<PAGE>
RENAISSANCE SOFTWARE, INC.
-------------------------------------------
FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999 AND 1998
<PAGE>
RENAISSANCE SOFTWARE, INC.
CONTENTS
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
REPORT OF INDEPENDENT ACCOUNTANTS 1
FINANCIAL STATEMENTS:
Balance Sheets 2
Statements of Operations and Comprehensive Income 3
Statements of Stockholders' Deficit 4
Statements of Cash Flows 5
Notes to Financial Statements 6 - 17
</TABLE>
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors
Renaissance Software, Inc.
Lake Success, New York
We have audited the accompanying balance sheets of Renaissance Software, Inc. as
of December 31, 1999 and 1998, and the related statements of operations and
comprehensive income, stockholders' 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 generally accepted auditing
standards. 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 Renaissance Software, Inc. as
of December 31, 1999 and 1998, and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted accounting
principles.
Garden City, N.Y.
November 27, 2000
/s/ Margolin, Winer & Evens LLP
1
<PAGE>
RENAISSANCE SOFTWARE, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------
December 31, 1999 1998
-------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 250,523 $ 1,393,060
Marketable securities -- 517,758
Accounts receivable, net of allowance for doubtful
accounts of $143,000 in 1999 and $-0- in 1998
(including unbilled receivables of $672,159 in
1999 and $722,560 in 1998) 1,869,626 1,514,793
Other current assets 156,556 176,473
----------- -----------
Total Current Assets 2,276,705 3,602,084
Property and Equipment, net 195,214 216,916
Software License, net -- 320,769
Deferred Charges, net 55,512 74,017
Due from Officers -- 30,693
Security Deposits and Other Assets 16,343 32,395
----------- -----------
Total Assets $ 2,543,774 $ 4,276,874
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Revolving line of credit $ 450,000 $ --
Accounts payable, accrued expenses and other
current liabilities 1,238,822 390,403
Deferred revenue 865,335 1,442,614
Current portion of notes payable 204,546 3,853
Income taxes payable 1,084 59,000
----------- -----------
Total Current Liabilities 2,759,787 1,895,870
Promissory Note Payable, net of unamortized discount 1,218,787 1,150,431
Non-Current Portion of Notes Payable 16,602 21,147
Deferred Rent 125,756 116,823
----------- -----------
Total Liabilities 4,120,593 3,184,271
----------- -----------
Commitments and Contingencies -- --
Redeemable Convertible Preferred Stock:
Series A redeemable convertible preferred stock aggregate
liquidation value $1,500,000, $.01 par value; 1,000,000
shares authorized, issued and outstanding in 1999 and
1998 3,016,949 2,399,055
Series B redeemable convertible preferred stock aggregate
liquidation value $1,000,000, $.01 par value; 1,000,000
shares authorized; 400,000 shares issued and
outstanding in 1999 1,153,174 --
----------- -----------
4,170,123 2,399,055
----------- -----------
Stockholders' Deficit:
Common stock, $.01 par value; 6,000,000 and 5,000,000
shares authorized in 1999 and 1998, respectively;
1,069,694 and 1,046,497 shares issued and
outstanding in 1999 and 1998, respectively 10,697 10,465
Additional paid-in capital -- 614,499
Deferred compensation (149,679) (228,446)
Accretion of redeemable preferred stock (111,421) --
Accumulated deficit (5,496,539) (1,681,530)
Accumulated other comprehensive income - unrealized
loss on securities -- (21,440)
----------- -----------
Total Stockholders' Deficit (5,746,942) (1,306,452)
----------- -----------
Total Liabilities and Stockholders' Deficit $ 2,543,774 $ 4,276,874
=========== ===========
</TABLE>
--------------------------------------------------------------------------------
The accompanying notes are an intergral part of these statements. 2
<PAGE>
RENAISSANCE SOFTWARE, INC.
--------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended December 31, 1999 1998
--------------------------------------------------------------------------------
<S> <C> <C>
Revenue:
Software $1,016,308 $2,782,263
Consulting 3,185,363 2,241,117
Maintenance 1,133,526 913,429
Hardware 1,094,209 366,376
----------- -----------
Total Revenue 6,429,406 6,303,185
----------- -----------
Cost of Revenue:
Software 320,769 320,766
Consulting 1,840,517 1,298,649
Maintenance 588,654 442,599
Hardware 1,103,773 238,504
----------- -----------
Total Cost of Revenue 3,853,713 2,300,518
----------- -----------
Gross Profit 2,575,693 4,002,667
----------- -----------
Operating Costs and Expenses:
Sales and marketing 1,950,282 1,930,716
Research and development 2,064,420 1,338,801
General and administrative 2,248,023 2,078,699
----------- -----------
Total Operating Costs and Expenses 6,262,725 5,348,216
----------- -----------
Operating Loss (3,687,032) (1,345,549)
----------- -----------
Other Income (Expense):
Interest income 20,720 117,775
Interest expense (199,757) (172,574)
Other 41,862 12,242
----------- -----------
Total Other Income (Expense) (137,175) (42,557)
----------- -----------
Loss Before Income Taxes and
Extraordinary Item (3,824,207) (1,388,106)
Benefit From Income Taxes (9,198) (168,512)
----------- -----------
Loss Before Extraordinary Item (3,815,009) (1,219,594)
Extraordinary Loss on Extinguishment
of Debt - (35,000)
----------- -----------
Net Loss (3,815,009) (1,254,594)
Other Comprehensive Income:
Unrealized gain (loss) on securities 29,281 (21,440)
Reclassification adjustment (7,841) -
----------- -----------
Other Comprehensive Income (Loss) 21,440 (21,440)
----------- -----------
Comprehensive Loss $(3,793,569) $(1,276,034)
=========== ===========
</TABLE>
--------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements. 3
<PAGE>
RENAISSANCE SOFTWARE, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
--------------------------------------------------------------------------------
Years Ended December 31, 1999 and 1998
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COMMON STOCK
------------------------ ADDITIONAL
NUMBER PAID-IN DEFERRED
OF SHARES AMOUNT CAPITAL COMPENSATION
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Balance - January 1, 1998 1,000,000 $ 10,000 $ 796,972 $ --
Comprehensive income:
Net loss -- -- -- --
Other comprehensive income - unrealized loss
on marketable securities -- -- -- --
Issuance costs of redeemable convertible
preferred stock (Series A) -- -- (92,521) --
Accretion of redeemable convertible preferred stock -- -- (491,345) --
Deferred compensation -- -- 388,500 (388,500)
Amortization of deferred compensation -- -- -- 160,054
Issuance of common stock options for services -- -- 6,050 --
Exercise of stock options 46,497 465 6,843 --
----------- ----------- ----------- -----------
Balance - December 31, 1998 1,046,497 10,465 614,499 (228,446)
Comprehensive income:
Net loss -- -- -- --
Other comprehensive income - unrealized
gain on marketable securities -- -- -- --
Reclassification adjustment -- -- -- --
Issuance costs of redeemable convertible
preferred stock (Series B) -- -- (5,256) --
Accretion of redeemable convertible preferred stock -- -- (659,647) --
Deferred compensation -- -- (4,801) 4,801
Amortization of deferred compensation -- -- -- 73,966
Issuance of warrants -- -- 49,450 --
Exercise of stock options 23,197 232 5,755 --
----------- ----------- ----------- -----------
Balance - December 31, 1999 1,069,694 $ 10,697 $ -- $ (149,679)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
<CAPTION>
ACCUMULATED
OTHER
COMPREHENSIVE
ACCRETION OF INCOME -
REDEEMABLE UNREALIZED
PREFERRED ACCUMULATED LOSS ON
STOCK DEFICIT SECURITIES TOTAL
------------ ------------- ------------- --------------
Balance - January 1, 1998 $ -- $ (426,936) $ -- $ 380,036
Comprehensive income:
Net loss -- (1,254,594) -- (1,254,594)
Other comprehensive income - unrealized loss
on marketable securities -- -- (21,440) (21,440)
Issuance costs of redeemable convertible
preferred stock (Series A) -- -- -- (92,521)
Accretion of redeemable convertible preferred stock -- -- -- (491,345)
Deferred compensation -- -- -- --
Amortization of deferred compensation -- -- -- 160,054
Issuance of common stock options for services -- -- -- 6,050
Exercise of stock options -- -- -- 7,308
----------- ----------- ----------- -----------
Balance - December 31, 1998 -- (1,681,530) (21,440) (1,306,452)
Comprehensive income:
Net loss -- (3,815,009) -- (3,815,009)
Other comprehensive income - unrealized
gain on marketable securities -- -- 29,281 29,281
Reclassification adjustment -- -- (7,841) (7,841)
Issuance costs of redeemable convertible
preferred stock (Series B) -- -- -- (5,256)
Accretion of redeemable convertible preferred stock (111,421) -- -- (771,068)
Deferred compensation -- -- -- --
Amortization of deferred compensation -- -- -- 73,966
Issuance of warrants -- -- -- 49,450
Exercise of stock options -- -- -- 5,987
----------- ----------- ----------- -----------
Balance - December 31, 1999 $ (111,421) $(5,496,539) $ -- $(5,746,942)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
--------------------------------------------------------------------------------
The accompanying notes are an intergral part of these statements. 4
<PAGE>
RENAISSANCE SOFTWARE, INC.
STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------
Years Ended December 31, 1999 1998
----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> C>
Net loss $(3,815,009) $(1,254,594)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 437,482 386,562
Compensation for employee stock options and warrants 73,966 160,054
Amortization of original issue discount 68,017 58,141
Deferred rent 8,933 116,823
Gain on sale of marketable securities (7,841) -
Loss on extinguishment of debt - 35,000
Deferred income taxes - (235,000)
Issuance of common stock options/warrants for services 9,739 6,050
Changes in operating assets and liabilities:
Increase in accounts receivable (354,833) (659,187)
Decrease (increase) in other current assets 66,582 (61,275)
Decrease (increase) in security deposits 2,799 (10,377)
Increase in accounts payable and accrued expenses 848,419 89,867
(Decrease) increase in deferred revenue (577,279) 593,496
(Decrease) increase in income taxes payable (57,916) 59,000
----------- -----------
Net Cash Used in Operating Activities (3,296,941) (715,440)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (63,254) (159,446)
Purchase of marketable securities (927) (539,198)
Proceeds from sale of marketable securities 547,966 -
Loans and advances to employees, net (6,953) 2,129
Due from officers 30,693 14,327
----------- -----------
Net Cash Provided by (Used in) Investing Activities 507,525 (682,188)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from private placement (exclusive of
$1,500,000 held in escrow at December 31, 1997) - 1,500,000
Proceeds from notes payable to officer/stockholder 200,000 -
Proceeds from issuance of preferred stock (Series B) 994,744 -
Proceeds from notes payable to bank 450,000 25,000
Principal payments on notes payable to bank (3,852) (200,000)
Principal payments on license agreement - (420,000)
Deferred financing costs - (12,078)
Distributions (accrued in prior year) - (72,295)
Proceeds from exercise of stock options 5,987 7,308
----------- -----------
Net Cash Provided by Financing Activities 1,646,879 827,935
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS $(1,142,537) $ (569,693)
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 1,393,060 1,962,753
----------- -----------
CASH AND CASH EQUIVALENTS - END OF YEAR $ 250,523 $ 1,393,060
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 127,572 $ 86,072
Cash paid for income taxes 56,945 6,475
</TABLE>
--------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements. 5
<PAGE>
RENAISSANCE SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
1. ORGANIZATION AND ORGANIZATION AND BUSINESS - Renaissance Software,
SUMMARY OF Inc. (the "Company") develops, markets, and
SIGNIFICANT supports supply chain and warehouse management
ACCOUNTING POLICIES systems designed to promote the efficient flow of
inventory through the supply chain, manage and
optimize the operational flow of product, and
address the increasingly complex business
requirements of manufacturers, distributors and
retailers through timely availability of data.
The Company was initially organized as a New Jersey
limited liability company ("LLC") on December 23,
1994. LLC commenced operations in 1995 after
entering into agreements with an entity (the
"Licensor") that provided for the acquisition of a
software license, an assignment of various
contracts and agreements in progress, and the
rental and leasing of office space and equipment
(see Note 5). Certain of the owners, management and
other personnel of the Company were employed by the
Licensor prior to December 1994.
On November 1, 1997, LLC assigned its assets
subject to its liabilities to Renaissance Software,
Inc., a C-Corporation, in exchange for 1,000,000
shares of common stock, with a par value of $.01
per share. The common shares were issued to the
former members of LLC.
USE OF ESTIMATES - The presentation of financial
statements in conformity with generally accepted
accounting principles requires management to make
estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of
the financial statements and the reported amounts
of revenue and expenses during the reporting
period. Actual results could differ from those
estimates.
REVENUE RECOGNITION - The Company's revenue
consists of revenue from the licensing of packaged
software; fees from consulting, implementation,
training, and maintenance services; and revenue
from the sale of related radio frequency and
computer equipment. Effective January 1, 1998, the
Company adopted Statement of Position No. 97-2,
"Software Revenue Recognition" ("SOP 97-2"), which
superseded Statement of Position No. 91-1.
Consulting services are generally billed on an
hourly basis and revenue is recognized as the work
is performed. Revenue related to sales of hardware
is recognized when the products are shipped.
Revenue related to software license sales is
recorded at the time of shipment provided that (a)
no significant vendor obligations remain
outstanding at the time of the sale; (b) the
collection of the related receivable is deemed
probable by management; and (c) effective with the
adoption of SOP 97-2, that vendor specific
objective evidence (V.S.O.E.) of fair value exists
for all significant elements, including
post-contract customer support (PCS) in multiple
element arrangements. The company accounts for
revenue related to post-contract customer support
(maintenance) ratably over the period the
maintenance is to be furnished, which is generally
for a one year period, billed in advance.
--------------------------------------------------------------------------------
6
<PAGE>
RENAISSANCE SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Where the professional services relate to
arrangements requiring significant production,
modification or customization of software, and the
service element does not meet the criteria for
separate accounting, the entire arrangement,
including the software element, is accounted for in
conformity with the percentage-of-completion
contract accounting method.
Percentage-of-completion is generally measured
using input measures, primarily labor costs, where
such costs indicate progress to completion. The
adoption of SOP 97-2 did not have a significant
impact on the Company's financial statements for
the year ended December 31, 1998.
Deferred revenue represents the unearned portion of
revenue related to PCS arrangements not yet
completed and revenue related to multiple element
arrangements accounted for in conformity with the
percentage of completion contract accounting
method.
CASH EQUIVALENTS - The Company classifies as cash
equivalents all highly liquid investments with a
maturity of three months or less at time of
purchase. Cash equivalents consist of money market
funds totaling approximately $191,000 and $594,000
at December 31, 1999 and 1998, respectively.
MARKETABLE SECURITIES - Marketable securities are
accounted for in accordance with Statement of
Financial Accounting Standards No. 115, "Accounting
for Certain Investments in Debt and Equity
Securities." Marketable securities have been
categorized as available for sale and as a result
are stated at fair value. Marketable securities are
available for current operations and are classified
in the balance sheet as current assets. Unrealized
holding gains and losses are included in the
statement of operations and comprehensive income as
other comprehensive income and as a separate
component of stockholders' equity until realized.
PROPERTY AND EQUIPMENT - Property and equipment,
including leasehold improvements, are stated at
cost and are depreciated or amortized on a
straight-line basis over their estimated useful
lives, as follows: computer and office equipment -
3 to 5 years; furniture - 7 years; and leasehold
improvements, over the life of the related lease.
The cost and related accumulated depreciation of
assets sold or otherwise disposed of are removed
from the accounts, and the resulting gain or loss
is included in other income and expenses.
RESEARCH AND DEVELOPMENT - Costs associated with
research and development are generally charged to
operations as incurred. Statement of Financial
Accounting Standards No. 86, "Accounting for the
Costs of Computer Software to be Sold, Leased or
Otherwise Marketed," requires that certain software
development costs subsequent to the establishment
of technological feasibility be capitalized. Based
on the
--------------------------------------------------------------------------------
7
<PAGE>
RENAISSANCE SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Company's product development process,
technological feasibility is established upon
completion of a working model. Development costs
incurred by the Company between completion of the
working model and the point at which the product is
ready for general release have been immaterial, and
therefore, all costs of computer software for the
years ended December 31, 1999 and 1998 have been
expensed.
SOFTWARE LICENSE - The software license is recorded
at cost of $1,603,836 and is being amortized over
an estimated useful life of five years. Total
accumulated amortization was $1,603,836 and
$1,283,067 as of December 31, 1999 and 1998,
respectively.
DEFERRED CHARGES - Financing costs are being
amortized over the term of the related debt.
Accumulated amortization of deferred costs was
$37,009 and $18,504 as of December 31, 1999 and
1998, respectively.
STOCK-BASED COMPENSATION - As permitted by
Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation"
("SFAS 123"), the Company has elected to account
for employee stock options and other stock-based
employee awards under Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to
Employees" ("Opinion 25"). Pro-forma information
regarding net income as calculated under the
provision of SFAS 123 is disclosed in Note 9.
ADVERTISING - The Company records advertising as an
expense when incurred. Advertising expense,
including certain marketing costs, was
approximately $468,000 in 1999 and $348,400 in
1998.
INCOME TAXES - The Company follows the provisions
of Statement of Financial Accounting Standards No.
109 "Accounting for Income Taxes" ("SFAS 109").
Under SFAS 109, the Company records a deferred tax
expense or benefit equal to the change in the
deferred tax liability or asset during the period.
Deferred income taxes reflect the net tax effects
of temporary differences between the carrying
amounts of assets and liabilities for financial
reporting purposes and the amounts used for income
tax purposes, and benefits to be realized from
utilization of operating loss carryforwards.
COMPREHENSIVE INCOME - During the year ended
December 31, 1998, the Company adopted Statement of
Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("SFAS 130"), issued in June
1997 by the Financial Accounting Standards Board.
SFAS 130 establishes standards for reporting and
display of comprehensive income and its components
in a full set of general-purpose financial
statements. Comprehensive income includes net
income and other comprehensive income.
Comprehensive income is defined as the change in
net assets of a business enterprise during a period
from
--------------------------------------------------------------------------------
8
<PAGE>
RENAISSANCE SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
transactions and other events and circumstances
from nonowner sources. It includes all changes in
equity during a period except those resulting from
investments by owners and distributions to owners.
2. PROPERTY AND EQUIPMENT Property and equipment consist of the following:
<TABLE>
<CAPTION>
December 31,
----------------------
1999 1998
-------- ----------
<S> <C> <C>
Computer and office equipment $219,360 $176,000
Furniture 64,134 62,204
Trade show equipment 32,205 14,242
Leasehold improvements 20,000 20,000
-------- --------
335,699 272,446
Less accumulated depreciation
and amortization 140,485 55,530
-------- --------
$195,214 $216,916
======== ========
</TABLE>
Depreciation and amortization expense for the
aforementioned items totaled $84,955 and $34,061
for the years ended December 31, 1999 and 1998,
respectively.
3. REVOLVING LINE OF CREDIT The Company maintains a secured, revolving, working
capital line of credit agreement with a bank
expiring August 1, 2000. The agreement provides for
a maximum borrowing equal to the lesser of $500,000
or 75% of eligible accounts receivable and bears
interest at prime plus 2% (10.5% at December 31,
1999). The borrowings under this line are secured
by the assets of the Company and are guaranteed by
two of the stockholders who received warrants in
consideration of the guarantee (see Note 11).
Borrowings of $450,000 were outstanding as of
December 31, 1999. No borrowings were outstanding
at December 31, 1998.
4. NOTES PAYABLE BANK - On December 28, 1998, the Company entered
into a $25,000 fixed asset term loan agreement with
its bank bearing interest at 8% per annum. Monthly
payments of principal and interest of $508 are due
through January 1, 2004 when all unpaid principal
and interest are due in full. The term loan is
secured by the assets of the Company and is
guaranteed by two of the stockholders.
--------------------------------------------------------------------------------
9
<PAGE>
RENAISSANCE SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
The aggregate amounts of maturities on long-term
debt outstanding at December 31, 1999 are as
follows:
<TABLE>
<S> <C>
2000 $ 4,546
2001 4,933
2002 5,349
2003 5,799
2004 521
-------
$21,148
=======
</TABLE>
OFFICER/STOCKHOLDER - At December 31, 1999, the
Company was obligated on a note to an officer in
the amount of $50,000, and on a note to a
stockholder in the amount of $150,000. These notes
had an original maturity date of January 2000 and
are non-interest bearing. The officer and the
stockholder received warrants in consideration of
these notes (see Note 11). The effective rate of
the notes is approximately 29% after giving effect
to the fair value of the warrants. The value of the
warrants is recognized as interest expense over the
term of the borrowing agreement. In June 2000,
these notes were exchanged for Preferred Stock
(Series C) (see Note 15).
5. LICENSE AGREEMENT In December 1994, the Company entered into a ten
year software license agreement with the Licensor,
which granted the Company worldwide rights for
specific warehouse management, logistics, and
related software.
In June 1997 the Company entered into additional
agreements with the Licensor whereby it made a
partial pre-payment of the remaining amount due the
Licensor, obtained ownership to the previously
licensed software, and restructured the remaining
obligation due the Licensor. The Company paid
$420,000 during 1998 in satisfaction of the
obligation resulting in an extraordinary loss on
extinguishment of debt in the amount of $35,000.
6. INCOME TAXES The provision (benefit) for income taxes consists
of the following:
<TABLE>
<CAPTION>
Years Ended
December 31,
----------------------
1999 1998
-------- --------
<S> <C> <C>
Current:
Federal $(10,151) $43,000
State 953 23,488
-------- -------
(9,198) 66,488
-------- -------
</TABLE>
--------------------------------------------------------------------------------
10
<PAGE>
RENAISSANCE SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Deferred:
Federal - (175,000)
State - (60,000)
---------- -----------
- (235,000)
---------- -----------
Benefit for income taxes $ (9,198) $(168,512)
========== ===========
</TABLE>
Components of the Company's deferred tax assets and
liabilities as of December 31, 1999 and 1998 are
shown below. A valuation allowance has been
recognized to offset the net deferred tax asset as
realization of such asset is uncertain.
<TABLE>
<CAPTION>
December 31,
--------------------------
1999 1998
-------------- ---------
<S> <C> <C>
Deferred tax assets:
Research and development costs $ 1,566,000 $ 490,000
Stock compensation costs 177,000 179,000
Net operating loss 356,000 -
Deferred rent 58,000 54,000
Other 118,000 75,000
-------------- ---------
Total gross deferred tax asset 2,275,000 798,000
Less valuation allowance (2,275,000) (652,000)
-------------- ---------
Net deferred tax assets - 146,000
-------------- ---------
Deferred tax liabilities -
License agreement - 146,000
-------------- ---------
Total gross deferred tax liabilities - 146,000
-------------- ---------
Net deferred taxes $ - $ -
============== =========
</TABLE>
The benefit for income taxes for 1999 and 1998
differs from the statutory U.S. Federal income tax
rate primarily due to the valuation adjustment for
deferred taxes. The net change in the total
valuation allowance for the years ended December
31, 1999 and 1998 was an increase of $1,623,000 and
$652,000 respectively.
At December 31, 1999, the Company has a net
operating loss carryforward of approximately
$774,000 for income tax purposes. The utilization
of these losses to reduce future income taxes
depends on the Company generating sufficient
taxable income prior to the expiration of this
carryforward in December 2019.
--------------------------------------------------------------------------------
11
<PAGE>
RENAISSANCE SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
7. CONVERTIBLE PREFERRED Pursuant to a private placement during 1998, in
STOCK consideration of the receipt of $3 million, the
Company issued 1,000,000 shares of $.01 par value
Series A Convertible Preferred Stock (the "Series A
Stock") and 8% Promissory Notes with a face value
of $1.5 million (see Note 8). Based upon an
independent appraisal of both elements of the
offering, the Series A Stock was recorded at its
fair value of $1,907,710. Additionally, during
1999, the Company issued 400,000 shares of $.01 par
value Series B Convertible Preferred Stock (the
"Series B Stock") in consideration of the receipt
of $1 million.
Each series of preferred stock (collectively the
"Preferred Stock") is identical with the other
except that the holders of Series A Stock have the
sole right to nominate 2 of 5 directors, or 3 of 7
directors if the Board is increased. The holders of
Series B Stock are entitled to a $2.50 per share
liquidation preference and non-dilution protection
at $2.50 per share as opposed to the holders of
Series A Stock whose liquidation and non-dilution
preference are $1.50 per share.
Preferred Stock may be converted at any time, at
the investors' option, into shares of Common Stock
on a share for share basis. The Company has the
right to require the holders of the Preferred Stock
to convert all such shares into Common Stock upon a
public offering of the Company's stock at certain
minimum levels. The holders of the Preferred Stock
and Common Stock vote together as a single class
with each share of Preferred Stock being entitled
to a number of votes equal to the number of shares
of Common Stock into which it is then convertible.
The holders of the Preferred Stock, voting as a
single class, may at any time after January 6,
2003, or upon the occurrence of certain events of
default, require the Company to redeem all of the
Preferred Stock at a price equal to the greater of
$6.00 per share or the fair market value of such
Preferred Stock as determined by an independent
third party appraiser.
The Series A Stock's initial assigned carrying
value of $1,907,910 and the Series B Stock's
initial value of $1,000,000 are periodically
adjusted to increase the carrying values to the
minimum redemption values of $6,000,000 and
$2,400,000, respectively, by means of a charge to
additional paid-in capital to the extent that it is
available, and to the extent that it has been
depleted, by means of a charge to an account within
the stockholders' equity section titled "Accretion
of Redeemable Preferred Stock." For the years ended
December 31, 1999 and 1998, accretion of Preferred
Stock totaled $771,068 and $491,345, respectively.
--------------------------------------------------------------------------------
12
<PAGE>
RENAISSANCE SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
8. PROMISSORY NOTES As indicated in Note 7, during 1998 the Company
issued $1.5 million of Promissory Notes in
connection with the issuance of Preferred Stock.
These notes bear interest at 8% per annum, payable
quarterly, and mature at the earliest of (i)
January 6, 2003, (ii) a private sale of
substantially all of the Company's assets or
capital stock, or (iii) a public offering of the
Company's stock. Based upon an independent
appraisal (see Note 7), original issue discount
("OID") was recorded in the amount of $407,710,
representing the difference between the $1,500,000
face amount of the Promissory Notes and their fair
value at issuance of $1,092,290. The OID is being
amortized on the interest method over the term of
the Promissory Notes as additional interest
expense. The effective rate of the Promissory Notes
is 16% after giving effect to the amortization of
the OID.
9. EMPLOYEE STOCK OPTION Effective March 16, 1998, the Company adopted the
PLAN Renaissance Software, Inc. Stock Option Plan (the
"Stock Option Plan"), which is available to certain
employees and others and administered by a
Committee of the Board of Directors. The number of
shares, which may be issued under this plan, cannot
exceed 350,000. Unexercised options expire
automatically upon termination of the employee's
employment. One third of the options granted under
the Stock Option Plan vest at the time of grant,
one third one year after the date of grant, and the
remaining one third two years after the date of
grant. An option granted to a person who is not an
employee of the Company is immediately exercisable,
and generally expires ten years after the date of
grant.
As of December 31, 1999 and 1998 options for
186,635 and 115,335 shares were exercisable,
respectively. The weighted average fair value per
share of options granted during the years ended
December 31, 1999 and 1998 was $.31 and $.61,
respectively. As of December 31, 1999, the
weighted-average remaining life of the options was
8.54 years. At December 31, 1999, 10,169 options
were available for grant under the Stock Option
Plan.
The following table summarizes information with
respect to the Company's 1998 Stock Option Plan:
<TABLE>
<CAPTION>
Stock Weighted
Options Exercise Average
Outstanding Price Range Exercise Price
----------- ----------- --------------
<S> <C> <C> <C>
Granted 283,000 $0.15 - $1.00 $0.27
Exercised 46,497 $0.15 - $0.40 $0.16
Cancelled 1,500 $0.15 $0.15
--------
</TABLE>
--------------------------------------------------------------------------------
13
<PAGE>
RENAISSANCE SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
Balance at
December 31, 1998 235,003 $0.15 - $1.00 $0.29
----------
Granted 67,000 $1.50 $1.50
Exercised 23,197 $0.15 - $1.00 $0.26
Cancelled 8,669 $0.15 - $0.40 $0.25
----------
Balance at
December 31, 1999 270,137 $0.15 - $1.50 $0.59
===========
</TABLE>
Furthermore, effective January 1, 1998, the Company
has granted warrants to purchase 365,000 shares of
common stock with an exercise price of $.15 per
share to two employee/stockholders. The warrants
are exercisable by the warrant holders based on the
earlier date of December 31, 2002, or on the
Company achieving annual and cumulative financial
results, as defined, for the years 1997 through
2000. The warrants also contain annual and
"specific event" vesting rights. As of December 31,
1999 and 1998 10% of the warrants have become
exercisable. The weighted average fair value of
warrants granted during 1998 was $.72 with a
weighted average remaining life of eight years (at
December 31, 1999).
The fair value of each grant is estimated on the
date of grant using the Black-Scholes
option-pricing model with the weighted-average
risk-free interest rate assumptions of 5.54% and
5.77% for the years ended December 31, 1999 and
1998, respectively. The weighted average expected
life for options is 3 years and for warrants is 10
years.
Under Opinion 25, when the exercise price of
employee stock options and warrants is not less
than the fair value of the underlying stock on the
date of grant, no compensation expense is
recognized. However, when the exercise price is
less than the fair value of the underlying stock,
deferred stock compensation is recognized and
amortized to expense over the vesting period of the
option or warrant. During the year ended December
31, 1998, the Company recorded deferred
compensation in the amount of $388,500, of which
$160,054 was recognized as an expense. During the
year ended December 31, 1999, deferred compensation
was adjusted by $4,801 for options cancelled and
$73,966 was recognized as expense.
--------------------------------------------------------------------------------
14
<PAGE>
RENAISSANCE SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
If the Company had recorded compensation cost based
upon the fair value at the grant date for awards
under these plans consistent with SFAS 123, the
Company's net loss for the years ended December 31,
1999 and 1998 would have been increased to the pro
forma amounts indicated below:
<TABLE>
<CAPTION>
Years Ended
December 31,
-----------------------------
1999 1998
--------------- ---------
<S> <C> <C>
Net loss as reported $(3,815,009) $(1,254,594)
Pro forma net loss (3,838,456) (1,266,371)
</TABLE>
10. RETIREMENT PLAN The Company has a qualified profit sharing plan
under the provisions of Section 401(k) of the
Internal Revenue Code that covers substantially all
employees who have met the age and service
requirements. Under the plan, participating
employees may defer up to 12% of their pretax
salary, but not more than statutory limits. The
Company has not elected to contribute any amounts
to the plan.
11. WARRANTS In February 1999, the Company issued 25,000
warrants to purchase common stock, exercisable at
$1.00 per share, to two of its stockholders in
consideration of a guarantee of the line of credit
issued by the Company's bank (see Note 3). The
Company recorded expense of $6,250 as the fair
value of the warrants issued.
In December 1999, the Company issued 60,000
warrants to purchase shares of common stock,
exercisable at $1.50 per share, to three of its
stockholders in consideration for loans aggregating
$300,000, of which $100,000 was received in January
2000 (see Note 4).
12. COMMITMENTS AND LEASES - The Company leases office space and
CONTINGENCIES computer and office equipment under various
noncancellable operating lease arrangements, which
expire through December 2007. Some of the Company's
leases have renewal options at agreed upon or fair
market value rentals. In addition to monthly
minimum rentals, some leases require additional
rentals for the payment of real estate tax
escalations, and certain expense escalations and
utility costs.
The operating lease for the Company's headquarters
is secured by an $87,000 standby letter of credit
from a bank. The Company has the option of
terminating this rental commitment at various times
during the lease upon payment of certain costs, as
defined, to the landlord. In addition, this lease
includes a free rent period and scheduled base rent
increases over the term of the lease. The total
base rent payable is being charged to expense on
the straight-line method over the term of
--------------------------------------------------------------------------------
15
<PAGE>
RENAISSANCE SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
the lease. The Company has recorded a deferred rent
liability to reflect the excess of rent expense
over cash payments since inception of the lease.
Future minimum rental payments under these
noncancellable leases at December 31, 1999 are as
follows:
<TABLE>
<CAPTION>
Years ending December 31,
<S> <C> <C>
2000 $ 400,600
2001 345,700
2002 257,800
2003 234,500
2004 228,500
Thereafter 731,000
----------
$2,198,100
==========
</TABLE>
Rent expense was $483,805 and $361,704, including
contingent rents of approximately $28,000 and
$48,000 for the years ended December 31, 1999 and
1998, respectively.
LITIGATION - On April 17, 2000, a customer of the
Company (the Plaintiff) brought an action against
the Company requesting partial recission of
contract. The Company has denied the Plaintiff's
claim and intends to vigorously defend against this
action and will seek monetary damages on its
counterclaim. Management believes that any
settlement will not have a material effect on its
financial position or results of operations.
EMPLOYMENT AGREEMENTS - In January 1998, the
Company entered into employment agreements with two
of its officers pursuant to which the individuals
will receive aggregate base compensation of
$458,000 per annum through 2000; thereafter the
agreements renew on an annual basis. The agreements
provide for the grant to the officers of a total of
365,000 warrants and 50,000 options to purchase
common stock (see Note 9). One of the officers is
also entitled to receive a bonus of $270,000 to be
paid upon the earliest of (i) five years, (ii) the
consummation of a public offering of the Company's
stock, or (iii) a change in control, as defined.
13. BUSINESS AND CREDIT During the years ended December 31, 1999 and 1998,
CONCENTRATION 39% and 30% of revenue was from two customers,
respectively. No other single customer accounted
for more than 10% of revenue.
At December 31, 1999 and 1998, 47% and 51% of
accounts receivable, including unbilled
receivables, were from three and four customers,
respectively. No other single customer accounted
for more than 10% of accounts receivable.
--------------------------------------------------------------------------------
16
<PAGE>
RENAISSANCE SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
The Company maintains cash at two banks. Accounts
at each institution are insured by the Federal
Deposit Insurance Corporation up to $100,000. At
December 31, 1999 and 1998, the Company had cash
balances exceeding the $100,000 limit (based upon
bank balances) by approximately $67,000 and
$947,000, respectively.
14. RELATED PARTY In January 1998, the Company acquired intangible
TRANSACTIONS assets, including customer lists and software
applications, from an entity in which a stockholder
of the Company had an ownership interest. No
consideration was paid for the intangibles
acquired.
15. SUBSEQUENT EVENTS During June 2000, the Company issued 1,558,917
shares $.01 par value Redeemable Convertible
Preferred Stock (Series C) in consideration of
$4,287,022 including the cancellation of notes
payable to stockholders in the amount of $245,000.
In September 2000, Vertex Interactive, Inc.
acquired all of the outstanding shares of
Renaissance Software, Inc.
--------------------------------------------------------------------------------
17
