TABLE>
The weighted average exercise price for options granted at December 31, 1998 was
$0.29. The weighted average exercise price of options granted during 1999 was
$0.88.
Stock options outstanding at December 31, 1999 under the Plan are summarized as
follows:
<TABLE>
<CAPTION>
Outstanding Weighted Weighted Average
Range of Exercise Options at Average Remaining Exercise
Prices December 31, 1999 Contractual Life Prices
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
$0.01 - $1.67 1,955,700 8.5 $0.51
</TABLE>
9
<PAGE>
7. COMMON STOCK
The rights and attributes of each share of Class A and Class B Common Stock are
identical except the holders of Class A Stock have one vote per share while the
holders of Class B Stock have two votes per share.
At December 31, 1999, the Company has authorized the following shares of Common
Stock for issuance upon conversion of Preferred Stock and exercise of options:
<TABLE>
<CAPTION>
(in thousands)
<S> <C>
Series A Preferred Stock 2,136
Series B Preferred Stock 3,965
Series E Preferred Stock 667
Series F Preferred Stock 3,589
Series G Preferred Stock 3,000
Common Stock Options Outstanding 1,956
Common Stock Options Available for Grant 1,044
--------------
Total shares of authorized Common Stock reserved 16,357
==============
</TABLE>
8. COMMITMENTS
The Company leases its office facility under an operating lease which expires on
May 31, 2001. Minimum annual rentals, including operating expenses, are $191,000
and $80,000 for the years ended December 31, 2000 and 2001, respectively.
9. INCOME TAXES
The Company has approximately $6.4 million of net operating loss carry forwards,
resulting in a deferred tax asset of $2.5 million. The Company has provided a
full valuation allowance at December 31, 1999 against the deferred tax asset, as
recoverability is uncertain. The carry forwards expire in various years through
2019.
The timing and manner in which the Company can utilize operating loss carry
forwards and future tax deductions in any year may be limited by provisions of
the Internal Revenue Code regarding changes in ownership of corporations. Such
limitation may have an impact on the ultimate timing and realization of its
carry forwards and future tax deductions.
10. EVENTS (UNAUDITED) SUBSEQUENT TO THE DATE OF THE AUDITORS' REPORT
On March 27, 2000, the Company entered in a Plan and Agreement of Reorganization
(the "Merger Agreement") with a wholly-owned subsidiary of Liberate Technologies
("Liberate"), which was completed on June 22, 2000. Pursuant to the Merger
Agreement, each issued and outstanding share of common and preferred stock of
the Company was converted into 0.31252641 shares of common stock of Liberate. In
addition, each outstanding option to purchase shares of the Company's common
stock under the Plan was assumed by Liberate. MoreCom is the surviving entity in
the merger and continues as a wholly-owned subsidiary of Liberate.
10
<PAGE>
FINANCIAL STATEMENTS
MORECOM, INC.
(A DEVELOPMENT STAGE CORPORATION)
AS OF MARCH 31, 2000 AND FOR THE
THREE MONTH PERIODS ENDED MARCH 31,
2000 AND 1999 AND THE PERIOD
SEPTEMBER 15, 1997 (DATE OF
INCEPTION) TO MARCH 31, 2000
<PAGE>
MORECOM, INC.
(A DEVELOPMENT STAGE CORPORATION)
FINANCIAL STATEMENTS
As of March 31, 2000 and for the three
month periods ended March 31, 2000 and
1999, and the period September 15, 1997
(date of inception) to March 31, 2000
<TABLE>
<CAPTION>
CONTENTS
<S> <C>
Balance Sheet (unaudited)......................................................1
Statements of Operations (unaudited)...........................................2
Statements of Cash Flows (unaudited)...........................................3
Notes to Financial Statements (unaudited)......................................4
</TABLE>
<PAGE>
MORECOM, INC.
(A DEVELOPMENT STAGE CORPORATION)
BALANCE SHEET
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
March 31, 2000
--------------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 6,230
--------------
Total current assets 6,230
Property and equipment, net 422
Other 17
--------------
Total assets $ 6,669
==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 129
Accrued expenses 353
--------------
Total current liabilities 482
--------------
Total liabilities 482
Stockholders' equity:
Preferred stock, $.001 par value:
Authorized shares - 50,000
Series A: Authorized shares - 2,136
Issued and outstanding shares - 2,136 2
(liquidation preference of $684)
Series B: Authorized shares - 3,965
Issued and outstanding shares - 3,965 4
(liquidation preference of $1,785)
Series E: Authorized shares - 667
Issued and outstanding shares - 667 1
(liquidation preference of $500)
Series F: Authorized shares - 3,589
Issued and outstanding shares - 3,589 4
(liquidation preference of $5,000)
Series G: Authorized shares - 3,000
Issued and outstanding shares - 3,000 3
(liquidation preference of $5,000 )
Common stock, $.001 par value:
Class A: Authorized shares - 97,000
Issued and outstanding shares - 6,338 6
Class B: Authorized shares - 3,000
Issued and outstanding shares - 3,000 3
Additional paid-in capital 13,688
Unearned compensation (11)
Deficit accumulated during the development stage (7,513)
--------------
Total stockholders' equity 6,187
--------------
Total liabilities and stockholders' equity $ 6,669
==============
</TABLE>
SEE ACCOMPANYING NOTES.
1
<PAGE>
MoreCom, Inc.
(A Development Stage Corporation)
Statements of Operations
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
September 15, 1997
(date of
Three month period inception) through
ended March 31, March 31,
2000 1999 2000
--------------------------------------------------
<S> <C> <C> <C>
Costs and expenses:
Research and development $ 648 $ 406 $ 4,485
General and administrative 500 311 3,259
--------------------------------------------------
Operating loss (1,148) (717) (7,744)
Other income 86 8 232
--------------------------------------------------
Net loss $ (1,062) $ (709) $ (7,512)
==================================================
Net loss per common share - basic and
diluted $ (0.11) $ (0.08) $ (0.91)
==================================================
Weighted average common shares
outstanding - basic and diluted
$ 9,338,000 $ 9,338,000 $ 8,264,058
==================================================
</TABLE>
SEE ACCOMPANYING NOTES.
2
<PAGE>
MoreCom, Inc.
(A Development Stage Corporation)
Statements of Cash Flows
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
September 15,
Three month 1997 (date of
period ended inception)
March 31, through March 31,
2000 1999 2000
--------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $ (1,062) $ (709) $ (7,512)
Adjustments to reconcile net loss to net cash used in
operating activities:
Stock based compensation expense -- 35 59
Depreciation 58 40 354
Changes in assets and liabilities:
Other current assets 11 (11) --
Other assets -- -- (17)
Accounts payable 29 (50) 129
Accrued expenses (293) 102 353
--------------------------------------------------
Net cash used in operating activities (1,253) (623) (6,634)
--------------------------------------------------
INVESTING ACTIVITIES
Purchase of property and equipment (102) (14) (527)
--------------------------------------------------
Net cash used in investing activities (102) (14) (527)
--------------------------------------------------
FINANCING ACTIVITIES
Proceeds from issuance of debt -- -- 725
Repayment of debt (150) -- (150)
Proceeds from issuance of common stock -- -- 831
Proceeds from issuance of preferred stock, net -- -- 11,985
--------------------------------------------------
Net cash provided by (used in) financing activities (150) -- 13,391
--------------------------------------------------
Net increase(decrease) in cash and equivalents (1,505) (637) 6,230
Cash and cash equivalents, beginning of period 7,735 1,183 --
--------------------------------------------------
Cash and cash equivalents, end of period $ 6,230 $ 546 $ 6,230
==================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Liabilities incurred for property and equipment $ -- $ -- $ 250
Conversion of debt to common stock -- -- 250
Conversion of debt to preferred stock -- -- 575
SEE ACCOMPANYING NOTES
</TABLE>
3
<PAGE>
MoreCom, Inc.
(A Development Stage Corporation)
Notes to Financial Statements
March 31, 2000
1. BUSINESS
DEVELOPMENT STAGE CORPORATION
MoreCom, Inc. (the Company), a development stage corporation, was incorporated
in Pennsylvania on September 15, 1997 to provide the technology and products to
integrate entertainment quality digital video with internet content on
television sets. While principal operations have commenced, there has not been
any revenue derived from such operations. The majority of the Company's efforts
have been devoted to research and development, raising capital, and recruiting
personnel.
2. ACCOUNTING POLICIES
INTERIM FINANCIAL STATEMENTS (UNAUDITED)
The accompanying financial statements as of March 31, 2000 and for three month
periods ended March 31, 1999 and 2000 have been prepared in accordance with
generally accepted accounting principles for interim financial information
pursuant to the rules and regulations of the SEC. In the opinion of management,
all adjustments, consisting only of normal recurring adjustments, considered
necessary for fair presentation of the Company's financial position at March 31,
2000 and its operations and cash flows for three month periods ended March 31,
1999 and 2000 have been included. Operating results for the three month period
ended March 31, 2000 are not necessarily indicative of the results that may be
expected for the year ended December 31, 2000.
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
NET LOSS PER SHARE
Basic net loss per common share is calculated by dividing net loss by weighted
average number of common shares outstanding for the period. Diluted net loss per
common share reflects the potential dilution of securities by including other
common stock equivalents, including stock options, convertible preferred stock
and warrants to purchase common stock in the weighted average number of common
shares outstanding for the period, if dilutive. Due to their anti-dilutive
effect, dilutive securities were excluded from the computation of diluted net
loss per common share for the three month periods ended March 31, 2000 and 1999
and the period September 15, 1997 (date of inception) to March 31, 2000.
4
<PAGE>
3. PROPERTY AND EQUIPMENT
Property and equipment are comprised of the following:
<TABLE>
<CAPTION>
March 31,
2000
------------------
<S> <C>
(in thousands)
Equipment $ 753
Furniture and Fixtures 23
------------------
776
Less accumulated depreciation and amortization 354
------------------
$ 422
==================
</TABLE>
4. LONG-TERM DEBT
In March 1998, the Company executed a note payable with the Ben Franklin
Technology Center ("BFTC") that provided funds for the Company under the
emerging company investment funding program. The BFTC approved the disbursement
of $150,000 in funds for the Company's development of software and hardware. On
March 24, 2000, the Company repaid the note in full.
5. MERGER AGREEMENT
On March 27, 2000, the Company entered in a Plan and Agreement of Reorganization
(the "Merger Agreement") with a wholly-owned subsidiary of Liberate Technologies
("Liberate"), which was completed on June 22, 2000. Pursuant to the Merger
Agreement, each issued and outstanding share of common and preferred stock of
the Company was converted into 0.31252641 shares of common stock of Liberate. In
addition, each outstanding option to purchase shares of the Company's common
stock under the Plan was assumed by Liberate. MoreCom is the surviving entity in
the merger and continues as a wholly-owned subsidiary of Liberate.
5
