<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-KSB/A
(AMENDMENT NO. 1)
<TABLE>
<C> <S>
/X/ ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED] FOR THE FISCAL YEAR
ENDED: DECEMBER 31, 1999
/ / TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] FOR THE
TRANSITION PERIOD FROM TO
</TABLE>
COMMISSION FILE NUMBER: 33-37751-D
------------------------
SOFTLOCK.COM, INC.
(Name of small business issuer in its charter)
<TABLE>
<S> <C>
DELAWARE 84-1130229
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
FIVE CLOCK TOWER PLACE, SUITE 440
MAYNARD, MASSACHUSETTS 01754
(Address of principal executive offices)
(Zip Code)
</TABLE>
Issuer's telephone number: (978) 461-5940
Securities to be registered under Section 12(b) of the Act: NONE
Securities registered under Section 12(g) of the Act: Common Stock, $.01 per
share
------------------------
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past
12 months (or for such shorter period that the Registrant was required to file
such reports), and (2) has been subject to such filing requirements for at least
the past 90 days. Yes /X/ No / /
Check if there is no disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B contained herein, and will not be contained, to the best of
Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. /X/
Issuer's revenues for its most recent fiscal year: $83,790
Aggregate market value of voting stock held by non-affiliates as of
March 14, 2000 was approximately: $216,000,000
Shares of Common Stock, $0.01 par value, outstanding as of March 14, 2000:
12,862,841
This Report on Form 10-KSB/A (Amendment No. 1) is being filed solely for the
purpose of including the conformed signature of Deloitte & Touche LLP on the
Independent Auditors Report incorporated by reference into Part II,
Item 7--FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA, of the Annual Report on
Form 10-KSB, filed by the small business issuer on March 30, 2000.
This amendment to the Annual Report of Form 10-KSB, which sets forth the
conformed signature of Deloitte & Touche LLP on the Independent Auditors Report,
does not otherwise attempt to update or modify the information included in
Item 7 or in the Annual Report, beyond the original filing date of the report.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
<TABLE>
<S> <C>
Date: April 14, 2000 SOFTLOCK.COM, INC.
By:/s/ DOUGLAS R. JOHNSON
--------------------------------------------
Douglas R. Johnson,
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<S> <C> <C>
/s/ KEITH LORIS Chief Executive Officer, April 14, 2000
- ------------------------------------------- President and Director
Keith Loris
/s/ DOUGLAS R. JOHNSON Executive Vice President and April 14, 2000
- ------------------------------------------- Chief Financial Officer
Douglas R. Johnson (Principal Financial and
Accounting Officer)
/s/ JONATHAN SCHULL Chief Technology Officer and April 14, 2000
- ------------------------------------------- Director
Jonathan Schull
/s/ FRANCIS J. KNOTT Chairman of the Board and April 14, 2000
- ------------------------------------------- Director
Francis J. Knott
/s/ SCOTT GRIFFITH Director April 14, 2000
- -------------------------------------------
Scott Griffith
/s/ RICHARD N. GOLD Director April 14, 2000
- -------------------------------------------
Richard N. Gold
/s/ ADAM RIN Director April 14, 2000
- -------------------------------------------
Adam Rin
/s/ GEOFFREY DE LESSEPS Director April 14, 2000
- -------------------------------------------
Geoffrey De Lesseps
/s/ LEIGH MICHL Director April 14, 2000
- -------------------------------------------
Leigh Michl
</TABLE>
30
<PAGE>
FINANCIAL STATEMENTS
As required under Item 7. Financial Statements, the consolidated
financial statements of the Company are provided in this separate section.
The consolidated financial statements included in this section are as follows:
Contents
<TABLE>
<CAPTION>
<S> <C>
Independent Auditors' Report............................................... F-1
Consolidated Balance Sheets................................................ F-2
Consolidated Statements of Operations...................................... F-3
Consolidated Statements of Changes in Stockholders' Equity (Deficit)....... F-4
Consolidated Statements of Cash Flows...................................... F-5
Notes to Consolidated Financial Statements......................... F-6 to F-19
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
To Management and the Board of Directors
SoftLock.com, Inc.
Maynard, Massachusetts
We have audited the accompanying consolidated balance sheets of SoftLock.com,
Inc. and subsidiary (the "Company") as of December 31, 1999 and 1998, and the
related consolidated statements of operations, changes in stockholders'
equity (deficit), and cash flows for each of the three years in the period
ended December 31, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company at December 31, 1999
and 1998, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 1999, in conformity with accounting
principles generally accepted in the United States of America.
As discussed in Note 9, the accompanying 1998 financial statements have been
restated.
/s/ Deloitte & Touche LLP
Boston, Massachusetts
March 13, 2000
F-1
<PAGE>
<TABLE>
<CAPTION>
SOFTLOCK.COM, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
- -------------------------------------------------------------------------------------------------------------
1999 1998
ASSETS (AS RESTATED,
SEE NOTE 9)
<S> <C> <C>
CURRENT ASSETS:
Cash $3,695,409 $160,841
Accounts receivable 5,979 4,619
Prepaid expenses and other current assets 274,831 --
---------- --------
Total current assets 3,976,219 165,460
PROPERTY AND EQUIPMENT - Net 620,769 16,324
WEBSITE AND PRODUCT DEVELOPMENT COSTS 1,444,360 --
SECURITY DEPOSITS 31,888 1,058
PREPAID ROYALTIES 65,579 --
---------- --------
TOTAL ASSETS $6,138,815 $182,842
========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable - website and product development $291,131 --
Other accounts payable 311,922 106,114
Accrued expenses - website and product development 489,065 --
Other accrued expenses 91,058 781
Accrued compensation and benefits 383,621 77,694
Current portion of obligations under capital leases 112,990 3,018
---------- --------
Total current liabilities 1,679,787 187,607
---------- --------
OBLIGATIONS UNDER CAPITAL LEASES, Less current portion 227,981 1,906
---------- --------
OTHER LONG-TERM LIABILITIES 56,294 --
---------- --------
COMMITMENTS AND CONTINGENCIES (Note 7)
REDEEMABLE CONVERTIBLE SERIES A PREFERRED STOCK
(Aggregate liquidation preference of $3,250,000 in 1999, Note 4) 3,210,604 --
---------- --------
STOCKHOLDERS' EQUITY (DEFICIENCY):
Common stock, $0.01 par value; 50,000,000 shares authorized; 12,819,582 and
7,955,580 shares issued and outstanding at
December 31, 1999 and 1998, respectively 128,195 79,556
Deferred compensation (2,834,952) (475,711)
Deferred royalties (639,866) --
Additional paid-in capital 13,301,296 2,781,053
Accumulated deficit (8,721,644) (2,122,689)
Notes receivable from officer and directors (268,880) (268,880)
---------- ----------
Total stockholders' equity (deficiency) 964,149 (6,671)
---------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $6,138,815 $182,842
========== ========
</TABLE>
See notes to consolidated financial statements.
F-2
<PAGE>
<TABLE>
<CAPTION>
SOFTLOCK.COM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
- --------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
(AS RESTATED)
<S> <C> <C> <C>
NET REVENUES $83,790 $109,402 $110,774
COST OF REVENUES 21,902 23,166 20,346
------ ------ ------
GROSS PROFIT 61,888 86,236 90,428
------ ------ ------
OPERATING EXPENSES:
Research and development (including noncash compensation
and consulting expenses of $550,107, $9,861 and $468, respectively) 1,823,141 117,899 130,373
Selling and marketing (including noncash compensation
and consulting expenses of $278,582, $12,812 and $1,000, respectively) 1,181,155 168,788 162,588
General and administrative (including noncash compensation and
consulting expenses of $1,941,466, $198,920 and $244,073, respectively) 3,700,796 554,064 631,862
--------- ------- -------
Total operating expenses 6,705,092 840,751 924,823
--------- ------- -------
OPERATING LOSS (6,643,204) (754,515) (834,395)
----------- --------- ---------
OTHER INCOME (EXPENSE):
Interest expense (23,472) (9,733) (833)
Interest income 68,283 24,083 19,859
Other income (expense) (562) 93 91
------ ------ ------
Total other income 44,249 14,443 19,117
------ ------ ------
LOSS BEFORE INCOME TAX EXPENSE (BENEFIT) (6,598,955) (740,072) (815,278)
INCOME TAX EXPENSE (BENEFIT) -- -- --
------ ------ ------
NET LOSS (6,598,955) (740,072) (815,278)
----------- --------- ----------
BENEFICIAL CONVERSION FEATURE ON
CONVERTIBLE PREFERRED STOCK (3,210,604) -- --
----------- --------- ----------
NET LOSS ATTRIBUTABLE TO COMMON
STOCKHOLDERS $(9,809,559) $(740,072) $(815,278)
=========== ========= =========
BASIC AND DILUTED NET LOSS PER COMMON
SHARE $(0.94) $(0.10) $(0.14)
====== ====== ======
BASIC AND DILUTED WEIGHTED-AVERAGE SHARES
OUTSTANDING 10,400,995 7,594,513 5,853,337
========== ========= =========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
SOFTLOCK.COM, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
- -----------------------------------------------------------------------------------------------------------------------------------
Deferred
Additional Compensation
Common Stock Paid-in and
Shares Amount Capital Expense
<S> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1997 5,661,342 $ 56,614 $ 954,541 $ --
Issuance of common stock for cash, net of
issuance costs 748,269 7,482 451,217 --
Issuance of common stock in exchange for
notes payable 5,952 60 20,774 --
Issuance of common stock in exchange for services 39,605 396 44,858 --
Grant of options for services -- -- 162,384 --
Net loss -- -- -- --
---------- -------- --------- ---------
BALANCE, DECEMBER 31, 1997 6,455,168 64,552 1,633,774 --
Issuance of common stock for cash, net of
issuance costs 702,099 7,021 551,741 --
Issuance of common stock in reverse acquisition 788,580 7,886 (18,216) --
Debt converted to common stock 9,733 97 16,936 --
Deferred compensation and expense - option
grants (as restated) -- -- 596,818 (596,818)
Amortization of deferred compensation (as restated) -- -- -- 121,107
Net loss (as restated) -- -- -- --
---------- -------- --------- ---------
BALANCE, DECEMBER 31, 1998 (As restated, see Note ) 7,955,580 79,556 2,781,053 (475,711)
Issuance of common stock for cash, net of issuance costs 3,375,000 33,750 4,992,153 --
Issuance of common stock for cashless exercise of 919,333 9,193 (9,193) --
Issuance of common stock for exercise of options 211,882 2,118 34,811 --
Issuance of common stock in exchange for services 133,273 1,333 878,113 --
Deferred compensation and consulting expenses - option
grants -- -- 3,821,159 (3,821,159)
Amortization of deferred compensation and expenses -- -- -- 1,461,918
Beneficial conversion feature related to redeemable
convertible preferred stock -- -- (3,210,604) --
Accretion of Series A preferred beneficial conversion feAture -- -- 3,210,604 --
Stock issued for prepaid royalties (Note 6) 224,514 2,245 825,650 --
Change in fair value of prepaid royalties (Note 6) -- -- (22,450) --
Net loss -- -- -- --
---------- -------- --------- ---------
BALANCE, DECEMBER 31, 1999 12,819,582 $128,195 $13,301,296 $(2,834,952)
========== ======== =========== ===========
</TABLE>
See notes to consolidated financial statements.
<TABLE>
<CAPTION>
Notes
Receivable
From
Officer
Deferred Accumulated and
Royalty Deficit Directors Total
<S> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1997 $-- $(567,339) $(268,880) $ 174,936
Issuance of common stock for cash, net of
issuance costs -- -- -- 458,699
Issuance of common stock in exchange for
notes payable -- -- -- 20,834
Issuance of common stock in exchange for services -- -- -- 45,254
Grant of options for services -- -- -- 162,384
Net loss -- (815,278) -- (815,278)
---------- ------------ ---------- -----------
BALANCE, DECEMBER 31, 1997 -- (1,382,617) (268,880) 46,829
Issuance of common stock for cash, net of
issuance costs -- -- -- 558,762
Issuance of common stock in reverse acquisition -- -- -- (10,330)
Debt converted to common stock -- -- -- 17,033
Deferred compensation and expense - option
grants (as restated) -- -- -- --
Amortization of deferred compensation (as restated) -- -- -- 121,107
Net loss (as restated) -- (740,072) -- (740,072)
---------- ------------ ---------- -----------
BALANCE, DECEMBER 31, 1998 (As restated, see Note ) -- (2,122,689) (268,880) (6,671)
Issuance of common stock for cash, net of issuance costs -- -- -- 5,025,903
Issuance of common stock for cashless exercise of -- -- -- --
Issuance of common stock for exercise of options -- -- -- 36,929
Issuance of common stock in exchange for services -- -- -- 879,446
Deferred compensation and consulting expenses - option
grants -- -- -- --
Amortization of deferred compensation and expenses -- -- -- 1,461,918
Beneficial conversion feature related to redeemable
convertible preferred stock -- -- -- (3,210,604)
Accretion of Series A preferred beneficial conversion feAture -- -- -- 3,210,604
Stock issued for prepaid royalties (Note 6) (662,316) -- -- 165,579
Change in fair value of prepaid royalties (Note 6) 22,450 -- -- --
Net loss -- (6,598,955) -- (6,598,955)
---------- ------------ ---------- -----------
BALANCE, DECEMBER 31, 1999 $(639,866) $(8,721,644) $(268,880) $964,149
========== ============ ========== ===========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
SOFTLOCK.COM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
- -------------------------------------------------------------------------------------------------------------
1999 1998 1997
(AS RESTATED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(6,598,955) $(740,072) $(815,278)
Adjustments to reconcile net loss to net cash used for
operating activities:
Depreciation 61,202 8,281 12,880
Noncash compensation and consulting expense 2,187,610 121,107 228,472
Noncash interest charges relating to equity issuances -- 9,733 --
Loss on sale of property and equipment 533 -- --
Deferred rent expense 56,294 -- --
Increase (decrease) in cash from:
Accounts receivable (1,359) -- --
Prepaid expenses and other current assets (174,831) 205 414
Accounts payable 205,808 39,925 12,471
Accrued compensation and benefits 305,927 49,193 14,526
Other accrued expenses 90,277 781 --
----------- --------- ---------
Net cash used for operating activities (3,867,494) (510,847) (546,515)
----------- ---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payment of security deposits (30,830) -- --
Website development costs (510,411) -- --
Purchases of property and equipment (304,272) (3,607) (8,570)
Proceeds from sale of property and equipment 1,511 -- --
----------- ---------- ---------
Net cash used for investing activities (844,002) (3,607) (8,570)
----------- ---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt (27,372) -- --
Proceeds from issuance of note payable 500,000 -- --
Payments on note payable (500,000) -- --
Net Proceeds from issuance of Series A preferred, net of
issuance costs 3,210,604 -- --
Proceeds from issuance of common stock, net of issuance costs 5,025,903 558,762 458,699
Proceeds from exercise of stock options 36,929 -- --
Deficit assumed in reverse acquisition -- (3,030) --
----------- ---------- ---------
Net cash provided by financing activities 8,246,064 555,732 458,699
----------- ---------- ---------
NET INCREASE (DECREASE) IN CASH 3,534,568 41,278 (96,386)
CASH, BEGINNING OF YEAR 160,841 119,563 215,949
----------- ---------- ---------
CASH, END OF YEAR $3,695,409 $160,841 $119,563
========== ======== ========
(Continued)
</TABLE>
F-5
<PAGE>
<TABLE>
<CAPTION>
SOFTLOCK.COM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
- ----------------------------------------------------------------------------------------
1999 1998 1997
(AS RESTATED)
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the year for interest $ 10,990 $440 $833
======== ==== ====
Cash paid during the year for taxes $ 2,196 $513 $794
======== ==== ====
SUMMARY OF NONCASH FINANCING AND
INVESTING ACTIVITIES:
Payable and accrued website development costs $780,196 $ -- $ --
======== ==== ====
Issuance of common stock for web development costs $153,753 $ -- $ --
======== ======== ========
Issuance of common stock for prepaid royalties $805,450 $ -- $ --
======== ======== ========
Capital lease obligation - property and equipment $363,419 $4,924 $ --
======== ======== ========
Issuance of common stock for services and notes $725,693 $14,058 $66,088
======== ======== ========
Issuance of common stock options in exchange for
services $ -- $ -- $162,384
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
(Concluded)
F-6
<PAGE>
SOFTLOCK.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
- -------------------------------------------------------------------------------
1. DESCRIPTION OF THE BUSINESS, BASIS OF PRESENTATION AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF THE BUSINESS - SoftLock.com, Inc. (the "Company") provides
a channel for the distribution and sale of documents over the
Internet. The Company's software tools and services allow publishers to
freely distribute their content on the Internet. When end-users wish to
view the complete documents, they must purchase a password from the
Company's transaction processing system.
The Company was incorporated in Delaware under the name Fieldcrest Corp. As
is more fully described below, the Company effected various stock splits
and a Plan and Agreement of Reorganization with SoftLock Services, Inc. All
share and per share amounts have been restated to reflect these
transactions.
The accompanying financial statements include all of the accounts of the
Company and its wholly owned subsidiary, SoftLock Services, Inc. All
intercompany activity has been eliminated.
BASIS OF PRESENTATION - As reflected in the consolidated financial
statements, during the years ended December 31, 1999, 1998 and 1997, the
Company incurred net losses of $6,598,955, $740,072 and $815,278,
respectively, and management expects that the Company will continue to
incur losses in the future. As a result of operating losses through
December 31, 1999, the Company had an accumulated deficit of $8,721,644.
Through December 31, 1999, the Company had funded its operating losses
primarily from the sale of preferred and common stock amounting to
approximately $8,245,000 and debt financing approximating $500,000.
The Company is actively seeking additional financing to fund operating
losses and significant investments in the business, including the hiring of
additional personnel. As disclosed in Note 8, subsequent to year end the
Company has raised approximately $9,420,000 through the issuance of common
stock and Series A and B preferred stock. These funds will be used to fund
technology development and deployment costs, marketing and distribution
costs and operating expenses. Management believes that the existing cash
balances will be sufficient to finance the Company's operations and other
cash needs through at least December 31, 2000. However, there can be no
assurance that the Company will be successful in its efforts to raise
additional financing on favorable terms after December 31, 2000 or that
management will achieve their financial projections.
PLAN AND AGREEMENT OF REORGANIZATION - As of July 28, 1998, the Company
consummated a Plan and Agreement of Reorganization (the "Agreement")
whereby it acquired all of the issued and outstanding shares of common
stock of SoftLock Services, Inc. in exchange for 7,097,266 shares of the
Company's "restricted" common stock. As a result, SoftLock Services, Inc.
became the wholly owned subsidiary of the Company, and the former
shareholders of SoftLock Services, Inc. became 90% shareholders in the
Company. Existing options of SoftLock Services, Inc. were exchanged for
options in the Company for identical rights and in the same ratio as the
exchange of common shares.
The transaction has been accounted for as a reverse acquisition with
SoftLock Services, Inc. as the accounting acquirer. The Company adopted the
fiscal year end of December 31, which is the reporting year of the
accounting acquirer.
F-7
<PAGE>
1. DESCRIPTION OF THE BUSINESS, BASIS OF PRESENTATION AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK SPLITS - As of July 28, 1998, and in connection with the Agreement
described above, SoftLock Services, Inc. exchanged one share of stock for
224.7348 shares of SoftLock.com, Inc. and, on August 10, 1998, effected a
50-for-1 reverse stock split. All share and per share amounts have been
restated to reflect these transactions retroactively to inception.
USE OF ESTIMATES - The preparation of the Company's financial statements in
conformity with generally accepted accounting principles requires the
Company's management to make estimates and assumptions that affect the
amounts reported in these financial statements and accompanying notes.
Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS - The Company considers all highly liquid
investments with original maturities of three months or less when purchased
to be cash equivalents.
PROPERTY AND EQUIPMENT - Purchased property and equipment is recorded at
cost. Capital lease property and equipment is recorded at the lesser of
cost or the present value of the minimum lease payments required.
Expenditures for renewals and improvements are capitalized, while
expenditures for repairs and maintenance are charged to operations as
incurred. Depreciation and amortization of property and equipment are
computed using the straight-line method over the estimated useful lives of
the related assets (three to seven years) and over the terms of the related
leases (two to three years). Leasehold improvements are being amortized
over the lesser of the lease term or their useful lives.
IMPAIRMENT OF LONG-LIVED ASSETS - The Company evaluates its long-lived
assets for impairment whenever events or changes in circumstances indicate
that the carrying amount of such assets may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of
the carrying amount of an asset to the future undiscounted cash flows
expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by
which the carrying amount of the asset exceeds the fair value of the asset.
Assets to be disposed of are reported at the lower of the carrying amount
or fair value, less costs to sell.
WEBSITE AND PRODUCT DEVELOPMENT COSTS - Website and product development
costs include the costs to develop, enhance, manage and monitor the
Company's Cybersales solution and online operations. Such costs are
considered to relate to software developed for internal use.
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") No. 98-1, "Accounting for Costs of
Computer Software Developed or Obtained for Internal Use," which provides
guidance on accounting for the costs of computer software developed or
obtained for internal use. In accordance with its provisions, the Company
adopted the SOP effective January 1, 1999. In accordance with the SOP,
development costs incurred during 1999 have been capitalized and all
related design costs have been expensed as incurred. Upon adoption,
development costs incurred prior to the initial application of the SOP can
not be adjusted to reflect the capitalization of such costs. Amortization
of the capitalized costs of approximately $1,444,400 is computed using the
straight-line method over the estimated useful life of the asset (three
years).
REVENUE RECOGNITION - Revenue from product sales is recognized when
software tools and passwords are provided to customers. The Company also
enters into license agreements for certain of its products. Revenues from
such agreements are recognized based on the terms of the agreement. Revenue
from the Company's online sales are recognized based on the net amount due
the Company on sales made by affiliates at the time the Company receives
authorization for the sale and payment by the customer.
F-8
<PAGE>
1. DESCRIPTION OF THE BUSINESS, BASIS OF PRESENTATION AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
COMPREHENSIVE INCOME (LOSS) - The Company does not have any items of
comprehensive income (loss) other than the net losses as reported.
INCOME TAXES - Pursuant to Statement of Financial Accounting Standards
("SFAS") No. 109, "Accounting for Income Taxes," income taxes are provided
for the tax effects of transactions reported in the financial statements
and consist of taxes currently due plus deferred taxes. Deferred tax assets
and liabilities are recognized for the expected future tax consequences of
events that have been included in the Company's financial statements or tax
returns. Deferred tax assets and liabilities are determined based on the
difference between the financial statement carrying amounts and tax bases
of existing assets and liabilities, using enacted tax rates in effect in
the years in which the differences are expected to reverse.
ADVERTISING AND MARKETING - Advertising and marketing costs are charged to
operations in the year incurred. Total advertising and marketing costs were
$1,181,155, $168,788 and $162,588 in 1999, 1998 and 1997, respectively.
NET LOSS PER COMMON SHARE - Basic loss per common share is computed using
the weighted-average number of common shares outstanding. Shares issued in
the reverse acquisition described above have been treated as outstanding
since inception. Diluted loss per common share reflects the potential
dilution if common equivalent shares outstanding (common stock options,
preferred shares, warrants) were exercised or converted into common stock
unless the effects are antidilutive. All common stock equivalents (options,
warrants and preferred stock) that were outstanding during 1999, 1998 and
1997 were not included in the computation of earnings per share due to a
net loss on all three years presented, and, therefore, their effect would
be antidilutive.
RESEARCH AND DEVELOPMENT - Research and development costs are expensed as
incurred. Such expenses amounted to $1,823,141, $117,899 and $130,373 in
fiscal years 1999, 1998 and 1997, respectively.
FAIR VALUES OF FINANCIAL INSTRUMENTS - Unless otherwise indicated, the fair
values of all reported assets and liabilities which represent financial
instruments (none of which are held for trading purposes) approximate the
carrying values of such instruments due to the short-term nature of such
instruments.
CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS - The Company's revenues
are derived from various customers who generally are not required to
provide collateral for amounts owed to the Company. The Company's customers
are dispersed over a wide geographic area.
Major customers accounted for the following percentages of the Company's
revenues:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Customer A 21% 22% 17%
Customer B 18 -- --
</TABLE>
No other customers accounted for more than 10% of revenues in any of the
years presented.
STOCK-BASED COMPENSATION - As permitted by SFAS No. 123, "Accounting for
Stock-Based Compensation," the Company accounts for stock option grants
using the intrinsic value method in accordance with Accounting Principles
Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees."
Accordingly, compensation expense related to employee options is recorded
only if, on the grant date, the fair value of the underlying equity exceeds
the option exercise price. SFAS No. 123 is used to account for nonemployee
stock options.
F-9
<PAGE>
1. DESCRIPTION OF THE BUSINESS, BASIS OF PRESENTATION AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SEGMENTS - In 1998, the Company adopted provisions of SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information." The
standard requires the reporting of certain information about operating
segments including the basis for the presentation and segment profit or
loss. The Company currently operates as a single operating segment.
RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARD - In June of 1998, the
Financial Accounting Standards Board (the "FASB") issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which was
amended in June 1999 and is effective for fiscal years beginning after June
15, 2000. The new standard requires that all companies record derivatives
on the balance sheet as assets or liabilities, measured at fair value.
Gains or losses resulting from changes in the values of those derivatives
are accounted for depending on the use of the derivative and whether it
qualifies for hedge accounting. Management is currently assessing the
impact of SFAS No. 133 on the financial statements of the Company. The
Company will adopt this accounting standard on January 1, 2001, as
required. At December 31, 1999, the Company did not have any derivative
instruments.
RECLASSIFICATIONS - Certain reclassifications have been made to the 1997
and 1998 financial statements to conform to the 1999 presentation.
2. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Leasehold improvements $225,090 $ --
Office equipment 485,030 44,472
------- ------
Total property and equipment 710,120 44,472
Less accumulated depreciation (89,351) (28,148)
------- -------
Property and equipment - net $620,769 $16,324
======== =======
</TABLE>
Included in property and equipment is certain equipment held under capital
leases with a net carrying value of $340,971 and $4,924 as of December 31,
1999 and 1998, respectively.
3. COMMITMENTS
In October 1999, the Company completed the relocation of its corporate
office to Maynard, Massachusetts, from Rochester, New York. The Company
leases approximately 15,000 square feet as its principal operating location
under a seven-year operating lease agreement. The agreement provides for a
yearly escalating, monthly rental of $7,448 for the first 12 months,
$14,219 for months 13 through 24, and $21,114 for months 25 and forward.
The Company is recording the expense on a straight-line basis over the
entire life of the lease. The lease also requires the Company to pay
certain incremental costs incurred by the lessor and shared costs of the
property. Rent expense for each of the years ended December 31, 1999, 1998
and 1997 totaled $95,943, $17,690 and $16,800, respectively.
F-10
<PAGE>
3. COMMITMENTS (CONTINUED)
At December 31, 1999, the aggregate minimum rental payments due under
noncancelable operating leases are as follows:
<TABLE>
<S> <C>
2000.................... $ 113,375
2001.................... 194,152
2002.................... 253,667
2003.................... 253,370
2004.................... 253,370
2005 and thereafter..... 443,398
--------
Total................... $1,511,332
==========
</TABLE>
Minimum payments due under capitalized leases as of December 31, 1999 are as
follows:
<TABLE>
<S> <C>
2000...................................... $ 146,032
2001...................................... 140,276
2002...................................... 108,188
2003...................................... 4,692
---------
Total..................................... 399,188
Less amount representing interest......... 58,217
---------
Present value of minimum payments......... 340,971
Less current portion...................... 112,990
---------
Total long-term capital lease obligation.. $ 227,981
=========
</TABLE>
The Company has an Employment Agreement (the "Agreement") with one officer
of the Company. The Agreement provides for the following financial
committments: (i) a minimum base salary of $160,000 per annum subject to
an annual review by the Board of Directors; (ii) severance and provisions
for the acceleration of options granted. The term of the Agreement shall be
indefinite subject to the termination provisions of the Agreement.
4. REDEEMABLE CONVERTIBLE SERIES A PREFERRED STOCK
In December 1999, the Company issued 31,863 shares of Series A preferred
stock, $0.01 par value redeemable convertible preferred stock, in exchange
for $3,210,604 (net of issuance costs of $39,396).
On September 2, 1999, the Company entered into a nonbinding term sheet (the
"Term Sheet") with SI Venture Associates, LLC ("SI Ventures"), in which SI
Ventures agreed to acquire shares of the Company's Series A preferred stock
for $1.25 million, provided that the Company could identify a second
venture capital investor to contribute at least another $1.25 million. In
connection with the Term Sheet, SI Ventures provided to the Company a
$500,000 bridge loan (the "Bridge Loan"). The Series A preferred stock is
convertible into shares of the Company's common stock. Series A
shareholders have, among other rights, certain registration rights, rights
of first refusal to participate in subsequent equity financings, the right
to appoint one director to the Company's Board, voting rights on certain
significant matters and redemption rights.
F-11
<PAGE>
4. REDEEMABLE CONVERTIBLE SERIES A PREFERRED STOCK (CONTINUED)
CONVERSION RIGHTS - Each share of Series A preferred stock is initially
convertible into 100 shares of the Company's common stock, subject to
certain antidilution adjustments described below, at any time at the
holder's option at a conversion price of $1.02 per share of common stock.
The Series A preferred stock will automatically convert into shares of the
Company's common stock upon the earlier of (i) immediately prior to the
consummation of an underwritten public offering with aggregate proceeds to
the Company in excess of $20 million at a public offering price per share
that is at least four times the then effective conversion price (a
"Qualified Public Offering"), or (ii) at the election of the holders of
two-thirds of the outstanding shares of the preferred stock. If the Company
issues any equity securities or the right to purchase equity securities at
a price below the conversion price then in effect (subject to certain
exceptions), the conversion price will be reduced on the weighted-average
basis.
The Company allocated the entire net proceeds received from the issuance of
the Series A preferred stock of $3,210,604 to the beneficial conversion
feature on the issuance of Series A preferred stock. The beneficial
conversion feature was calculated at the issuance date of the Series A
preferred stock based on the difference between the conversion price of
$1.02 per share and the estimated fair value of the common stock at that
date. This amount, however, was limited to the proceeds received from
issuing the beneficial convertible security. As the Series A preferred
stock was immediately convertible, the Company also recorded accretion of
$3,210,604 to additional paid-in capital.
DIVIDEND RIGHTS - Holders of the preferred stock are entitled to receive,
prior to any distribution to common shareholders, if and when and as
declared by the Board out of legally available funds, quarterly dividends
at a rate of $10.20 per preferred share per year. Unpaid dividends are
cumulative but do not bear interest. However, if all the preferred stock is
automatically converted into common stock as a result of a qualified public
offering and the Company provides the purchasers with an opportunity to
register their shares of common stock resulting from the conversion, all
within two years of the date of closing, then no dividends are payable.
VOTING AND REGISTRATION RIGHTS - Generally, holders of Series A preferred
stock vote with the common shareholders as a single class on any matter
submitted to the shareholders with the holders of the Series A preferred
stock having that number of votes equal to the whole number of common
shares into which each share of Series A preferred stock is then
convertible. However, holders of the Series A preferred stock have the
right to elect by majority vote one Class III member of the Board of
Directors subject to the provisions of the Shareholders' Agreement. The
Series A preferred stockholders also have certain registration rights.
REDEMPTION RIGHTS - The Company is required to redeem the Series A
preferred stock for $102 per share plus any accrued but unpaid dividends at
the election of a majority of the Series A preferred stock in two equal
annual installments beginning on the fourth anniversary of the closing date
of the Series A preferred stock subject to the availability of legally
sufficient funds.
LIQUIDATION PREFERENCE - Upon any liquidation, dissolution, winding up or
any merger, consolidation, sale of assets, reorganization or other
transaction in which control of the Company is transferred, each holder of
Series A preferred stock is entitled to receive, prior to the common
shareholders, $102 per share plus accrued but unpaid dividends. However, if
the preferred shareholder would receive higher value in the liquidation
transaction if the shares were converted into common stock, then the
holders of the Series A preferred stock will receive the higher amount
along with the common shareholders.
FURTHER ADJUSTMENTS - The dividend rate, redemption price, liquidation
preference and conversion price are subject to adjustment for stock splits
and other stock distributions.
F-12
<PAGE>
5. INCOME TAXES
The components of the provision (benefit) for income taxes consist of the
following for the year ended December 31:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Current income taxes paid or payable $ -- $ -- $ --
Federal deferred 1,809,500 210,700 298,200
State deferred 358,400 37,200 49,800
Increase in valuation allowance (2,167,900) (247,900) (348,000)
----------- ----------- -----------
Provision (benefit) for taxes $ -- $ -- $ --
=========== =========== ===========
</TABLE>
A reconciliation of the statutory federal rate to the effective rate for
all years is as follows:
<TABLE>
<S> <C>
Statutory federal rate 34%
State, net of federal benefit 6
Valuation allowance (40)
-----
Effective rate -- %
=====
</TABLE>
Deferred income taxes are provided on temporary timing differences between
financial statement and income tax reporting. The components of deferred
income tax assets and liabilities are as follows for the years ended
December 31:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Total deferred tax liabilities $ -- $ -- $ --
Deferred tax assets:
Deferred compensation -- 60,700 60,700
Property and equipment 14,000 4,500 4,300
Net operating loss carryforwards 2,757,200 702,400 316,000
Research and development credits 83,300 -- --
Investment tax credit 11,800 -- --
Other 10,800 -- --
---------- -------- --------
Total deferred tax assets 2,877,100 767,600 381,000
Less valuation allowance (2,877,100) (767,600) (381,000)
---------- -------- --------
Net deferred tax assets $ -- $ -- $ --
=========== =========== ===========
</TABLE>
As of December 31, 1999 the Company has federal net operating loss
carryforwards totaling approximately $6.8 million, which expire between
2012 and 2019, and research and development and investment tax credits of
$94,500, which expire in 2014. Because of the Company's limited operating
history, management has provided in each of the last three years a 100%
allowance against the Company's net deferred tax assets.
F-13
<PAGE>
6. STOCKHOLDERS' EQUITY
DEBT CONVERTED TO STOCK - During the third quarter of 1998, a total of
9,733 shares of common stock were issued upon conversion of debt totaling
$17,033.
STOCK OFFERING - In June 1998, the Company sold 642,099 shares of its
common stock at a price of $0.78 per share for a total of $500,000.
In February 1999, the Company completed the issuance of 1,600,000 shares of
common stock for net cash proceeds of $1,882,210 in a private placement of
its common stock under Section 4(2) of the Securities Act of 1933, as
amended (the "Act") and Regulation D promulgated thereunder.
In June 1999, the Company issued a total of 235,000 shares of common stock
for net cash proceeds of $1,155,136 in a private placement of its common
stock under the Act and Regulation D promulgated thereunder.
In December 1999, the Company issued a total of 1,600,000 shares of common
stock for net cash proceeds of $1,988,557 in a private placement of its
common stock under the Act and Regulation D promulgated thereunder.
NOTE RECEIVABLE - EXERCISE OF OPTION - In June 1996, key employees entered
into promissory notes with the Company totaling $268,880 in order to
exercise options granted to them. These loans are due June 2006, and bear
interest at 7.04% per annum. Loans are collateralized by a pledge of the
shares purchased.
PREPAID ROYALTIES - In December 1999, the Company entered into an agreement
with Intel for the use of certain of Intel's technology. In connection with
such agreement, the Company paid $75,000 and issued 224,514 shares of its
common stock to Intel. Under the agreement, the Company has the right to
recoup a portion of the shares issued if Intel fails to meet its
performance obligations; the portion that may be recouped decreases as
follows: termination by or before 6/30/00 - 80%, 9/30/00 - 60%, 12/31/00 -
40%, and 3/31/01 - 20%. None of the stock shall be recouped after June 30,
2001. Accordingly, at December 31, 1999, 44,900 shares of the stock issued
were nonforfeitable. The Company has recorded the nonforfeitable shares and
the cash paid as a prepaid royalty at December 31, 1999. As a result, as of
December 31, 1999, current and long-term prepaid royalties include
approximately $240,000 which represents the $75,000 cash paid and the fair
value as of the measurement date of the 44,900 shares of nonforfeitable
stock. The fair value of the forfeitable shares has been recorded as a
reduction of stockholders' equity. The value of such forfeitable shares
will be remeasured at each reporting period until such shares become
nonforfeitable.
STOCK OPTION PLAN - In January 1997, the shareholders of SoftLock Services,
Inc. approved the 1996 Stock Option Plan (the "96 Plan"). When the 1998
Stock Option Plan (the "98 Plan") was approved on July 28, 1998 by the
shareholders of the Company, the options issued by SoftLock Services, Inc.
under the 96 Plan were replaced by options to purchase shares of the
Company, and were deemed included in the 98 Plan. The termination of the 96
Plan resulted in no changes to the vesting or exercise provisions to the
holders of options under that plan, except that the number and price per
share of the 96 options were adjusted for the stock transfer and exchange
and subsequent stock splits.
F-14
<PAGE>
6. STOCKHOLDERS' EQUITY (CONTINUED)
STOCK OPTION PLAN (CONTINUED) - The 98 Plan was established to attract,
retain and provide equity incentives to selected persons to promote the
financial success of the Company. A total of 3,000,000 common shares were
reserved for grants under this plan. On June 8, 1999, the Board approved an
increase to 5,000,000 shares of common stock to be reserved under this
plan. This increase was approved by shareholders on June 30, 1999. The
options may be granted as either incentive stock options or Non-Qualified
Stock Options. The Company has issued options for 1,150,500, 1,368,343 and
724,619 shares of its common stock for the years ended December 31, 1999,
1998 and 1997, respectively, and has 1,791,038 options still available for
grant at December 31, 1999.
Also outstanding at December 31, 1998 were 1,011,307 options, originally
issued by SoftLock Services, Inc. and replaced with options to purchase
shares of SoftLock.com, Inc. These options were issued and outstanding
prior to the 96 Plan and, therefore, were not included under the 98 Plan.
These options were exercised for 919,333 common shares in a cashless
exercise completed on March 30, 1999.
A summary of stock option activity is as follows:
<TABLE>
<CAPTION>
Weighted- Weighted-
Average Average
Number of Exercise Fair
Options Price Value
<S> <C> <C> <C>
Outstanding as of January 1, 1997 1,011,307 $0.18
Granted 724,619 0.47 $0.20
Exercised -- --
Forfeited -- --
--------- -----
Outstanding as of December 31, 1997 1,735,926 0.30
Granted 1,368,343 0.94 $0.43
Exercised -- --
Forfeited -- --
--------- -----
Outstanding as of December 31, 1998 3,104,269 0.58
Granted 1,150,500 3.18 $5.13
Exercised (1,223,189) 0.18
Forfeited (14,500) 4.73
--------- -----
Outstanding as of December 31, 1999 3,017,080 $1.71
========= =====
</TABLE>
F-15
<PAGE>
6. STOCKHOLDERS' EQUITY (CONTINUED)
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
WEIGHTED-
AVERAGE WEIGHTED-
RANGE OF REMAINING AVERAGE NUMBER
NUMBER OF EXERCISE LIVES EXERCISE CURRENTLY
OPTIONS PRICES (YEARS) PRICE EXERCISABLE
<S> <C> <C> <C> <C>
163,606 $0.18 - $0.24 7.0 $0.24 163,600
1,660,024 $0.78 - $0.89 8.5 0.87 697,961
374,950 $1.83 - $2.02 9.1 1.96 219,936
637,000 $2.79 - $4.00 9.5 3.11 208,000
121,500 $4.38 - $6.55 9.6 4.41 29,875
60,000 $7.48 - $7.71 9.5 7.26 15,000
========= =========
3,017,080 1,334,372
========= =========
</TABLE>
The options vest over periods up to five years.
As described in Note 1, the Company uses the intrinsic value method to
measure compensation expense associated with grants of stock options to
employees. Had the Company used the fair value method to measure
compensation for grants made, pro forma net loss and net loss per share for
years indicated would have been as follows:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Net loss attributable to common stock $ (10,456,192) $ (838,722) $ (834,397)
============== =========== ===========
Diluted net loss per common share $ (1.01) $ (0.11) $ (0.14)
============== =========== ===========
</TABLE>
The fair value of options is estimated on the date of grant using the
Black-Scholes option-pricing model. Key assumptions used to apply this
pricing model for the years indicated are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Risk-free interest rate 6.00% 5.62% 5.77%
Expected life of option grants 10 years 10 years 10 years
Expected volatility of underlying stock 107% 35% 0%
Expected forfeiture rate 0% 0% 0%
</TABLE>
It should be noted that the option-pricing model used was designed to value
readily tradable stock options with relatively short lives. The options
granted to employees are not tradable and have contractual lives of up to
10 years. However, management believes the assumptions used to value the
options and the model applied yield a reasonable estimate of the fair value
of the grants made under the circumstances.
F-16
<PAGE>
7. COMMITMENTS AND CONTINGENCIES
The Company is one of 18 defendants in an action in the United States
District Court for the Southern District of New York entitled Interactive
Gift vs. CompuServe Inc. et al, filed August 23, 1995. The action alleges
infringement of the so-called Freeny patent. The plaintiff seeks judgment
declaring the validity of its patent and further declaring that each of the
defendants has infringed the plaintiff's patent; enjoining further
infringement; and treble damages plus attorney's fees and costs and
disbursements. The Company has answered the plaintiff's complaint and has
counter-claimed for a declaratory judgment that the plaintiff's patent is
invalid, unenforceable, and is not infringed upon by the Company.
On March 12, 1999, the court entered a stipulation order and judgment that,
based on the interpretation of the claims of the subject patent as
determined by the court in earlier orders, the Company has not in the past
infringed, nor is it now infringing on any of the provisions established in
the patent. Judgment has been entered in the Company's favor and the
present patent owner's claims have been dismissed on its merits by the
court. As of the date of these financial statements, the patent owner has
appealed this decision.
The Company is subject to this and other litigation from time to time in
the ordinary course of business. Although the amount of the liability, if
any, with respect to such litigation cannot be determined, in the opinion
of management, such liability, if any, will not have a material adverse
effect on the Company's financial condition, results of operations or cash
flows.
8. SUBSEQUENT EVENTS
On January 7, 2000, the Company received $500,004 in exchange for 4,902
shares of the Company's Series A preferred stock.
In connection with the Series A Preferred transaction, the Company entered
into a Series A Preferred Stock Purchase Agreement dated as of December 30,
1999 as supplemented on January 7, 2000 (the "Purchase Agreement") with SI,
Apex and RSA (collectively, the "Purchasers") and a Shareholders and Rights
Agreement (the "Shareholders Agreement") with the Purchasers and the
president and chief executive officer and the chief technology officer of
the Company. The Company also filed a Certificate of Designation with the
Delaware Secretary of State that states the powers, preferences and rights
of the Series A Preferred.
On February 10, 2000, the Company issued 46,875 shares of Series B
preferred stock (the "Series B Preferred") to a group of investors,
including affiliates of Tudor Investment Corp. and Ritchie Capital, as well
as investors in an earlier round of financing, SI and Apex Investment Fund
IV, L.P. (collectively, the "investors") for a purchase price of $160 per
share for an aggregate purchase price of $7,500,000. These investors were
also issued two warrants, one of which becomes exercisable for an aggregate
of 312,500 shares of common stock if, as of August 15, 2000, the Company's
registration statement for the shares of common stock issuable upon
conversion of the Series B Preferred was not declared effective and the
NASDAQ listing application for the common stock was not accepted, and the
second of which would become exercisable for an aggregate of an additional
312,500 shares of common stock if, as of November 15, 2000, these two
conditions were not met.
F-17
<PAGE>
8. SUBSEQUENT EVENTS (CONTINUED)
Ascent Venture Partners III, L.P. ("Ascent") also purchased 14,706 shares
of the Company's Series A Preferred for $102 per share for an aggregate
purchase price of $1,500,000 in February 2000. In connection with the
investment by Ascent, the Company agreed to appoint an Ascent
representative to its Board of Directors.
In connection with the Series B Preferred transaction, the Company entered
into a Series B Preferred Stock and Warrant Purchase Agreement dated as of
February 10, 2000 (the "Purchase Agreement") with the investors and an
Amended and Restated Shareholders and Rights Agreement (the "Amended
Shareholders Agreement") with the investors, the holders of the Series A
Preferred and the Company's president and chief executive officer and its
chief technology officer. The rights and preferences of the Series B
Preferred are similar to those of the Series A Preferred (see Note 4).
As disclosed in Note 4, the Company will record, immediately upon issuance,
a preferred stock dividend representing the value of the beneficial
conversion feature on the issuance of Series A and B preferred stocks. Such
amount will be limited to the proceeds received from issuing the beneficial
conversion securities or approximately $9,420,000.
Proceeds received by the Company in connection with the issuance of the
Series A and Series B Preferred above were as follows:
<TABLE>
<S> <C>
Proceeds from issuance of 19,608 shares of
Series A preferred stock, net of estimated
issuance costs $1,969,769
Proceeds from issuance of 46,875 shares of
Series B preferred stock, net of estimated
issuance costs 7,450,000
---------
Total proceeds $9,419,769
==========
</TABLE>
On March 8, 2000, the Company announced that it had entered into a letter
of intent to acquire all the outstanding stock of Chili Pepper, Inc., a
Boston-based strategic marketing consulting firm. The completion of the
acquisition is contingent on, among other things, the completion of due
diligence and the execution of definitive agreements.
F-18
<PAGE>
9. RESTATEMENT
In accordance with generally accepted accounting principles, quoted market
prices, if available, should be used for purposes of recording stock
issuances and determining compensation costs related to stock option grants.
The Company had historically determined the fair market value of its common
stock based on a 90 day weighted average calculation of both its private and
public equity transactions. This method was used based on management's belief
that such calculated amount was more representative of the market price of
the Company's common stock when compared to the Company's quoted market price
on the Over the Counter Bulletin Board. As a result, during 1998 the Company
had priced its private stock issuances and set the exercise price of its
stock option grants at amounts that differed from quoted market prices on the
date of issuance.
Subsequent to the issuance of the Company's 1998 consolidated financial
statements, management determined that certain stock issuances and exercise
prices set for option grants during 1998 should have been accounted for using
quoted market prices. Therefore the accompanying 1998 consolidated financial
statements have been restated from the amounts previously reported to reflect
the recording of such transactions using quoted market prices and to provide
certain additional disclosures relating to equity issuances and stock-based
compensation. A summary of the significant effects of the restatement is as
follows:
<TABLE>
<CAPTION>
AS PREVIOUSLY AS
FOR THE YEAR ENDED DECEMBER 31, 1998 REPORTED RESTATED DIFFERENCE
<S> <C> <C> <C>
Operating loss $ (632,114) $ (754,515) $ (122,401)
Net loss (609,232) (740,072) (130,840)
Additional paid-in capital 2,174,502 2,781,053 606,551
Deferred compensation -- (475,711) (475,711)
Accumulated deficit (1,991,849) (2,122,689) (130,840)
Net loss per common share (.08) (.10) (.02)
</TABLE>
* * * * * *
F-19
