<PAGE> 1
Exhibit 99.1
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Savant Corporation
We have audited the accompanying balance sheets of Savant Corporation (the
"Company") as of June 30, 2000 and 1999, and the related statements of
operations, shareholders' deficit, and cash flows for the years then ended.
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 Savant Corporation at June
30, 2000 and 1999, and the results of its operations and its cash flows for the
years then ended in conformity with accounting principles generally accepted in
the United States.
/s/Ernst & Young LLP
McLean, Virginia
August 23, 2000
1
<PAGE> 2
SAVANT CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
(UNAUDITED) JUNE 30,
------------- -----------------------
2000 2000 1999
------------- ---------- ----------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash.................................................... $ 488,838 $ 333,783 $ 567,813
Accounts receivable..................................... 494,245 1,037,578 400,084
Receivable for redeemable convertible preferred stock... -- 50,400 --
Prepaid offering costs.................................. 54,689 -- 75,000
Other prepaid expenses and current assets............... -- 49,546 39,518
----------- ----------- -----------
Total current assets............................... 1,037,772 1,471,307 1,082,415
Property and equipment:
Furniture and fixtures.................................. 100,333 100,333 96,142
Computer equipment...................................... 154,599 154,599 84,435
Leasehold improvements.................................. 14,310 14,310 14,310
Equipment under capital lease........................... 84,345 54,706 114,200
----------- ----------- -----------
353,587 323,948 309,087
Less: accumulated depreciation and amortization............. (230,215) (216,843) (128,451)
----------- ----------- -----------
123,372 107,105 180,636
Software rights and development costs, net.................. 872,585 626,090 48,857
Deposits.................................................... 4,870 6,826 1,644
----------- ----------- -----------
Total assets....................................... $ 2,038,599 $ 2,211,328 $ 1,313,552
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Unearned revenue........................................ $ 700,929 $ 786,806 $ 386,291
Accounts payable........................................ 118,690 109,334 88,143
Current portion of notes payable to related party....... 580,952 547,591 584,453
Current portion of notes payable to third parties....... -- 105,064 172,800
Accrued professional fees and other current
liabilities........................................... -- -- 30,631
Accrued payroll expenses................................ 239,666 102,878 88,176
Capital lease obligations -- current.................... 17,442 16,039 24,087
----------- ----------- -----------
Total current liabilities.......................... 1,657,679 1,667,712 1,374,581
Notes payable to related party.............................. -- -- 237,997
Capital lease obligations................................... 22,768 1,898 18,327
----------- ----------- -----------
Total liabilities.................................. 1,680,447 1,669,610 1,630,905
Redeemable convertible preferred stock, $0.01 and $.000005
par value; authorized shares 5,005,000, issued and
outstanding 615,950 and 615,950 at September 30 and June
30, 2000 and 2,223 at June 30, 1999 ($1,571,693
liquidation value)........................................ 1,420,331 1,420,331 900,657
Shareholders' deficit:
Common stock, $0.000005 par value; authorized shares
100,000,000, issued and outstanding 22,170,476,
21,886,000, and 21,746,000 at September 30, 2000, June 30,
2000 and June 30, 1999, respectively...................... 111 110 110
Additional paid-in capital.................................. 1,721,949 1,621,596 1,416,425
Accumulated deficit......................................... (2,784,239) (2,500,319) (2,634,545)
----------- ----------- -----------
(1,062,179) (878,613) (1,218,010)
----------- ----------- -----------
Total liabilities and shareholders' deficit........ $ 2,038,599 $ 2,211,328 $ 1,313,552
=========== =========== ===========
</TABLE>
See accompanying notes.
2
<PAGE> 3
SAVANT CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE
MONTHS
ENDED
SEPTEMBER 30,
(UNAUDITED) YEAR ENDED JUNE 30,
------------- -----------------------
2000 2000 1999
------------- ---------- ----------
<S> <C> <C> <C>
Net revenue:
Product sales........................................... $ 249,486 $2,555,952 $2,318,227
Development & design.................................... -- 81,510 899,490
Maintenance and other revenues.......................... 410,400 1,120,949 444,243
--------- ---------- ----------
659,886 3,758,411 3,661,960
Operating expenses:
General and administrative.............................. 361,921 1,242,777 986,377
Sales and marketing..................................... 393,257 1,450,582 1,215,721
Research and development................................ 120,749 688,626 1,078,862
Product maintenance..................................... 51,299 151,539 60,887
--------- ---------- ----------
927,226 3,533,524 3,341,847
--------- ---------- ----------
Income (loss) from operations............................. (267,340) 224,887 320,113
Other income (expense):
Interest and other income............................... 4,048 8,274 12,975
Interest expense........................................ (20,628) (98,935) (213,232)
--------- ---------- ----------
(16,580) (90,661) (200,257)
--------- ---------- ----------
Income (loss) before cumulative effect of accounting
change.................................................. (283,920) 134,226 119,856
========= ========== ==========
Cumulative effect of accounting change:
Adoption of SOP 98-5.................................... -- -- (16,364)
--------- ---------- ----------
Net income (loss)......................................... $(283,920) $ 134,226 $ 103,492
========= ========== ==========
</TABLE>
See accompanying notes.
3
<PAGE> 4
SAVANT CORPORATION
STATEMENTS OF SHAREHOLDERS' DEFICIT
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
------------------- PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
---------- ------ ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1998.............. 20,000,000 $100 $ 960,717 $(2,738,037) $(1,777,220)
Conversion of debt to common stock.... 1,508,000 8 229,100 -- 229,108
Common stock issued as consideration
for services........................ 124,000 1 47,499 -- 47,500
Amortization of compensatory stock
options............................. -- -- 155,334 -- 155,334
Common stock issued to directors...... 114,000 1 23,775 -- 23,776
Net income............................ -- -- -- 103,492 103,492
---------- ---- ---------- ----------- -----------
Balance at June 30, 1999.............. 21,746,000 $110 $1,416,425 $(2,634,545) $(1,218,010)
========== ==== ========== =========== ===========
Exercise of stock options............. 54,000 -- 2,700 -- 2,700
Common stock issued to directors...... 86,000 -- 23,220 -- 23,220
Amortization of compensatory stock
options............................. -- -- 179,251 -- 179,251
Net income............................ -- -- -- 134,226 134,226
---------- ---- ---------- ----------- -----------
Balance at June 30, 2000.............. 21,886,000 $110 $1,621,596 $(2,500,319) $ (878,613)
========== ==== ========== =========== ===========
Exercise of stock options............. 14,000 -- 722 -- 722
Conversion of debt to common stock.... 270,476 1 56,799 -- 56,800
Amortization of compensatory stock
options............................. -- -- 42,832 -- 42,832
Net loss.............................. -- -- -- (283,920) (283,920)
---------- ---- ---------- ----------- -----------
Balance at September 30, 2000
(unaudited)......................... 22,170,476 $111 $1,721,949 $(2,784,239) $(1,062,179)
========== ==== ========== =========== ===========
</TABLE>
See accompanying notes.
4
<PAGE> 5
SAVANT CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
SEPTEMBER 30,
(UNAUDITED) YEAR ENDED JUNE 30,
---------------- -------------------
2000 2000 1999
---------------- -------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)......................................... $(283,920) $ 134,226 $ 103,492
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization........................ 17,539 142,805 154,079
Amortization of compensatory stock options........... 42,832 179,251 155,334
Write-off of prepaid offering costs.................. -- 75,000 --
Common stock issued as consideration for services.... -- -- 47,500
Common stock issued to directors..................... -- 23,220 23,776
Cumulative effect of accounting change............... -- -- 16,364
Changes in operating assets and liabilities:
Accounts receivable................................ 543,333 (637,494) (76,107)
Other prepaid expenses and current assets.......... (5,143) (10,028) (23,745)
Deposits........................................... 1,956 (5,182) 14,376
Unearned revenue................................... (85,877) 400,515 206,209
Accounts payable and accrued professional fees..... 9,356 (9,440) 23,423
Accrued payroll expenses........................... 136,788 14,702 48,127
--------- --------- ---------
Net cash provided by operating activities................. 376,864 307,575 692,828
INVESTING ACTIVITIES
Purchase of property and equipment........................ -- (14,861) (66,613)
Acquisition of software rights and development............ (250,662) (631,646) --
--------- --------- ---------
Net cash used in investing activities..................... (250,662) (646,507) (66,613)
FINANCING ACTIVITIES
Proceeds from long-term debt and short-term borrowings.... 722 -- 750,000
Proceeds from the exercise of stock options............... -- 2,700 --
Proceeds from indebtedness................................ (14,903) 120,000 --
Proceeds from note payable to Space Applications
Corporation............................................. -- -- --
Repayments of indebtedness................................ -- (462,595) (840,096)
Repayments of note payable................................ -- -- --
Proceeds from sale of convertible preferred stock, net.... 50,400 469,274 --
Prepaid offering costs.................................... -- -- (75,000)
Payments under capital lease obligations.................. (7,366) (24,477) (32,242)
--------- --------- ---------
Net cash provided by (used in) financing activities....... 28,853 104,902 (197,338)
(Decrease) increase in cash............................... 155,055 (234,030) 428,877
Cash at beginning of year................................. 333,783 567,813 138,936
--------- --------- ---------
Cash at end of year....................................... $ 488,838 $ 333,783 $ 567,813
========= ========= =========
Cash paid for interest.................................... $ 20,628 $ 98,935 $ 162,464
========= ========= =========
</TABLE>
See accompanying notes.
5
<PAGE> 6
SAVANT CORPORATION
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2000
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Savant Corporation (the "Company") develops, sells, supports, and provides
training for computer software applications. Currently, the Company's primary
product which was released for sale in March 1997, is Diagnostic Center software
for use with Oracle Relational Data Base Management Systems ("RDBMS") and which
allows the users to monitor and adjust the operations of RDBMS. The Company is
capable of providing its software and services worldwide.
During the year ended June 30, 2000, the Company developed three additional
products that work with the Diagnostic Center: Sensor, Analyst and Profiler.
INTERIM FINANCIAL INFORMATION
The accompanying financial statements as of September 30, 2000, and for the
three months then ended are unaudited. This unaudited information has been
prepared by the Company on the same basis as the audited consolidated financial
statements and, in the opinion of management, all adjustments, consisting only
of normal recurring accruals considered necessary for a fair presentation, have
been included in the accompanying unaudited statements as of and for the three
months ended September 30, 2000. The results for the three months ended
September 30, 2000 are not necessarily indicative of the results to be expected
for the entire fiscal year ending June 30, 2001.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at historical cost. Depreciation of
equipment is computed using the straight-line method over the estimated useful
lives of the assets. The Company estimates the useful lives to be three years
for computers and software and five years for equipment. Amortization of
leasehold improvements is computed using the straight-line method over the
shorter of the term of the lease or the assets useful lives. Amortization of
equipment under capital lease is computed using the straight-line method over
the shorter of the term of the lease or the related asset's estimated useful
life. Depreciation expense recognized for the three months ended September 30,
2000 and the years ended June 30, 2000 and 1999 was $13,372, $88,392 and
$65,005, respectively.
RESEARCH AND DEVELOPMENT
All research and development costs are expensed as incurred until
technological feasibility has been established ("beta stage"). Once
technological feasibility has been established, such costs are capitalized until
the software has completed beta testing and is generally available. After the
software becomes generally available, the related capitalized costs are
amortized on a straight-line basis over a period that approximates its useful
life. Management periodically reviews recoverability of the remaining
unamortized costs and, if necessary, makes an adjustment to reduce the carrying
value to approximate net realizable value.
SOFTWARE RIGHTS AND DEVELOPMENT COSTS
Software rights and development costs are stated at cost. Amortization of
software rights and development costs is computed on the straight-line basis
over three years. The Company capitalized $250,662 and $581,646 of software
development costs during the three months ended September 30, 2000 and the year
ended June 30, 2000. The Company also paid $50,000 to a third party for the
rights to certain software. In connection with this purchase of the rights to
certain software from a third party, the
6
<PAGE> 7
SAVANT CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Company will have to make an additional payment of $25,000 to the third party
once the software is available for commercial release. Such payment will be
recorded by the Company when it is earned and amortized over the remaining life
of the software.
The amortization expense recognized for software rights and development
costs for the three months ended September 30, 2000 and the years ended June 30,
2000 and 1999 was $4,167, $54,413 and $89,074, respectively. Accumulated
amortization as of September 30, 2000, June 30, 2000 and June 30, 1999 was
$291,086, $286,919 and $232,506, respectively.
ORGANIZATIONAL COSTS
On July 1, 1998, the Company adopted the provisions of Statement of
Position ("SOP") 98-5, Reporting the Costs of Start-Up Activities. SOP 98-5
requires that any costs related to start-up activities be expensed in the period
incurred. In addition, in connection with the adoption of SOP 98-5, the Company
wrote-off its remaining organization costs of $16,364 and reflected such
write-off as the cumulative effect of adopting an accounting change in the
statement of operations for the year ended June 30, 1999.
REVENUE RECOGNITION
The Company records revenue in accordance with AICPA Statement of Position
97-2, "Software Revenue Recognition," as amended. In accordance with SOP 97-2,
revenue from product sales is recognized upon shipment provided that no
significant vendor and post contract support obligations remain and collection
of the related receivable is considered probable. Revenues from post contract
customer support, primarily maintenance, are recognized ratably over the period
the customer support services are provided, which is generally one year. In
software arrangements that include post contract customer support, the Company
allocates the total fee among each deliverable based on the relative fair value
of the deliverables determined on vendor specific objective evidence.
Development and design revenues represent research services provided to a
third party for development of certain software. Such revenues are recognized as
performance hurdles are met (in accordance with the provisions of the agreement)
and collectibility is probable.
ADVERTISING EXPENSE
The cost of advertising is expensed as incurred, and amounted to $10,574,
$65,987 and $62,746 for the three months ended September 30, 2000 and the years
ended June 30, 2000 and 1999, respectively.
INCOME TAXES
The Company computes income taxes under the liability method. Under the
liability method, deferred income taxes are generally determined based on the
difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect in the years in which the
differences are expected to reverse. Net deferred tax assets are recorded when
it is more likely than not that such tax benefits will be realized.
STOCK BASED COMPENSATION
During fiscal 1997, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation." The
provisions of SFAS No. 123 allow companies to either expense the estimated fair
value of stock options or to continue to follow the intrinsic value method set
forth in APB Opinion 25, "Accounting for Stock Issued to Employees" ("APB 25")
but disclose the pro forma effects on net income had the fair value of the
options been expensed. The
7
<PAGE> 8
SAVANT CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Company has elected to continue to apply APB 25 in accounting for its stock
option incentive plans. Accordingly, compensation cost for stock options is
measured as the excess, if any, of the estimated fair market value of the
Company's stock at the date of grant over the amount an employee must pay to
acquire the stock (See Note 7).
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 amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
2. ORGANIZATION AND CAPITALIZATION
The Company was incorporated on April 30, 1996. On this date, the Company
purchased substantially all of the assets of Envision Software, Incorporated
("Envision") for $100,000 and a 55% interest in the outstanding common stock of
the Company. The purchase price was allocated to both the tangible assets and
the software rights acquired from Envision.
During fiscal year 1996, the Company sold a 45% interest in the outstanding
common stock of the Company to Space Applications Corporation ("SAC") for cash
totaling $700,000 and notes receivable totaling $440,000. The notes receivable
were due monthly through September 1996. These notes were paid in full as of
October 16, 1996. During fiscal 1999, SAC sold its 45% interest in the Company
to Summit Aviation, Inc. ("Summit").
3. RELATED PARTY TRANSACTIONS
The Company had an administrative services agreement with SAC, whereby SAC
will provide the Company with certain administrative and management services.
The payment of up to $200,000 of these costs may be deferred by the Company
under a line of credit agreement. Any deferred amounts bore interest at an
annual rate of 20% from the date of invoice until paid in full.
In September 1998, the Company consolidated all outstanding debt with SAC
(including amounts drawn down under the administrative services agreement) into
one note in the amount of $235,709, bearing an annual interest rate of 10.5% and
amortizing over the term of the note, which matures on October 1, 2000. The note
is secured by certain assets of the Company. At June 30, 1999, the outstanding
balance on this note was $162,505.
In September 1998, the Company entered into a promissory note with Summit
in the amount of $750,000, bearing an annual interest rate of 14% and amortizing
over the term of the note, which matures on October 31, 2000. This note is
personally secured by the President of the Company. The proceeds of this note
were used to retire the line of credit with Capital Financial and Management,
Inc. (see Note 4). At June 30, 1999, the outstanding balance on this note was
$659,945.
In March 2000, the Company, SAC and Summit agreed on a new payment plan in
connection with raising additional capital. The new payment plan provided for
three payments to settle the debt with the last payment on May 15, 2000, the
anticipated date of closing a transaction to raise capital. As of September 30,
2000, the Company has not made all of these payments as it did not raise the
capital it anticipated. As a result, the entire remaining balances are
classified as current, as they are due. At September 30, 2000 the outstanding
balances on these notes payable to SAC and Summit were $87,097 and $493,855,
respectively and are reflected in notes payable to related parties in the
balance sheet. At June 30, 2000, the outstanding balances on these notes payable
to SAC and Summit were $87,097 and $460,494, respectively and are reflected in
notes payable to related party in the balance sheet. Included in these amounts
is accrued interest totaling $90,161.
8
<PAGE> 9
SAVANT CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
In December 1998, the Company signed a memorandum of understanding with
Steven Myers & Associates, Inc. ("SMA"), a company affiliated with Summit, for
SMA to provide professional services to the Company with respect to a private
placement of Company securities. The total fee for such services was expected to
be $300,000, of which $75,000 was paid as of June 30, 1999. The $75,000 paid as
of June 30, 1999 was capitalized and included in prepaid offering costs in the
June 30, 1999 balance sheet. The prepaid offering costs were expensed in general
and administrative expenses during the year ended June 30, 2000 as the private
placement never occurred. In the event that the Company is acquired, the
remaining $225,000 obligation would be payable to SMA under this memorandum of
understanding.
4. LONG-TERM DEBT
On July 9, 1997, the Company entered into a letter of agreement with a
third party for the express purpose of raising operating capital for the
Company. This agreement provided that the Company would pay interest at a rate
of 20% per annum for all loans received, with principal and interest payments
due 24 months from the date of investment. Upon loan maturity, the Company would
repay the principal and interest in full, or at the investors option, credit the
interest towards the purchase of Company stock at a value of $0.209 per share.
The Company borrowed $120,000 under this agreement. This loan had a maturity
date of July 9, 1999.
On August 1, 1999, the loan was replaced by another loan with principal and
interest payments due 13 months from the date of investment. Upon loan maturity,
the Company would repay the principal and interest in full, or at the investors
option, credit the interest towards the purchase of Company stock at a value of
$0.209 per share. The Company borrowed $120,000 under this agreement. This loan
has a maturity date of September 1, 2000. The interest accrued and unpaid at
June 30, 2000 and 1999 was $58,483 and $52,800, respectively and is included as
part of this debt balance. The principal amount outstanding at June 30, 2000 and
1999 was $46,581 and $120,000, which is included in notes payable to third
party. On August 29, 2000, $56,800 of accrued interest was converted to 270,476
shares of the Company's common stock under terms stipulated in the original loan
agreement. In addition, the rest of the balance was fully paid during the three
months ended September 30, 2000.
On September 15, 1997, the Company entered into a line of credit, with
Capital Financial and Management, Inc. with a maximum borrowing amount not to
exceed $900,000, which was due on September 15, 1999. Interest on any
outstanding principal amounts was payable at an annual rate of 22%. There is no
balance outstanding as of June 30, 2000 and 1999, and the line of credit was
terminated at its maturity date.
An additional note was entered into on May 21, 1998, in the amount of
$50,000 which is due on or before May 21, 2000. Interest on this note is payable
at an annual rate of 10%, to be paid at maturity. The note contains a conversion
feature which allows the lender to convert all principal and interest due to
shares of common stock of the Company, on or before the date of note maturity,
at a rate of $0.270 per share. In March 1999, an additional $50,000 note was
entered into on substantially the same terms as the first note. In June 1999,
the entire outstanding balance of $105,990, which included $5,990 of accrued
interest, was converted into 392,000 shares of common stock.
5. LEASES
The Company leases office facilities and certain equipment. The office
facility lease is classified as an operating lease. The equipment leases are
classified as either operating or capital leases. The Company incurred rent
expense related to operating leases of $33,112, $119,584 and $114,644 for the
three months ended September 30, 2000 and the years ended June 30, 2000 and
1999, respectively.
9
<PAGE> 10
SAVANT CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
As of September 30, 2000, future minimum lease payments under capital
leases and non-cancelable operating leases with initial terms of one year or
more are as follows (unaudited):
<TABLE>
<CAPTION>
CAPITAL
YEAR ENDING JUNE 30, LEASES OPERATING LEASES
-------------------- ------- ----------------
<S> <C> <C>
2001........................................................ $23,815 $122,158
2002........................................................ 13,702 105,442
2003........................................................ 11,737 3,307
------- --------
Total minimum lease payments...................... 49,254 $230,907
========
Amount representing interest................................ (9,044)
-------
Present value of net minimum lease payments................. $40,210
=======
</TABLE>
As of June 30, 2000, future minimum lease payments under capital leases and
non-cancelable operating leases with initial terms of one year or more are as
follows:
<TABLE>
<CAPTION>
CAPITAL
YEAR ENDING JUNE 30, LEASES OPERATING LEASES
-------------------- ------- ----------------
<S> <C> <C>
2001........................................................ $17,921 $122,158
2002........................................................ 1,965 105,442
2003........................................................ -- 3,307
------- --------
Total minimum lease payments...................... 19,886 $230,907
========
Amount representing interest................................ 1,949
-------
Present value of net minimum lease payments................. $17,937
=======
</TABLE>
The Company entered into capital lease obligations for equipment in the
amount of $23,639, $0 and $17,894 during the three months ended September 30,
2000 and the years ended June 30, 2000 and 1999, respectively.
6. INCOME TAXES
At September 30 and June 30, 2000, the Company has net operating loss
carryforwards for federal income tax purposes of approximately $2,321,386 and
$2,037,466, respectively, which are available to offset future federal taxable
income through 2015. Net deferred tax assets have been fully offset by a
valuation allowance due to the uncertainty of their realization.
7. SHAREHOLDERS' EQUITY
SALE OF PREFERRED STOCK
On or before January 31, 1997 the Company sold 2,223 shares of non-voting
redeemable convertible preferred stock (the "1997 Preferred Stock"), par value
$0.01, at $417.13 per share in a private placement memorandum. There are 5,000
shares of the 1997 Preferred Stock authorized for issuance. The 1997 Preferred
Stock is non-voting, except that holders are entitled to elect one individual to
serve on the Company's Board of Directors. Each holder of the 1997 Preferred
Stock will have the right to convert, at any time, any or all of such holder's
shares into common stock at an applicable conversion ratio as defined in the
private placement memorandum dated December 16, 1996. The 1997 Preferred Stock
is non-cumulative, does not have a defined dividend rate and is convertible into
4,446,000 shares of Company common stock. In the event of the sale of the
Company, a merger of the Company into another company or the sale or disposition
of all or substantially all of the Company's assets, the Company is required to
redeem the 1997 Preferred Stock in cash at a rate of $417.13 per share.
10
<PAGE> 11
SAVANT CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
In March 2000, the Company's shareholders approved the issuance of up to an
additional 5,000,000 shares of convertible preferred stock with terms identical
to the redeemable preferred stock sold in 1997 (the "2000 Redeemable Preferred
Stock"). In May 2000, the Company completed the sale of 613,727 shares of the
2000 Preferred Stock, par value $0.000005, at $1.05 per share in a private
placement memorandum. The net proceeds to the Company were $519,674 of which
$50,400 is still owed as of June 30, 2000 and is reflected as a receivable in
the June 30, 2000 balance sheet. This amount was received subsequent to June 30,
2000. The 2000 Preferred Stock is non-voting. Each holder of the 2000 Preferred
Stock will have the right to convert, at any time, any or all of such holder's
shares into common stock at an applicable conversion ratio as defined in the
private placement memorandum dated March 24, 2000. The 2000 Preferred Stock is
non-cumulative, does not have a defined dividend rate and is convertible into
613,727 shares of Company common stock. In the event of the sale of the Company,
a merger of the Company into another company or the sale or disposition of all
or substantially all of the Company's assets, the Company is required to redeem
the 2000 Preferred Stock in cash at a rate of $1.05 per share.
STOCK OPTION PLAN
The Company has a nonqualified stock option plan, under which options are
granted to all employees and vest over periods generally ranging from one to
four years. A summary of stock option activity is as follows:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE
---------------- ----------------
<S> <C> <C>
Balance at June 30, 1998.................................... 8,890,000 $0.120
Granted................................................ 2,276,000 0.268
Exercised.............................................. -- --
Forfeited.............................................. (120,000) 0.050
----------
Balance at June 30, 1999.................................... 11,046,000 0.150
Granted................................................ 586,234 0.251
Exercised.............................................. (54,000) 0.050
Forfeited.............................................. (690,000) 0.269
----------
Balance at June 30, 2000.................................... 10,888,234 0.148
Granted................................................... 972,500 1.050
Exercised................................................. (14,000) 0.050
Forfeited................................................. (505,000) 0.312
----------
Balance at September 30, 2000 (unaudited)................... 11,341,734 $0.218
----------
</TABLE>
11
<PAGE> 12
SAVANT CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The following represents the Company's outstanding and exercisable stock
options at September 30, 2000 (unaudited):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-------------------------------------------
APPROXIMATE OPTIONS EXERCISABLE
WEIGHTED -------------------------------
NUMBER AVERAGE NUMBER
OUTSTANDING AT REMAINING EXERCISABLE AT WEIGHTED
EXERCISE SEPTEMBER 30, CONTRACTUAL LIFE SEPTEMBER 30, AVERAGE
PRICE 2000 (IN YEARS) 2000 EXERCISE PRICE
-------- -------------- ---------------- -------------- --------------
<S> <C> <C> <C> <C>
$0.005 307,692 9.51 -- $0.005
0.050 710,000 7.75 710,000 0.050
0.079 4,972,000 5.75 4,972,000 0.079
0.209 3,116,000 7.00 3,116,000 0.209
0.270 1,203,042 8.80 596,000 0.270
1.050 1,033,000 9.97 -- 1.050
</TABLE>
The following represents the Company's outstanding and exercisable stock
options at June 30, 2000:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-------------------------------------------
APPROXIMATE
WEIGHTED OPTIONS EXERCISABLE
NUMBER AVERAGE -------------------------------
OUTSTANDING AT REMAINING NUMBER WEIGHTED
EXERCISE SEPTEMBER 30, CONTRACTUAL LIFE EXERCISABLE AT AVERAGE
PRICE 2000 (IN YEARS) JUNE 30, 2000 EXERCISE PRICE
-------- -------------- ---------------- -------------- --------------
<S> <C> <C> <C> <C>
$0.005 307,692 9.76 -- $0.005
0.050 724,000 8 724,000 0.050
0.079 4,972,000 6 4,972,000 0.079
0.209 3,116,000 7.25 3,116,000 0.209
0.270 1,680,542 9.05 -- 0.270
1.050 88,000 9.80 -- 1.050
</TABLE>
The Company granted 2,704,000 options during fiscal 1996, whose grant
prices were less than the deemed fair value of the Company's common stock. The
Company recognized $117,881 of compensation expense during fiscal 1999 and 1998
related to these options. In addition, the Company recorded $21,030, $121,815
and $37,453 in compensation expense during the three months ended September 30,
2000 and the years ended June 30, 2000 and 1999, respectively, related to
certain stock options granted to the President of the Company.
During fiscal 1998, the Company issued 460,000 warrants to third party as
consideration for services received. The warrants are fully vested and
exercisable for a period of 10 years at a strike price of $0.209. All of the
warrants are outstanding as of September 30, 2000.
During fiscal year 2000, the Company granted 307,692 options whose grant
prices were less than the deemed fair value of the Company's common stock. As a
result, the Company recognized $21,802 and $57,436 in compensation expense
during the three months ended September 30, 2000 and the year ended June 30,
2000 related to these options.
Had compensation cost related to the stock option plan been determined
based on the fair value at the grant date for options granted during the three
months ended September 30, 2000 and the years ended June 30, 2000 and 1999
consistent with the provisions of SFAS 123, the Company's pro forma net
(loss)income would be $(313,045), $87,946 and $82,370, respectively. The fair
value of the options granted during fiscal year 1999 are estimated at $0.064 per
share on the date of grant using the minimum value option-pricing model with the
following assumptions: no dividend yield, no volatility, a risk-free
12
<PAGE> 13
SAVANT CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
investment rate of 5.5% and an expected life of 5.0 years from the date of
issuance. The fair value of the options granted during fiscal year 2000 are
estimated at $0.126 per share on the date of grant using the minimum value
option-pricing model with the following assumptions: no dividend yield, no
volatility, a risk-free investment rate of 5.5% and an expected life of 5.0
years from the date of issuance. The effect of applying SFAS 123 on pro forma
net income is not necessarily representative of the effects on reported net
income for future years due to, among other things, the changes in fair value of
additional stock options in future years.
COMMON STOCK
In March 2000, the Company's shareholders approved a 2-for-1 stock split of
the Company's common stock. In July 1999, the Company's shareholders approved a
1,000-for-1 stock split of the Company's common stock. Accordingly, all data
shown in the accompanying financial statements and notes has been retroactively
adjusted to reflect the stock splits.
In March 2000, the Company's shareholders approved an increase of the
authorized shares of Company common stock from 25,000,000 to 100,000,000. In
July 1999, the Company's shareholders approved an increase of the authorized
shares of Company common stock from 20,000,000 to 25,000,000.
During fiscal 1999, the Company issued 124,000 shares of common stock to a
third party as consideration for certain services valued at $47,500. In
addition, during fiscal 2000 and 1999, the Company issued 86,000 and 114,000
shares of common stock, respectively, to non-employee directors as consideration
for past services valued at $23,220 and $23,776 in the aggregate.
8. EMPLOYEE BENEFIT PLAN
In July 1999, the Company established the Savant Corporation 401(k) Plan
(the "Plan"). The Plan was established to qualify as a deferred salary
arrangement under Section 401(k) of the Internal Revenue Code (the "Code"). The
Plan covers all employees who have completed three months of service and
attained the age of twenty-one. The Plan allows employees to contribute up to
15% of their total compensation, subject to Code limitations. The Company may
make a matching contribution at its discretion. No such matching contributions
were made during the three months ended September 30, 2000 and the year ended
June 30, 2000.
9. SYBASE LITIGATION
In May 2000, Sybase, Inc. ("Sybase") filed a lawsuit alleging a breach of
contract by the Company relating to a software development agreement. Sybase
seeks to have certain software transferred to it plus unspecified damages. The
Company has filed a counter complaint against Sybase for breach of contract and
seeks damages for services believed to be in excess of $700,000. The Company has
denied the allegations in Sybase's complaint and intends to vigorously defend
the action. The Company does not believe that this matter will have a material
impact on its financial position or results of operations.
10. SUBSEQUENT EVENT (UNAUDITED)
In October 2000, the Company and Precise Software Solutions Ltd. (Precise)
entered into an agreement under which Precise would acquire all of the
outstanding shares of capital stock of the Company for total stock and cash
consideration of $20,000,000. In addition, the Company will have the right to
receive additional consideration based on the achievement of certain
post-acquisition revenue performance targets. The additional consideration would
be in an amount equal to four and one-half times the amount by which such
revenue exceeds $7 million (up to a maximum of $13 million in revenue).
13
