<PAGE>
EXHIBIT 99.1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of
FRx Software Corporation
In our opinion, the accompanying balance sheets and the related statements
of operations, of cash flows and of changes in stockholders' equity present
fairly, in all material respects, the financial position of FRx Software
Corporation at June 30, 1998 and 1999, and the results of its operations and its
cash flows for each of the three years in the period ended June 30, 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 audits. We conducted our audits 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.
/s/ PRICEWATERHOUSECOOPERS LLP
PricewaterhouseCoopers LLP
Broomfield, Colorado
September 13, 1999
<PAGE>
FRx SOFTWARE CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
----------------------- ------------
1998 1999 1999
---------- ---------- ------------
UNAUDITED
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $1,194,141 $2,038,541 $ 5,788,641
Accounts receivable, net.................................. 3,347,547 4,462,994 3,616,066
Deferred income taxes..................................... 123,061 340,069 498,864
Other current assets...................................... 194,579 143,387 799,066
---------- ---------- -----------
Total current assets.................................... 4,859,328 6,984,991 10,702,637
Property and equipment, net................................. 1,354,308 1,882,897 1,671,193
Deferred income taxes....................................... 92,206 494,412 319,315
---------- ---------- -----------
$6,305,842 $9,362,300 $12,693,145
========== ========== ===========
LIABILITIES, MANDATORILY REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of long-term debt......................... $ 384,558 $ 450,641 $ 555,919
Accounts payable.......................................... 660,444 831,108 300,959
Accrued compensation and related expenses................. 674,698 933,158 1,146,811
Other accrued liabilities................................. 111,219 652,308 769,003
Deferred revenue.......................................... 2,846,444 4,560,979 5,194,459
---------- ---------- -----------
Total current liabilities............................... 4,677,363 7,428,194 7,967,151
Non-current liabilities:
Long-term debt............................................ 600,798 666,138 578,707
Deferred revenue.......................................... 68,593 1,037,925 58,225
---------- ---------- -----------
Total non-current liabilities........................... 669,391 1,704,063 636,932
Commitments and contingencies (Notes 2 and 3)
Mandatorily redeemable preferred stock at redemption value:
Series B mandatorily redeemable preferred stock, $.01 par
value; 1,100,000 shares authorized; 0, 0 and 1,041,667
shares issued and outstanding at June 30, 1998, 1999 and
December 31, 1999 (unaudited), respectively............. -- -- 5,723,746
Stockholders' equity (deficit):
Preferred stock, $.01 par value; 2,900,000 shares
authorized; no shares issued and outstanding............ -- -- --
Series A preferred stock, $.01 par value; 1,000,000 shares
authorized; 600,000 shares issued and outstanding;
aggregate liquidation preference of $600,000............ 6,000 6,000 6,000
Class A voting common stock, $.01 par value; 50,000,000
shares authorized; 3,260,000 shares issued and
outstanding............................................. 32,600 32,600 32,600
Class B non-voting common stock, $.01 par value;
25,000,000 shares authorized; 2,763,336, 2,685,045 and
2,672,963 shares issued at June 30, 1998, 1999 and
December 31, 1999 (unaudited), respectively............. 27,633 26,850 26,730
Additional paid-in capital.................................. 645,919 656,446 323,955
Notes receivable from stockholders.......................... (405,827) (294,043) (294,043)
Deferred compensation....................................... -- -- (311,225)
Retained earnings (deficit)................................. 652,763 (197,810) (1,294,497)
Treasury stock at cost; 0, 0 and 33,645 shares at June 30,
1998, 1999 and December 31, 1999 (unaudited),
respectively.............................................. -- -- (124,204)
---------- ---------- -----------
Total stockholders' equity (deficit).................... 959,088 230,043 (1,634,684)
---------- ---------- -----------
$6,305,842 $9,362,300 $12,693,145
========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
FRx SOFTWARE CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED JUNE 30, DECEMBER 31,
-------------------------------------- ------------------------
1997 1998 1999 1998 1999
---------- ----------- ----------- ---------- -----------
UNAUDITED UNAUDITED
<S> <C> <C> <C> <C> <C>
Revenues:.......................
Software licenses............. $3,468,700 $ 6,788,560 $ 9,683,931 $4,599,142 $ 3,702,034
Services...................... 1,639,815 3,787,940 8,500,144 3,637,784 5,377,274
---------- ----------- ----------- ---------- -----------
Total revenues.............. 5,108,515 10,576,500 18,184,075 8,236,926 9,079,308
---------- ----------- ----------- ---------- -----------
Cost of revenues:
Software licenses............. 87,715 147,297 116,742 52,243 82,983
Services...................... 1,009,827 2,779,177 5,308,327 2,467,652 3,104,709
---------- ----------- ----------- ---------- -----------
Total cost of revenues...... 1,097,542 2,926,474 5,425,069 2,519,895 3,187,692
---------- ----------- ----------- ---------- -----------
Gross margin.................... 4,010,973 7,650,026 12,759,006 5,717,031 5,891,616
---------- ----------- ----------- ---------- -----------
Operating expenses:
Research and development...... 1,761,398 3,140,167 6,235,685 2,726,566 3,487,804
Selling, general &
administration.............. 1,207,744 4,273,130 7,923,308 3,588,005 4,203,706
---------- ----------- ----------- ---------- -----------
Total operating expenses.... 2,969,142 7,413,297 14,158,993 6,314,571 7,691,510
---------- ----------- ----------- ---------- -----------
Income (loss) from operations... 1,041,831 236,729 (1,399,987) (597,540) (1,799,894)
Other income (expense), net..... 247 (71,541) (29,651) (12,928) 36,522
---------- ----------- ----------- ---------- -----------
Income (loss) before income
taxes......................... 1,042,078 165,188 (1,429,638) (610,468) (1,763,372)
Provision for (benefit from)
income taxes.................. 108,014 (4,716) (579,065) (228,925) (666,685)
---------- ----------- ----------- ---------- -----------
Net income (loss)............... 934,064 169,904 (850,573) (381,543) (1,096,687)
Accretion of preferred stock.... -- -- -- -- (750,000)
---------- ----------- ----------- ---------- -----------
Net income (loss) available to
common stockholders........... $ 934,064 $ 169,904 $ (850,573) $ (381,543) $(1,846,687)
========== =========== =========== ========== ===========
Net income (loss) per common
share:
Basic......................... $ 0.19 $ 0.03 $ (0.16) $ (0.07) $ (0.34)
========== =========== =========== ========== ===========
Diluted....................... $ 0.10 $ 0.02 $ (0.16) $ (0.07) $ (0.34)
========== =========== =========== ========== ===========
Weighted average number of
common shares outstanding:
Basic......................... 5,000,000 5,194,000 5,291,482 5,293,974 5,484,418
========== =========== =========== ========== ===========
Diluted....................... 9,047,000 8,536,000 5,291,482 5,293,974 5,484,418
========== =========== =========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
FRx SOFTWARE COPORATION
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
SERIES A CLASS A VOTING CLASS B NON-VOTING NOTES
PREF STOCK COMMON STOCK COMMON STOCK ADDITIONAL RECEIVABLE
--------------------- -------------------- -------------------- PAID-IN FROM
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL STOCKHOLDERS
---------- -------- --------- -------- --------- -------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JUNE 30, 1996......... 600,000 $ 6,000 4,005,000 $40,050 995,000 $ 9,950 $569,000 $ --
Net income.....................
---------- -------- --------- ------- --------- ------- -------- ---------
BALANCE, JUNE 30, 1997......... 600,000 6,000 4,005,000 40,050 995,000 9,950 569,000 --
Stock option exercises, net.... 1,023,336 10,233 76,919 (405,827)
Conversion of Class A Voting to
Class B Non-Voting Common
Stock........................ (745,000) (7,450) 745,000 7,450
Net income.....................
---------- -------- --------- ------- --------- ------- -------- ---------
BALANCE, JUNE 30, 1998......... 600,000 6,000 3,260,000 32,600 2,763,336 27,633 645,919 (405,827)
Stock option exercises, net.... 103,292 1,033 8,532
Cancellation of unvested shares
and notes receivable......... (181,583) (1,816) (84,014) 85,830
Payments of notes receivable... 25,954
Compensation expense related to
stock options................ 86,009
Net loss.......................
---------- -------- --------- ------- --------- ------- -------- ---------
BALANCE, JUNE 30, 1999......... 600,000 6,000 3,260,000 32,600 2,685,045 26,850 656,446 (294,043)
Repurchase of common stock
(unaudited).................. (13,332) (133) (6,390)
Stock option exercises, net
(unaudited).................. 1,250 13 (5,810)
Deferred compensation related
to stock options
(unaudited).................. 318,703
Amortization of deferred
compensation (unaudited)..... 111,006
Accretion of preferred stock
(unaudited).................. (750,000)
Net loss (unaudited)...........
---------- -------- --------- ------- --------- ------- -------- ---------
BALANCE, DECEMBER 31, 1999
(UNAUDITED).................. 600,000 $ 6,000 3,260,000 $32,600 2,672,963 $26,730 $323,955 $(294,043)
========== ======== ========= ======= ========= ======= ======== =========
<CAPTION>
RETAINED TREASURY STOCK TOTAL
DEFERRED EARNINGS -------------------- STOCKHOLDERS'
COMPENSATION (DEFICIT) SHARES AMOUNT EQUITY (DEFICIT)
------------ ----------- -------- --------- ----------------
<S> <C> <C> <C> <C> <C>
BALANCE, JUNE 30, 1996......... $ (451,205) -- $ -- $ 173,795
Net income..................... 934,064 934,064
--------- ----------- ------- ---------
BALANCE, JUNE 30, 1997......... -- 482,859 -- -- 1,107,859
Stock option exercises, net.... (318,675)
Conversion of Class A Voting to
Class B Non-Voting Common
Stock........................
Net income..................... 169,904 169,904
--------- ----------- ------- --------- -----------
BALANCE, JUNE 30, 1998......... -- 652,763 -- -- 959,088
Stock option exercises, net.... 9,565
Cancellation of unvested shares
and notes receivable.........
Payments of notes receivable... 25,954
Compensation expense related to
stock options................ 86,009
Net loss....................... (850,573) (850,573)
--------- ----------- ------- --------- -----------
BALANCE, JUNE 30, 1999......... (197,810) 230,043
Repurchase of common stock
(unaudited).................. (36,000) (132,800) (139,323)
Stock option exercises, net
(unaudited).................. 2,355 8,596 2,799
Deferred compensation related
to stock options
(unaudited).................. (318,703)
Amortization of deferred
compensation (unaudited)..... 7,478 118,484
Accretion of preferred stock
(unaudited).................. (750,000)
Net loss (unaudited)........... (1,096,687) (1,096,687)
--------- ----------- ------- --------- -----------
BALANCE, DECEMBER 31, 1999
(UNAUDITED).................. $(311,225) $(1,294,497) (33,645) $(124,204) $(1,634,684)
========= =========== ======= ========= ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
FRx SOFTWARE CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED JUNE 30, DECEMBER 31,
-------------------------------------- -------------------------
1997 1998 1999 1998 1999
---------- ----------- ----------- ----------- -----------
UNAUDITED
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).................................... $ 934,064 $ 169,904 $ (850,573) $ (381,543) $(1,096,687)
Adjustments to reconcile net income (loss) to net
cash provided (used) by operating activities:
Depreciation....................................... 152,610 371,957 789,127 349,279 482,901
Loss on disposal of property and equipment......... -- -- 145,475 -- 8,586
Allowance for doubtful accounts.................... 39,000 60,000 144,602 237,998 734
Provision for (benefit from) deferred income
taxes............................................ (176,873) (38,394) (619,214) (244,797) 16,302
Non-cash compensation expense...................... -- -- 86,009 -- 118,484
Net changes in operating assets and liabilities:
(Increase) decrease in accounts receivable....... (553,496) (2,514,254) (1,260,048) (1,569,074) 846,194
(Increase) decrease in other current assets...... (84,080) (51,571) 51,191 10,370 (655,679)
Increase (decrease) in accounts payable and other
accrued liabilities............................ 631,905 652,780 970,213 (41,123) (199,801)
Increase (decrease) in deferred revenue.......... 1,386,154 1,292,701 2,683,867 1,507,357 (346,220)
---------- ----------- ----------- ----------- -----------
Net cash provided (used) by operating activities... 2,329,284 (56,877) 2,140,649 (131,533) (825,186)
---------- ----------- ----------- ----------- -----------
Cash flows from investing activities:
Purchases of property and equipment.................. (434,612) (1,225,741) (1,463,191) (541,574) (282,182)
---------- ----------- ----------- ----------- -----------
Net cash used by investing activities.............. (434,612) (1,225,741) (1,463,191) (541,574) (282,182)
---------- ----------- ----------- ----------- -----------
Cash flows from financing activities:
Proceeds from revolving line of credit............... -- -- 1,350,000 850,000 --
Repayments of revolving line of credit............... -- -- (1,350,000) (250,000) --
Proceeds from long-term debt......................... 120,000 890,000 475,000 210,000
Repayment of long-term debt.......................... (51,157) (129,388) (343,577) (151,561) (192,153)
Proceeds from issuance of common stock............... -- 39,525 14,790 38,918 2,798
Proceeds from issuance of preferred stock............ 4,973,746
Proceeds from payments of notes receivable from
shareholders....................................... -- -- 25,954 18,616 --
Repurchase of common stock........................... -- (358,200) (5,225) -- (136,923)
Payments of note payable to stockholder.............. (129,949) -- -- -- --
---------- ----------- ----------- ----------- -----------
Net cash provided (used) by financing
activities..................................... (61,106) 441,937 166,942 505,973 4,857,468
---------- ----------- ----------- ----------- -----------
Net increase (decrease) in cash........................ 1,833,566 (840,681) 844,400 (167,134) 3,750,100
Cash and cash equivalents at beginning of year......... 201,256 2,034,822 1,194,141 1,194,141 2,038,541
---------- ----------- ----------- ----------- -----------
Cash and cash equivalents at end of year............... $2,034,822 $ 1,194,141 $ 2,038,541 $ 1,027,007 $ 5,788,641
========== =========== =========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid........................................ $ 16,044 $ 37,837 $ 78,837 $ 37,488 $ 25,966
Income taxes paid.................................... $ 41,700 $ 349,200 $ 6,150 -- --
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Capital lease obligations............................ $ 28,328 $ -- $ -- $ -- $ --
Common stock issued (cancelled) in exchange for
issuance (cancellation) of notes receivable from
stockholders....................................... $ -- $ 405,827 $ (85,830) $ -- $ --
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
FRx SOFTWARE CORPORATION
NOTES TO FINANCIAL STATEMENTS
(FOOTNOTE INFORMATION SUBSEQUENT TO JUNE 30, 1999 IS UNAUDITED)
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
FRx Software Corporation (the "Company"), a Colorado corporation, was
incorporated on July 22, 1994 and reincorporated in Delaware in December 1999.
The Company develops, markets and supports its "Visual Financial Reporting"-TM-
software products and related services. The Company currently markets its
products to mid-sized and large corporations, worldwide.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION: The Company recognizes revenue in accordance with the
provisions of the American Institute of Certified Public Accountants (AICPA)
Statement of Position (SOP) 97-2, "Software Revenue Recognition", as amended.
Software license revenue is generated from sales of the Company's products to
resellers and directly to end users. Resellers are typically other accounting
software vendors who distribute the Company's product in conjunction with the
sale and distribution of their own product, for which the Company is paid a
royalty. Software license revenue is recognized when persuasive evidence of an
arrangement exists, delivery has occurred, the fee is fixed or determinable and
collection is probable. Where applicable, fees from multiple-element
arrangements are unbundled and recorded as revenue as the elements are delivered
to the extent that vendor specific objective evidence of fair value exists.
Services revenue includes maintenance revenue, which is recognized ratably
over the maintenance period, and revenue from consulting and training services,
which is recognized as services are performed. Training and consulting services
are not essential to the functionality or necessary for the customer to
implement and utilize the Company's software products and are separately priced
and recorded separate from the license fee.
Deferred revenue is comprised of revenue amounts which have been billed or
received but which do not qualify for revenue recognition in accordance with the
Company's revenue recognition policies as described above.
Prior to fiscal 1999, the Company recognized revenue in accordance with SOP
91-1 "Software Revenue Recognition" and accordingly recorded license revenue
when a non-cancelable license agreement had been executed, the product had been
shipped, collection was probable and all significant post-delivery obligations
had been satisfied.
RESEARCH AND DEVELOPMENT AND CAPITALIZED SOFTWARE DEVELOPMENT
COSTS: Research and development costs related to new software products, as well
as maintenance of existing software products, are charged to expense as
incurred. Due to the short period of time between the determination of
technological feasibility and the date of commercial availability of such
software, development costs qualifying for capitalization have been
insignificant and therefore, the Company has not capitalized any software
development costs to date.
DEPRECIATION AND AMORTIZATION: Property and equipment are recorded at cost
and depreciated using an accelerated method over estimated useful lives ranging
from two to seven years. Leasehold improvements are recorded at cost and
amortized on a straight-line method over the lesser of the term of the lease or
the expected useful lives of the improvements.
6
<PAGE>
FAIR VALUE OF FINANCIAL INSTRUMENTS: The Company's financial instruments
include cash, accounts receivable, accounts payable, accrued liabilities and
notes payable. The carrying value of financial instruments, other than debt,
approximate fair value due to their short maturities. The carrying amount of
debt approximates fair value based upon rates currently available for similar
instruments.
CONCENTRATION OF CREDIT RISK: The Company has concentrations of credit
risk, primarily in accounts receivable, which are concentrated in the computer
software industry. One customer comprised approximately 25%, 17% and 23% of the
Company's fiscal 1997, fiscal 1998 and fiscal 1999 revenue and approximately 12%
and 25% of its accounts receivable as of June 30, 1998 and 1999, respectively.
No other customers accounted for 10% or more of the of the Company's revenue in
these same periods however, one other customer accounted for approximately 21%
and 12% of the Company's accounts receivable as of June 30, 1998 and 1999.
Accounts receivable, as stated on the balance sheet as of June 30, 1998 and
1999 and December 31, 1999 is net of an allowance for doubtful accounts of
$98,884, $243,486 and $244,221 (unaudited), respectively.
ESTIMATES: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities as
well as the reported amounts of revenue and expenses. Actual results could
differ from these estimates, making it reasonably possible that a change in
these estimates could occur in the near term.
RECLASSIFICATIONS: Certain prior period amounts have been reclassified to
conform with the current year presentation.
CASH AND CASH EQUIVALENTS: The Company classifies cash on hand and all
highly liquid short term investments purchased with original maturities of less
than three months as cash and cash equivalents.
INCOME TAXES: Deferred income taxes are provided for temporary differences
between the financial reporting basis and tax basis of the Company's assets and
liabilities. Income taxes are also provided for taxes currently payable based on
taxable income.
STOCK-BASED COMPENSATION: Statement of Financial Accounting Standard (SFAS)
No. 123, "Accounting for Stock-Based Compensation" permits the use of either a
fair value based method or the intrinsic value method prescribed by Accounting
Principles Board opinion number 25 (APB 25), "Accounting for Stock Issued to
Employees" to account for stock-based compensation arrangements. Companies that
elect to use the intrinsic value method prescribed by APB 25, are required to
disclose the pro forma net income and earnings per share that would have
resulted from the use of the fair value based method. The Company has elected to
continue to determine the value of stock-based compensation arrangements under
the provisions of APB 25 and, accordingly, has included the pro forma
disclosures required under SFAS No. 123 in Note 5.
STOCK SPLIT: All references in the financial statements to shares, share
prices, and per share amounts have been adjusted retroactively for all periods
presented to give effect to a five-for-one stock split which occurred in fiscal
1997.
7
<PAGE>
EARNINGS PER COMMON SHARE: Basic EPS is computed by dividing net income by
the weighted average number of common shares outstanding during the period.
Diluted EPS is computed using the weighted average number of common shares
outstanding plus all dilutive potential common shares outstanding. For periods
in which a net loss is incurred, potential common shares are excluded from the
diluted EPS calculation as they would be anti-dilutive.
Following is a reconciliation of the numerators and denominators of the
basic and diluted EPS computations:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED JUNE 30, DECEMBER 31,
--------------------------------- -----------------------
1997 1998 1999 1998 1999
--------- --------- --------- --------- -----------
UNAUDITED
<S> <C> <C> <C> <C> <C>
BASIC EARNINGS PER SHARE:
Net income (loss) available to
common stockholders.............. $ 934,064 $ 169,904 $(850,573) $(381,543) $(1,846,687)
========= ========= ========= ========= ===========
Basic weighted average common
shares outstanding............... 5,000,000 5,194,000 5,291,482 5,293,974 5,484,418
========= ========= ========= ========= ===========
Basic earnings per common
share.......................... $ 0.19 $ 0.03 $ (0.16) $ (0.07) $ (0.34)
========= ========= ========= ========= ===========
DILUTED EARNINGS PER SHARE:
Net income (loss) available to
common stockholders.............. $ 934,064 $ 169,904 $(850,573) $(381,543) $(1,846,687)
========= ========= ========= ========= ===========
Basic weighted average common
shares outstanding............... 5,000,000 5,194,000 5,291,482 5,293,974 5,484,418
Effect of dilutive securities:
Stock options.................... 1,047,000 342,000 -- -- --
Conversion of preferred shares... 3,000,000 3,000,000 -- -- --
--------- --------- --------- --------- -----------
Diluted weighted average common
shares outstanding............... 9,047,000 8,536,000 5,291,482 5,293,974 5,484,418
========= ========= ========= ========= ===========
Diluted earnings per common
share............................ $ 0.10 $ 0.02 $ (0.16) $ (0.07) $ (0.34)
========= ========= ========= ========= ===========
</TABLE>
INTERIM FINANCIAL DATA: The financial information presented as of
December 31, 1999, and for each of the six-month periods ended December 31,
1998, and 1999, including related information set forth in the notes to
financial statements, is unaudited. In the opinion of management, this financial
information reflects the adjustments necessary for a fair presentation of the
financial information for such periods. These adjustments consist of normal,
recurring items. The results of operations for the six-month period ending
December 31, 1999, should not necessarily be taken as indicative of the results
of operations that may be expected for the entire year.
8
<PAGE>
2. PROPERTY, EQUIPMENT AND OPERATING LEASES
Property and equipment is comprised of the following:
<TABLE>
<CAPTION>
JUNE 30,
------------------------
1998 1999
---------- -----------
<S> <C> <C>
Furniture and office equipment...................... $ 538,200 $ 1,015,307
Computer equipment.................................. 1,363,570 1,960,267
Leasehold improvements.............................. 92,683 287,043
---------- -----------
1,994,453 3,262,617
Less: Accumulated depreciation and amortization..... (640,145) (1,379,720)
---------- -----------
Property and equipment, net......................... $1,354,308 $ 1,882,897
========== ===========
</TABLE>
Property and equipment balances as of June 30, 1998 and 1999 include
$182,989 of equipment acquired under capital leases. Accumulated depreciation
related to these assets was $126,092 and $143,222 as of June 30, 1998 and 1999,
respectively.
The Company maintains non-cancelable operating lease arrangements for office
space and office equipment. Rent expense related to these operating leases
netted $146,000, $334,000, and $615,000 for the fiscal 1997, fiscal 1998 and
fiscal 1999, respectively. Future minimum non-cancelable operating lease
payments and sublease income are as follows:
<TABLE>
<S> <C>
Fiscal year 2000............................................ $ 729,000
Fiscal year 2001............................................ 336,000
Fiscal year 2002............................................ 121,000
----------
1,186,000
Less: Sublease income....................................... (587,000)
----------
$ 599,000
==========
</TABLE>
3. LONG-TERM DEBT AND AVAILABLE BORROWINGS
The Company has a Loan and Security Agreement ("Loan Agreement") with
Silicon Valley Bank ("SVB") which, as amended, provides for a $1.5 million
revolving facility ("Revolver"); a term loan, which represents a consolidation
of previously existing term and equipment loans totaling $888,333 ("Term Loan");
and a $1,000,000 equipment facility ("Equipment Facility"). The Revolver bears
interest at the SVB prime rate plus 0.5% and matures on September 30, 1999. The
Term Loan bears interest at the SVB prime rate plus 0.75%. The Equipment
Facility initially bears interest at the SVB prime rate plus 1.95%, reducing to
the SVB prime rate plus 0.75% based upon attainment of specified ratios. As of
June 30, 1999, the Company has $1.5 million available for borrowing under the
Revolver and $525,000 available under the Equipment Facility.
Substantially all of the Company's assets have been pledged as collateral
under the Loan Agreement. The Loan Agreement contains certain restrictive
covenants pertaining to liquidity, debt, tangible net worth, and revenue. The
Loan Agreement also includes restrictions against mergers and
9
<PAGE>
acquisitions and payment of dividends and other distributions. As of June 30,
1999, the Company either was in compliance with all restrictive covenants of the
Loan Agreement or had subsequently obtained appropriate waivers from SVB.
Long-term debt is comprised of the following:
<TABLE>
<CAPTION>
JUNE 30,
---------------------
1998 1999
-------- ----------
<S> <C> <C>
Equipment Facility, repayable in monthly principal and
interest installments through February 2003......... $605,000 $ 475,000
Term Loan, repayable in monthly principal and interest
installments through February 2001.................. 330,000 612,644
Capital lease obligations, secured by the related
equipment, repayable in monthly principal and
interest installments through February 2002......... 50,356 29,135
-------- ----------
985,356 1,116,779
Less: current portion................................. 384,558 450,641
-------- ----------
Long-term debt........................................ $600,798 $ 666,138
======== ==========
</TABLE>
Scheduled annual maturities of long-term debt (including future minimum
annual payments required under non-cancelable capitalized lease obligations) as
of June 30, 1999 are as follows:
<TABLE>
<S> <C>
Fiscal year 2000............................................ $ 452,663
Fiscal year 2001............................................ 411,627
Fiscal year 2002............................................ 163,165
Fiscal year 2003............................................ 92,361
----------
1,119,816
Less: amount representing interest.......................... (3,037)
----------
1,116,779
Less: current portion....................................... (450,641)
----------
$ 666,138
==========
</TABLE>
4. STOCKHOLDERS' EQUITY
The issued and outstanding stock of the Company is comprised of Series A
Preferred Stock, Class A Voting Common Stock and Class B Non-Voting Common
Stock. The Series A Preferred Stock is entitled to: dividends, when and as
declared, by the Board of Directors; voting rights equal to the Class A Voting
Common Stock; a liquidation preference equal to the original issuance price of
the shares plus any accrued but unpaid dividends; and conversion rights, subject
to certain anti-dilution provisions. Upon the closing of a public offering of
the Company's securities, all shares of Class B Non-Voting Common Stock and the
Series A Preferred Stock shall automatically convert into Class A Voting Common
Stock at a current conversion ratio of 1 to 1 and 5 to 1, respectively. The
Class A
10
<PAGE>
Preferred Stock may also be converted to Class A Voting Common Stock upon the
affirmative vote of two-thirds of the outstanding Series A Preferred Stock
shareholders.
During fiscal 1998, the Company exercised its right to acquire 995,000
shares of Class B Non-Voting Common Stock from a third party for $358,200 and an
officer converted 745,000 shares of Class A Voting Common Stock into an
equivalent number of Class B Non-Voting Common shares. Also during fiscal 1998,
certain employees exercised stock options for the purchase of 924,666 shares of
Class B Non-Voting Common Stock in exchange for full recourse promissory notes
bearing interest of 6% per annum with principal and all accrued interest due on
June 30, 2003. The notes are secured by personal property of the employees and
by the stock acquired by the note. These notes are classified on the balance
sheet as a reduction to Stockholders' Equity. The outstanding shares of Class B
Non-Voting Common Stock include 490,948 shares which are unvested as of
June 30, 1999.
During fiscal 1999, the Company cancelled 181,583 unvested shares of
restricted Class B Non-Voting Common Stock at the original issuance price of the
shares. In exchange for the repurchased shares, the Company cancelled $85,830 of
related notes receivable from shareholders. In conjunction with this
transaction, the Company accelerated the vesting on a portion of the unvested
restricted shares and recorded $50,014 of compensation expense.
5. STOCK OPTIONS
The Company has two stock option plans that provide for incentive and
non-qualified stock options to be granted to eligible employees, directors and
consultants, as determined by the Board of Directors. The Company is authorized
to grant options for up to 1,000,000 shares of Class B Non-Voting Common Stock
under the 1999 Stock Option/Stock Issuance Plan, of which 459,600 are available
for grant as of June 30, 1999. The 1996 Stock Option Plan has exercisable
options outstanding as of June 30, 1999, but no further options available for
grant.
Options generally vest over four years, are granted at the estimated fair
market value of the Company's common stock on the date of grant (as determined
by the Board of Directors) and expire no more than 10 years from the date of
grant. Common stock received upon exercise of stock options is subject to a
stock restriction agreement which limits future transfers of the common shares,
requires forfeiture of any unvested shares upon termination of employment and
allows the Company to repurchase any vested shares upon termination of
employment. During fiscal 1999, the Company granted 97,000 options, with a
weighted average exercise price of $.70 per share, to non-employees and recorded
$35,995 of expense based upon a Black-Scholes option-pricing model.
The Company applies APB Opinion 25 and related interpretations in accounting
for stock options granted to employees. Had the Company adopted the fair value
based method for recording stock options prescribed by SFAS No. 123, net
income(loss) would have been as follows:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30
-------------------------------
1997 1998 1999
-------- -------- ---------
<S> <C> <C> <C>
NET INCOME (LOSS):
As Reported................................ $934,064 $169,904 $(850,573)
Pro Forma.................................. $915,251 $153,637 $(952,997)
</TABLE>
11
<PAGE>
The above amounts were determined by utilizing a minimum value
option-pricing model with the following assumptions: expected lives of three to
four years; risk free interest rates of 5.82% to 6.45% in fiscal 1997, 5.35% to
5.92% in fiscal 1998 and 4.18% to 5.81% in fiscal 1999; and an expected dividend
yield and expected volatility of 0% for all periods. Based on calculations using
the minimum value option-pricing model and factors mentioned above, the weighted
average grant date fair value of options granted during each fiscal year was
$0.05 in fiscal 1997, $0.11 in fiscal 1998 and $0.39 in fiscal 1999.
The status of total stock options outstanding and exercisable as of
June 30, 1999 is as follows:
<TABLE>
<CAPTION>
STOCK OPTIONS OUTSTANDING STOCK OPTIONS EXERCISABLE
---------------------------------------------------------------- ----------------------------
WEIGHTED AVERAGE
REMAINING
RANGE OF NUMBER OF CONTRACTUAL LIFE WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE
EXERCISE PRICES SHARES (YEARS) EXERCISE PRICE OF SHARES EXERCISE PRICE
--------------- --------- ---------------- ---------------- --------- ----------------
<S> <C> <C> <C> <C> <C>
$0.03 - $1.50 453,603 8.84 $0.79 123,514 $0.33
$1.70 - $2.05 179,000 9.48 $2.01 -- $ --
$2.25 - $3.50 538,400 9.62 $2.36 -- $ --
--------- -------
$0.03 - $3.50 1,171,003 9.30 $1.70 123,514 $0.33
========= =======
</TABLE>
Stock option activity for the for fiscal 1997, 1998, and 1999 is summarized
below:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED AVERAGE OPTIONS WEIGHTED AVERAGE
SHARES EXERCISE PRICE EXERCISABLE EXERCISE PRICE
---------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C>
Options outstanding, June 30, 1996....... 965,000 $0.02 250,005 $0.02
Granted................................ 1,488,750 $0.23
Cancelled.............................. (10,000) $0.02
----------
Options outstanding, June 30, 1997....... 2,443,750 $0.15 568,355 $0.02
Granted................................ 1,005,250 $0.53
Exercised.............................. (2,018,336) $0.22
Cancelled.............................. (1,072,750) $0.30
----------
Options outstanding, June 30, 1998....... 357,914 $0.36 17,756 $0.13
Granted................................ 1,011,600 $1.94
Exercised.............................. (106,501) $0.15
Cancelled.............................. (92,010) $1.00
----------
Options outstanding, June 30, 1999....... 1,171,003 $1.70 123,514 $0.33
Granted (unaudited).................... 611,850 $3.61
Exercised (unaudited).................. (3,605) $0.78
Cancelled (unaudited).................. (24,415) $2.01
----------
Options outstanding, December 31, 1999
(unaudited)............................ 1,754,833 $2.36 254,421 $0.94
==========
</TABLE>
12
<PAGE>
6. INCOME TAXES
Components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------------------
1997 1998 1999
--------- -------- ---------
<S> <C> <C> <C>
Current provision (benefit):
Federal.................................... $ 249,311 $ (881) $ 53,748
State...................................... 35,576 34,559 (13,599)
--------- -------- ---------
284,887 33,678 40,149
--------- -------- ---------
Deferred provision (benefit):
Federal.................................... (161,441) (34,781) (586,188)
State...................................... (15,432) (3,613) (33,026)
--------- -------- ---------
(176,873) (38,394) (619,214)
--------- -------- ---------
Total provision (benefit).................... $ 108,014 $ (4,716) $(579,065)
========= ======== =========
</TABLE>
The provision (benefit) for income taxes differs from the amounts computed
by applying the federal statutory rate to income (loss) before income taxes. The
amounts are reconciled as follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
---------------------------------
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Statutory rate.............................. $ 354,307 $ 56,164 $(486,077)
Non-deductible expenses..................... 4,112 19,925 48,831
Change in valuation allowance............... (175,511) -- --
State income taxes.......................... 8,106 19,195 (41,819)
Research and development tax credits........ (83,000) (100,000) (100,000)
--------- --------- ---------
Provision (benefit) for income taxes........ $ 108,014 $ (4,716) $(579,065)
========= ========= =========
</TABLE>
Deferred tax assets are comprised of the following:
<TABLE>
<CAPTION>
JUNE 30,
-------------------
1998 1999
-------- --------
<S> <C> <C>
Deferred tax assets:
Deferred revenue...................................... $126,374 $194,559
Compensation and related accruals..................... 44,760 183,184
Research and development credit carryovers............ -- 164,240
Other accruals........................................ -- 124,842
Allowance for doubtful accounts....................... 36,883 90,820
Net operating loss carryforwards...................... -- 85,692
Other................................................. 7,250 (8,856)
-------- --------
Total deferred tax assets............................. $215,267 $834,481
======== ========
</TABLE>
13
<PAGE>
As of June 30, 1999 the Company had research and development credit
carryforwards of $164,240 which begin to expire in 2012.
7. EMPLOYEE BENEFIT PLAN
The Company has a 401(k) savings plan which allows qualified employees the
opportunity to invest up to 15 percent of their salary or wages (not to exceed
the maximum allowed by law) on a pretax basis. Discretionary and matching
contributions are contributed at the election of the Company. The Company
recorded an expense for matching contributions of $35,000, $90,000 and $155,000
in fiscal 1997, fiscal 1998 and fiscal 1999, respectively.
8. SUBSEQUENT EVENTS (UNAUDITED)
MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK: In October 1999, the
Company sold 1,041,667 shares of its $0.01 par value Series B mandatorily
redeemable convertible preferred stock (the "Series B preferred stock") at
$4.8024 per share to Great Plains Software, Inc. The Company received proceeds,
net of issuance costs, totaling $4,973,746.
The holders of Series B preferred stock are entitled to receive dividends
prior and in preference to any declaration or payment of any dividend on any
other class of common or preferred stock, when and as declared by the Board of
Directors, based on a monthly dividend ranging from $.07 to $.72 per share.
Shares of Series B preferred stock have no voting rights.
Each share of Series B preferred stock was, as of December 31, 1999,
convertible, at the option of the holder, at any time after the date of issuance
and prior to the redemption date, into shares of Class B common stock as
determined by dividing the original issue price by the conversion price in
effect on the date the certificate is surrendered for conversion. The conversion
price is the original issue price as adjusted for certain dilutive issuances,
splits and combinations. Additionally, if the Company completes an initial
public offering of its common stock in which the price is at least $5.00 per
share and gross proceeds exceed $20,000,000, the Series B preferred stock will
automatically convert into shares of Class B common stock.
In the event of liquidation of the Company, the holders of Series B
preferred stock will be entitled to receive, prior and in preference to any
payments to any class of common or preferred stockholders, an amount per share
equal to $4.8024 plus all accrued but unpaid dividends.
Upon the receipt by the Company of a written redemption demand from the
Series B preferred stockholders delivered at any time after October 22, 2002,
the Company shall redeem all but not less than all the Series B preferred stock
for a per share purchase price equal to the original issue price, plus accrued
and unpaid dividends.
BUSINESS COMBINATION: On March 17, 2000, the Company signed a definitive
merger agreement with Great Plains Software, Inc. ("Great Plains") whereby Great
Plains acquired the company for 786,000 shares of Great Plains common stock and
$12,250,000 in cash. All options to purchase FRx stock were converted into
options to purchase common stock of Great Plains. Upon consummation of the
merger the Company repaid all amounts outstanding under its Loan Agreement with
Silicon Valley Bank and terminated that relationship.
14
<PAGE>
DEFERRED COMPENSATION: Certain options granted to employees during the
six-months ended December 31, 1999 resulted in deferred compensation of
$318,703. The amount recorded represents the difference between the exercise
price and the deemed fair value of the Company's common stock for shares subject
to the options granted. Deferred compensation is reflected as a reduction of
stockholders' equity and is being amortized as a charge to operations over the
vesting period of the options, which is generally four years.
RECENT ACCOUNTING PRONOUNCEMENTS: In December 1999, the SEC issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." SAB 101 provides specific guidance, among other things, as to the
recognition of revenue related to up-front non-refundable fees and service
charges received in connection with a contractual arrangement. The Company is
currently evaluating the impact of SAB 101.
15
