RESEARCH TRIANGLE COMMERCE, INC.
FINANCIAL STATEMENTS
INDEX
Exhibit 99.1
------------
Page
Report of Independent Accountants F-2
Financial Statements:
Balance Sheets F-3
Statements of Operations F-4
Statements of Cash Flows F-5
Statements of Stockholders' Equity (Deficit) F-7
Notes to Financial Statements F-8
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of
Research Triangle Commerce, Inc.
In our opinion, the accompanying balance sheets and the related statements of
operations, of cash flows and stockholders' equity (deficit) present fairly, in
all material respects, the financial position of Research Triangle Commerce,
Inc. at December 31, 1999 and 1998, and the results of its operations and its
cash flows for the years then ended in conformity with accounting principles
generally accepted in the United States. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States, which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
from material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PricewaterhouseCoopers LLP
Raleigh, North Carolina
March 30, 2000
F-2
<PAGE>
Research Triangle Commerce, Inc.
Balance Sheets
(in thousands, except share and per share data)
December 31, June 30,
------------------ -----------
1999 1998 2000
--------- ------- -----------
(unaudited)
Assets
Current assets:
Cash and cash equivalents $ 292 $ 8 $ 3,709
Accounts receivable, net of allowance for
doubtful accounts of $73 and
$14 at December 31, 1999 and 1998,
respectively and of $70 at
June 30, 2000 (unaudited) 1,193 532 943
Other receivables 15 19 17
Income tax receivable 41 - 33
Inventories 171 162 166
Prepaid expenses 86 49 157
Deferred income taxes - 13 -
--------- ------- -----------
Total current assets 1,798 783 5,025
Property and equipment, net 1,171 293 1,103
Capitalized software costs, net 99 108 68
Other assets 63 26 37
--------- ------- -----------
Total assets $3,131 $1,210 $ 6,233
========= ======= ===========
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Accounts payable $ 218 $ 222 $ 340
Accrued expenses 592 180 343
Current portion of capital lease 80 17 82
obligations
Deferred revenue 10 18 25
Convertible debenture 1,842 - 2,093
Amounts due to lenders - 577 5,000
--------- ------- -----------
Total current liabilities 2,742 1,014 7,883
Deferred income taxes - 18 -
Long term portion of capital lease obligations 346 43 302
Commitments and contingencies (Note 13)
Mandatorily redeemable convertible preferred
stock, no par value;
2,870,000 shares designated, 2,789,650
shares issued and outstanding at December
31, 1999 (liquidation preference of $3,069
as of December 31, 1999), 2,789,650 shares
issued and outstanding at June 30, 2000
(unaudited) (liquidation preference of
$3,069 as of June 30, 2000 (unaudited)) 3,140 - 3,093
Stockholders' equity (deficit):
Common stock, $.00011 par value,
20,000,000 shares
authorized, 9,300,000 shares issued and - -
outstanding at December 31, 1999 and June
30, 2000 (unaudited)
Retained earnings (accumulated deficit) (3,097) 135 (5,045)
--------- ------- -----------
Total stockholders' equity (deficit) (3,097) 135 (5,045)
--------- ------- -----------
Total liabilities and stockholders $ 3,131 $ 1,210 $ 6,233
========= ======= ===========
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
Research Triangle Commerce, Inc.
Statements Of Operations
(in thousands)
Year ended Six months ended
December 31, June 30,
---------------- ---------------
1999 1998 2000 1999
------- ------- ------- ------
(unaudited)
Revenue:
Services $6,032 $4,434 $3,536 $2,865
Software sales 634 180 204 84
------- ------- ------- ------
Total revenue 6,666 4,614 3,740 2,949
------- ------- ------- ------
Costs and operating expenses:
Services 5,093 2,506 2,823 2,315
Software 402 123 196 49
Selling, general and 4,115 1,827 2,410 1,626
administrative ------- ------- ------- ------
Total costs and 9,610 4,456 5,429 3,990
operating expenses ------- ------- ------- ------
Income (loss) from operations (2,944) 158 (1,689) (1,041)
------- ------- ------- ------
Interest income (expense):
Interest income 26 1 18 20
Interest expense (82) (79) (324) (5)
------- ------- ------- ------
Interest expense, net (56) (78) (306) 15
------- ------- ------- ------
Income (loss) before income taxes (3,000) 80 (1,995) (1,026)
Provision (benefit) for income (37) 19 - -
taxes ------- ------- ------- ------
Net income (loss) (2,963) 61 (1,995) (1,026)
Accretion of mandatorily (553) - 47 (242)
redeemable preferred stock ------- ------- ------- ------
Net income (loss) available to
common stockholders $(3,516) $ 61 $(1,948) $(1,268)
======= ======= ======= ======
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
Research Triangle Commerce, Inc.
Statements Of Cash Flows
(in thousands)
Year ended Six months ended
December 31, June 30,
------------------ -----------------
1999 1998 2000 1999
--------- ------- ------- --------
(unaudited)
Cash flows from operating activities:
<S> <C> <C> <C> <C>
Net income (loss) $(2,963) $ 61 $(1,995) $(1,026)
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation and amortization 275 76 242 81
Deferred tax expense (5) 15 - (5)
Noncash interest expense 39 - 269 -
Loss on disposal of property and equipment 16 - - -
Bad debt expense 60 26 36 15
Changes in operating assets and liabilities:
Accounts receivable (721) (75) 214 (229)
Other receivables 4 - (2) (1)
Income tax receivable (41) - 8 (22)
Inventories (9) (147) 5 1
Prepaids (37) (62) (71) (22)
Other assets 26 - (18) (31)
Accounts payable (4) 73 122 253
Accrued expenses 412 35 (256) 111
Deferred revenue (8) - 4 2
--------- ------- ------- --------
Net cash provided by (used in) operating (2,956) 2 (1,442) (873)
activities --------- ------- ------- --------
Cash flows from investing activities:
Purchase of property and equipment (446) (189) (99) (481)
Purchase/development of software - (56) - (4)
Cash paid for acquisitions (274) - - -
Cash paid for noncompete agreements (113) - - (107)
--------- ------- ------- --------
Net cash used in investing activities (833) (245) (99) (592)
--------- ------- ------- --------
Cash flows from financing activities:
Proceeds from issuance of mandatorily
redeemable preferred stock and
and warrants 2,673 - - 2,673
Proceeds from line of credit 3,615 3,335 2,774 808
Payments on line of credit (3,892) (3,320) (2,774) (1,078)
Proceeds from issuance of notes, 2,000 - 5,000 -
convertible debenture and warrants
Payments on notes payable to related party - (115) - -
Proceeds from (payments on) term note (300) 300 - (282)
Payments on capital lease obligations (23) (15) (42) (9)
--------- ------- ------- --------
Net cash provided by financing activities 4,073 185 4,958 2,112
--------- ------- ------- --------
Net increase (decrease) in cash and cash 284 (58) 3,417 647
equivalents
Cash and cash equivalents at beginning of year 8 66 292 8
--------- ------- ------- --------
Cash and cash equivalents at end of year $ 292 $ 8 $ 3,709 $ 655
========= ======= ======= ========
The accompanying notes are an integral part of these financial statements.
</TABLE>
F-5
<PAGE>
Research Triangle Commerce, Inc.
Statements Of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Year ended Six months ended
December 31, June 30,
------------------ -----------------
1999 1998 2000 1999
--------- ------- ------- --------
(unaudited)
Supplemental cash flow disclosures:
<S> <C> <C> <C> <C>
Interest paid $ 25 $ 79 $ 37 $ 5
========= ======= ======= ========
Taxes paid $ 5 $ 14 - -
========= ======= ======= ========
Supplemental disclosure of noncash transactions:
Execution of capital lease agreements $ 389 $ 21 - -
========= ======= ======= ========
Accretion of mandatorily redeemable preferred $ 553 - $(47) $ 242
stock ========= ======= ======= ========
The accompanying notes are an integral part of these financial statements.
</TABLE>
F-6
<PAGE>
<TABLE>
<CAPTION>
Research Triangle Commerce, Inc.
Statements of Stockholders' Equity (Deficit)
Retained
Additional Earnings
Common Stock Paid-In - (Accumulated
Shares Amount Capital Deficit) Total
----------- --------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1997 9,300,000 $ - $ - $ 74 $ 74
Net income - - - 61 61
----------- --------- ---------- ------------ ----------
Balance at December 31, 1998 9,300,000 - - 135 135
Issuance of common - - 284 - 284
stock warrants
Accretion of mandatorily
redeemable preferred stock - - (284) (269) (553)
Net loss - - - (2,963) (2,963)
----------- --------- ---------- ------------ ----------
Balance at December 31, 1999 9,300,000 - - (3,097) (3,097)
Accretion of mandatorily
redeemable preferred stock
(unaudited) - - - 47 47
Net loss (unaudited) - - - (1,995) (1,995)
----------- --------- ---------- ------------ ----------
Balance at June 30, 2000
(unaudited) 9,300,000 $ - $ - $(5,045) $(5,045)
=========== ========= ========== ============ ==========
The accompanying notes are an integral part of these financial statements.
</TABLE>
F-7
<PAGE>
Research Triangle Commerce, Inc.
Notes to Financial Statements
1. Business and Operating Environment
Research Triangle Commerce, Inc., (formerly Research Triangle Consultants
Inc.) (the "Company") is a North Carolina based corporation incorporated in
1991. The Company is a vertically integrated provider of education and
consulting services, custom programming, internetworking operations, software
sales and related services that enable organizations to implement Electronic
Commerce ("EC") methodologies to integrate their business applications, both
internally and with external business partners.
During 1999, the Company increased its number of employees, office space and
other technical capabilities to prepare for anticipated growth in its
business. This growth has been slower than anticipated, due partially to
customers' Y2K concerns, and accordingly, the Company incurred a net loss
from operations for the year 1999.
In the opinion of management, the accompanying unaudited June 30, 1999 and
June 30, 2000 financial statements include all adjustments (consisting only
of normal recurring adjustments) necessary to present fairly the financial
position, results of operations, and cash flows of the Company. Results for
the interim periods are not necessarily indicative of the results for any
other interim period or for the full fiscal year.
Management anticipates an increase in revenues and cash flow from operations
in 2000, which it believes, along with temporary borrowings under its
$2,000,000 line of credit, will be sufficient to meet its anticipated cash
needs for working capital and capital expenditures for the next year. In
addition, management is currently attempting to obtain additional capital
through a private placement of its equity securities to finance its long-term
expansion plans. However, there can be no assurance that the Company will be
able to meet its operating plans, achieve profitability, or raise additional
equity financing. See Note 14.
2. Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the 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 revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity
of three months or less at the date of purchase to be cash equivalents.
Fair Value of Financial Instruments
The carrying amounts of the Company's financial instruments, which include
cash equivalents, accounts receivable, accounts payable and other accrued
expenses approximate their fair values due to their short maturities. Based
on borrowing rates currently available to the Company for loans with similar
terms, the carrying value of the convertible debenture and capital lease
obligations approximates fair value.
F-8
<PAGE>
Research Triangle Commerce, Inc.
Notes to Financial Statements
Concentration of Credit Risk and Significant Customers Financial instruments
which potentially subject the Company to a concentration of credit risk
consist principally of temporary cash and trade receivables. The Company
primarily places its temporary cash with high-credit quality financial
institutions. Cash deposits are all in financial institutions in the United
States. The Company performs ongoing credit evaluations to reduce credit risk
and requires no collateral from its customers. Management estimates the
allowance for uncollectible accounts based on its historical experience and
credit evaluation.
At December 31, 1999, two customers accounted for 27% of gross accounts
receivable. There were no significant individual customer balances at
December 31, 1998. At June 30, 2000, one customer accounted for 12% of gross
accounts receivable (unaudited). For the years ended December 31, 1999 and
1998, two customers accounted for 23% and 33%, respectively, of total
revenue. For the six month period ended June 30, 2000, one customer accounted
for 18% of revenues (unaudited). For the six month period ended June 30,
1999, one customer accounted for 16% of revenues (unaudited).
Inventories
Inventories are valued at the lower of cost or market, with cost determined
using the first-in, first-out method. Inventory primarily consists of
software for resale.
Property and Equipment
Property and equipment are recorded at cost and depreciated over their
estimated useful lives using the straight-line method. Property and equipment
held under capital leases, which involve a transfer of ownership, are
amortized over the estimated useful life of the asset. Other property and
equipment held under capital leases and leasehold improvements are amortized
over the shorter of the lease term or the estimated useful life of the
related asset. Upon retirement or sale, the cost of assets disposed of and
the related accumulated depreciation are removed from the accounts and any
resulting gain or loss is credited or charged to income. Repairs and
maintenance costs are expensed as incurred.
Capitalized Software Costs
Software development costs are capitalized beginning when a product's
technological feasibility has been established and ending when a product is
available for general release.
Capitalized software costs are amortized over their expected useful life, but
in no case over a period greater than three years. Capitalized software costs
are presented net of accumulated amortization of $67,000 and $33,000 at
December 31, 1999 and 1998, respectively.
Income Taxes
The Company accounts for income taxes using the liability method which
requires the recognition of deferred tax assets or liabilities for temporary
differences between financial reporting and tax bases of the Company's assets
and liabilities and for tax carryforwards. A valuation allowance is recorded,
if necessary, to reduce net deferred tax assets to an amount which management
believes is more likely than not to be realized.
Revenue Recognition
Service revenues are recognized over the period in which services are
provided to customers according to individual contract terms. Revenues from
the sale of software products having no significant ongoing obligations are
recognized after delivery of the products and fulfillment of acceptance
terms, including installation. In the event services are billed prior to
performing work, revenues are deferred and recognized over the period the
work is performed.
F-9
<PAGE>
Research Triangle Commerce, Inc.
Notes to Financial Statements
Reclassifications
Certain reclassifications have been made to prior year amounts to conform to
current year presentation.
Accounting for Stock-Based Compensation
The Company accounts for stock-based compensation based on the provisions of
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock
Issued to Employees" ("APB No. 25"), which states that no compensation
expense is recorded for stock options or other stock-based awards to
employees that are granted with an exercise price equal to or above the
estimated fair value of the Company's common stock on the grant date. In the
event that stock options are granted with an exercise price below the
estimated fair value of the Company's common stock at the grant date, the
difference between the fair value of the Company's common stock and the
exercise price is recorded as deferred compensation. Deferred compensation is
amortized to compensation expense over the vesting period of the related
stock option. The Company has adopted the disclosure requirements of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," ("SFAS No. 123"), which requires pro forma net income (loss)
to be disclosed as if compensation had been recorded based on the fair value
of the options granted at the date of grant. Stock-based awards to
non-employees are accounted for under the provisions of SFAS No. 123.
Redeemable Preferred Stock
The carrying value of redeemable convertible preferred stock is increased by
periodic accretions so that the carrying amount will equal the redemption
amount at the redemption date.
Advertising Costs
Advertising costs are charged to operations as incurred. Advertising costs
were approximately $78,000 and $29,000 for the years ended December 31, 1999
and 1998, respectively.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivatives
Investments and Hedging Activities" (SFAS No. 133). SFAS No. 133
established a new model for accounting for derivatives and hedging
activities and supercedes several existing standards. SFAS No. 133, as
amended by SFAS No. 137, is effective for all fiscal quarters of fiscal
years beginning after June 15, 2000. The Company does not expect that the
adoption of SFAS No. 133 will have a material impact on the financial
statements.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101 ("SAB
101"), "Revenue Recognition in Financial Statements." SAB 101 provides
specific guidance, among other things, as to the recognition of revenue
related to up-front non-refundable fees and services charges received in
connection with a contractual arrangement. The Company has applied the
provisions of SAB 101 for the year ended December 31, 1999, and its adoption
did not have a material impact on the Company's financial condition or
results of operations.
F-10
<PAGE>
Research Triangle Commerce, Inc.
Notes to Financial Statements
3. Contract Termination
On December 1, 1996, the Company entered into an agreement with a customer in
which the Company agreed to establish and operate an internetworking center
and to promote, market and sell EC services for the customer. The agreement
was for one year with automatic one-year renewal periods, unless either party
to the agreement provided the other party with written notice at least ninety
days prior to the expiration of the initial period or any additional one-year
period.
On November 24, 1998, the customer and the Company agreed to an early
termination of the agreement. In exchange for the Company agreeing to this
early termination, the customer agreed to pay the balance of its monthly
retainer and maintenance fee through December 31, 1998, and to transfer
ownership of certain other assets utilized in the internetworking center to
the Company. The Company recorded these assets at their estimated fair values
as set forth below.
Computer equipment $113,000
Inventory - software 150,000
Other 1,000
---------
Total $264,000
=========
4. Acquisition
During June 1999, the Company acquired the fixed assets of EDI Partners, Ltd.
in exchange for cash of $250,000. The purchase price was allocated among the
assets purchased.
5. Property and Equipment
Property and equipment consist of the following:
December 31, June 30,
Useful Life ---------------------- -----------------
(Years) 1999 1998 2000
---------------------- -----------------
(unaudited)
Computer equipment and 3 - 5 $ 1,109,000 $ 412,000 $ 1,198,000
software
Office equipment 5 - 7 207,000 78,000 210,000
Leasehold improvements 5 38,000 11,000 38,000
Furniture and fixtures 7 208,000 22,000 218,000
---------------------- -----------------
1,562,000 523,000 1,664,000
Less accumulated (391,000) (230,000) (561,000)
depreciation ---------------------- -----------------
Property and $ 1,171,000 $ 293,000 $ 1,103,000
equipment, net ====================== =================
F-11
<PAGE>
Research Triangle Commerce, Inc.
Notes to Financial Statements
6. Other Assets
Other assets are comprised of the following at December 31:
1999 1998
--------- ---------
Deferred charges $ 112,000 $ 8,000
Security deposit 4,000 4,000
Other - 18,000
--------- ---------
116,000 30,000
Less accumulated amortization (53,000) (4,000)
--------- ---------
$ 63,000 $ 26,000
========= =========
Deferred charges are recorded at cost and amortized over a period of one to
three years.
7. Accrued Expenses
Accrued expenses consisted of the following:
December 31, June 30,
-------------------------- -------------
1999 1998 2000
----------- ----------- -------------
(unaudited)
Accrued salaries, benefits and $ 321,000 $ 155,000 $ 85,000
related costs
Professional fees 82,000 - -
Lease termination fees 66,000 - -
Other 123,000 25,000 79,000
----------- ----------- -------------
$ 592,000 $ 180,000 $ 164,000
=========== =========== =============
F-12
<PAGE>
Research Triangle Commerce, Inc.
Notes to Financial Statements
8. Due to Lenders
Amount due to lenders consisted of the following at December 31:
December 31, June 30,
-------------------- ----------
1999 1998 2000
--------- --------- ----------
(unaudited)
Term loan, with a bank, principal amount of
$300,000, interest payable monthly at prime
plus 1.5% (9.25% at December 31, 1998)
per annum $ - $ 300,000 $ -
Revolving line of credit, with a bank,
maximum borrowing capacity of $2,000,000;
interest payable monthly capacity at prime
plus 1% (8.75% at December 31, 1998) per
annum; collateralized by all assets of the
company - 277,000 -
Note payable to Internet Commerce
Corporation, convertible or payable on
August 15, 2000 interest
at 7.5% per annum (See Note 14) 5,000,000
--------- --------- ----------
$ - $ 577,000 $ 5,000,000
========= ========= ==========
The Company has allocated $50,000 of the revolving line of credit to serve as
a letter of credit to secure the Company's facility lease.
9. Convertible Debenture
During December 1999, the Company issued a $2,000,000 subordinated
convertible debenture (the "Debenture"). The note accrues interest at a rate
of 8% per annum. The unpaid principal amount of, and accrued but unpaid
interest under, the Debenture shall be automatically converted into shares of
Preferred Stock or other securities of the Company, as more fully described
below, sold to investors in the Company's next transaction or series of
related transactions in which the Company sells equity securities and in
which the gross proceeds to the Company equal or exceed $5,000,000 (the "Next
Equity Financing").
If, prior to June 30, 2000, either (i) the Company completes an initial
public offering, or (ii) another entity obtains 50% or more of the
outstanding voting power of the Company or purchases all or substantially all
of the assets of the Company, then the Debenture shall automatically convert
into shares of the Company's Series A Preferred Stock.
F-13
<PAGE>
Research Triangle Commerce, Inc.
Notes to Financial Statements
Notwithstanding the foregoing, if (i) a term sheet for the Next Equity
Financing has not been signed by June 30, 2000, (ii) the Next Equity
Financing does not close on or prior to December 15, 2000, and (iii) the
Debenture has not otherwise been converted, then the unpaid principal amount
of, and accrued but unpaid interest under, the Debenture shall be
automatically converted into shares of the Company's Series A Preferred
Stock.
The owner of the Debenture shall receive one share of Preferred Stock for a
number of dollars in principal and interest amount of the Debenture so
converted equal to the Preferred Stock Purchase Price. For purposes of the
Debenture, the Preferred Stock Purchase Price shall be the price per share of
equity securities sold to investors in the Company's Next Equity Financing.
See Note 14.
In the event that the Debenture is converted as a result of an initial public
offering or a transaction whereby another entity obtains 50% or more of the
outstanding voting power of the Company, then the Preferred Stock Purchase
Price shall be $2.857143.
Notwithstanding the foregoing, if (i) a term sheet for the Next Equity
Financing has not been signed by June 30, 2000, or (ii) the Next Equity
Financing does not close on or prior to December 15, 2000, then the Preferred
Stock Purchase Price shall be that amount equal to the product of two times
the Company's revenue between July 1, 1999 and June 30, 2000, inclusive,
divided by 14,000,000.
In connection with this Debenture, the Company issued warrants to purchase
shares of common stock. The number of shares that can be purchased in
conjunction with these warrants is dependent upon the type of securities the
Debenture will be converted into at a later date. These warrants are
exercisable at $0.01 per share and expire in December 2004. The Company
allocated $198,000 of the $2,000,000 gross proceeds to the warrants based on
their fair value as determined using the Black-Scholes pricing model. This
amount was recorded as debt discount and additional paid-in capital. The debt
discount is being amortized in interest expense over the life of the
Debenture.
10. Income Taxes
The components of income tax expense (benefit) consist of the following at
December 31:
1999 1998
----------- ----------
Current tax expense (benefit):
Federal $ (33,000) 1,000
State 1,000 3,000
----------- ----------
Current tax expense (benefit) (32,000) 4,000
----------- ----------
Deferred tax expense (benefit):
Federal (4,000) 1,000
State (1,000) 14,000
----------- ----------
Deferred tax expense (benefit) (5,000) 15,000
----------- ----------
Net tax expense (benefit) $ (37,000) $ 19,000
=========== ==========
The tax benefit of $37,000 for 1999 relates to the carryback of the 1999 net
operating loss to recover income taxes paid for the pervious two years.
F-14
<PAGE>
Research Triangle Commerce, Inc.
Notes to Financial Statements
Significant components of net deferred tax assets and liabilities consist of
the following at December 31:
1999 1998
----------- -----------
Domestic net operating loss carryforwards $ 1,063,000 $ -
Accounts receivable 29,000 6,000
Deferred revenue - 7,000
Compensation accruals 74,000 -
Fixed assets 3,000 -
Other accruals 5,000 -
----------- -----------
Total deferred tax assets 1,174,000 13,000
Valuation allowance for deferred assets (1,093,000) -
----------- -----------
Deferred tax assets 81,000 13,000
=========== ===========
Capitalized software 81,000 18,000
----------- -----------
Total deferred tax liabilities 81,000 18,000
=========== ===========
Net deferred tax assets (liability) $ - $ (5,000)
=========== ===========
At December 31, 1999, the Company provided a full valuation allowance against
its net deferred tax assets since realization of these benefits could not be
reasonably assured. The increase in valuation allowance resulted primarily
from the additional net operating loss carryforward generated.
As of December 31, 1999, the Company had federal and state net operating loss
carryforwards of $2,710,000. These net operating loss carryforwards begin to
expire in 2019 and 2014 for federal and state purposes, respectively. The
utilization of the federal net operating loss carryforward may be subject to
limitation under the rules regarding a change in stock ownership as
determined by the Internal Revenue Code.
Taxes computed at the statutory federal income tax rate of 34% are reconciled
to the provision for income taxes as follows:
1999 1998
----------- ----------
Effective rate 1.2% 23.7%
----------- ----------
United States Federal tax at
statutory rate $ (1,020,000) 34.0% $ 27,000 33.6%
States taxes (net of Federal
benefit) (147,000) 4.9% 4,000 5.0%
Change in valuation reserves 1,093,000 36.5% - 0.0%
Carryback of net operating loss 20,000 -0.7% - 0.0%
(at other than 34%)
Other nondeductible expenses 17,000 -0.5% (12,000) -14.9%
---------- ------ --------- -------
Provision for income taxes $ (37,000) 1.2% $ 19,000 23.7%
========== ====== ========= =======
F-15
<PAGE>
Research Triangle Commerce, Inc.
Notes to Financial Statements
11. Capital Stock
Common Stock
The Company has authorized 20,000,000 shares of common stock with a par value
of $.00011 per share. Holders of these shares have one vote per share. The
holders of common stock are also entitled to receive dividends whenever funds
are legally available and when declared by the Board of Directors, subject to
the prior rights of holders of all classes of stock outstanding. Upon
dissolution, liquidation or winding up of the Company, holders of common
stock will be entitled to receive the assets of the Company after the
satisfaction of the preferential rights of the outstanding Series A
mandatorily redeemable convertible preferred stock or any other outstanding
stock ranking on liquidation senior to or on parity of the common stock.
Mandatorily Redeemable Convertible Preferred Stock
On January 22, 1999, the Company designated 2,870,000 shares of no par value
Series A preferred stock (the "Preferred Stock") and entered into a stock
purchase agreement (the "Agreement") with a venture capital fund. The Company
sold 2,730,000 shares of the Preferred Stock with warrants for gross proceeds
of $3,000,000 that was paid as follows: $2,000,000 on January 22, 1999 and
$1,000,000 on April 9, 1999.
On April 10, 1999 the Company issued 59,650 additional shares of Series A
preferred stock to the venture capital fund in accordance with the stock
purchase agreement anti-dilution clause.
Rights, Preference and Terms of Preferred Stock
The following is a summary of the rights, preferences, and terms of the
Company's outstanding series of preferred stock:
Dividends
The Series A Preferred Stockholders (the "Holders") shall be entitled to
receive cash dividends as and when declared by the Board of Directors (the
"Board") out of the assets of the Corporation. In the event the Board
declares a dividend to the common stockholders, the Board shall at the same
time declare a dividend for the Holders payable at the same time as the
dividend due to the common stockholders in an amount for each share of
Preferred Stock equal to the dividend payable on the number of shares of
common stock into which such shares of Preferred Stock may be converted.
Dividends on the Preferred Stock shall accumulate from the date of
declaration and shall not bear interest.
Conversion
Each share of Preferred Stock is convertible at the option of the Holder into
common stock on a one-for-one basis. This conversion shall be adjusted upon
the issuance by the Company of additional common shares for consideration per
share less that the original per share issue price of Series A Preferred
Stock of $.91 per share.
F-16
<PAGE>
Research Triangle Commerce, Inc.
Notes to Financial Statements
Voting
Holders of Preferred Stock have voting rights on an as-if-converted to common
stock basis.
Mandatory Conversion
A mandatory conversion event, as defined in the Agreement, is the closing of
an underwritten initial public offering of the common stock of the
Corporation resulting in gross proceeds to the Company of at least $15
million or the vote of a majority of the Holders of outstanding shares to
convert the preferred shares to common stock. If a mandatory conversion event
were to occur, as defined by the Agreement, all outstanding shares of
Preferred Stock shall, without any action on the part of the Holder thereof,
be converted automatically into shares of the common stock by dividing the
Preferred Stock purchase price by the then applicable conversion price. The
conversion price shall be adjusted from time to time if the Company, while
there are shares of Preferred Stock outstanding, issues or sells shares of
the common stock of the Corporation at a cash or non-cash price per share
less than the conversion price in effect immediately prior to issuance or
sale.
Redemption
Each Holder of Preferred Stock may require the Company to redeem all or any
portion of such Holder's preferred shares at any time after December 31,
2004. The redemption price per preferred share shall equal the product of (i)
an amount equal to two times the sum of the Company's gross revenues, as
defined, for the twelve month calendar period immediately preceding the date
of the notice less all debts and other liabilities of the Company multiplied
by (ii) one and then, divided (iii) by number of fully diluted common shares
of the Company. This calculation resulted in a redemption value of $9,023,000
as of December 31, 1999 and $5,454,000 as of June 30, 2000 (unaudited). The
Series A Preferred Stock was initially recorded at $1,669,000 as of January
22, 1999 based on the cash received, net of issue costs of $245,000 and the
fair value of warrants of $86,000. Additional Series A Preferred Stock was
initially recorded at $918,000 as of April 9, 1999 based on cash received,
net of issue costs of $82,000. The Series A Preferred Stock is being accreted
to the redemption value, utilizing the interest method. The accretion is
recorded as an increase or decrease to additional paid-in capital and an
increase or decrease to the recorded value of the Series A Preferred Stock
through December 2004, the redemption date. The Company recorded
increases(decreases) to stockholders' equity of $553,000 for accretion for
the year ended December 31, 1999 and ($47,000) and $242,000 for the six
months ended June 30, 2000 and 1999 (unaudited), respectively.
Liquidation
In the event of liquidation, dissolution or winding up of the Company, the
Holders shall be entitled to receive an amount per share in cash equal to
$1.10 per share, plus any declared but unpaid dividends, plus an amount equal
to eight percent per annum times an amount equal to the Preferred Purchase
Price ($1.10) for such share; provided that if the assets and funds available
for distribution to the Holders as to liquidation preference shall be
insufficient to permit the payment to all such Holders of the full amount of
their liquidation preferences, then the Holders shall share ratably in any
distribution of the remaining assets and funds of the Company.
F-17
<PAGE>
Research Triangle Commerce, Inc.
Notes to Financial Statements
Warrants
In connection with the issuance of the Preferred Stock in January 1999, the
Company issued warrants to purchase 218,400 shares of common stock at an
exercise price of $1.21 per share. The warrants expire upon the earlier of
(i) January 22, 2003 or (ii) upon the effectiveness of a registration
statement under the Securities Act of 1933, as amended, and sale of the
Company's stock in a firm commitment underwritten public offering. The
Company allocated $86,000 of the $3,000,000 gross proceeds to the warrants
and recorded additional paid-in capital based on their fair value as
determined using the Black-Scholes pricing model.
12. Stock Options
During 1998, the Company's Board of Directors approved a plan (the "Plan")
whereby 1,500,000 shares of common stock have been reserved for issuance to
employees and consultants at terms and prices to be determined by the Board
of Directors. The Plan specifies that the exercise price cannot be less than
100% of the fair market value of the stock on the date of grant. However, if
the optionee owns more than 10% of the outstanding stock on the option grant
date, the incentive stock price per share shall not be less that 110% of the
fair market value of the stock on the option grant date. The maximum term for
options granted is ten years. Options granted under the Plan generally vest
ratably over a three or four year period from the date of grant and expire
ten years from the grant date. The activity for the Plan is presented in the
following table:
1999 1998
--------------------- ----------------------
Weighted Weighted
Number Average Number Average
of Exercise of Exercise
Options Price Options Price
---------- ---------- ----------- ----------
Outstanding - beginning of 728,000 $ .75 - $ -
period
Granted below fair value - - - -
Grant at fair value 587,500 1.05 737,000 .75
Exercised - - - -
Forfeited (21,000) .86 (9,000) .75
---------- ---------- ----------- ----------
Outstanding - end of period 1,294,500 $ .89 728,000 $ .75
========== ========== =========== ==========
Exercisable at end of period 238,667 .75 - -
Weighted average grant date fair value $ 1.05 $ .75
F-18
<PAGE>
Research Triangle Commerce, Inc.
Notes to Financial Statements
The following table summarizes information about the Company's stock options:
Options Outstanding at December 31, 1999
----------------------------------------------------
Remaining
Exercise Number Contractual Options
Price Outstanding Life Exercisable
------------ ---------------- --------------- --------------
$ .75 716,000 8.5 years 238,667
$ 1.00 517,500 9.5 -
$ 1.50 61,000 9.9 -
If the company had elected to recognize compensation expense based on fair
value of stock-based instruments at the grant date as prescribed by SFAS No.
123, its net loss for the year ended December 31, 1999, would have been
($3,002,000). The fair value of options was estimated using the minimum value
method with the following assumptions: expected life of 4 years for options
vesting over a 3 year period and 5 years for options vesting over a 4 year
period; interest rate (5.71%); no volatility and no dividend yield.
13. Commitments and Contingencies
The Company leases its facilities and equipment under operating and capital
lease agreements. Future minimum lease payments under noncancelable operating
and capital leases at December 31, 1999 are as follows:
Capital Operating
Leases Leases
------------ -------------
2000 $ 119,000 $ 583,000
2001 115,000 561,000
2002 114,000 577,000
2003 102,000 593,000
2004 92,000 606,000
------------ -------------
542,000 $2,920,000
-------------
Less amounts representing interest (116,000)
------------
426,000
Less current maturities (80,000)
------------
$ 346,000
============
Rent expense for the years ended December 31, 1999 and 1998 was $414,000 and
$202,000, respectively.
In September 1999, the Company entered into an agreement with a software
development company (the "software company"). The Company has agreed to sell
a minimum of $62,500 of software for the software company quarterly. If the
Company is unable to sell this amount, they have agreed to reimburse the
software company for the difference between the $62,500 and the amount sold.
This agreement expires September 30, 2000. The Company had accrued $12,000
associated with fourth quarter 1999 sales at December 31, 1999.
F-19
<PAGE>
Research Triangle Commerce, Inc.
Notes to Financial Statements
14. Subsequent Events (Unaudited)
The Company and Internet Commerce Corporation ("ICC") entered into an
Agreement and Plan of Merger dated June 14, 2000 (the "Merger Agreement").
Pursuant to the Merger Agreement, the Company will become a wholly-owned
subsidiary of ICC. ICC will pay aggregate consideration of $42,000,000, in
ICC stock and cash, to the Company's stockholders and option and warrant
holders.
On June 14, 2000 the Company signed a promissory note to ICC for $5,000,000.
The note shall be payable immediately after the effective date of the merger
provided however, that upon the merger and in any event on August 15, 2000,
the note would automatically convert into shares of the Company's common
stock. The Company converted the promissory note into 1,793,896 shares of
common stock.
On August 10, 2000 the Company adopted a Restricted Stock Plan. The Plan is
designed to award shares of common stock, on a restricted basis, to certain
individuals, conditioned upon and subject to the closing of a proposed
transaction between the Company and ICC. One stockholder will transfer
825,000 shares of common stock owned by the stockholder to the individuals
awarded in the form of restricted stock.
On August 15, 2000, the Company converted the Convertible Debenture into
738,500 shares of common stock.
F-20
