<PAGE> 1
HIGHTOUCH TECHNOLOGIES, INC.
INDEX TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
PAGE(S)
Report of Independent Accountants 1
Financial Statements:
Balance Sheet 2
Statement of Operations 3
Statement of Changes in Stockholders' Deficiency 4
Statement of Cash Flows 5
Notes to Financial Statements 6-12
<PAGE> 2
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
HighTouch Technologies, Inc.:
In our opinion, the accompanying balance sheet and the related statements of
operations, changes in stockholders' deficiency and cash flows present fairly,
in all material respects, the financial position of HighTouch Technologies, Inc.
(the Company) at December 21, 1999, and the results of its operations and its
cash flows for the period from April 1, 1999 to December 21, 1999, in
conformity with accounting principles generally accepted in the United States.
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 of these statements in accordance with
auditing standards generally accepted in the United States, 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.
As discussed in Note 12 to the financial statements, on December 21, 1999,
Kipling Investments Labuan Limited purchased 100% of the outstanding capital
stock of the Company.
PricewaterhouseCoopers LLP
Minneapolis, Minnesota
July 24, 2000
1
<PAGE> 3
HIGHTOUCH TECHNOLOGIES, INC.
BALANCE SHEET
DECEMBER 21, 1999
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash $ 138,638
Accounts receivable 90,338
Deferred software project costs 16,661
Prepaid expenses and other current assets 20,930
---------
Total current assets 266,567
Property and equipment,net 171,568
Intangible assets,net 451,683
Other assets 12,474
---------
Total assets $ 902,292
=========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Accounts payable $ 491,055
Current maturities of long-term debt 975,580
Deferred revenue 747,824
Accrued expenses and other 84,618
----------
Total current liabilities 2,299,077
----------
Long-term debt and capital lease obligations 346,555
Total liabilities 2,645,632
Commitments and contingencies (Notes 5 and 11)
Stockholders' deficiency:
Series A convertible preferred stock; $.01 par value; 511,716 shares authorized;
505,882 shares issued and outstanding 5,059
Common stock, $.01 par value; 3,000,000 shares authorized, 1,000,000 shares issued
and outstanding 10,000
Additional paid-in capital 2,003,563
Accumulated deficit (3,761,962)
----------
Total stockholders' deficiency (1,743,340)
----------
Total liabilities and stockholders' deficiency $ 902,292
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE> 4
HIGHTOUCH TECHNOLOGIES, INC.
STATEMENT OF OPERATIONS
FOR THE PERIOD FROM APRIL 1, 1999 TO DECEMBER 21, 1999
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
Revenues $ 1,421,837
Cost of revenues 951,374
-----------
Gross profit 470,463
-----------
Operating expenses:
General and administrative 1,010,009
Sales and marketing 353,047
Product development 484,728
-----------
Total operating expenses 1,847,784
-----------
Loss from operations (1,377,321)
Interest expense (512,350)
-----------
Net loss $(1,889,671)
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 5
HIGHTOUCH TECHNOLOGIES, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIENCY
FOR THE PERIOD FROM APRIL 1, 1999 TO DECEMBER 21, 1999
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL STOCKHOLDERS'
--------------- --------------------- PAID-IN ACCUMULATED DEFICIENCY
SHARES PAR VALUE SHARES PAR VALUE CAPITAL DEFICIT
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at March 31, 1999 441,177 $ 4,412 1,000,000 $ 10,000 $1,371,121 $ (1,872,291) $ (486,758)
Issuance of preferred stock 64,705 647 208,328 208,975
Warrants issued in connection
with debt 424,114 424,114
Net loss (1,889,671) (1,889,671)
-------- ------ --------- -------- ---------- ------------ -----------
Balances at December 21, 1999 $505,882 $5,059 1,000,000 $ 10,000 $2,003,563 $ (3,761,962) $(1,743,340)
======== ====== ========= ======== ========== ============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 6
HIGHTOUCH TECHNOLOGIES, INC.
STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM APRIL 1, 1999 TO DECEMBER 21, 1999
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
Cash flows from operating activities:
Net loss $ (1,889,671)
Adjustments to reconcile net loss to net cash used by
operating activities:
Warrants issued in connection with debt 424,114
Depreciation 32,526
Amortization 91,226
Changes in assets and liabilities:
Accounts receivable 107,229
Deferred Software Project costs (16,661)
Prepaid expenses and other current assets (12,683)
Other assets (6,346)
Accounts payable (874)
Deferred revenue 747,824
Accrued expenses and other 58,047
------------
(465,269)
Net cash used in operating activities
------------
Cash flows from investing activities:
Purchase of property and equipment (90,425)
------------
Net cash used in financing activities (90,425)
------------
Cash flows from financing activities:
Proceeds from issuance of debt 500,000
Principal payments on debt (44,670)
Proceeds from issuance of preferred stock 208,975
------------
Net cash provided by financing activities 664,305
------------
Net increase in cash 108,611
Cash at beginning of year 30,027
------------
Cash at end of year $ 138,638
------------
Supplemental disclosure of cash flow information:
Cash paid for interest $ 73,658
============
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 7
HIGHTOUCH TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD FROM APRIL 1, 1999 TO DECEMBER 21, 1999
--------------------------------------------------------------------------------
1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
HighTouch Technologies, Inc. (the Company) was incorporated on January 9,
1998 under the laws of the state of Florida. The Company has developed
customer order processing software applications targeted for large
enterprises with multiple marketing and distribution channels to end-user
consumers. The Company also provides consulting services to these
enterprises.
FINANCIAL STATEMENT PRESENTATION
The preparation of the financial statements, in conformity with
accounting principles generally accepted in the United States, 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 dates of the financial statements and the reported
amounts of revenues and expenses during the reporting periods. Actual
results could differ from those estimates.
CASH EQUIVALENTS
The Company considers all highly liquid instruments purchased with an
original maturity of three months or less to be cash equivalents. The
carrying value of cash equivalents approximates fair value due to the
short maturity of these instruments.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. The Company recognizes
depreciation expense using the straight-line method over the estimated
useful lives of the assets, which range from three to seven years. Repair
and maintenance costs are charged to expense as incurred.
CAPITALIZED SOFTWARE
Development costs for software to be licensed or sold that are incurred
from the time technological feasibility is established until the product
is available for general release to customers are capitalized and
reported at the lower of cost or net realizable value. Through December
21, 1999, no significant amounts were expended subsequent to reaching
technological feasibility.
INTANGIBLE ASSETS
The costs of a trademark and certain licensing agreements for software
usage are being amortized on the straight-line method over their
respective useful lives of three to ten years. Intangible assets are
shown net of accumulated amortization of approximately $91,226 at
December 21, 1999.
6
<PAGE> 8
HIGHTOUCH TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD FROM APRIL 1, 1999 TO DECEMBER 21, 1999
--------------------------------------------------------------------------------
LONG-LIVED ASSETS
When events or changes in circumstances warrant, the Company investigates
potential impairments of long-lived assets and certain identifiable
intangibles. An impairment loss would be recognized if the sum of the
expected future net cash flows were less than the carrying amount of the
asset. No such impairments of long-lived assets occurred during the
period from April 1, 1999 to December 21, 1999.
REVENUE RECOGNITION
The Company recognizes software license revenue upon meeting each of the
following criteria: execution of a license agreement or contract;
delivery of software; the license fee is fixed and determinable;
collectibility of the proceeds is assessed as being probable; and vendor
specific objective evidence exists to allocate the total fee to elements
of the arrangement. Vendor-specific objective evidence is based on the
price charged when an element is sold separately, or if not yet sold
separately, is established by authorized management. Service revenue
includes maintenance revenue, which is deferred and recognized ratably
over the maintenance period, and revenue from consulting and training
services, which is recognized as services are performed. Consulting
services are customarily billed at a fixed daily rate plus out-of-pocket
expenses.
The Company's revenue, other then maintenance revenue, is generally
recognized using the completed contract method, with the associated costs
of the contract deferred until the revenue is recognized. Amounts
received under contracts in advance of completion are recorded as
deferred revenue and are generally recognized within one year from
receipt. Contract losses are recorded as a charge to income in the period
such losses are first identified.
INCOME TAXES
The Company accounts for income taxes pursuant to Statement of Financial
Accounting Standard No. 109, "Accounting for Income Taxes" (SFAS No.
109). Deferred income taxes are recognized for the tax consequences in
future years of differences between the tax basis of assets and
liabilities and their financial reporting amounts at each year end based
on enacted tax laws and statutory tax rates applicable to the periods in
which the differences are expected to affect taxable income. Valuation
allowances are established when necessary to reduce deferred tax assets
to the amount expected to be realized based on expectations about future
taxable income.
ADVERTISING EXPENSE
The costs incurred for advertising and promotion are expensed when
incurred. Included in sales and marketing expenses were advertising
expense of $60,693 for the period from April 1, 1999 to December 21,
1999.
CONCENTRATIONS OF CREDIT RISK
The Company's financial investments that are subject to concentrations of
credit risk consist primarily of cash. The Company's policy is to place
its cash with high credit quality financial institutions in order to
limit the amount of its credit exposure.
7
<PAGE> 9
HIGHTOUCH TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD FROM APRIL 1, 1999 TO DECEMBER 21, 1999
--------------------------------------------------------------------------------
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Accounting Standards No. 133 ("FAS 133"), "Accounting for
Derivative Instruments and Hedging Activities" which is effective for all
fiscal quarters of fiscal years beginning after June 15, 1999. This
statement establishes a new model for accounting for derivatives and
hedging activities. Under FAS 133, all derivatives must be recognized as
assets and liabilities and measured at fair value. In July 1999, the FASB
issued Statement of Accounting Standards No. 137 "Accounting for
Derivative Instruments and Hedging Activities -- Deferral of the
Effective Date of FASB Statement No. 133" which defers the effective date
of FAS 133 to all fiscal quarters of fiscal years beginning after June
15, 2000. In June 2000, the FASB issued Statement of Accounting Standards
No. 138 "Accounting for Certain Derivative Instruments and Certain
Hedging Activities -- an Amendment of FASB Statement No. 133" which
amends certain aspects of FAS 133. The adoption of FAS 133 and FAS 138 is
not expected to have a significant impact on the Company's financial
position or results of operations.
In April 2000, the FASB issued FASB Interpretation ("FIN") No. 44,
"Accounting for Certain Transactions Involving Stock Compensation and
Interpretation of APB 25," which is effective July 1, 2000, except for
certain conclusions which cover specific events after either December 15,
1998 or January 12, 2000. FIN No. 44 clarifies the application of APB 25
related to modifications of stock options, changes in grantee status, and
options issued on a business combination, among other things. The
adoption of FIN No. 44 is not expected to have a significant impact on
the Company's financial position or results of operations.
2. PROPERTY AND EQUIPMENT
<TABLE>
<S> <C>
Property and equipment consisted of the following at December 21, 1999:
Furniture and office equipment $ 24,605
Computer equipment 181,245
Software 23,452
---------
229,302
Less accumulated depreciation (57,734)
---------
$171,568
=========
</TABLE>
8
<PAGE> 10
HIGHTOUCH TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD FROM APRIL 1, 1999 TO DECEMBER 21, 1999
--------------------------------------------------------------------------------
3. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
<TABLE>
<S> <C>
At December 21, 1999, long-term debt consisted of the following:
Note payable to officer, uncollateralized, interest at 7%, payment due on
demand $ 12,265
Note payable to a vendor, uncollateralized, interest at 7%, monthly
interest payments of $2,500, all principal and remaining accrued
interest due on July 1, 2005 400,000
Note payable, uncollateralized, interest at 8%, all principal and interest
due on August 2000 500,000
Capital lease obligations, interest at 7%, monthly payments
through July 1, 2005 409,870
---------
Total debt obligations 1,322,135
Less current portion 975,580
---------
Long-term debt and capital lease obligations, less current portion $ 346,555
---------
</TABLE>
The annual principal requirements on obligations capital lease
obligations for the remainder of fiscal year 2000 and fiscal years
subsequent are as follows:
<TABLE>
<S> <C>
2000 $ 22,500
2001 90,000
2002 90,000
2003 90,000
2004 90,000
2005 90,000
Thereafter 22,500
----------
495,000
Less: Amount representing interest (85,130)
----------
$ 409,870
==========
</TABLE>
9
<PAGE> 11
HIGHTOUCH TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD FROM APRIL 1, 1999 TO DECEMBER 21, 1999
--------------------------------------------------------------------------------
4 SAVINGS PLAN
Effective January 1, 1999, the Company established a defined contribution
savings plan (the Plan) under Section 401(k) of the Internal Revenue Code
for all eligible employees. The Plan allows employees to defer up to 15%
of their total compensation up to a maximum allowed on an annual basis
under Internal Revenue Service regulations. The Company is not required
to match any deferrals; however, the Company, may, at its discretion,
make profit sharing contributions to the Plan. For the period from April
1, 1999 to December 21, 1999, the Company did not make a matching
contribution to the Plan.
5. OPERATING LEASES
The Company leases office space under non-cancelable operating leases
expiring in various years through 2001. Rental expense under
non-cancelable operating leases was approximately $113,338 for the period
ended December 21, 1999.
Future minimum lease payments under non-cancelable operating leases
having remaining terms in excess of one year for the remainder of fiscal
year 2000 and fiscal years subsequent are as follows:
<TABLE>
<S> <C>
2000 $ 25,171
2001 110,793
2002 87,802
2003 70,004
----------
$ 293,770
----------
</TABLE>
6. SERIES A PREFERRED
During 1998, the Company amended its articles of incorporation to
authorize the issuance of up to 511,716 shares of convertible series A
preferred stock (Series A Preferred), with a $.01 par value. In February
1999, the Company conducted a private placement of 441,177 shares of
Series A Preferred for an aggregate amount of approximately $1.5 million,
net of approximately $125,000 of offering cost.
During the period from April 1, 1999 to December 21, 1999, the Company
issued an additional 64,705 shares of Series A Preferred stock for an
aggregate amount of $208,975, net of $11,025 of offering costs.
The Series A Preferred will be automatically converted into shares of
common stock on a one-for-one basis subject to certain anti-dilutive
provisions upon the closing of a public offering equal to at least
$10,000,000 or greater than $10 a share. In addition, the holders of the
Series A Preferred shall have the right, at their option at any time, to
convert shares into common stock on a one-for-one basis. Series A
Preferred dividend declarations are under the sole discretion of the
Board. There is no accumulation provision on undeclared dividends.
Additionally, no dividends are able to be declared on common stock unless
prior to or contemporaneously therewith, an equal amount per share is
declared on Series A Preferred. Series A Preferred shareholders are
entitled to preferences on liquidation and have a right to vote on all
matters equal to one vote per share.
The holders of Series A Preferred stock have the right to elect one of
the Board of Directors (the Board) of the Company.
WARRANTS
The Company issued warrants to purchase 124,999 shares of the Company's
common stock in conjunction with the $500,000 note payable issued in the
period from April 1, 1999 to December 21, 1999. The fair value of the
warrants issued was calculated using the Black-Scholes valuation model,
and $424,114 was recognized as interest expense in the period from April
1, 1999 to December 21, 1999. A total of 256,171 warrants were
outstanding and exercisable at December 21, 1999 with a weighted average
exercise price of $1.21 per share and a weighted average remaining
contracted life of 4.8 years.
10
<PAGE> 12
HIGHTOUCH TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD FROM APRIL 1, 1999 TO DECEMBER 21, 1999
--------------------------------------------------------------------------------
7. STOCK OPTION PLAN
In August 1999, the Company adopted the HighTouch Technologies, Inc. 1999
Stock Option Plan ("Stock Option Plan"). The Stock Option plan provides
the Board of Directors to award up to 345,345 shares of the Company's
common stock in the form of nonqualified or incentive stock options.
Nonqualified stock options may be awarded at a price not less than 85% of
the fair market value of the stock at the date of the award. Incentive
stock options must be awarded at a price not less than 100% of the fair
market value of the stock at the date of the award or 110% of fair market
value of the stock at the date of the awards to more than 10%
stockholders. Options granted under the Stock Option Plan may have a term
of up to 10 years. Options vest over three years at the rate of 33.33% of
the total grant each year. However, the Board of Directors may, at its
discretion, implement a different vesting schedule with respect to any
new stock option grant. At December 21, 1999, options outstanding had a
10.0 weighted average remaining contractual life and no options were
exercisable.
Transactions relating to employees of the Company under the Company's
Stock Option Plan during the period from April 1, 1999 to December 21,
1999 is summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE
EXERCISE
SHARES PRICE
<S> <C> <C>
Outstanding, March 31, 1999 - $ -
Granted 88,500 $ 3.40
--------------
Outstanding, December 21, 1999 88,500 $ 3.40
-------------- -------------
</TABLE>
The Company applies Accounting Principles Board Opinion No. 25 and
related Interpretations in accounting for its stock-based compensation.
Had compensation cost for the Company's stock-based compensation awards
to the Company's employees been determined based on the fair value at the
grant dates of awards consistent with the method of Financial Accounting
Standards Board Statement No. 123 ("FAS 123"), the Company's net loss for
the period April 1, 1999 to December 31, 1999 would have been reduced to
the pro forma amounts indicated below:
<TABLE>
<S> <C>
Net loss
As reported $ (1,889,671)
Pro forma (1,899,168)
</TABLE>
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted
average assumptions used for grants during the period from April 1, 1999
11
<PAGE> 13
HIGHTOUCH TECHNOLOGIES, INC. NOTES TO FINANCIAL STATEMENTS FOR THE PERIOD FROM
APRIL 1, 1999 TO DECEMBER 21, 1999
-------------------------------------------------------------------------------
to December 21, 1999: dividend yield of 0.0%; risk-free interest rates of
6.55%; expected volatility of 0% and expected lives of 4 years. The
weighted average fair value of the stock options granted in the period
from April 1, 1999 to December 21, 1999 was $ 0.77 per share.
8. INCOME TAXES
At December 21, 1999, principally all of the Company's deferred tax asset
of approximately $1.4 million related to its net operating loss
carryforward. The Company has provided a valuation allowance against this
deferred tax asset since, based on the weight of available evidence, it
is more likely than not that the deferred tax asset will not be realized.
The income tax benefit, computed by applying the federal statutory rate
to loss before taxes, and the actual benefit for income taxes differ due
to the valuation allowance. As of December 21, 1999, the Company had a
net operating loss of approximately $3.5 million available to reduce
future federal income taxes. This net operating loss carryforward will
begin to expire in 2018 and is subject to limitation in any given year in
the event of certain changes in ownership as set forth in the Internal
Revenue Code and related Treasury Regulations.
9. CUSTOMER AND VENDOR CONCENTRATIONS
For the period from April 1, 1999 to December 21, 1999, the Company
derived approximately $1,147,341 (81%) of revenues from customer A and
$274,496 (19%) of revenues from customer B.
The Company has relied almost exclusively on a single supplier for
software implementation and support. For the period from April 1, 1999 to
December 21, 1999, approximately 78% of cost of revenues are
represented by this supplier.
12
<PAGE> 14
HIGHTOUCH TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD FROM APRIL 1, 1999 TO DECEMBER 21, 1999
--------------------------------------------------------------------------------
11. COMMITMENTS
The Company entered into employment agreements with its executives
effective August 1, 1998. The contracts terminate on July 31, 2001 with
one-year renewal options. Total base compensation provided for in the
agreements for the remainder of fiscal year 2000 and fiscal years
subsequent are as follows:
<TABLE>
<S> <C>
2000 $ 82,500
2001 364,000
2002 125,000
---------------
$ 571,500
---------------
</TABLE>
The Company has also entered into a software marketing agreement with an
unrelated third party. The agreement requires the Company to pay
royalties based upon percentages of future sales of specified software.
12. SUBSEQUENT EVENT
On December 21, 1999, Kipling Investments Labuan Limited acquired 100% of
the outstanding common stock, preferred stock and warrants of the
Company. The purchase price totaled $14,628,062 in cash and was accounted
for by the Company as a purchase.
13
