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U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
-----------
AMENDMENT NO. 1 TO
FORM 10-KSB
[x] Annual Report Under Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Fiscal Year Ended December 31, 1999
or
[ ] Transition Report Under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the Transition Period From _____ To _____
Commission File Number: 33-93994
MANGOSOFT, INC.
(Exact name of small business issuer as specified in its charter)
Nevada 87-0543565
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(State or other jurisdiction of (IRS Employer ID. No.)
incorporation or organization)
1500 West Park Drive, Suite 190 01581
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Westborough, MA (Zip code)
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(Address of principal executive offices)
Issuer's telephone number, including area code: (508) 871-7397
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the issuer was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes __ No X
---
Check if disclosure of delinquent filers in response to Item 405 of Regulation
SB is not contained in this form, and no disclosure will be contained, to the
best of the Issuer'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 ]
State issuer's revenues for the most recent fiscal year: $37,207
State the aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common equity
was sold, or the average bid and asked price of such common equity, as of a
specified date within the past 60 days: $144,870,663. This amount reflects the
average bid and ask price of the Company's common stock on the OTCBB on February
18, 2000. There is no established trading market in the Company's common stock
and, accordingly, such valuation may not necessarily reflect the actual market
value of the outstanding stock.
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
Common Stock 19,924,127 Shares
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$.001 Par Value (Outstanding on February 28, 2000)
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MANGOSOFT, INC.
(A DEVELOPMENT STAGE COMPANY)
INDEX TO FORM 10-KSB
<TABLE>
<CAPTION>
Page
PART 1
<S> <C> <C>
ITEM 1-- Description of Business ............................................................. 3
ITEM 2-- Description of Property ............................................................. 10
ITEM 3-- Legal Proceedings ................................................................... 10
ITEM 4-- Submission of Matters to a Vote of Security Holders ................................. 10
PART II
ITEM 5-- Market for Common Equity and Related Stockholder Matters ............................ 10
ITEM 6-- Management's Discussion and Analysis of Financial Condition and Results of
Operations......................................................................... 12
ITEM 7-- Financial Statements ................................................................ 14
ITEM 8-- Changes in and Disagreements With Accountants on Accounting and Financial
Disclosure......................................................................... 14
PART III.
ITEM 9-- Directors, Executive Officers, Promoters and Control Persons, Compliance With
Section 16(a) of The Exchange Act ................................................. 15
ITEM 10-- Executive Compensation .............................................................. 17
ITEM 11-- Security Ownership of Certain Beneficial Owners and Management ...................... 18
ITEM 12-- Certain Relationships and Related Transactions ...................................... 19
ITEM 13-- Exhibits and Reports on Form 8-K .................................................... 21
Signatures .................................................................................... 22
</TABLE>
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
(A) BUSINESS DEVELOPMENT
MangoSoft, Inc. (the "Company" or "MangoSoft") was incorporated as First
American Clock Co. ("First American") under the laws of the State of Nevada on
May 17, 1995. In connection with the organization of First American, the
President and founders contributed $8,000 cash as initial capital. To raise
funds with which to commence business operations, First American registered a
public offering of its securities on Form SB-2, Commission File No. 33-93994,
which became effective on October 25, 1995. Pursuant thereto, the Company sold
187,800 shares of its common stock (as adjusted for stock splits) to the public
at approximately $.29 per share and raised gross proceeds of $54,150. However,
the Company did not generate any significant revenues from its operations and
ceased such operations at the end of 1998.
Pursuant to an Agreement and Plan of Merger by and among MangoSoft
Corporation, MangoMerger Corp. and First American, dated August 27, 1999 (the
"Merger Agreement"), MangoSoft Corporation, a Delaware software development
company, merged with MangoMerger Corp., a wholly-owned subsidiary of First
American Clock, which changed its name to MangoSoft, Inc., so that MangoSoft
Corporation became the wholly-owned operating subsidiary of MangoSoft, Inc., the
Registrant (such transactions collectively referred to as the "Merger").
Pursuant to the terms of the Merger Agreement, all of the outstanding
capital stock of MangoSoft Corporation was converted into common stock of the
Company, par value $.001 per share (the "Common Stock"), in accordance with the
conversion rates specified in the Merger Agreement. In connection with the
Merger, the Company issued 15,008,998 shares of Common Stock to security holders
and certain debt holders of MangoSoft Corporation. As part of the Merger, the
Company completed a private placement of 3,000,000 shares of Common Stock for
net proceeds of approximately $3,098,827. The Company also issued 300,000 shares
of Common Stock to the placement agent in respect of such private placement.
Because First American Clock was a non-operating entity and the closing of such
private placement was contingent upon the closing of the Merger, the Merger was
accounted for as a capital transaction and treated as a reverse acquisition, so
that MangoSoft Corporation was deemed to have acquired First American Clock.
Accordingly, unless otherwise specified, historical references to the operations
of the Company are references to the operations of MangoSoft Corporation.
(B) BUSINESS OF THE COMPANY
GENERAL
The Company develops, markets and supports software solutions to address
the networking needs of small businesses, workgroups and large enterprises.
MangoSoft has leveraged its patented technology known as "Pooling" to develop
its suite of software solutions. Pooling is a clustered caching technology that
utilizes the network and resources of client personal computers ("PCs") and
workstations to deliver easy-to-use advanced software services normally
associated with servers. MangoSoft's products enhance the performance of PC
networks and deliver improved service utilizing existing equipment. The Company
competes primarily with general technology suppliers such as Microsoft
Corporation, Oracle Corporation and Novell, Inc., as well as emerging Internet
storage companies such as Xdrive, Inc. The Company anticipates that it will
encounter substantial competition from these companies as well as others
entering the Internet storage market.
The Company is a development stage company and has had limited revenues
since its inception. Those revenues that the Company has received have come from
a small number of customers. See "Management's Discussion and Analysis."
The Company is subject to a number of risks similar to those of other
companies in an early stage of development. Principal among these risks are
dependencies on key individuals, competition from other substitute products and
larger companies, the successful development and marketing of its products and
the need to obtain adequate additional financing necessary to fund future
operations. See "Risk Factors."
BUSINESS STRATEGY
MangoSoft's objective is to become the leading provider of
software-based service solutions that enable customers to maximize the return on
their networks. The Company intends to leverage its patented Pooling technology
with customer desktops and networks to deliver software based solutions, such as
Local Area Networks ("LANs"), Internet file services and web cache appliances.
The Company's strategy is to (a) advance its existing products (b) establish
more comprehensive distribution channels, including strategic partnerships (c)
commercialize MangoSoft Internet Drive ("Mangomind"), a new Internet service and
(d) extend its technology to additional software solutions.
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The Company is using its highly adaptable, Pooling technology to
develop additional software solutions based on the underlying concept of
aggregating the excess memory and disk resources of networked computers.
MangoSoft's current initiative is to deliver an easy-to use Internet file
service, which provides universal native data access and sharing from any
disparate location. Since its inception, the Company has invested approximately
$24 million of its capital in the aggregate in research and development
activities.
TECHNOLOGY
MangoSoft's core technology is based on patented, clustered cache
technology that unifies memory and disk resources across multiple systems to
provide a single shared resource accessible by all connected PC users. The
Company has identified this technology as "Pooling" and has filed nine patents,
four of which have been granted. The Pool's caching and virtual memory
techniques are made possible by a piece of software that creates the notion of
virtual storage. Virtual storage refers to the unification of memory and disk
resources of all systems on the network into a single, dynamic Pool. The
technology that makes this possible is the Company's "Distributed Storage
Engine." It manages both memory and disk resources across systems as a unified
shared virtual memory which is treated as a large, coherent cache. The global
memory and disk managers are integrated so that both access data using the same
set of global shared addresses.
The Distributed Storage Engine also eliminates any fixed home for data.
Data migrates to the most appropriate location based upon access patterns and
availability requirements. The cache is also implemented, meaning that many of
the control structures exhibit the same homeless behavior. Frequently referenced
data is stored close to where it is used, improving performance of the entire
system. Users can access data faster than if the data was statically stored on
another computer.
PRODUCTS
The Company's products include CacheLink, a software-based web caching
product that increases the delivery speed of Internet and Intranet content to
end-users, and Medley, a software-based file server that enables small
businesses to share files without investing in server hardware and its
associated administrative costs. The Company is completing the development of
Mangomind, an Internet file service which provides native data access and
sharing from user locations which have access to the Internet.
CacheLink is a software-based LAN-wide web-caching product designed to
increase the delivery speed of Internet or Intranet content in any size
business. CacheLink stores frequently viewed web pages for rapid retrieval by
all PCs connected to the LAN. It complements the browser cache in each PC by
linking them together into a single cache Pool. Access from any LAN-connected PC
enables a cached copy to be available to all other users. As CacheLink attempts
to be transparent and non-intrusive, it benefits LAN segments of all sizes, from
as few as two nodes to an entire LAN segment with hundreds of users. The
resulting system provides a faster-than-normal Internet experience for users and
allows web page fragments to be retrieved from the local LAN instead of from the
Internet or Intranet.
Medley creates a software-based file server by aggregating idle
capacity from connected PC's. Medley stores multiple copies of data and
automatically recovers information from system failures and maintains data
access. The Company's virtual server, referred to as a Pool, functions as
another local hard drive and is visible on every system in the Pool.
Mangomind, which is currently under development, will adapt the
Company's Pooling technology to deliver a virtual file service for the Internet
that enables universal native data access and sharing from any disparate
location. MangoSoft plans to offer the service through Internet Service
Providers ("ISPs"), Application Service Providers ("ASPs"), and Internet
community sites and portals. Since the intended
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virtual file service is an extended local file system, all programs operate
directly on the files and data, which essentially extends all Windows
applications to the Internet.
MARKETING AND SALES
The Company is pursuing a multi-faceted marketing strategy, which
includes: (i) the formation of strategic relationships with leading technology
companies that can provide distribution and co-marketing efforts for its
software and products; (ii) the internal development of an in-house sales and
marketing team; (iii) the formation of a distribution channel with
manufacturer's representative organizations; and (iv) the engagement of both an
outside advertising agency and public relations firm. In addition, MangoSoft
intends to establish technology partnerships to explore, develop, market and
distribute other applications related to its Pooling technology.
The Company is pursing the following strategic partnerships: ISPs, who
sell its CacheLink product to the enterprise market; original equipment
manufacturers of network hardware, such as communications devices that enable
shared Internet access throughout companies; and ASPs to act as distribution
partners for Mangomind. MangoSoft intends to commercialize bundled products and
establish distribution channels through these relationships. The Company's
ability to formulate strategic partnerships and align itself with other similar
technology companies will greatly impact its future operations and financial
position.
PRODUCT SUPPORT
MangoSoft provides channel and technical support to its partners
through Internet communication, electronic mail and a traditional telephone
support line. It depends on its resellers to provide end-user support and
troubleshooting. The Company maintains a specific reseller area on its web site
that includes a frequently asked questions sheet and regularly updated support
information. Analysis of support calls is used to improve and enhance both the
product and the web site content.
INTELLECTUAL PROPERTY
The Company considers elements of its software and its Pooling
technology to be proprietary. It relies on a combination of trade secrets,
copyright and trademark law, contractual provisions, confidentiality agreements,
and certain technology and security measures to protect its proprietary
intellectual property, technology and know-how. The Company's future results of
operations are highly dependent on the proprietary technology that it has
developed internally. Consequently, the Company has taken actions to secure our
proprietary technology in the form of patent protection. If the Company is
denied its patent requests, either individually or as a group, management
believes that there would be a material adverse impact on its business.
To date, the Company has been granted four patents for: (1) System and
Method for Providing Highly Available Data Storage Using Globally Addressable
Memory on June 1, 1999; (2) Structured Data Storage Using Globally Addressable
Memory on June 29, 1999; (3) Remote Access and Geographically Distributed
Computers in a Globally Addressable Storage Environment on November 16, 1999;
and (4) Shares client-side Web Caching Using Globally Addressable Memory on
February 15, 2000. The Company's Distributed Storage Engine is not covered by a
single patent. The Company's issued patents cover various inventions
incorporated into the Distributed Storage Engine or improvements in such
inventions. In addition, the Company previously filed two provisional patent
applications. One of these provisional patent applications has expired and one
is still pending. The Company has applied for five other U.S. patents which
applications are still pending. The Company has also filed patent applications
outside of the U.S. that are counterparts to the issued patents and pending
applications.
The Company is actively seeking an external solution for its data
encryption needs. The Company expects to enter into an agreement with an
encryption technology company. Such agreement will most likely require that
MangoSoft make limited royalty payments to such company based on the volume of
its sales.
EMPLOYEES
As of December 31, 1999, the Company had 46 full-time employees, of
which 41 were in product research, development and support, 2 were in sales and
marketing and 3 were in finance and administration. The Company's success is
highly dependent on its ability to attract and retain qualified employees.
Competition for employees is intense in the software industry. To date, the
Company believes it has been successful in its efforts to recruit qualified
employees, but there is no assurance that it will continue to be as successful
in the future. None of the Company's employees is subject to collective
bargaining agreements. The Company believes its relations with its employees are
excellent.
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RISK FACTORS
Limited Operating History and History of Substantial Operating Losses
The Company's current operations substantially commenced in May 1997.
Accordingly, the Company's prospects must be evaluated in light of the problems,
expenses, delays and complications normally encountered with any early stage
business. The Company has a history of substantial operating losses since
inception (June 1995) and has an accumulated deficit of approximately $72.2
million as of December 31, 1999. For its fiscal years ended December 31, 1999
and 1998, the Company's losses from operations were $27.8 million and $13.1
million, respectively. Such losses have resulted primarily from costs incurred
in research and development activities, the establishment of an initial sales
and marketing force, and general and administrative expenses. The Company
expects to incur additional operating losses over the foreseeable future and
expects cumulative losses to increase substantially as the Company's marketing,
sales, and research and development efforts expand. The Company has historically
experienced cash flow difficulties primarily because its expenses exceed its
revenues.
Need for Expanded Market Acceptance of the Company's Products; Concentration of
Revenue
The Company's 1999 and 1998 product revenues of $37,207 and $245,406,
respectively, have been derived primarily from sales of the prior versions of
its Medley product through the Company's relationship with SVA Japan, Inc. The
Company expects to derive a substantial majority of its revenues in the
foreseeable future from the sale of CacheLink, MIND and its updated Medley
product, none of which has previously been marketed by the Company. Accordingly,
the Company's future financial performance will depend on the growth in demand
for and acceptance of new software products. As is typical in new and evolving
markets, demand for and market acceptance of products are subject to a high
level of uncertainty. The Company has limited experience in commercially
providing software products and services and the Company's MIND product is still
only a prototype and will not be available for commercial sale until at least
the fourth quarter of 2000. In addition, the small business market is relatively
young and there are few proven products. There can be no assurance that the
Company will generate business from these products or that its market acceptance
will increase. If these markets fail to develop, develop more slowly than
expected or attract new competitors, or if the Company's products do not achieve
market acceptance, the Company's business, financial condition and results of
operations will be materially and adversely affected. In addition, the loss of
SVA Japan, Inc. as a reseller could have a material affect on the Company's
business financial condition and results of operations.
Evolving Market Strategy
The Company expects its future marketing efforts will substantially focus
on developing strategic relationships with other larger public and private
companies ("Channel Sources") that seek to augment their business by directly or
indirectly offering to their customers the Company's products. To date, the
Company's only significant Channel Sources are with US Online and SVA Japan,
Inc. The inability to receive, manage or retain additional Channel Sources, or
their ability to market the Company's products effectively or provide timely and
cost effective customer support and service, could materially adversely affect
the Company's business, operating results and financial condition.
Expansion and Lack of Liquidity
The Company will require substantial additional capital to finance its
future growth and product development activities. The Company intends to use a
significant portion of the proceeds from the securities sales in the first
quarter of 2000 for current operating expenses and to expand its operations. The
expansion of the Company's operations will be dependent in large measure on the
acceptance of its technology. Although the Company has identified certain areas
for potential expansion, there can be no assurance that the Company will be able
to expand its operations successfully. The Company may also expand its
operations through acquisitions. The Company currently has no agreements,
understandings or commitments and is not engaged in any negotiations relating to
any potential acquisitions. There can be no assurance that the Company will
effect any acquisitions or that the Company will be able to successfully
integrate into its operations any acquired businesses.
The future rollout of its MIND Internet service may require additional
investment capital. The timing and amount of the Company's capital requirements
will depend on many factors, including:
o acceptance and demand for the Company's products;
o the costs of developing new products or enhancing existing new products;
o the costs associated with expanding the Company's operations; and
o the number and timing of acquisitions, if any.
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If the Company issues additional stock to raise capital, current
ownership percentages may be reduced. If funding is insufficient at any time in
the future, the Company may be unable to develop or enhance its products, take
advantage of business opportunities or respond to competitive pressures, any of
which could harm the Company's business.
Potential Delisting; Possible Volatility of Stock Price
Although the Company will attempt to do so, there can be no assurance
that the Company will be able to maintain its listing on the OTCBB, which would
require it to register its common stock under Federal Securities laws by
mid-April 2000. For the Common Stock to thereafter be included for trading on
the National Quotation Bureau "Pink Sheets," a market maker must make certain
filings with the National Quotation Bureau. There can be no assurance that any
such filings will be made or that if made, the common stock will be accepted for
inclusion into the "Pink Sheets." Even if included, a trading market may not
develop or be sustained. Regardless, since there may not be a trading market for
the common stock, investors may not be able to liquidate their investment.
Moreover, even if the common stock is included for trading in the "Pink Sheets,"
the price of the common stock may be adversely affected when an aggregate of
18,349,127 shares of the common stock become eligible for sale pursuant to (i)
Rule 144 and (ii) registration rights afforded certain stockholders of the
Company.
Uncertain Adoption of Internet as a Medium of Commerce and Communications, and
Dependence on the Internet
Demand and market acceptance for recently introduced services and
products like those offered by the Company are subject to a high level of
uncertainty. The use of the Internet in marketing and advertising and otherwise,
particularly by those individuals and enterprises that have historically relied
upon traditional means of marketing and advertising, generally requires the
acceptance of a new way of conducting business and exchanging information.
Enterprises that have already invested substantial resources in other means of
conducting business and exchanging information may be particularly reluctant or
slow to adopt a new strategy that may make their existing resources and
infrastructure less useful. There can be no assurance that the market for the
Company's products will develop and if it fails to develop, develops more slowly
than expected or becomes saturated with competitors, or if the Company's
products do not achieve market acceptance, the Company's business, operating
results and financial conditions will be materially adversely affected. The
Company's ability to derive revenues will also depend upon a robust industry and
the infrastructure for providing Internet access and carrying Internet traffic.
The Internet may not prove to be a viable commercial marketplace because of
inadequate development of the necessary infrastructure or timely development of
complementary products, such as high speed modems. Moreover, other critical
issues concerning the commercial use of the Internet (including security,
reliability, cost, ease-of-use, access, and quality of service) remain
unresolved and may impact the growth of Internet use. Because global commerce
and online exchange of information on the Internet and other similar open
wide-area- networks ("WANs") are new and evolving, it is difficult to predict
with any assurance whether the Internet will prove to be and remain a viable
commercial marketplace. If the infrastructure necessary to support the
Internet's commercial viability is not developed, or if the Internet does not
become a viable marketplace, the Company's business, operating results and
financial condition would be materially and adversely affected.
Intellectual Property; Changing Technology; Potential Infringement
The Company owns trademarks on "CacheLink," "Medley," "Mango,"
"MangoSoft," "Pool" and "Pooling." In addition, the Company has been granted
four patents and two provisional patents. Four other patents have been applied
for and are pending. There can be no assurance, however, that the patents will
be issued, and if issued, there can be no certainty that claims allowed in any
such patents would provide competitive advantages or protection for the
Company's products, or that such claims will not be successfully challenged by
competitors. The Company considers certain elements of its software and its
Pooling technology to be proprietary. The Company relies on a combination of
trade secrets, copyright and trademark law, contractual provisions,
confidentiality agreements and certain technology and security measures to
protect its proprietary intellectual property, technology and know-how. The
Company's business is subject to rapid changes in technology including potential
introduction of competing products and services which could have a material
adverse impact on the Company's business. There are existing hardware-based file
server and web caching products that could be used as the basis for the
development of technology that would be directly competitive with the technology
employed by the Company. In addition, there can be no assurance that research
and development by others will not render the Company's technology obsolete or
uncompetitive. Furthermore, in a technology-based industry, there can be no
assurance that a claim of patent or other infringement will not be made against
the Company. While the Company is not aware of any such claims, no infringement
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studies have been conducted on behalf of the Company. Despite the Company's
efforts to protect its proprietary rights, existing copyright, trademark, patent
and trade secret laws afford only limited protection.
Moreover, effective protection of copyrights, trade secrets, trademarks and
other proprietary rights may be unavailable or limited in certain foreign
countries and territories. There can be no assurance that these domestic and
foreign laws, in combination with the steps taken by the Company to guard its
proprietary rights, will be adequate to prevent misappropriation of its
technology or other proprietary rights.
Regulatory Acceptance of the Company's Technology; Government Regulation, Legal
Uncertainties and Regulatory Policy Risks
The Company is not currently subject to direct regulation by any
government agency, other than regulations applicable to businesses generally.
However, due to the increasing media attention focused on the Internet, it is
possible that a number of laws and regulations may be adopted with respect to
the Internet, covering issues such as user privacy, and pricing and
characteristics and quality of products and services. The adoption of any such
laws or regulations may decrease the growth of the Internet, which could in turn
decrease the demand for the Company's products and increase the Company's cost
of doing business or cause the Company to modify its operations, or otherwise
have an adverse effect on the Company's business, operating results and
financial condition. Moreover, the applicability to the Internet of existing
laws governing issues such as property ownership, libel and personal privacy is
uncertain. The Company cannot predict the impact, if any, that future regulation
or regulatory changes may have on its business.
Competition; No Substantial Barriers to Entry into the Company's Business; Price
Erosion
The markets for the Company's products are characterized by rapid
technological change, evolving industry standards, customer demands and intense
competition. The Company competes with a number of large public and private
companies, including many large computer and software designers which have
created technologies and products that perform similar and/or competing
functions to those of the Company's products. The Company also competes with
hardware providers that have bundled in a certain level of networking
functionality on top of the hardware, all-in-one Internet access solutions and
virtual office workspace offerings. Many of the Company's competitors have
greater resources, including more extensive facilities, larger research and
development teams, more experienced marketing teams, greater capital resources
and equipment, and the ability to offer a broader range of services than the
Company. As a result, the Company's ability to remain competitive will depend in
significant part upon it being able to successfully and continually develop and
introduce, in a timely and cost-effective manner, enhancements to existing
products in response to both evolving demands of the marketplace and competitive
product offerings. In addition, over a long-term period, the Company's ability
to remain competitive will depend in significant part upon its ability to
develop and introduce, in a timely and cost-effective manner, new products to
expand and diversify the Company's product offerings. There can be no assurance
that the Company will be successful in developing and introducing, in a timely
and cost-effective way, any enhancements or extension for existing products or
any new products. In addition, there can be assurance that the competitors of
the Company will not achieve technological advances that provide a competitive
advantage over the Company's products or that make such products obsolete.
Management of Growth; Dependence on Key Personnel and Ability to Attract New
Personnel
Even if the Company successfully generates significant revenue growth,
there can be no assurance that the Company will effectively develop and
implement systems, procedures or controls adequate to support the Company's
operations or that management will be able to achieve the rapid execution
necessary to fully exploit the opportunity for the Company's products. To manage
its business and any growth, the Company must continue to implement and improve
its operational and financial systems and continue to expand, train and manage
its employees. In particular, management believes that the Company will need to
hire additional employees. If the Company is unable to manage growth
effectively, the Company's business, operating results and financial condition
will be materially affected. The success of the Company is dependent upon the
efforts of Dale Vincent, the Company's President and Chief Executive Officer;
Scott H. Davis, the Company's Vice President and Chief Technology Officer;
Robert E. Parsons, the Company's Chief Financial Officer; and other members of
senior management. The loss of Mr. Vincent, Mr. Davis, Mr. Parsons, or of any of
the Company's senior management, could delay or prevent the Company from
achieving its objectives. The Company is also highly dependent upon its ability
to continue to attract and retain additional management and technical personnel
because of the specialized nature of the Company's business.
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Competition for such qualified personnel is intense, and there can be no
assurance that the Company will be able to retain existing personnel or attract,
assimilate or retain additional qualified personnel necessary for the
development of its business. The inability of the Company to attract and retain
qualified personnel would have a material adverse effect on the Company's
business, financial condition and results of operations.
Risk of Errors or Failure in Software Products
Complex products such as CacheLink and Medley, or any new product which
may be developed by the Company in the future, may contain errors, failures,
bugs or defects, particularly when first introduced, and as updates, upgrades
and new versions are released. The introduction by the Company of products with
errors, failures, bugs, defects or otherwise with reliability, quality or
compatibility problems could result in adverse publicity, product returns,
reduced orders, uncollectible accounts receivable, delays in collecting accounts
receivable, product redevelopment costs, loss of or delay in market acceptance
of the Company's products, or claims by the customer or others against the
Company. Alleviating such problems could require significant expenditures of
capital and resources by the Company's customers. Errors, failures, bugs or
defects in the Company's products could have a material adverse effect on the
Company's business, financial condition and results of operations.
No Dividends
The Company intends to retain any future earnings to finance its
operations and does not intend to pay dividends.
Concentration of Share Ownership
As of December 31, 1999, the Company's directors and officers, together
with entities affiliated with them, beneficially own approximately 21% of the
Company's capital stock, including all outstanding options to purchase shares of
the Company's common stock. These stockholders, acting as a group, may continue
to have significant influence over the outcome of all matters submitted to the
stockholders for approval, including the election of a majority of the Company's
Board of Directors and the determination of all corporate actions. The voting
power of these stockholders could also have the effect of delaying or preventing
a change in control of the Company. Such influence by management could have the
effect of discouraging others from attempting to take-over the Company thereby
increasing the likelihood that the market price of the common stock will not
reflect a premium for control.
Year 2000 Risk
The Company has reviewed its internal computer programs and systems to
ensure that they are Year 2000 compliant and has not experienced any material
adverse effects as a result of the Year 2000 problem. While the Company believes
that its current systems are compliant and that no additional material
expenditures are required to address Year 2000 compliance of its internal
computer systems, there can be no assurance to that effect. In addition, the
Company cannot predict the effect of the Year 2000 problem on the vendors,
customers and other entities with which the Company transacts business, or with
whose products the Company's products interact. There can be no assurance that
the effect of the Year 2000 problem on such entities will not have a material
adverse effect on the Company's business, financial condition and results of
operations.
Registration Rights of Other Securityholders-Potential Costs to the Company;
Adverse Effects on Future Financing and Stock Price
Pursuant to the merger agreement by and among the Company and First
American, the Company is obligated to use reasonable efforts to file a
registration statement relating to the resale of up to 1,000,000 shares of the
Company's common stock sold in a Rule 506 Offering completed in August of 1999,
300,000 shares of the Company's common stock held by the placement agent from
that offering and 1,000,000 shares of the Company's common stock held by
Palisade Private Partnership, L.P. The Company is obligated to use its best
efforts to have such registration statement declared effective as soon as
practicable after filing with the Securities Exchange Commission and shall keep
such registration statement effective for a period of at least one year. These
registration rights could result in substantial future expense to the Company
and could adversely affect any future equity or debt financing. Furthermore, the
sale
9
<PAGE>
of common stock held by or issuable to the holders of registration rights, or
even the potential of such sales, could have an adverse effect on the market
price of the Common Stock.
ITEM 2. DESCRIPTION OF PROPERTY
The Company's research and development, sales and marketing, customer
support and administrative offices are located in Westborough, Massachusetts,
and consist of approximately 23,000 square feet of office space under a lease
expiring on August 31, 2001. The Company's offices are leased from Westborough
Five, an independent, third-party lessor. The lease terms include an annual base
rent of $511,268 per year plus a proportionate share of certain operating costs,
such as common area maintenance. The total rent expense on this facility in 1999
was $540,697.
The Company's offices have the capacity to accommodate approximately 100
employees.
ITEM 3. LEGAL PROCEEDINGS
On August 30, 1999, one of the Company's shareholders filed suit in
Orange County (CA) Superior Court alleging damages for fraud in the sale of
securities under both federal and California state law seeking a rescission of
the purchase agreement governing such sale of securities. The caption of the
matter is Rafik Y. Kammell, Plaintiff, v. Cachelink Corp., a Delaware
corporation, Steven Frank, individually, Leonard Davidson, individually, Value
Investing Partners, Inc., a corporation, Kevin R. Greene, individually, and Does
1 to 300, inclusive, Defendants, and the case number is OSCS 813867. The
stockholder alleges misrepresentations, both verbal and within a private
placement memorandum, of the Company's technology and product readiness, the
state of its marketing and sales activities and the returns the stockholder
expected from his investment in the Company. The stockholder further alleges
that these purported misrepresentations induced the stockholder's investment in
the Company. The shareholder seeks damages in the amount of $50,000, the amount
of the stockholder's original investment, plus interest. The Company has
answered the complaint, denied all material allegations and asserted various
affirmative defenses. Discovery has commenced. The Company believes that this
litigation will not have a material adverse effect on its business, financial
position, liquidity and results of operations, although there can be no
assurance as to the ultimate outcome of these matters.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF THE SECURITY HOLDERS
No matters were submitted during the fourth quarter of the year ended
December 31, 1999 to a vote of security holders of the Company, through the
solicitation of proxies or otherwise.
PART II
ITEM 5. MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS
(A) Market Information
As of December 31, 1999, the Company had a total of 19,924,127
shares of common stock issued and outstanding. The Company estimates
that approximately 1,575,000 shares are publicly tradable, including
187,800 shares (as adjusted for the 1.734 stock split in conjunction
with the merger) registered and issued under Form SB-2, Commission File
No. 33-93994, which became effective on October 25, 1995; and 1,387,200
shares previously restricted under Rule 144 of the Securities Act
("Rule 144") for which the two year holding period elapsed in December
1999.
The Company estimates that approximately 18,349,127 shares, or
92.1% of the total issued and outstanding shares, remain restricted
under Rule 144 and are not currently available to be publicly traded as
follows:
Shares issued in conjunction with the merger
in September 1999 ....................................... 15,308,998
Shares sold to accredited investors under
Regulation D (see Item 5D below)......................... 3,000,000
Shares issued under the December 1999
exercises of employee stock options...................... 40,129
----------
Estimate of total restricted shares under Rule 144......... 18,349,127
==========
10
<PAGE>
The registered common shares have been trading on the
Over-The-Counter Bulletin Board Market ("OTCBB") since April 1997.
However, trading has been very limited and sporadic, and there has not
generally been an active public trading market for the securities. The
following sets forth the high and low bid price quotations for each
calendar quarter that trading occurred during the last two fiscal
years. Such quotations represent interdealer prices, without retail
markup, markdown or commission, and may not represent actual
transactions:
High Low
1999 ---- ---
First Quarter $ 7.50 $1.73
Second Quarter 11.00 4.00
Third Quarter 13.13 4.50
Fourth Quarter 9.75 3.25
1998
First Quarter No Shares Traded
Second Quarter $1.56 $1.50
Third Quarter 1.56 1.50
Fourth Quarter 1.25 1.25
Although the Company will attempt to do so, there can be no
assurance that the Company will be able to maintain its trading
privileges on the OTCBB. The OTCBB may take the position that the
Company is not obligated to file reports pursuant to Section 13 or
15(d) of the Securities and Exchange Act of 1934 (the "Exchange Act")
and therefore is not eligible to maintain its trading privileges on the
OTCBB until such time as the Company files an effective Registration
Statement under the Securities Act or the Exchange Act as a result of
which the Company is required to file reports under Section 13 or 15(d)
of the Exchange Act or is otherwise obligated to file reports pursuant
to Section 13 or 15(d) of the Exchange Act. If the Company is not able
to maintain its trading privileges on the OTCBB, the Company's common
stock may trade on the National Quotation Bureau "Pink Sheets". In
order to trade on the "Pink Sheets", a market-maker must make certain
filings with the National Quotation Bureau. There can be no assurance
that any such filings will be made, or that if made, the common stock
will be accepted for inclusion into the "Pink Sheets". Even if
included, a trading market may not develop or be sustained. Regardless,
since there may not be a trading market for the common stock, investors
may not be able to liquidate their investment.
(B) Holders
As of February 28, 2000, there were approximately 400
record holders of the Company's common stock. This number does not
include stockholders for whom shares were held in a "nominee" or
"street name."
(C) Dividends
The Company has not previously paid any cash dividends on the
common stock and does not anticipate or contemplate paying cash
dividends on the common stock in the foreseeable future. It is the
present intention of management to utilize all available funds for the
development of the Company's business.
The only restrictions that limit the ability to pay dividends
on the common stock are those imposed by law. Under Nevada corporate
law, no dividends or other distributions may be made which would render
the Company insolvent or reduce assets to less than the sum of its
liabilities plus the amount needed to satisfy any liquidation
preference.
(D) Recent sales of unregistered securities and use of proceeds
In conjunction with the merger on September 7,1999, the
Company sold 3,000,000 shares of its common stock at $1.25 per share to
accredited investors under Rule 506 of Regulation D promulgated under
the Securities Act of 1933, as amended, (the "Securities Act"). The
$3,690,000 in net proceeds from the sale was used for working capital
and general corporate purposes.
11
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Management's Discussion and Analysis of Financial Condition and Results of
Operations contains trend analysis and other forward-looking statements. Actual
results could differ materially from those set forth in the forward-looking
statements as a result of factors set forth elsewhere herein, including under
"Risk Factors." This discussion should be read in conjunction with the
accompanying consolidated financial statements for the periods specified and the
associated notes. Further reference should be made to the Company's Form 8-K
filed with the Securities and Exchange Commission on September 21, 1999 (as
amended on October 27, 1999).
As described in Note 2 to the Consolidated Financial Statements, the
accounting applied in the merger of First American Clock Co. and MangoSoft
Corporation differs from the legal form. As the transaction has been accounted
for as a reverse acquisition, the historical financial results of the Company
are those of MangoSoft Corporation. For purposes of the following discussion,
the reporting entity is referred to interchangeably as the "Company" or
"MangoSoft".
The Company develops and markets advanced software technology to simplify,
expand and integrate networking and pooled use of computer resources. The
Company is considered to be a development stage company since it has not
generated significant revenues from the products that have been
developed to date. The Company is subject to a number of risks similar to those
of other companies in an early stage of development. Principal among these risks
are dependencies on key individuals, competition from other substitute products
and larger companies, the successful development and marketing of its products
and the need to obtain adequate additional financing necessary to fund future
operations.
RESULTS OF OPERATIONS - YEARS ENDED DECEMBER 31, 1999 AND 1998
Revenue decreased from $245,406 in 1998 to $37,207 in 1999 due to the
Company's decision to defer sales and marketing efforts and focus on improving
the product following a product recall in 1998. A single customer, Hitachi,
Ltd., represented 67% of the 1999 revenue, while another customer, Nippon
Telephone & Telegraph, represented 85% of the 1998 revenue. No other customer
represented 10% or more of revenue in 1999 or 1998.
Cost of revenues decreased to $363 from $91,529 due to the lower level
of revenue. In 1999, the products sold were delivered over the Internet and the
Company incurred no disk replication costs as had occurred in 1998.
Operating expenses, excluding stock-based compensation costs, decreased
46.4% to $7,103,132 in 1999 from $13,259,855 in 1998. The decrease is due to
changing the sales distribution channel from a retail approach to value added
resellers, consolidating corporate functions and reducing total personnel.
A summary of the operating expenses and the (decreases) increases is as
follows:
<TABLE>
<CAPTION>
Year Ended December 31, Increase (Decrease)
----------------------- -------------------
1999 1998 $ Amount %
---- ---- -------- -
<S> <C> <C> <C> <C>
Research and development.............. $ 4,420,903 $ 6,615,558 $ (2,194,655) (33.2)
Selling and marketing................. 412,842 2,608,190 (2,195,348) (84.2)
General and administrative............ 2,204,499 3,388,312 (1,183,813) (34.9)
Consulting fees paid to related party. 64,888 647,795 (582,907) (90.0)
----------- ------------ ------------- ----
7,103,132 13,259,855 (6,156,723) (46.4)
Stock-based compensation.............. 20,734,695 -- 20,734,695 100.0
----------- ------------ ------------- -----
Total......................... $27,837,827 $ 13,259,855 $ 14,577,972 110.0
=========== ============ ============= =====
</TABLE>
Operating expenses, including stock-based compensation costs, increased
110.0% to $27,837,827 in 1999 from $13,259,855 in 1998.
12
<PAGE>
Stock-based compensation costs were $20,734,695 in 1999. Of this total,
$10,085,922 related to research and development, $1,303,333 related to selling
and marketing and $9,345,440 related to general and administrative activities.
The stock-based compensation costs represent the excess of the fair value of the
Company's common stock over the exercise price of the variable stock option
grants during the year. There were no stock-based compensation costs in 1998.
The loss from operations increased from $13.1 million in 1998 to $27.8
million in 1999, or 112.1%, due to the stock-based compensation costs.
Interest income declined from $168,498 in 1998 to $13,542 in 1999 due to
generally lower average cash balances in 1999, as only $2.0 million was raised
during the year through debt offerings, versus the $13.1 million raised at the
end of 1997 through the sale of the Redeemable Convertible Preferred Stock,
Series E.
Interest expense increased from $69,233 in 1998 to $5.2 million in 1999
due to the issuance of the 12% convertible notes in February 1999. Approximately
$4.9 million of the interest cost in 1999 represents the value of a beneficial
conversion feature. Pursuant to the merger, the notes converted at a price of
$.71 per share, which was lower than the fair value of the common stock. The
difference between the $.71 and the fair value, which constitutes a beneficial
conversion feature, has been recorded as interest expense. Since the accrued
interest on the 12% convertible notes also converted to Company common stock in
conjunction with the merger, virtually none of the interest expense required an
outlay of cash in 1999.
The net loss increased 152.6% to $33,021,645 in 1999 from $13,073,913 in
1998 due primarily to the stock-based compensation costs and the beneficial
conversion feature of the 12% convertible notes.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
MangoSoft Corporation was formed in June 1995 and, as part of the
formation, its founder and former Chief Executive Officer purchased 750,000
shares of common stock for $750. Through December 1999, MangoSoft Corporation
has raised an additional $41.8 million in financing from the placement of
private debt and equity securities, as follows:
<TABLE>
<CAPTION>
Date Description $ Millions
---- ----------- ----------
<S> <C> <C>
August 1995 Convertible preferred stock, Series A................. $ 1.5
December 1995 Convertible preferred stock, Series B................. 2.0
June 1996 Redeemable convertible preferred stock, Series C...... 9.0
April 1997 Redeemable convertible preferred stock, Series D...... 6.4
December 1997 Redeemable convertible preferred stock, Series E...... 13.1
October 1998 Demand notes issued to related parties................ 2.0
February 1999 12% Senior Secondary Secured Convertible Notes. 4.0
September 1999 Sale of 3 million common shares....................... 3.8
-----
Total $41.8
=====
</TABLE>
In addition to the above, MangoSoft Corporation has, at times, depended
upon bank debt, loans from stockholders and Directors and credit from suppliers
to meet interim financing needs. Bank debt of $750,000, incurred to purchase
capital equipment, was repaid using proceeds received from issuance of the 12%
Senior Secondary Secured Convertible Notes (the "12% convertible notes").
Borrowing from stockholders and Directors have generally been refinanced with
new debt instruments or converted to additional equity. At December 31, 1999,
notes payable consisted of $.1 million to an insurance company representing the
balance due on the Company's Directors and Officers insurance policy, and $.2
million to stockholders and Directors. An additional $2.9 million in financing
was provided through accounts payable, accrued expenses and other trade credit,
a significant portion of which was past due.
13
<PAGE>
The proceeds raised have been used in the development of the Company's
current products with approximately $23.0 million invested in research and
development and $9.5 million in sales and marketing, principally due to an
earlier attempt to distribute its products through traditional retail software
channels. The remaining proceeds have been used for working capital and general
corporate purposes.
To date, product sales have provided a minor source of liquidity. From
inception through December 31, 1999, MangoSoft generated $.3 million in sales
and incurred cumulative net losses of $69.1 million, including losses of $33.0
million and $13.1 million during the years ended December 31, 1999 and 1998,
respectively. In the fourth quarter of 1998, MangoSoft significantly modified
its operations in an effort to reduce its operating costs and net losses. The
modifications included changing the sales distribution channel from a retail
approach to value added resellers, consolidating corporate functions and
reducing total personnel.
At December 31, 1999, the Company had a cash balance of $29,959 and a
working capital deficit of $3.1 million. The working capital deficit included
$.2 million in stockholder and Director loans and $.7 million in other financing
from related parties.
Since inception, the Company has satisfied its working capital and other
liquidity needs principally through the issuance of equity and debt securities,
loans from stockholders and Directors, trade credit and bank debt. Unless the
Company can generate a significant level of on-going revenue and attain adequate
profitability in the near-term, it will be necessary to seek additional sources
of equity or debt financing. Although the Company has been successful in raising
past financing, there can be no assurance that any additional financing will be
available to the Company on commercially reasonable terms, or at all. Any
inability to obtain additional financing when needed will have a material
adverse effect on the Company, requiring the Company to significantly curtail or
possibly cease its operations. In addition, any additional equity financing may
involve substantial dilution to the interests of the Company's then existing
shareholders.
Subsequent to December 31, 1999, the Company received $29.4 million from
the sale of 2.5 million shares of Convertible Preferred Stock, Series A, (the
"Preferred Stock") to accredited investors for $4.00 per share and approximately
4.0 million shares of common stock to accredited investors for $5.00 per share.
Receipt of an additional $3.4 million from the sale of an additional 680,000
common shares is subject to the completion of offering documentation, and such
funds are currently held in escrow. Under the terms of the Preferred Stock
issuance, the Preferred Stock automatically converted into common stock on a
one-for-one basis when $10 million or greater was raised in the subsequent sale
of common stock. The sale of the common and Preferred Stock is exempt from
registration under the Securities Act pursuant to Section 4(2) thereof under
Regulation D promulgated thereunder.
Management believes the $29.4 million in proceeds from the sale of the
common and Preferred Stock, which funds are currently available for use by the
Company, will be adequate to fund the Company's existing operations for at least
the next twelve (12) months. The Company can provide no assurances, however,
that such amount will adequately fund its operations for such period, and it may
be necessary for the Company to obtain additional financing.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No.
133 establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. The provisions of SFAS No. 133 are effective for periods
beginning after June 15, 2000. The Company is currently evaluating the effect,
if any, SFAS No. 133 will have on the Company's financial position and its
results of operations. The Company will adopt this accounting standard on
January 1, 2001, as required.
ITEM 7. FINANCIAL STATEMENTS
Incorporated by reference from the consolidated financial statements
and notes thereto of MangoSoft, Inc and subsidiary which are attached hereto
beginning on page 24.
ITEM 8. CHANGES IN AND DISAGEEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Incorporated by reference from Form 8-K filed with the Securities and
Exchange Commission on January 20, 2000 (as amended on January 28, 2000),
MangoSoft, Inc. dismissed its then current independent accountant, David T.
Thomson P.C. ("Thomson") on January 11, 2000 and appointed Deloitte & Touche LLP
as its independent accountant
14
<PAGE>
During the fiscal years ended December 31, 1999 and 1998, there were no
disagreements between First American and Thomson on any matter of accounting
principles or practice, financial statement disclosures, auditing scope or
procedure which, if not resolved to the satisfaction of Thomson would have
caused him to make reference to the subject matter of the disagreement in
connection with his report.
PART III.
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
(A) Identify directors and executive officers
Directors are elected by the stockholders or by affirmative
vote of a majority of the directors then in office, and hold office
until they first resign or a successor is duly elected. Officers and
other employees serve at the will of the Board of Directors. The
following table sets forth information as to the Company's directors,
executive officers and significant employees. All of the Company's
officers provide services to the Company on a full-time basis.
Name Age Position
---- --- --------
Dale Vincent 53 President, Chief Executive Officer and Director
Scott H. Davis 42 Vice President and Chief Technology Officer
Daniel J. Dietterich 42 Vice President - Engineering
Robert E. Parsons 49 Vice President and Chief Financial Officer
Craig D. Goldman (1) 55 Director, Non-Executive Co-Chairman
Dr. Ira Goldstein 55 Director
Paul C. O'Brien (2) 60 Director, Non-Executive Co-Chairman
Ravi P. Singh 41 Director
Selig Zises 56 Director
-------------
(1) Chairman of the Compensation Committee; Member of the Audit Committee
(2) Chairman of the Audit Committee; Member of the Compensation Committee
DALE VINCENT was appointed President, Chief Executive Officer
and elected a Director following the merger in September 1999.
Previously, he served as the Chief Executive Officer of MangoSoft
Corporation since May 1999, as its Chief Financial Officer from
September 1998 to May 1999, and as a Director of MangoSoft Corporation
since July 1995. Mr. Vincent has over 25 years of senior financial and
business management experience, with the last 10 years developing and
funding companies in the software industry. Since April 1990, Mr.
Vincent has served as a Managing Director of ACAP, a private investment
company, the general partner of Associated Capital L.P,a private
investment company, and consults with Associated Capital L.P with
respect to its investment and marketing activities. He has also served
as a Director of MaMaMedia Inc. since 1996.
SCOTT H. DAVIS was appointed Vice President and Chief
Technology Officer following the merger in September 1999. He
previously served MangoSoft Corporation in the same capacity since
October 1998. From September 1995 through September 1998, he served
MangoSoft Corporation as the Director of Software Development. Prior to
joining MangoSoft Corporation in September 1995, Mr. Davis was employed
at Digital Equipment Corporation where he held a variety of engineering
and management positions over a 16-year period. Mr. Davis has also
spoken widely at industry conferences on such topics as Clustering and
RAID technology and holds numerous patents.
DANIEL J. DIETTERICH was appointed Vice President -
Engineering following the merger in September 1999. He previously
served MangoSoft Corporation in the same capacity since October 1998.
From March 1997 through September 1998, he served as its Director of
Development. From October 1995 through February 1997, he was a
Consulting Engineer. Prior to joining MangoSoft Corporation in October
1995, he held various engineering and technical leadership positions at
Digital Equipment Corporation for 15 years.
ROBERT E. PARSONS was appointed Vice President and Chief
Financial Officer following the merger in September 1999. He previously
served MangoSoft Corporation in the same capacity since August 1999.
From 1992 through August 1999, he was employed by Advanced Modular
Solutions, Inc., a privately held technology company that develops
networked client/server computing systems, high availability/fault
tolerant computing systems, network attached storage systems and
fully-integrated streaming video solutions. He served Advanced Modular
Solutions, Inc. as its Chief Financial Officer from 1997 to August
1999, as Director of Manufacturing during 1996 and 1997, and as
Controller from 1992 to 1996.
CRAIG D. GOLDMAN was elected a Director and Non-Executive
Co-Chairman following the merger in September 1999. He previously
served MangoSoft Corporation in the same capacity since June 1999. He
founded Cyber Consulting Services Corporation and has been its
President and Chief Executive Officer since 1996. Cyber Consulting
Services provides strategic, business and technology consulting
15
<PAGE>
services to Fortune 500 and startup companies. Mr. Goldman was
previously employed by Chase Manhattan Bank, N.A. for 11 years, most
recently serving as its Chief Information Officer from 1991 through
1996. Mr. Goldman serves as a Director of CMGI Inc., Engage Technology,
Inc., NaviSite, Inc. and PRT Group, Inc.
DR. IRA GOLDSTEIN was elected a Director following the merger
in September 1999. He previously served MangoSoft Corporation in the
same capacity from June 1999 to September 1999. Dr. Goldstein has been
the Chief Scientist at the LaserJet Imaging Division of Hewlett-Packard
Company ("HP") for the past two years. Prior to his current position,
he served HP as Chief Technology Officer for two years. Previously, he
managed a research center at HP Laboratories and various product
divisions in the areas of software development, networking, imaging and
security. Prior to joining HP in 1981, Dr. Goldstein served as
Executive Vice President of the Open Group and Director of the Open
Group Research Institute, where he built major programs focused on
distributed computing scaleable secure operating systems and world-wide
web technology. Prior thereto, he served as a scientist at the Xerox
Palo Alto Research Center, where he contributed to the evolution of
Smalltalk and developed architectures for personal information
environments, and as a Professor at the Massachusetts Institute of
Technology. Dr. Goldstein received his Ph.D. in applied mathematics
from Massachusetts Institute of Technology and his bachelor's degree in
pure mathematics from Harvard University.
PAUL C. O'BRIEN was elected a Director and Non-Executive
Co-Chairman following the merger in September 1999. He previously
served MangoSoft Corporation in the same capacity from June 1999 to
September 1999. Mr. O'Brien has over thirty years experience in the
telecommunications industry. He has been the President of Pan-Asia
Development, an investment firm concentrating on Asian ventures, since
1995. In December 1994, Mr. O'Brien founded The O'Brien Group, Inc., a
telecommunications investment and consulting firm that provides pro
bono consulting services for a wide variety of non-profit organizations
concentrating on fund-raising and public policy issues. Prior to
founding his firm, he was employed by New England Telephone where he
was appointed President and Chief Executive Officer in 1988 and
Chairman of the Board in 1993. Mr. O'Brien serves as a Director of
NETOPTIK and Renaissance Worldwide, and is non-executive Chairman of
the Board of View Tech and Cambridge Neuroscience. He is also a
Director of several private companies.
RAVI P. SINGH was elected a Director following the merger in
September 1999. He previously served MangoSoft Corporation in the same
capacity from June 1999 to September 1999. Mr. Singh has eighteen years
of investment banking and senior management experience, with the focus
on technology and emerging growth companies for the past ten years.
Since 1998, Mr. Singh has served as Managing Director and Head of
Technology Investment Banking at Punk, Ziegel & Company. Mr. Singh's
prior experience has included positions of General Partner and Managing
Director of Cowen & Company in New York; Managing Director of Forbes &
Walker Inc., a New York and Toronto based private equity investment
firm; and Chief Executive Officer and Director of Bacon Felt Company.
SELIG ZISES was elected a Director following the merger in
September 1999. He previously served MangoSoft Corporation in the same
capacity from July 1995 to September 1999. Mr. Zises has served as a
Managing Director and Treasurer of ACAP, Inc., the general partner of
Associated Capital L.P. since April 1990. In this capacity, he consults
with Associated Capital L.P. with respect to its trading and investment
activities. He was a co-founder of Integrated Resources, Inc. and
served as its Chairman and Chief Executive Officer from 1969 through
early 1989. Mr. Zises is the Chairman of the Board of Associated
Venture Management, a venture capital / merchant banking firm. He also
serves as a Director of Collagenesis, Inc.
(B) Identify significant employees
None other than those persons previously identified.
(C) Family relationships
None.
(D) Involvement in certain legal proceedings
No present officer or director of the Company: (1) has had any
petition filed, within the past five years, in Federal Bankruptcy or
state insolvency proceedings on such person's behalf or on behalf of
any entity of which such person was an officer or general partner
within two years of filing; or (2) has been convicted in a criminal
proceeding within the past five years or is currently a named subject
of a pending criminal proceeding (excluding traffic violations and
other minor offenses); or (3) has been the subject, within the past
five years, of any order, judgement, decree or finding (not
subsequently reversed, suspended or vacated) of any court or regulatory
authority involving violation of securities or commodities laws, or
barring, suspending, enjoining or limiting any activity relating to
securities, commodities or other business practice.
16
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth the total compensation paid to
the Company's chief executive officers and four most highly compensated
executives and significant employees in 1999, 1998 and 1997:
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long Term Compensation
----------------------------------------------
Annual Compensation ALL
Name and Principal --------------------- $ Restricted Securities Under $ LTIP Other
Position Year $ Salary $ Bonus Stock Awards Options / SARs Payouts Comp.
------------------ ---- -------- ------- ------------ ---------------- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Dale Vincent (1) 1999 150,000 -- -- 400,000 -- --
President and Chief 1998 201,200 -- -- -- -- --
Executive Officer 1997 -- -- -- -- -- --
Mick Jardine (2) 1999 -- -- -- -- -- --
President 1998 -- -- -- -- -- --
1997 -- -- -- -- -- --
Scott H. Davis 1999 128,000 19,000 -- 250,000 -- --
Vice President and Chief 1998 124,462 -- -- -- -- --
Technology Officer 1997 103,846 -- -- -- -- --
Daniel J. Dietterich 1999 119,139 6,050 -- 250,000 -- --
Vice President - 1998 113,692 -- -- -- -- --
Engineering 1997 106,462 -- -- -- -- --
Robert E. Parsons (3) 1999 43,269 25,000 (5) -- 160,000 -- --
Vice President and Chief 1998 -- -- -- -- -- --
Financial Officer 1997 -- -- -- -- -- --
James M. Stark (3)(4) 1999 36,058 25,000 (5) -- 200,000 -- --
Senior Vice President - 1998 -- -- -- -- -- --
Sales and Marketing 1997 -- -- -- -- -- --
</TABLE>
-------------------------
(1) From March 1998 to September 1998, Mr. Vincent served as the Chief
Financial Officer of MangoSoft Corporation pursuant to an agreement between
MangoSoft Corporation and Associated Venture Management ("AVM"). Selig
Zises, a director and principal stockholder of the Company, is the Chairman
of the Board of AVM. The cost of Mr. Vincent's services was $151,200, which
was included in the $647,795 administrative fee charged to MangoSoft
Corporation by AVM during 1998. In September 1998, MangoSoft Corporation
negotiated an agreement with Mr. Vincent and his company RCG Real Estate
("RCG") under which Mr. Vincent continued to serve MangoSoft Corporation as
its Chief Financial Officer, in consideration of which MangoSoft
Corporation paid RCG $12,500 per month. In May 1999, Mr. Vincent was named
the President and Chief Executive Officer of MangoSoft Corporation. Mr.
Vincent continued to be compensated under the terms of the agreement with
RCG through December 1999. On January 1, 2000, Mr. Vincent became an
employee of the Company and the agreement with RCG was terminated. The
Company believes the fees paid to AVM and RCG for Mr. Vincent's services
during the respective periods were on terms as favorable as those available
from non-affiliated persons.
(2) Mr. Jardine was paid no compensation for his services to the Company; he
resigned effective with the consummation of the merger on September 7,
1999.
(3) The 1999 salary amounts reflect a partial year; Mr. Parsons began
employment in August 1999 ; Mr. Stark began employment in September 1999.
(4) Mr. Stark terminated employment with the Company effective April 1, 2000.
(5) Bonus was earned in 1999 and paid in 2000.
The following table sets forth information concerning the
individual grants of stock options made to each of the above named
executive officers in 1999:
<TABLE>
<CAPTION>
OPTIONS / SAR GRANTS IN LAST FISCAL YEAR [INDIVIDUAL GRANTS]
------------------------------------------------------------
Number of Securities Under- Percent Of The Total Option
lying Options/ SARs Options / SARs Granted Option Exercise Expiration
Name Granted To Employees in 1999 Price Per Share Date
---- --------------------------- -------------------- --------------- ----------
<S> <C> <C> <C> <C>
Dale Vincent 400,000 12.4% $ 1.25 9/07/09
Scott H. Davis 250,000 7.7% $ 1.25 9/07/09
Daniel J. Dietterich 250,000 7.7% $ 1.25 9/07/09
Robert E. Parsons 160,000 4.9% $ 1.25 9/07/09
James M. Stark 200,000 6.2% $ 1.25 9/07/09
</TABLE>
None of the named executives exercised any stock options in
the year ended December 31, 1999. The following table sets forth
information concerning the exercised options / SARs for each of the
above
17
<PAGE>
named executive officers as of December 31, 1999. The Value of the
Unexercised In-The-Money Options is based on the average bid and ask
price of the Company's common stock on the OTCBB on December 31, 1999.
There is no established market for the Company's common stock and,
accordingly, such valuation may not necessarily reflect the actual
market value of the outstanding options:
<TABLE>
<CAPTION>
FISCAL YEAR-END OPTION / SAR VALUES
No. of Securities Underlying Value of Unexercised
Unexercised Options In-The-Money Options
------------------------------- ----------------------------
Shares
Acquired On Value
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
---- -------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Dale Vincent -- -- 400,000 -- $ 3,400,000 $ --
Scott H. Davis -- -- 250,000 -- 2,125,000 --
Daniel J. Dietterich -- -- 250,000 -- 2,125,000 --
Robert E. Parsons -- -- 100,000 60,000 850,000 510,000
James M. Stark -- -- 100,000 100,000 850,000 850,000
</TABLE>
The Company's outside directors are compensated for their
services in the form of stock option grants. No cash compensation is
paid to the directors for their services. The following table sets
forth the options granted to each outside director in 1999:
<TABLE>
<CAPTION>
OPTIONS / SAR GRANTS IN LAST FISCAL YEAR [INDIVIDUAL GRANTS]
------------------------------------------------------------
Number of Securities Under- Option
lying Options/ SARs Option Exercise Expiration
Name Granted Price Per Share Date
------- --------------------------- ---------------- -----------
<S> <C> <C> <C>
Craig D. Goldman 230,000 $ 1.25 9/07/09
Dr. Ira Goldstein 75,000 $ 1.25 9/07/09
Paul C. O'Brien 200,000 $ 1.25 9/07/09
Ravi P. Singh 50,000 $ 1.25 9/07/09
Selig Zises -- -- --
</TABLE>
ITEM 11. SECURITY OWNERSHIP OF CETAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the
beneficial ownership of the Company's common stock as of December 31, 1999 (i)
by each person who is known to the Company to own beneficially more than 5% of
the fully-diluted shares of the Company's common stock; (ii) by all directors
and officers of the Company; and (iii) by all directors and officers of the
Company as a group.
<TABLE>
<CAPTION>
Number of Common Percentage of Common
Beneficial owners: Shares Owned Stock Owned
------------------ ---------------- --------------------
<S> <C> <C>
Jay Zises (1) ................................ 3,150,297 13.7%
767 3rd Avenue, 16th Floor
New York, New York 10017
Palisade Private Partnership, L.P. ........... 3,000,000 13.0%
One Bridge Plaza , Suite 695
Fort Lee, NJ 07024
Directors and officers:
Selig Zises (2) .............................. 3,015,537 13.1%
Dale Vincent (3) ............................. 427,135 1.9%
Scott H. Davis (4) ........................... 250,000 1.1%
Daniel J. Dietterich (5) ..................... 250,000 1.1%
Craig D. Goldman (6) ......................... 230,000 1.0%
Paul C. O'Brien (7) .......................... 200,000 *
James M. Stark (8) ........................... 200,000 *
Robert E. Parsons (9) ........................ 160,000 *
Dr. Ira Goldstein (10) ....................... 75,000 *
Ravi P. Singh (11) ........................... 50,000 *
--------- -------
All directors and officers as a group .......... 4,857,672 21.1%
</TABLE>
18
<PAGE>
* Less than one percent.
(1) Total shares of common stock beneficially owned by Jay Zises, the brother
of Selig Zises, include the following: 63,928 shares owned by Jay Zises;
2,652,375 shares owned by Delaware Guarantee & Trust TTEE FBO Jay Zises IRA
(a self-directed IRA); 40,478 shares owned by Jay and Nancy Zises JTWROS;
169,932 shares owned by Guarantee & Trust TTEE FBO Jay Zises IRA DTD 7-9-92
(a self-directed IRA); 67,458 shares owned by Associated Capital LP; and
94,406 shares owned by Associated Capital Offshore LP. Nancy Zises is the
wife of Jay Zises. Jay Zises is a limited partner in Associated Capital LP
and Associated Capital Offshore LP, and has voting and dispositive power in
respect of the common stock owned by such entities. Other than the Zises
family relationships references in this table and the related footnotes,
there are no affiliations between Jay Zises and any other persons or
entities identified in such table or footnotes.
(2) Total shares of common stock beneficially owned by Selig Zises include the
following: 2,692,606 shares owned by Selig Zises; 113,287 shares owned by
Guarantee & Trust Co. TEE FBO Selig Zises R-IRA DTD 5-20-96 (a
self-directed IRA); 68,799 shares owned by his daughter Lynn Zises; and
140,845 shares under contract for sale to qualified institutional investors
for $100,000. Selig Zises is the brother of Jay Zises, both of whom are
principal stockholders of the Company. Other than the Zises family
relationships references in this table and the related footnotes, there are
no affiliations between Selig Zises and any other persons or entities
identified in such table or footnotes.
(3) Includes 400,000 shares of unexercised vested stock options.
(4) Includes 250,000 shares of unexercised vested stock options.
(5) Includes 250,000 shares of unexercised vested stock options.
(6) Includes 230,000 shares of unexercised vested stock options.
(7) Includes 200,000 shares of unexercised vested stock options.
(8) Includes 100,000 shares of unexercised vested stock options and 100,000
shares of options that will vest and be exercisable in quarterly increments
beginning January 1, 2000 through December 31, 2000.
(9) Includes 100,000 shares of unexercised vested stock options and 60,000
shares of options that will vest and be exercisable in quarterly increments
beginning January 1, 2000 through December 31, 2000.
(10) Includes 75,000 shares of unexercised vested stock options.
(11) Includes 50,000 shares of unexercised vested stock options; excludes
300,000 shares owned by Punk Zeigel & Company for which Mr. Singh claims no
beneficial ownership.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
(a) Transactions with directors and officers
During 1998, AVM provided executive and administrative assistance to
MangoSoft Corporation, including services performed by Mr. Dale Vincent through
August 1998. Mr. Vincent was an employee of AVM and he served MangoSoft
Corporation as a consultant. The cost of these services totaled $647,795 in
1998, including $151,200 for Mr. Vincent's services. In addition, MangoSoft
Corporation issued warrants to purchase 25,000 shares of its common stock at an
exercise price of $3.50 per share to AVM for services rendered. In 1999, AVM
provided administrative assistance to the Company at a total cost of $64,888.
Selig Zises, Director of the Company, is the Chairman of the Board of AVM. The
Company believes that the fees paid to AVM for its executive and administrative
services during 1999 and 1998 were on terms as favorable as those available from
non-affiliated persons.
In September 1998, MangoSoft Corporation established a consulting
relationship with Dale Vincent, to serve as its interim Vice President and Chief
Financial Officer. The consulting relationship continued when Mr. Vincent became
President and Chief Executive Officer of MangoSoft Corporation. For his
services, the Company compensated Mr. Vincent through his company, RCG, in the
amount of $12,500 per month. Mr. Vincent was paid a total of $50,000 in 1998 and
$150,000 in 1999. Mr. Vincent served MangoSoft Corporation through RCG because
it was not clear at that time that he would join MangoSoft Corporation on a
permanent basis. The Company believes that the fees paid to RCG for Mr.
Vincent's services during 1999 and 1998 were on terms as favorable as those
available from non-affiliated persons.
In October 1998, MangoSoft Corporation issued a $1 million demand note
to each of Selig Zises and Jay Zises. Both Selig Zises and Jay Zises are
principal stockholders of MangoSoft, Inc. and Selig Zises is a director of
MangoSoft, Inc. Such notes are unsecured, accrued interest at a rate of 8% per
annum and were senior to all obligations of MangoSoft Corporation. In February
1999, each of the notes was converted into $1 million of the 12% Notes of
MangoSoft Corporation. Over the following six months, Selig and Jay Zises
advanced in the aggregate an additional $2,032,500 of interim financing, of
which $2,000,000 represented the purchase of additional 12% Notes, in order for
MangoSoft Corporation to meet its working capital needs. Also in February 1999,
Palisade Private Partnership, L.P. ("Palisade") purchased $2 million principal
of amount of 12% Notes. In September 1999, in connection with the Merger, the
aggregate $6 million plus accrued interest on the 12% Notes held by Selig Zises,
Jay Zises and Palisade were converted into 9,000,000 shares of common stock, so
that 3,000,000 shares of common stock were issued to each of Selig Zises, Jay
Zises and Palisade.
19
<PAGE>
Due to MangoSoft Corporation's continuing losses and lack of
significant revenue, in February 1999 MangoSoft Corporation encountered
difficulty with the issuance of the 12% Notes. Given the difficult market
conditions at that time for this type of security issuance, the 12% Notes
contained a beneficial conversion feature to make the investment more attractive
to new investors. The beneficial conversion feature allowed for conversion of
the 12% Notes into shares of common stock at 75% of the lowest cash price paid
for any equity offering during the period from the date of the issuance of the
12% Notes to their conversion, subject to additional discounts for each month
following the initial six-month period that the 12% Notes remained unpaid, with
a maximum discount of 50%.
At the time of the Merger, the conversion rate was 65% of the lowest
cash price paid for common stock. However, to facilitate completion of the
Merger in September 1999, an agreement was negotiated with Selig and Jay Zises
and Palisade to convert the 12% Notes at 58% of the lowest price paid for the
common stock, or $0.71 per share. The Company believes the terms of its
borrowing arrangements with Selig and Jay Zises and Palisade were on terms as
favorable as those available from non-affiliated persons.
In December 1999, the Company issued to Selig Zises an 8% unsecured
demand note for $200,000 principal amount which was senior to all the Company's
obligations. On March 28, 2000, the Company repaid the $232,500 principal,
including $32,500 outstanding from earlier in the year, plus related accrued
interest owed to Selig and Jay Zises. The Company believes the terms of its
borrowing arrangements with Selig and Jay Zises were on terms as favorable as
those available from non-affiliated persons.
The Company has an agreement with Craig D. Goldman, a director,
pursuant to which Mr. Goldman shall receive grants of stock options exercisable
at the current market price of the common stock on the date of grant equal to 1%
of the Company's voting securities on a fully-diluted basis. The anti-dilution
provision in respect of options granted to Mr. Goldman in connection with his
joining the Board of Directors is in recognition of his knowledge, experience
and extensive business relationships within the computer software and e-business
fields. Options granted to Mr. Goldman are adjusted whenever there are
significant new stock option grants or shares of common stock issued to others.
In the absence of significant new grants to others, Mr. Goldman's options are
adjusted on a quarterly basis. As of June 30, 2000, Mr. Goldman has been granted
options to purchase 350,000 shares of common stock at exercise prices ranging
from $1.25 to $4.00 per share. Options granted to Mr. Goldman have been included
in the Company's issued and outstanding stock options granted to employee and
non-employees. See Notes 9 and 11 of the Company's consolidated financial
statements.
In September 1999, in conjunction with the merger, all outstanding
options and warrants to purchase shares of MangoSoft Corporation's common stock
were terminated. New options to purchase the new common stock were issued in
their place. The warrant to purchase 25,000 shares held by AVM, as discussed
above, was not exercised and it terminated upon the merger.
On May 27, 1999, MangoSoft Corporation and Steve Frank, MangoSoft
Corporation's former Chief Executive Officer, reached a settlement agreement and
general release of claims brought by both parties over the termination of Mr.
Frank. As part of the settlement agreement, MangoSoft Corporation agreed to
repurchase 200,000 shares of its common stock for the sum of $100,000 upon the
completion of financing in the aggregate amount of $3,000,000. In connection
with the Merger, the Company repurchased the 200,000 shares from Mr. Frank as
agreed.
(b) Transactions with promoters
None.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The Company does not have a class of equity securities registered under
Section 12 of the Securities Exchange Act of 1934, and thus its officers,
directors and 10% shareholders are not subject to Section 16(a) of such Act.
20
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
2.1* Agreement and Plan of Merger by and among First American,
MangoSoft and MangoMerger, dated as of August 27,1999 (filed
without exhibits or schedules) (filed as Exhibit 2.1 to Form
8-K filed September 21, 1999)
3.1* Certificate of Amendment to the Articles of Incorporation of
First American, as filed with the Secretary of State of the
State of Nevada on September 7, 1999 (filed as Exhibit 4.2 to
Form 8-K filed September 21, 1999)
3.2* By-laws of the Company (formerly by-laws of MangoMerger)
(filed as Exhibit 3.2 to Form 10-QSB filed November 16, 1999)
10* Lease of Westborough Office Park, Building Five, dated
November 10, 1995 (filed as Exhibit 10 to Form 10-QSB filed
November 16, 1999)
11 Computation of Net Loss Per Common Share**
16* Letter on Change in Certifying Accountant (filed as Exhibit 18
to Form 8-K filed January 28, 2000)
20.1* Merger Consent Solicitation and Information Statement, dated
August 2, 1999 (filed as Exhibit 20.1 to Form 10-QSB filed
November 16, 1999)
20.2* Supplement to Merger Consent Solicitation and Information
Statement, dated August 26, 1999 (filed as Exhibit 20.2 to
Form 10-QSB filed November 16, 1999)
20.3* Supplement to Merger Consent Solicitation and Information
Statement, dated September 1, 1999 (filed as Exhibit 20.3 to
Form 10-QSB filed November 16, 1999)
21 Subsidiary of the Registrant**
27 Financial Data Schedule**
* Exhibits designated with an asterisk (*) have previously
been filed with the Commission and are incorporated by
reference to the document referenced in parentheticals
following the description of such exhibits.
** Filed herewith.
(b) Reports on Form 8-K
The Registrant filed a report on Form 8-K on January 20, 2000 (as
amended on January 28, 2000), which reported that the Company appointed
Deloitte & Touche LLP as its independent auditors.
The Registrant filed a report on Form 8-K on September 21, 1999, (as
amended on October 27, 1999), which reported that MangoMerger Corp.,
merged with and into MangoSoft Corporation, as provided for in that
certain Agreement and Plan of Merger dated August 27, 1999 between
First American Clock Company, MangoMerger and MangoSoft Corporation,
effective as of September 7, 1999, pursuant to a Certificate of Merger
filed with the Secretary of State of Delaware on that date. In
conjunction with the merger, First American changed its name to
"MangoSoft, Inc."
21
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
MANGOSOFT, INC.
/s/ Dale Vincent
------------------------
Dale Vincent
Chief Executive Officer
(Principal Executive Officer)
22
<PAGE>
MANGOSOFT, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Independent Auditors' Report ......................................................................... 24
Consolidated Statements of Operations For The Years Ended December 31, 1999 and 1998 and Cumulative
For The Period From June 15, 1995 (Inception) To December 31, 1999 .............................. 25
Consolidated Balance Sheets as of December 31, 1999 and 1998 ......................................... 26
Consolidated Statements of Stockholders' Equity (Deficiency) For The Years Ended December 31, 1999
and 1998 and Cumulative For The Period From June 15, 1995 (Inception) To December 31, 1999 ...... 27
Consolidated Statements of Cash Flows For The Years Ended December 31, 1999 and 1998 and Cumulative
For The Period From June 15, 1995 (Inception) To December 31, 1999 .............................. 28
Notes to Consolidated Financial Statements ........................................................... 29
</TABLE>
23
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors of MangoSoft, Inc. :
We have audited the accompanying consolidated balance sheets of MangoSoft, Inc.
and subsidiary (a development stage company) (the "Company") as of December 31,
1999 and 1998, and the related consolidated statements of operations,
stockholders' equity (deficiency), and cash flows for the years then ended and
cumulative for the period from June 15, 1995 (inception) to December 31, 1999.
The consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall consolidated 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 consolidated financial position of MangoSoft, Inc. and
subsidiary as of December 31, 1999 and 1998, and the results of their operations
and their cash flows for the years then ended and cumulative for the period from
June 15, 1995 (inception) to December 31, 1999 in conformity with accounting
principles generally accepted in the United States of America.
As discussed in Note 2, during 1999, the Company merged with MangoSoft
Corporation in a transaction to be accounted for as a reverse acquisition.
Following the merger, the business to be conducted by the Company is the
business previously conducted by MangoSoft Corporation.
The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. The Company is a development stage
enterprise engaged in the development of computer network technology. As
discussed in Note 1, the Company's recurring losses from operations and its
dependency on financing raise substantial doubt about its ability to continue as
a going concern. Management's plans concerning these matters are also discussed
in Note 1. The consolidated financial statements do not include any adjustments
that might result from the outcome of these uncertainties.
/s/ DELOITTE & TOUCHE LLP
Boston, Massachusetts
March 3, 2000
(April 11, 2000 as to the first three paragraphs of Note 14;
May 19, 2000 as to the last paragraph of Note 14)
24
<PAGE>
MANGOSOFT, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Cumulative From
Year Ended December 31, June 15, 1995
-------------------------- (Inception) To
1999 1998 December 31, 1999
--------- ---------- ------------------
<S> <C> <C> <C>
Revenues ..................................................... $ 37,207 $ 245,406 $ 282,613
Cost of revenues ............................................. 363 91,529 91,892
------------ ------------ ------------
Gross margin .............................................. 36,844 153,877 190,721
Costs and expenses:
Research and development (excluding
stock based compensation of
$10,085,922 in 1999 and cumulative
from June 15, 1995 (inception) to
December 31, 1999) ........................................ 4,420,903 6,615,558 22,985,471
Selling and marketing (excluding
stock-based compensation of
$1,303,333 in 1999 and
cumulative from June 15, 1995
(inception) to December 31, 1999) ......................... 412,842 2,608,190 9,499,512
General and administrative (excluding stock-
based compensation of $9,345,440 in 1999 and
cumulative from June 15, 1995 (inception) to
December 31, 1999) ........................................ 2,204,499 3,388,312 10,578,153
Stock-based compensation ..................................... 20,734,695 -- 20,734,695
Consulting fees to related parties ........................... 64,888 647,795 712,683
------------ ------------ ------------
Loss from operations ...................................... (27,800,983) (13,105,978) (64,319,793)
Interest income .............................................. 13,542 168,498 578,618
Interest expense:
Interest expense to related parties (including
$3,027,375 relating to a beneficial conversion
feature in 1999 and cumulative from June 15,
1995 (inception) to December 31, 1999) ..................... (3,391,167) (19,726) (3,410,893)
Other interest expense (including $1,832,625
relating to a beneficial conversion feature in
1999 and cumulative from June 15, 1995 to
December 31, 1999) ......................................... (1,837,490) (49,507) (1,886,997)
------------ ------------ ------------
Total interest expense .................................... (5,228,657) (69,233) (5,297,890)
Other income (expense), net .................................. (5,547) (67,200) (72,747)
------------ ------------ ------------
Net loss .................................................... (33,021,645) (13,073,913) (69,111,812)
Accretion of redeemable preferred stock ...................... 1,884,923 2,634,482 6,604,024
------------ ------------ ------------
Net loss applicable to common stockholders.................... $(34,906,568) $(15,708,395) $(75,715,836)
============ ============ ============
Net loss per common share - basic and diluted................. $ (5.44) $ (115.19)
Shares used in computing basic and diluted net loss
per common share ............................................ 6,414,178 136,367
</TABLE>
See Notes to Consolidated Financial Statements
25
<PAGE>
MANGOSOFT, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
------------
1999 1998
---- ----
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ............................................... $ 29,959 $ 232,637
Accounts receivable, net of an allowance of $9,702 in 1998 .............. -- 9,458
Inventory ............................................................... -- 275
Prepaid insurance ....................................................... 120,968 --
Other prepaid expenses and current assets ............................... 7,187 3,591
------------ ------------
Total current assets ............................................... 158,114 245,961
PROPERTY AND EQUIPMENT--Net .................................................. 147,889 206,264
DEPOSITS AND OTHER ASSETS .................................................... 5,943 5,943
------------ ------------
TOTAL ................................................................... $ 311,946 $ 458,168
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
CURRENT LIABILITIES:
Demand notes payable to related parties ................................. $ 232,500 $ 2,000,000
Other short-term debt.................................................... 92,904 750,000
Accrued expenses to related parties ..................................... 712,683 647,795
Accounts payable, including past due amounts ............................ 1,558,988 1,768,456
Accrued payroll ......................................................... 192,191 142,834
Accrued merger costs .................................................... 77,893 --
Other accrued expenses .................................................. 414,734 424,172
Deferred revenue ........................................................ -- 19,160
------------ ------------
Total current liabilities .......................................... 3,281,893 5,752,417
COMMITMENTS AND CONTINGENCIES
REDEEMABLE CONVERTIBLE PREFERRED STOCK:
Redeemable convertible preferred stock, Series C ..................... -- 10,536,748
Redeemable convertible preferred stock, Series D ..................... -- 7,193,384
Redeemable convertible preferred stock, Series E ..................... -- 14,233,546
------------ ------------
Total redeemable preferred stock ............................ -- 31,963,678
------------ ------------
STOCKHOLDERS' EQUITY (DEFICIENCY):
Convertible preferred stock, Series A ................................ -- 22,500
Convertible preferred stock, Series B ................................ -- 7,500
Common stock.......................................................... 19,924 761
Additional paid-in capital ........................................... 72,185,728 --
Deferred compensation ................................................ (2,980,343) --
Deficit accumulated during the development stage ..................... (72,195,256) (37,288,688)
------------ ------------
Total stockholders' equity (deficiency) ........................... (2,969,947) (37,257,927)
------------ ------------
TOTAL......................................................................... $ 311,946 $ 458,168
============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
26
<PAGE>
MANGOSOFT, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
<TABLE>
<CAPTION>
Convertible Preferred Convertible Preferred
Stock, Series A Stock, Series B
-------------------- --------------------
Shares Amount Shares Amount
------- ------- ------- -------
<S> <C> <C> <C> <C>
Balance, June 15, 1995 (Inception)............................. -- $ -- -- $ --
Issuance of common stock at $0.001 per share.................. -- -- -- --
Issuance of convertible preferred stock at $0.67 per share,
Series A, net of issuance costs of $26,998................. 2,250,000 22,500 -- --
Issuance of convertible preferred stock at $2.67 per share,
Series B, net of issuance costs of $14,401................. -- -- 750,002 7,500
Net loss...................................................... -- -- -- --
--------- ------------ -------------- ----------
Balance, December 31, 1995..................................... 2,250,000 22,500 750,002 7,500
Accretion of redeemable convertible preferred stock........... -- -- -- --
Net loss...................................................... -- -- -- --
---------- ----------- -------------- ----------
Balance, December 31, 1996..................................... 2,250,000 22,500 750,002 7,500
Accretion of redeemable convertible preferred stock........... -- -- -- --
Net loss...................................................... -- -- -- --
---------- ----------- -------------- ----------
Balance, December 31, 1997..................................... 2,250,000 22,500 750,002 7,500
Conversion of accounts payable................................ -- -- -- --
Accretion of redeemable convertible preferred stock........... -- -- -- --
Net loss...................................................... -- -- -- --
---------- ----------- -------------- ----------
Balance, December 31, 1998..................................... 2,250,000 22,500 750,002 7,500
Accretion of redeemable convertible preferred stock........... -- -- -- --
Purchase and retirement of common stock from related
party....................................................... -- -- -- --
Adjustment to reflect the exchange of common stock in
connection with the reverse merger.......................... -- -- -- --
Issuance of common stock in exchange for preferred stock...... (2,250,000) (22,500) (750,002) (7,500)
Conversion of 12% senior secured convertible notes
payable and related accrued interest........................ -- -- -- --
Beneficial conversion feature of 12% convertible notes........ -- -- -- --
Common stock held by former First American Clock
shareholders................................................ -- -- -- --
Issuance of common stock to placement agent .................. -- -- -- --
Issuance of common stock at $1.25 per share, net of issuance
costs of $651,173........................................... -- -- -- --
Stock-based compensation...................................... -- -- -- --
Net loss...................................................... -- -- -- --
---------- ----------- -------------- ----------
Balance, December 31, 1999..................................... -- $ -- -- $ --
========== =========== ============== ==========
<PAGE>
<CAPTION>
Common Stock Additional
-------------------- Paid-In Deferred
Shares Amount Capital Compensation
------- ------- ------------ --------------
<S> <C> <C> <C> <C>
Balance, June 15, 1995 (Inception)............................. -- $ -- $ -- $ --
Issuance of common stock at $0.001 per share.................. 750,000 750 -- --
Issuance of convertible preferred stock at $0.67 per share,
Series A, net of issuance costs of $26,998................. -- -- 1,451,057 --
Issuance of convertible preferred stock at $2.67 per share,
Series B, net of issuance costs of $14,401................. -- -- 1,979,534 --
Net loss...................................................... -- -- -- --
----------- ----------- ------------------ -----------------
Balance, December 31, 1995..................................... 750,000 750 3,430,591 --
Accretion of redeemable convertible preferred stock........... -- -- (486,523) --
Net loss...................................................... -- -- -- --
----------- ----------- ------------------ -----------------
Balance, December 31, 1996..................................... 750,000 750 2,944,068 --
Accretion of redeemable convertible preferred stock........... -- -- (1,598,096) --
Net loss...................................................... -- -- --
----------- ----------- ------------------ -----------------
Balance, December 31, 1997..................................... 750,000 750 1,345,972 --
Conversion of accounts payable................................ 11,250 11 89,989 --
Accretion of redeemable convertible preferred stock........... -- -- (1,435,961) --
Net loss...................................................... -- -- -- --
----------- ----------- ------------------ -----------------
Balance, December 31, 1998..................................... 761,250 761 -- --
Accretion of redeemable convertible preferred stock........... -- -- -- --
Purchase and retirement of common stock from related
party....................................................... (200,000) (200) (99,800) --
Adjustment to reflect the exchange of common stock in
connection with the reverse merger.......................... (460,381) (460) 460 --
Issuance of common stock in exchange for preferred stock...... 5,908,129 5,908 33,872,709 --
Conversion of 12% senior secured convertible notes
payable and related accrued interest........................ 9,000,000 9,000 6,368,409 --
Beneficial conversion feature of 12% convertible notes........ -- -- 4,860,000 --
Common stock held by former First American Clock
shareholders................................................ 1,575,000 1,575 (1,575) --
Issuance of common stock to placement agent................... 300,000 300 374,700 --
Issuance of common stock at $1.25 per share, net of issuance
costs of $651,173........................................... 3,000,000 3,000 3,095,827 --
Stock-based compensation...................................... 40,129 40 23,714,998 (2,980,343)
Net loss...................................................... -- -- -- --
----------- ----------- ------------------ -----------------
Balance, December 31, 1999..................................... 19,924,127 $19,924 $72,185,728 $(2,980,343)
=========== =========== ================== =================
<PAGE>
<CAPTION>
Deficit
Accumulated
During
Development
Stage Toys
------ -----
<S> <C> <C>
Balance, June 15, 1995 (Inception)............................. $ -- $ --
Issuance of common stock at $0.001 per share.................. -- 750
Issuance of convertible preferred stock at $0.67 per share,
Series A, net of issuance costs of $26,998................. -- 1,473,557
Issuance of convertible preferred stock at $2.67 per share,
Series B, net of issuance costs of $14,401................. -- 1,987,034
Net loss...................................................... (1,119,683) (1,119,683)
----------- -----------
Balance, December 31, 1995..................................... (1,119,683) 2,341,658
Accretion of redeemable convertible preferred stock........... -- (486,523)
Net loss...................................................... (6,115,576) (6,115,576)
----------- -----------
Balance, December 31, 1996..................................... (7,235,259) (4,260,441)
Accretion of redeemable convertible preferred stock........... -- (1,598,096)
Net loss...................................................... (15,780,995) (15,780,995)
----------- -------------
Balance, December 31, 1997..................................... (23,016,254) (21,639,532)
Conversion of accounts payable................................ -- 90,000
Accretion of redeemable convertible preferred stock........... (1,198,521) (2,634,482)
Net loss...................................................... (13,073,913) (13,073,913)
----------- --------------
Balance, December 31, 1998..................................... (37,288,688) (37,257,927)
Accretion of redeemable convertible preferred stock........... (1,884,923) (1,884,923)
Purchase and retirement of common stock from related
party....................................................... -- (100,000)
Adjustment to reflect the exchange of common stock in
connection with the reverse merger.......................... -- --
Issuance of common stock in exchange for preferred stock...... -- 33,848,617
Conversion of 12% senior secured convertible notes
payable and related accrued interest........................ -- 6,377,409
Beneficial conversion feature of 12% convertible notes........ -- 4,860,000
Common stock held by former First American Clock
shareholders................................................ -- --
Issuance of common stock to placement agent................... -- 375,000
Issuance of common stock at $1.25 per share, net of issuance
costs of $651,173........................................... -- 3,098,827
Stock-based compensation...................................... -- 20,734,695
Net loss...................................................... (33,021,645) (33,021,645)
----------- --------------
Balance, December 31, 1999..................................... $(72,195,256) $(2,969,947)
=========== ===============
</TABLE>
See Notes to Consolidated Financial Statements.
27
<PAGE>
MANGOSOFT, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Cumulative From
Year Ended December 31, June 15, 1995
------------------------ (Inception) To
1999 1998 December 31, 1999
------- ------- -----------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ............................................................ $(33,021,645) $(13,073,913) $(69,111,812)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization .................................. 115,752 542,166 2,051,566
Stock-based compensation ....................................... 20,734,695 -- 20,734,695
Beneficial conversion feature of 12% convertible notes ......... 4,860,000 -- 4,860,000
Accrued interest converted into paid-in capital in connection
with the conversion of the 12% convertible notes ........... 377,409 -- 377,409
Loss on disposal of equipment .................................. -- 71,942 71,942
Change in assets and liabilities:
Accounts receivable ......................................... 9,458 140,063 --
Inventory ................................................... 275 62,761 --
Prepaid insurance and other current assets................... 11,524 81,823 7,933
Deposits and other assets ................................... -- 175,657 (5,943)
Accrued expenses to related parties ......................... 64,888 647,795 712,683
Accounts payable ............................................ (209,468) (140,123) 1,558,988
Accrued payroll ............................................. 49,357 (74,754) 192,191
Other accrued expenses ...................................... (9,422) (189,049) 414,750
Deferred revenue ............................................ (19,160) (130,361) --
------------ ------------ ------------
Total adjustments .................................... 25,985,308 1,187,920 30,976,214
------------ ------------ ------------
Net cash used in operating activities ................ (7,036,337) (11,885,993) (38,135,598)
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property and equipment ........................ (57,377) (214,348) (2,284,146)
Payment of merger costs ........................................ (198,280) -- (198,280)
Proceeds from sale of fixed assets ............................. -- 12,749 12,749
------------ ------------ ------------
Net cash used in investing activities ................... (255,657) (201,599) (2,469,677)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of notes to related parties ............. 2,232,500 2,000,000 4,232,500
Proceeds from other debt financings ............................ 2,000,000 750,000 2,750,000
Repayments of other debt financings ............................ (793,184) -- (793,184)
Net proceeds from issuance of common and preferred stock ....... 3,750,000 203,837 34,545,918
Purchase of common stock from related party.................... (100,000) -- (100,000)
------------ ------------ ------------
Net cash provided from financing activities .......... 7,089,316 2,953,837 40,635,234
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS .................... (202,678) (9,133,755) 29,959
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ...................... 232,637 9,366,392 --
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD ............................ $ 29,959 $ 232,637 $ 29,959
============ ============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
28
<PAGE>
MANGOSOFT, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS
MangoSoft, Inc. and subsidiary (a development stage company) ("the
Company") develops advanced software technology to simplify, expand and
integrate networking and pooled use of computer resources. It is engaged in
a single operating segment of the computer software industry.
The Company is considered to be a development stage company because it
has not generated significant revenues from products that have been
developed-to-date. The Company is subject to a number of risks similar to
those of other companies in an early stage of development. Principal among
these risks are dependencies on key individuals, competition from other
substitute products and larger companies, the successful development and
marketing of its products and the need to obtain adequate additional
financing necessary to fund future operations.
The accompanying consolidated financial statements have been
prepared on a going concern basis, which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of
business. As shown in the financial statements during the years ended
December 31, 1999 and 1998, and cumulative for the period from June 15,
1995 (inception) to December 31, 1999, the Company incurred net losses of
$33,021,645, $13,073,913 and $69,111,812, respectively, and at December 31,
1999 a substantial portion of it's accounts payable were past due. These
factors, among others, raise substantial doubt about the Company's ability
to continue as a going concern. Based upon the raising of approximately
$29.4 million in proceeds from the sale of common stock and Convertible
Preferred Stock, Series A, subsequent to December 31, 1999 (see Note 14),
management believes that the Company will have sufficient capital to fund
its existing operations for the next twelve (12) months.
The financial statements do not include any adjustments relating to the
recoverability and classification of liabilities that might be necessary
should the Company be unable to continue as a going concern. The Company's
continuation as a going concern is dependent upon its ability to generate
sufficient cash flow to meet its obligations on a timely basis, to comply
with the terms of its financing agreements, to obtain additional financing,
and ultimately to attain profitability.
2. MERGER TRANSACTION AND BASIS OF PRESENTATION
On September 7, 1999, MangoMerger Corp., a wholly-owned subsidiary of
First American Clock Co. ("First American"), merged with and into MangoSoft
Corporation, pursuant to an Agreement and Plan of Merger ("the Merger")
dated August 27, 1999. Following the merger the business to be conducted by
First American was the business conducted by MangoSoft Corporation prior to
the merger. In conjunction with the merger, First American , which is the
legal acquirer and surviving legal entity, changed its name to MangoSoft,
Inc. ("MangoSoft, Inc.").
Immediately after the Merger, the former common and preferred
stockholders of MangoSoft Corporation held 6,008,998 shares of the
Company's common stock, while the former common stockholders of First
American held 1,575,000 shares of the Company's common stock. In addition,
the 12% Senior Secured Convertible Notes (the "12% convertible notes") in
the aggregate of $6,000,000 held by creditors of MangoSoft Corporation were
converted into an aggregate of 9,000,000 shares of the Company's common
stock. As part of the Merger, the Company completed a Private Placement
(the "Private Placement") of 3,000,000 shares of common stock for net
proceeds of $3,098,827. The Company also issued 300,000 shares of common
stock to the placement agent in respect for such Private Placement.
At the time of the merger, the common shares issued to the former
stockholders of MangoSoft Corporation represented a majority of the
Company's common sttock, enabling them to retain voting and operating
control of the Company. Because First American was a non-operating entity
and the closing of the Private Placement was contingent upon the closing of
the Merger, the Merger was accounted for as a capital transaction and was
treated as a reverse acquisition as the shareholders of MangoSoft
Corporation
29
<PAGE>
MERGER TRANSACTION AND BASIS OF PRESENTATION (CONT.)
received the larger portion of the voting interests in the combined
enterprise. Estimated costs of the Merger of $276,173 and the value
($375,000) of the 300,000 shares of common stock issued to the placement
agent have been recorded as issuance costs of the Private Placement.
Since the accounting applied differs from the legal form of the merger,
the Company's financial information for periods prior to the merger
represent the financial results of MangoSoft Corporation.
Pro Forma Disclosure (Unaudited) - The following table represents the
unaudited pro forma results of operations for the years ended December 31,
1999 and 1998 assuming the merger had occurred on January 1, 1998, the
beginning of the earliest period presented in the accompanying Consolidated
Statements of Operations. These pro forma results have been prepared for
comparative purposes only and are not necessarily indicative of what would
have occurred had the merger occurred at that date or of results which may
occur in the future.
(Unaudited)
Year Ended December 31,
-----------------------
1999 1998
---- ----
Revenue .................................... $ 37,207 $ 245,406
Loss from operations ....................... (27,801,521) (13,133,180)
Net loss ................................... (33,008,354) (13,101,389)
Net loss applicable to common stockholders . (33,008,354) (13,101,389)
Net loss per common share .................. $ (1.90) $ (1.55)
Shares used in computing net loss per common
Share ............................... 17,385,425 8,428,664
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation - As described in Note 2, the Company
completed a merger on September 7, 1999 that has been accounted for as a
reverse acquisition. Accordingly, the Company's consolidated financial
statements for periods prior to September 7, 1999 represent those of
MangoSoft Corporation, which is considered to be the acquirer for
accounting purposes. The consolidated financial statements for periods
subsequent to September 7, 1999 include the accounts of the Company and its
wholly owned subsidiary after the elimination of all significant
intercompany balances.
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 balance sheet dates. Actual results could differ from
those estimates.
Fair Value of Financial Instruments - The Company's financial
instruments, including cash and cash equivalents, accounts receivable,
accounts payable, notes payable and short-term debt are carried at cost
which approximates their fair value because of the short-term maturity of
these financial instruments.
Cash and Equivalents - Cash and equivalents include cash on hand, cash
deposited with banks and highly liquid debt securities with remaining
maturities of ninety days or less when purchased.
Inventory - Inventory is stated at lower of cost or market using the
first-in, first-out method. Inventory consists of costs associated with
printing and packaging of software.
Property and Equipment - Property and equipment are recorded at cost.
Depreciation and amortization are provided using the straight-line method
over the estimated useful lives (one to five years) of the related assets.
The Company periodically evaluates the recoverability of its long-lived
assets based on the expected
30
<PAGE>
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT.)
undiscounted cash flows and recognizes impairments, if any, based on
discounted cash flows.
Revenue Recognition - Revenue is recognized when earned. The Company
sells its products primarily through distributors, wherein the revenue is
recognized upon resale of the products by the distributor. Revenue from
products licensed to original equipment manufacturers ("OEMs") is
recognized when OEMs ship the licensed products. Provisions are recorded
for estimated product returns and allowances.
Software Development Costs - Costs incurred prior to technological
feasibility of the Company's software products are expensed as research and
development costs. Certain costs incurred after technological feasibility
has been established are capitalized. In 1999 and 1998, no such costs were
capitalized.
Stock-Based Compensation - The Company accounts for stock-based
employee compensation arrangements using the intrinsic value method in
accordance with Accounting Principles Board Opinion ("APB") No. 25,
"Accounting for Stock Issued to Employees", and complies with the
disclosure provisions of Statement of Financial Accounting Standards
("SFAS") No. 123, "Accounting for Stock-Based Compensation".
Equity instruments issued to non-employees are accounted for in
accordance with the provisions of SFAS No. 123 and Emerging Issues Task
Force ("EITF") Issue No. 96-18, "Accounting for Equity Instruments That Are
Issued To Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services". All transactions in which goods or services
are the consideration received for the issuance of equity instruments are
accounted for based on the fair value of the consideration received or the
fair value of the equity instrument issued, whichever is more reliably
measurable. The measurement date of the fair value of the equity instrument
issued is the earlier of the date on which the counterparty's performance
is complete or the date on which it is probable that performance will
occur.
Income Taxes - The Company accounts for income taxes under SFAS No.
109, "Accounting for Income Taxes." This Statement requires recognition of
deferred tax liabilities and assets for the expected future tax
consequences of events that have been included in the Company's
consolidated financial statements or tax returns. Deferred tax liabilities
and assets are determined based on the difference between the financial
statement carrying amounts and tax bases of existing assets and
liabilities, using enacted tax rates presently in effect. Valuation
allowances are established when necessary to reduce the deferred tax assets
to those amounts expected to be realized.
Net Loss Per Common Share - The Company computes basic and diluted
earnings (loss) per share in accordance with SFAS No. 128, "Earnings Per
Share". Basic earnings per common share is computed by dividing net loss
applicable to common stockholders by the weighted average number of common
shares outstanding during the period.
Basic and diluted loss per common share are the same for all periods
presented, as potentially dilutive stock options of 3,150,428 in 1999 and
1,994,737 in 1998 have not been included in the calculation as their effect
is antidilutive.
Comprehensive Income - Comprehensive income (loss) was equal to net
income (loss) for each year.
Future Adoption of Accounting Pronouncements - In June 1998, the
Financial Accounting Standards Board issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133 establishes
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts, and for
hedging activities. The provisions of SFAS No. 133 are effective for
periods beginning after June 15, 2000. The Company is currently evaluating
the effect, if any, SFAS No. 133 will have on the Company's financial
position and its results of operations. The Company will adopt this
accounting standard on January 1, 2001, as required.
Reclassifications - Certain reclassifications have been made to the
1998 and cumulative since inception amounts to conform to the 1999
presentation.
31
<PAGE>
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT.)
Supplemental Cash Flow Information - The following table sets forth
certain supplemental cash flow information for the years ended December 31,
1999 and 1998, and cumulative for the period from June 15, 1995 (inception)
to December 31, 1999:
<TABLE>
<CAPTION>
Cumulative
From
June 15, 1995
Year Ended December 31, (Inception) To
----------------------- December 31,
1999 1998 1999
---- ---- ----
<S> <C> <C> <C>
Cash paid during the period for interest ............................ $ 18,964 $ 69,233 $ 87,927
Non-Cash Financing Activities
Stock-based compensation ............................................ $20,734,695 $ -- $20,734,695
Merger-related transactions:
Conversion of redeemable convertible preferred stock into common
stock ........................................................... 33,818,617 -- 33,818,617
Conversion of convertible preferred stock into common stock ..... 30,000 -- 30,000
Conversion of 12% convertible notes into common stock............ 6,000,000 -- 6,000,000
Beneficial conversion feature on conversion of 12%
convertible notes ........................................... 4,860,000 -- 4,860,000
Conversion of accrued interest payable into common stock ........ 377,409 -- 377,409
Common stock issued in lieu of investment banking fees........... 300 -- 300
Accretion of redeemable convertible preferred stock ................ 1,884,923 2,634,482 6,604,024
Issuance of note to finance prepaid insurance premium .............. 136,088 -- 136,088
Conversion of accounts payable into common stock ................... -- 90,000 90,000
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1999 and 1998 consists of the
following:
December 31,
-----------------
1999 1998
---- ----
Computer equipment ............... $1,571,277 $1,529,654
Furniture and fixtures ........... 309,302 309,302
Leasehold improvements ........... 198,052 198,052
---------- ----------
Total ..................... 2,078,631 2,037,008
Accumulated depreciation ......... (1,930,742) (1,830,744)
---------- ----------
Property and equipment - net $ 147,889 $ 206,264
========== ==========
32
<PAGE>
5. SHORT-TERM DEBT
Short-term debt consisted of the following at:
December 31,
------------
1999 1998
---- ----
Demand notes payable to related parties... $ 232,500 $ 2,000,000
Note payable to insurance company......... 92,904 --
Equipment term loan due to bank........... -- 750,000
--------- -----------
Total............................... $ 325,404 $ 2,750,000
========= ===========
In December 1999, the Company entered into a financing arrangement with
two stockholders to provide $232,500 of interim financing through the
issuance of demand notes. The notes are unsecured, bear interest at an
annual rate of 8%, and are senior to all other obligations of the Company.
In October 1998, the Company entered into similar arrangements with these
same two stockholders to provide $2,000,000 of interim financing.
In September 1999, the Company executed a note payable to an insurance
company to finance an insurance premium. The $92,904 balance at December
31, 1999 is due in six monthly installments of approximately $15,661,
including interest at an annual rate of 8.5%, with a final maturity on June
3, 2000.
In August 1999, the Company entered into a financing arrangement with
two additional stockholders to provide $400,000 of interim financing in
advance of the merger. The notes were unsecured, carried interest at an
annual rate of 9%, and automatically converted into common stock at $1.25
per share in conjunction with the merger on September 7, 1999.
In February 1999, the Company issued $4,000,000 in 12% convertible
notes, which included $2,000,000 from conversion of the demand notes issued
to the two stockholders in 1998. Subsequent to the February 1999 issuance,
the two stockholders purchased an additional $2,000,000 in 12% convertible
notes to enable the Company to meet its financing needs. The 12%
convertible notes were secured by substantially all of the Company's
assets, and were convertible into common stock at the option of the holder
at $3.50 per common share, or at 75% of the lowest cash price paid in any
equity offering during the period the 12% convertible notes were
outstanding. In addition, the conversion price would continue to decrease
by 5% per month for each month following the initial six-month period the
12% convertible notes remained unpaid, provided that the final conversion
price would never be lower than 50% of the lowest price paid by investors
in any equity financing. The total $6,000,000 in 12% convertible notes plus
the related accrued interest of $377,409 was converted into 9,000,000
shares of MangoSoft, Inc. common stock at a value of $.71 per share in
connection with the merger.
The 12% convertible notes contained a beneficial conversion feature
which allowed their conversion into common stock at less than the fair
market value of the common stock. As part of the Merger, the Company
completed the Private Placement of 3,000,000 shares of its common stock at
$1.25 per share for net proceeds of $3,098,827. This per share value was
the lowest cash price paid in any equity offering during the period the 12%
convertible notes were outstanding. At the time of the Merger, the terms of
the 12% convertible notes allowed for its conversion at 65% of the $1.25
per share equity offering price, or $0.81 per share. To facilitate the
completion of the Company's Merger, a Note Conversion Agreement was entered
into between the Company and the holders of the 12% convertible notes which
allowed for their conversion at $0.71 per share (including accrued
interest), or $0.54 per share below fair market value of the Company's
common stock. In accordance with EITF Issue No. 98-5 "Accounting for
Convertible Securities with Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios", the difference of $4,860,000 was recognized
as a beneficial conversion feature through a charge to interest expense and
a credit to additional paid-in capital.
Upon conversion of the 12% convertible notes, the accrued interest
expense was no longer payable and was credited to additional paid-in
capital.
On May 28, 1998, the Company entered into a $1,250,000 financing
agreement with a bank. The financing consisted of a $750,000 equipment term
loan and a $500,000 revolving loan. Advances against the revolving loan
were based on a percentage of eligible accounts receivable. Interest was
charged at the bank's prime rate plus 1/2% (8.25% at December 31, 1998).
Borrowings were collateralized by substantially all of the Company's
assets. The financing agreement contained financial and non-financial
covenants including a prohibition on further indebtedness. The Company was
not in compliance with its financial covenants as of December 31, 1998.
Using proceeds received from the issuance of the Notes in February 1999,
the Company repaid the $750,000 of outstanding borrowings, plus the related
accrued interest, and the bank agreement was terminated.
6. INCOME TAXES
The Company has federal and state tax net operating loss carryforwards
available for future periods of approximately $42,000,000. The federal tax
net operating loss carryforwards expire beginning in 2010, and state tax
33
<PAGE>
net operating loss carryforwards expire beginning in 2000. As a result of
the changes in the ownership of the Company, there may be limitations on
the amounts of net operating loss carryforwards that may be utilized in any
one year. The Company also has research and development credits for federal
and state tax purposes of approximately $1,023,000 and $756,000,
respectively, which expire beginning in 2011.
The tax effect of significant items comprising the Company's deferred
tax assets at December 31, 1999 and 1998 are as follows:
1999 1998
---- ----
Deferred tax assets:
Net operating loss carryforwards $ 16,896,000 $ 13,849,000
Stock-based compensation ....... 3,514,000 --
Research and development credits 1,779,000 1,442,000
Depreciation and amortization .. 241,000 316,000
Organization costs and software 65,000 103,000
Accrued vacation ............... 35,000 46,000
Allowance for doubtful accounts 35,000 29,000
------------ ------------
22,565,000 15,785,000
Valuation allowance ............. (22,565,000) (15,785,000)
------------ ------------
Net deferred tax assets ... $ -- $ --
============ ============
The Company believes that uncertainty exists with respect to future
realization of the deferred tax assets and has established a valuation
allowance for the full amount as of December 31, 1999 and 1998.
A reconciliation between the amount of income tax determined by
applying the applicable U.S. statutory tax rate to the pre-tax loss is as
follows:
1999 1998
---- ----
Federal statutory rate .......................... (34)% (34)%
State tax, net of federal impact ................ (6) (6)
Non-deductible stock-based compensation ......... 21 --
Provision for valuation allowance on deferred tax 19 40
assets ........................................ --- ---
--% --%
=== ===
7. REDEEMABLE CONVERTIBLE PREFERRED STOCK
At December 31, 1998, the Company had 1,500,000 authorized, issued and
outstanding shares of Series C Redeemable Convertible Preferred Stock, $.01
par value (the "Series C Preferred Stock") with a liquidation preference of
$9 million; 1,000,000 authorized, 799,751 issued and outstanding shares of
Series D Convertible Preferred Stock, $.01 par value (the "Series D
Preferred Stock") with a liquidation preference of $6.4 million; and
1,450,000 authorized, issued and outstanding shares of Series E Convertible
Preferred Stock, $.01 par value (the "Series E Preferred Stock") with a
liquidation preference of $13.1 million (collectively, the "Redeemable
Preferred Stock").
The Redeemable Preferred Stock had no stated dividend rate. The holders
were entitled to receive dividends had dividends been declared on either
the Company's common stock or the Series A and B Convertible Preferred
Stock. The Company has not declared dividends since its inception.
Information with respect to the issuance of the Redeemable Preferred Stock
is as follows:
Issuance Date Net Proceeds
------------- ------------
Series C Redeemable Preferred Stock,
1,500,000 shares at $6.00 per share, net
of offering costs of $783,355 June 1996 $ 8,216,645
Series D Redeemable Preferred Stock,
799,751 shares at $8.00 per share, net
of offering costs of $351,020 April 1997 6,046,988
Series E Redeemable Preferred Stock,
1,450,000 shares at $9.00 per share, net
of offering costs of $272,893 December 1997 12,777,107
----------
$ 27,040,740
------------
Holders of the Redeemable Preferred Stock had the right and option to
convert the preferred shares, at any time, into shares of common stock.
Each share of Redeemable Preferred Stock would initially convert into one
share of common stock. The conversion rate was adjusted for stock splits,
combinations, stock dividends and distributions. The Redeemable Preferred
Stock had voting rights equal to the number of shares of common stock into
which it was convertible. Under certain events, including a public offering
of the common stock or approval by a certain percentage of each class of
the holders, the Redeemable Preferred Stock would automatically convert
into common stock at the applicable conversion rate.
34
<PAGE>
REDEEMABLE CONVERTIBLE PREFERRED STOCK (CONT.)
In addition, the holders of the Redeemable Preferred Stock were
entitled to receive preference to the holders of the common stock in the
event of liquidation. On June 15, 2001, the Company may have been required,
at the option of the holders of a majority of the then outstanding Series
C, Series D and Series E Preferred Stock, to redeem 33 1/3% of the
outstanding shares of the Series C, Series D and Series E Preferred Stock,
and 50% and 100% of all outstanding shares on the first and second
anniversaries from June 15, 2001, respectively. In the event of such a
mandatory redemption, the holders of the Redeemable Preferred Stock would
have received a price equal to the original issue price plus an annual
compounded dividend of 8%. Accordingly, to reflect the mandatory redemption
feature, the Company recorded accretion on the Redeemable Preferred Stock
of $1,884,923, $2,634,482 and $6,604,024 in 1999, 1998 and cumulative for
the period from June 15 (inception) to December 31, 1999, respectively.
In connection with the Merger in September 1999, as described in Note
2, all shares of the Redeemable Preferred Stock were converted into common
stock.
8. STOCKHOLDERS' EQUITY (DEFICIENCY)
MangoSoft, Inc.
Common stock - At December 31, 1999, the Company had authorized
100,000,000 shares of common stock, $.001 par value per share, of which
19,924,127 were issued and outstanding. Of the total authorized common
stock, 3,500,000 shares are reserved for issuance pursuant to the Company's
1999 Incentive Compensation Plan.
Preferred stock - At December 31, 1999, the Company had authorized
5,000,000 shares of preferred stock, $.001 par value per share, of which no
shares were issued and outstanding.
MangoSoft Corporation
Convertible Preferred Stock - At December 31, 1998, MangoSoft
Corporation had 2,250,000 authorized, issued and outstanding shares of
Series A Convertible Preferred Stock, $.01 par value (the "Series A
Preferred Stock") with a liquidation preference of $1,500,000; and 750,002
authorized, issued and outstanding shares of Series B Convertible Preferred
Stock, $.01 par value (the "Series B Preferred Stock") with a liquidation
preference of $2,001,075 (collectively, the "Convertible Preferred Stock").
Holders of the Convertible Preferred Stock had the right and option to
convert the preferred shares, at any time, into shares of common stock.
Each share of Convertible Preferred Stock would initially convert into one
share of common stock. The conversion rate was adjusted for stock splits,
combinations, stock dividends and distributions. The Convertible Preferred
Stock had voting rights equal to the number of shares of common stock into
which it was convertible, and a preference over the holders of the common
stock in the event of liquidation. In the event of a public offering of the
common stock or upon written notice of at least 51% of all the then
outstanding shares, the Series A Preferred Stock and Series B Preferred
Stock would automatically convert into common stock at the applicable
conversion rate. The Convertible Preferred Stock had no stated dividend
rate. The holders were entitled to receive dividends had dividends been
declared on the Company's common stock. The Company has not declared
dividends since inception.
Common Stock - At December 31, 1998, MangoSoft Corporation had
authorized 25,000,000 shares of $.001 par value common stock of which
761,250 shares were issued and outstanding; 2,250,000 shares were reserved
for issuance upon conversion of the Series A Preferred Stock; 750,002
shares were reserved for issuance upon conversion of the Series B Preferred
Stock; 1,500,000 shares were reserved for issuance upon conversion of the
Series C Preferred Stock; 799,751 shares were reserved for issuance upon
conversion of the Series D Preferred Stock; 1,450,000 shares were reserved
for issuance upon conversion of the Series E Preferred Stock; 180,000
shares were reserved for issuance upon exercise of outstanding common stock
warrants; and 2,000,000 shares were reserved for issuance pursuant to the
1995 Stock Plan.
In connection with the merger in September 1999, as described in Note
2, all shares of MangoSoft Corporation common stock and Convertible
Preferred Stock were converted into common stock of MangoSoft,
35
<PAGE>
STOCKHOLDERS' EQUITY (DEFICIENCY) (CONT.)
Inc. In addition, all outstanding options and warrants to purchase
MangoSoft Corporation common stock were terminated and new options to
purchase MangoSoft, Inc. common stock were issued in their place.
9. STOCK OPTION PLAN
In connection with the merger, Mangosoft Corporation's 1995 Stock
Option Plan was terminated and the Company adopted the 1999 Incentive
Compensation Plan (the "Plan"). As amended, the Plan provides for the
issuance of up to 3,500,000 shares of common stock to employees, officers,
directors and consultants in the form of nonqualified and incentive stock
options, restricted stock grants or other stock-based awards, including
stock appreciation rights. The stock options are exercisable as specified
at the date of grant and expire no later than ten years from the date of
grant.
As discussed in Note 3, the Company accounts for stock options granted
to employees in accordance with APB No. 25. In connection with the merger,
outstanding employee options of MangoSoft Corporation were cancelled and
replaced with options to purchase shares of MangoSoft, Inc. The new options
were granted at fair market value at the date of grant ($1.25) and
contained the same vesting provisions as the options replaced. In addition,
the new options include stock appreciation rights ("SARs") that permit the
employee to receive the appreciation in shares of common stock in lieu of
exercising the option.
Under APB No.25, SARs are accounted for as a variable plan and
compensation expense is measured at each reporting date based on the
difference between the exercise price and the market price of the common
stock. For unvested options, compensation expense is recognized over the
vesting period; for vested options, compensation expense is adjusted up or
down at each reporting date based on changes in the market price of the
common stock.
At December 31, 1999, compensation related to the SARs totaled
$23,552,721 based on the market price of $9.75 at that date compared to the
fair market value at the dates of grant. Because a substantial portion of
the options are vested, the charge to expense in the fourth quarter of 1999
was $20,572,378. The balance of $2,980,343 relates to unvested options and
will be charged to expense over the vesting period. Based on the number of
vested options at December 31, 1999, a $1 increase in the market price of
the Company's common stock results in the immediate recognition of
compensation expense of approximately $2,200,000.
In connection with the merger, the Company granted 405,590 options to
non-employees. The options were fully vested at the date of grant and the
Company recorded an expense of $162,317 related to these grants. The fair
value of the stock options awarded to non-employees on the grant date was
$.40 per share, calculated using the Black-Scholes option pricing model ,
with a risk-free interest rate of 6.0%, an expected option life of two
years, no dividends and a volatility of 50%.
The following table sets forth information regarding the outstanding
stock options at December 31, 1999:
<TABLE>
<CAPTION>
Weighted
Average
Number of Price of
Exercise Number of Weighted Average Weighted Average Shares Currently Currently
Prices Shares Exercise Price Remaining Life Exercisable Exercisable
------ ------ -------------- -------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
$ 1.25 3,121,425 $ 1.25 10 Years 2,615,633 $ 1.25
3.00 29,003 3.00 10 Years 7,243 3.00
--------- ---------
3,150,428 2,622,876
========= =========
</TABLE>
At December 31, 1999, all of the outstanding options to employees and
non-employees contained SARs.
36
<PAGE>
STOCK OPTION PLAN (CONT.)
The following table sets forth the stock option activity for the years
ended December 31, 1999 and 1998 (including options granted under the
predecessor 1995 Stock Option Plan):
Weighted
Average
Number of Exercise
Shares Price
------ -----
Outstanding at January 1, 1998 ... 1,128,561 $ 2.50
Granted .................... 1,300,081 3.55
Cancelled .................. (433,905) 3.23
Exercised .................. -- --
---------- --------
Outstanding at December 31, 1998.. 1,994,737 3.02
Granted .................... 3,235,993 1.27
Cancelled .................. (2,040,173) 2.98
Exercised .................. (40,129) 1.25
---------- --------
Outstanding at December 31, 1999. 3,150,428 $ 1.27
========== ========
Exercisable at December 31, 1999. 2,622,876 $ 1.25
========== ========
Exercisable at December 31, 1998. 379,565 $ 1.74
========== ========
Pro Forma Disclosure - As discussed in Note 3, the Company uses the
intrinsic value method to measure compensation expense associated with
grants of employee stock options. SFAS No. 123 requires the disclosure of
pro forma information as if the Company adopted the fair value method for
grants or awards made to employees. For purposes of the pro forma
disclosures, the fair value of options on their grant date was measured
using the Black-Scholes option pricing model with the following weighted
average assumptions: an expected life of two years; a risk-free interest
rate of 6.0%; no dividends; and a volatility factor of 50%. Forfeitures are
recognized as they occur.
Under SFAS No. 123, the options granted in 1999 and 1998 had a weighted
average grant date fair value of $.41 and $1.13, respectively. If the grant
date fair values of the awards had been amortized to expense over the
vesting period of the awards, the pro forma net loss and net loss per share
would have been as follows:
1999 1998
---- ----
Net loss as reported .......... $ (33,021,645) $ (13,073,913)
Pro forma net loss ............ (33,959,725) (13,393,559)
Net loss per share as reported. (5.44) (115.19)
Pro forma net loss per share .. (5.59) (117.54)
10. RETIREMENT SAVINGS PLAN
The Company has a 401(K) retirement savings plan covering substantially
all of its employees. Under provisions of the plan, employees may
contribute up to 15% of their compensation within certain limitations. The
Company may, at the discretion of the Board of Directors, make
contributions on behalf of its employees under this plan. Such
contributions, if any, become fully vested after five years of continuous
service. The Company did not make any contribution in 1999 and 1998.
37
<PAGE>
11. COMMITMENTS AND CONTINGENCIES
The Company has a noncancelable operating lease for office space, which
expires in 2001. The Company also leases various office equipment under
cancelable operating leases. Total rent expense was approximately $549,000
and $632,000 for the years ended December 31, 1999 and 1998, respectively.
Future minimum rental payments under the noncancelable office space lease
are $511,268 in 2000 and $340,845 in 2001.
The Company has an agreement with one of its directors pursuant to
which the director shall receive grants of stock options exercisable at the
current market price of the Company's common stock on the date of grant
equal to 1% of the voting securities of the Company on a fully-diluted
basis. Options granted to this director have been included in the Company's
issued and outstanding stock options granted to employees and
non-employees. See Note 9.
The Company has been, and expects to continue to be, subject to legal
proceedings and claims that arise in the ordinary course of business.
Management currently believes that resolving these matters will not have a
material adverse impact on the Company's financial position, results of
operations or its cash flows.
12. TRANSACTIONS WITH STOCKHOLDERS
Demand Notes Payable - As discussed in Note 5, the Company received
$2,000,000 of interim financing from two stockholders in 1998 in the form
of demand notes with interest at an annual rate of 8%. The demand notes
were converted into 12% convertible notes in February 1999. Subsequent
thereto, the Company received an additional $2,000,000 in financing from
these two stockholders in the form of the 12% convertible notes. In
conjunction with the merger in September 1999, the 12% convertible notes
were converted into MangoSoft, Inc. common stock. In December 1999, the two
stockholders provided an additional $232,500 of interim financing under
demand notes with terms similar to those in 1998.
Other Stockholder Loans - As discussed in Note 5, the Company received
$400,000 in interim financing from two additional stockholders in advance
of the merger. The loans automatically converted into common stock in
conjunction with the merger.
Repurchase of Common Stock - In connection with the merger in 1999,
MangoSoft Corporation agreed to repurchase 200,000 shares of common stock
from one of its former executives for $100,000.
Administrative Services - During 1999 and 1998, a stockholder provided
administrative assistance to the Company. Amounts expensed and accrued for
such services were $64,888 in 1999 and $647,795 in 1998, which are
reflected as accrued liabilities in the accompanying Consolidated Balance
Sheets.
13. GEOGRAPHIC SALES INFORMATION AND MAJOR CUSTOMERS
The Company's sales in Japan and North America were 67% and 33% in
1999, respectively, and 85% and 15% in 1998, respectively. One customer
accounted for 67% of the 1999 sales and another customer accounted for 85%
of the 1998 sales.
14. SUBSEQUENT EVENTS
Common and Series A Convertible Preferred Stock
Subsequent to December 31, 1999 , the Company completed the sale of 2.5
million shares of a new issuance of Convertible Preferred Stock, Series A,
(the "Preferred Stock") to accredited investors at $4.00 per share. The
Preferred Stock is convertible into common stock (initially at a ratio of
one to one) and has a liquidation preference of $10 million. The Preferred
Stock will automatically convert to common stock upon the subsequent sale
of an additional $10 million of the Company's securities.
In accordance with Emerging Issues Task Force Abstract No. 98-5,
"Accounting for Convertible Securities with Beneficial Conversion Features
or Contingently Adjustable Conversion Ratios," the proceeds from the Series
A financing will be allocated between the conversion feature and the
preferred stock; because the fair value of the common stock was
significantly in excess of the conversion price implicit in the Series A
stock, the entire amount of net proceeds will be allocated to the
conversion feature. Because the preferred stock is immediately convertible
into common stock, an immediate dividend or accretion will be recorded from
common stockholders' equity to the carrying value of the Series A preferred
stock.
38
<PAGE>
SUBSEQUENT EVENTS (CONT).
Subsequent to December 31, 1999, the Company sold 4.0 million shares
of common stock to accredited investors at $5.00 per share. Upon completion
of the sale of common stock, the Preferred Stock will automatically
convert, in accordance with its terms, into 2.5 million shares of common
stock. The $29.4 million in proceeds from the sale of the common stock and
Preferred Stock will be used for research and development, marketing and
general working capital or such other purposes as the Company may determine
from time to time in its discretion.
On May 19, 2000, the Company's stockholders approved the Company's
1999 Incentive Compensation Plan, as amended and restated, including
increasing the number of shares available to grant under the Plan from
3,500,000 to 8,000,000 shares.
*******
39
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
------- ------------
11 Computation of Net Loss Per Common Share
21 Subsidiary of the Registrant
27 Financial Data Schedules
40
