<PAGE>
Exhibit 13.1
--------------------------------------------------------------------------------
MANGOSOFT CORPORATION
(A DEVELOPMENT STAGE
COMPANY)
Financial Statements for the Years
Ended December 31, 1998 and 1997 and
Cumulative for the Period from June 15, 1995
(Inception) to December 31, 1998
and Independent Auditors' Report
<PAGE>
MANGOSOFT CORPORATION
(A DEVELOPMENT STAGE COMPANY)
TABLE OF CONTENTS
--------------------------------------------------------------------------------
PAGE
INDEPENDENT AUDITORS' REPORT 1
FINANCIAL STATEMENTS:
Balance Sheets as of December 31, 1998 and 1997 2
Statements of Operations for the Years Ended December 31, 1998
and 1997 and Cumulative for the Period from June 15, 1995
(Inception) to December 31, 1998 3
Statements of Stockholders' Equity (Deficiency) for the Years
Ended December 31, 1998 and 1997 and Cumulative for the Period
from June 15, 1995 (Inception) to December 31, 1998 4
Statements of Cash Flows for the Years Ended December 31, 1998
and 1997 and Cumulative for the Period from June 15, 1995
(Inception) to December 31, 1998 5
Notes to Financial Statements 6-16
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors of
MangoSoft Corporation:
We have audited the accompanying balance sheets of MangoSoft Corporation (a
development stage company) (the "Company") as of December 1998 and 1997, and the
related 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, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of MangoSoft Corporation as of December 31,
1998 and 1997, and the results of its operations and its cash flows for the
years then ended and cumulative for the period from June 15, 1995 (inception) to
December 31, 1998 in conformity with accounting principles generally accepted in
the United States of America.
The accompanying financial statements have been prepared assuming that 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 3 to the financial statements, 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 describe in Note 3. The financial statements do not include any
adjustments that might result from the outcome of these uncertainties.
As disclosed in Note 11, on September 7, 1999, the Company was acquired by
MangoSoft, Inc. (formerly known as First American Clock Co.) in a transaction to
be accounted for as a reverse acquisition.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Boston, Massachusetts
March 5, 1999
(September 7, 1999, as to the last paragraph of Note 8 and the first six
paragraphs of Note 11; April 11, 2000 as to the seventh, eighth and ninth
paragraphs of Note 11; May 19, 2000 as to the last paragraph of Note 11)
<PAGE>
MANGOSOFT CORPORATION
(A Development Stage Company)
BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS 1998 1997
<S> <C> <C>
CURRENT ASSETS:
Cash and equivalents $ 232,637 $ 9,366,392
Accounts receivable, net of an allowance of $9,702 in 1998 9,458 149,521
Prepaid expenses and other current assets 3,591 85,414
Inventory 275 63,036
------------ ------------
Total current assets 245,961 9,664,363
------------ ------------
PROPERTY AND EQUIPMENT:
Computer equipment 1,529,654 1,497,731
Furniture and fixtures 309,302 287,186
Leasehold improvements 198,052 227,504
------------ ------------
Total property and equipment 2,037,008 2,012,421
Less accumulated depreciation and amortization (1,830,744) (1,393,648)
------------ ------------
Property and equipment - net 206,264 618,773
------------ ------------
DEPOSITS AND OTHER ASSETS 5,943 181,600
------------ ------------
TOTAL $ 458,168 $ 10,464,736
============ ============
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) 1998 1997
<S> <C> <C>
CURRENT LIABILITIES:
Demand notes payable to related parties $ 2,000,000 $ --
Other short-term debt 750,000 --
Accounts payable - including amounts past due 1,768,456 1,998,579
Accrued expenses to related parties 647,795 --
Accrued payroll 142,834 217,588
Other accrued expenses 424,172 613,221
Deferred revenue 19,160 149,521
------------ ------------
Total current liabilities 5,752,417 2,978,909
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 8)
REDEEMABLE CONVERTIBLE PREFERRED STOCK:
Redeemable convertible preferred stock, Series C,
at redemption value - 1,500,000 shares authorized,
issued and outstanding; liquidation preference, $9,000,000 10,536,748 9,589,814
Redeemable convertible preferred stock, Series D, at redemption value -
1,000,000 shares authorized; 799,751 shares issued and outstanding
in 1998 and 1997; liquidation preference, $6,398,008 7,193,384 6,578,732
Redeemable convertible preferred stock, Series E,
at redemption value - 1,450,000 shares authorized; 1,450,000 shares issued
and outstanding in 1998; 1,426,409 shares issued
and outstanding in 1997; liquidation preference, $13,050,000 14,233,546 12,956,813
------------ ------------
Total redeemable convertible preferred stock 31,963,678 29,125,359
------------ ------------
STOCKHOLDERS' EQUITY (DEFICIENCY):
Convertible preferred stock, Series A, $.01 par value per share - 2,250,000
shares authorized, issued and outstanding; liquidation preference, $1,500,000 22,500 22,500
Convertible preferred stock, Series B, $.01 par value per share - 750,002 shares
authorized, issued and outstanding; liquidation preference, $2,001,075 7,500 7,500
Common stock, $.001 par value per share - 25,000,000 shares
authorized in 1998, 12,000,000 shares authorized in 1997;
761,250 shares issued and outstanding in 1998; 750,000
shares issued and outstanding in 1997 761 750
Additional paid-in capital -- 1,345,972
Deficit accumulated during the development stage (37,288,688) (23,016,254)
------------ ------------
Total stockholders' equity (deficiency) (37,257,927) (21,639,532)
------------ ------------
TOTAL $ 458,168 $ 10,464,736
============ ============
</TABLE>
See notes to financial statements.
- 2 -
<PAGE>
MANGOSOFT CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998 AND 1997 AND CUMULATIVE FOR THE PERIOD
FROM JUNE 15, 1995 (INCEPTION) TO DECEMBER 31, 1998
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Cumulative
Since
1998 1997 Inception
<S> <C> <C> <C>
REVENUES $ 245,406 $ -- $ 245,406
COST OF REVENUES 91,529 -- 91,529
------------ ------------ ------------
GROSS MARGIN 153,877 -- 153,877
COSTS AND EXPENSES:
Research and development 6,615,558 6,988,603 18,564,568
Selling and marketing 2,608,190 5,935,308 9,086,670
General and administrative 3,388,312 3,054,302 8,373,654
Consulting fees to related party 647,795 -- 647,795
------------ ------------ ------------
LOSS FROM OPERATIONS (13,105,978) (15,978,213) (36,518,810)
------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest income 168,498 197,218 565,076
Interest expense to related parties (19,726) -- (19,726)
Other interest expense (49,507) -- (49,507)
Other income (expense), net (67,200) -- (67,200)
------------ ------------ ------------
Total other income 32,065 197,218 428,643
------------ ------------ ------------
NET LOSS (13,073,913) (15,780,995) (36,090,167)
ACCRETION OF REDEEMABLE CONVERTIBLE
PREFERRED STOCK (2,634,482) (1,598,096) (4,719,101)
------------ ------------ ------------
NET LOSS APPLICABLE TO COMMON
STOCKHOLDERS $(15,708,395) $(17,379,091) $(40,809,268)
============ ============ ============
NET LOSS PER SHARE (BASIC AND DILUTED) $ (20.74) $ (23.17) $ (54.26)
============ ============ ============
SHARES USED IN CALCULATING NET LOSS
PER SHARE 757,500 750,000 752,143
============ ============ ============
</TABLE>
See notes to financial statements
- 3 -
<PAGE>
MANGOSOFT CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
YEARS ENDED DECEMBER 31, 1998 AND 1997 AND CUMULATIVE FOR THE PERIOD
FROM JUNE 15, 1995 (INCEPTION) TO DECEMBER 31, 1998
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CONVERTIBLE CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK
------------------------- ---------------------------
SERIES A 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, Series A,
at $0.67 per share, net of issuance costs of $26,998 2,250,000 22,500 -- --
Issuance of convertible preferred stock, Series B,
at $2.67 per share, net of issuance costs of $14,041 -- -- 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
========== ============ ============ ============
<CAPTION>
DEFICIT
ACCUMULATED
ADDITIONAL DURING THE
COMMON STOCK PAID-IN DEVELOPMENT
SHARES AMOUNT CAPITAL STAGE TOTAL
----------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
BALANCE, JUNE 15, 1995 (INCEPTION) -- $ -- $ -- $ -- $ --
Issuance of common stock, at $0.001 per share 750,000 750 -- -- 750
Issuance of convertible preferred stock, Series A,
at $0.67 per share, net of issuance costs of $26,998 -- -- 1,451,057 -- 1,473,557
Issuance of convertible preferred stock, Series B,
at $2.67 per share, net of issuance costs of $14,041 -- -- 1,979,534 -- 1,987,034
Net loss -- -- -- (1,119,683) (1,119,683)
----------- ------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 1995 750,000 750 3,430,591 (1,119,683) 2,341,658
Accretion of redeemable convertible
preferred stock -- -- (486,523) -- (486,523)
Net loss -- -- -- (6,115,576) (6,115,576)
----------- ------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 1996 750,000 750 2,944,068 (7,235,259) (4,260,441)
Accretion of redeemable convertible
preferred stock -- -- (1,598,096) -- (1,598,096)
Net loss -- -- -- (15,780,995) (15,780,995)
----------- ------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 1997 750,000 750 1,345,972 (23,016,254) (21,639,532)
Conversion of accounts payable 11,250 11 89,989 -- 90,000
Accretion of redeemable convertible
preferred stock -- -- (1,435,961) (1,198,521) (2,634,482)
Net loss -- -- -- (13,073,913) (13,073,913)
----------- ------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 1998 761,250 $ 761 $ -- $(37,288,688) $(37,257,927)
=========== ============ ============ ============ ============
</TABLE>
See notes to financial statements.
- 4 -
<PAGE>
MANGOSOFT CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998 AND 1997 AND CUMULATIVE FOR THE
PERIOD JUNE 15, 1995 (INCEPTION) TO DECEMBER 31, 1998
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CUMULATIVE
SINCE
1998 1997 INCEPTION
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(13,073,913) $(15,780,995) $(36,090,167)
------------ ------------ ------------
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 542,166 777,561 1,935,814
Loss on disposal of equipment 71,942 -- 71,942
Changes in assets and liabilities:
Accounts receivable 140,063 (149,521) (9,458)
Inventory 62,761 (63,036) (275)
Prepaid expenses and other current assets 81,823 (49,105) (3,591)
Deposits and other assets 175,657 80,200 (5,943)
Accounts payable (140,123) 2,421,224 1,768,456
Accrued expenses to related parties 647,795 -- 647,795
Accrued payroll (74,754) (58,128) 142,834
Other accrued expenses (189,049) -- 424,172
Deferred revenue (130,361) 149,521 19,160
------------ ------------ ------------
Total adjustments 1,187,920 3,108,716 4,990,906
------------ ------------ ------------
Net cash used in operating activities (11,885,993) (12,672,279) (31,099,261)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment 12,749 -- 12,749
Expenditures for property and equipment (214,348) (779,740) (2,226,769)
------------ ------------ ------------
Net cash used in investing activities (201,599) (779,740) (2,214,020)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuances of common and preferred stock 203,837 18,824,095 30,795,918
Proceeds from other debt financing 750,000 -- 750,000
Proceeds from issuance of notes to related parties 2,000,000 -- 2,000,000
------------ ------------ ------------
Net cash from financing activities 2,953,837 18,824,095 33,545,918
------------ ------------ ------------
NET (DECREASE) INCREASE IN CASH AND EQUIVALENTS (9,133,755) 5,372,076 232,637
CASH AND EQUIVALENTS, BEGINNING OF PERIOD 9,366,392 3,994,316 --
------------ ------------ ------------
CASH AND EQUIVALENTS, END OF PERIOD $ 232,637 $ 9,366,392 $ 232,637
============ ============ ============
SUPPLEMENTAL CASH FLOW INFORMATION -
Cash paid for interest $ 69,233 $ -- $ 69,233
============ ============ ============
NONCASH FINANCING ACTIVITY:
Conversion of accounts payable to common stock $ 90,000 $ -- $ --
============ ============ ============
Accretion of redeemable convertible preferred stock $ 2,634,482 $ 1,598,096 $ 4,719,101
============ ============ ============
</TABLE>
See notes to financial statements
- 5 -
<PAGE>
MANGOSOFT CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997 AND CUMULATIVE FOR
THE PERIOD FROM JUNE 15, 1995 (INCEPTION) TO DECEMBER 31, 1998
--------------------------------------------------------------------------------
1. NATURE OF BUSINESS
MangoSoft Corporation (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 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, 1998 and 1997 and cumulative
for the period from June 15, 1995 (inception) to December 31, 1998, the
Company incurred net losses of $13,073,913, $15,780,995 and $36,090,167,
respectively, and at December 31, 1998 a substantial portion of it's
accounts payable was past due. These factors, among others, raise
substantial doubt about the Company's ability to continue as a going
concern.
During 1999, management expects to reduce operating expenses, reevaluate
operations, and seek additional equity and debt financing. Management
expects to further develop markets for the Company's products by
establishing license and contractual agreements with original equipment
manufacturers.
As a result of these steps, management believes that the Company will have
sufficient capital to fund operations for the foreseeable future.
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. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
balance sheet dates. Actual results could differ from those estimates.
- 6 -
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 maturities 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 90 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 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 1998 and 1997, 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 ("APB") Opinion 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.
- 7 -
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 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 are 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 1,994,737 in 1998 and
1,128,561 in 1997 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 1997
financial statements and cumulative since inception amounts to conform to
the 1998 presentation.
3. SHORT-TERM DEBT
On May 28, 1998, the Company entered into a $1,250,000 financing agreement
with a bank. The financing consists 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 nonfinancial covenants including a
prohibition on further indebtedness. In connection with the February 11,
1999 issuance of 12% Senior Secured Convertible Notes (Note 11) by the
Company, the amounts outstanding under this agreement were paid in full and
the agreement was terminated. The Company was not in compliance with its
financial covenants as of December 31, 1998.
In October 1998, the Company entered into financing agreements with two
stockholders to provide $2,000,000 of financing through the issuance of
demand notes. Borrowings bear interest at 8%. Amounts outstanding at
December 31, 1998 total $2,000,000. In connection with the issuance by the
Company of 12% Senior Secured Convertible Notes on February 11, 1999, the
demand notes were converted into 12% Senior Secured Convertible Notes
(Note 11).
- 8 -
<PAGE>
4. 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 has no stated dividend rate. The holders are
entitled to receive dividends if dividends are declared on either the
Company's common stock or the Series A and B Convertible Preferred Stock
(Note 5). The Company has not declared dividends since its inception.
Information with respect to the issuance of the Redeemable Preferred Stock
is as follows:
<TABLE>
<CAPTION>
Issuance Date Net Proceeds
------------- ------------
<S> <C> <C>
Series C Redeemable Preferred Stock, 1,500,000 shares at June 1996 $ 8,216,645
$6.00 per share, net of offering costs of $783,355
Series D Redeemable Preferreed Stock, 799,751 shares at April 1997 6,046,988
$8.00 per share, net of offering costs of $351,020
Series E Redeemable Preferred Stock, 1,450,000 shares at December 1997 12,777,107
$9.00 per share, net of offering costs of $272,893 -----------
$27,040,740
===========
</TABLE>
CONVERSION AND VOTING RIGHTS - Holders of the Redeemable Preferred Stock
have the right and option to convert the preferred shares, at any time, into
shares of common stock. Each share of Redeemable Preferred Stock will
initially convert into one share of common stock. The conversion rate will
be adjusted for stock splits, combinations, stock dividends and
distributions. The Redeemable Preferred Stock has voting rights equal to the
number of shares of common stock into which it is 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 rate.
REDEMPTION - On June 15, 2001, the Company may be 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. The shares of the Series C, Series D and Series E Preferred
Stock shall be redeemed at $6.00, $8.00 and $9.00 per share, respectively,
plus dividends at a per annum rate, which would provide the holder with an
8% compounded return on the initial purchase price of $6.00, $8.00 and $9.00
per share, respectively, computed from May 22, 1996, January 31, 1997, and
October 31, 1997, respectively, to each Series' respective redemption date.
- 9 -
<PAGE>
4. REDEEMABLE CONVERTIBLE PREFERRED STOCK (CONTINUED)
Assuming no dividends are paid on the Series C, Series D and Series E
Preferred Stock, the future aggregate redemption requirements are as
follows:
SERIES C SERIES D SERIES E
June 15, 2001 $ 4,345,306 $ 2,970,202 $ 5,746,573
June 15, 2002 4,812,878 3,233,732 6,229,077
June 15, 2003 5,240,982 3,515,525 6,740,888
----------- ----------- -----------
$14,399,166 $ 9,719,459 $18,716,538
=========== =========== ===========
The redemption right will terminate in the event of a public offering of
shares of common stock in which the Company receives not less than
$15,000,000 in proceeds at an offering price to the public of not less than
$8.80 per share. At any time following a public offering of shares of the
common stock in which the Series C, Series D and Series E Preferred Stock
does not automatically convert, the Company may, at its option, redeem any
portion of the then outstanding Series C, Series D and Series E Preferred
Stock at $10.25 per share.
LIQUIDATION - In the event of liquidation of the Company, the holders of the
Redeemable Preferred Stock are entitled to receive in preference to the
holders of common stock, an amount equal to the greater of (a) $6.00 per
share in the case of Series C Preferred Stock, $8.00 per share in the case
of Series D Preferred Stock and $9.00 per share in the case of Series E
Preferred Stock, plus any declared and unpaid dividends; or (b) the amount
the holders would have received had they converted the Redeemable Preferred
Stock to common stock immediately prior to such liquidation.
DIVIDENDS - The holders of the Series C Preferred Stock will receive
dividends when and if declared by the Board of Directors.
5. STOCKHOLDERS' EQUITY (DEFICIENCY)
CONVERTIBLE PREFERRED STOCK - At December 31, 1998, the Company has
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, with a
liquidation preference of $2,001,075, $.01 par value (the "Series B
Preferred Stock") (collectively, the "Convertible Preferred Stock").
Holders of the Convertible Preferred Stock have the right and option to
convert the preferred shares, at any time, into shares of common stock. Each
share of Convertible Preferred Stock will initially convert into one share
of common stock. The conversion rate will be adjusted for stock splits,
combinations, stock dividends and distributions. The Convertible Preferred
Stock has voting rights equal to the number of shares of common stock into
which it is 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.
In the event of liquidation of the Company, the holders of the Convertible
Preferred Stock are entitled to receive in preference to the holders of
common stock, an amount equal to the greater of (a) $0.6667 per share in the
case of each share of Series A Preferred Stock, and $2.67 per share in the
case of Series B
- 10 -
<PAGE>
5. STOCKHOLDERS' EQUITY (DEFICIENCY) (CONTINUED)
Preferred Stock, plus any declared and unpaid dividends; or (b) the amount
the holders would have received had they converted the Convertible Preferred
Stock to common stock immediately prior to such liquidation.
The Convertible Preferred Stock has no stated dividend rate. The holders are
entitled to receive dividends should dividends be declared on the Company's
common stock. The Company has not declared dividends since its inception.
COMMON STOCK - At December 31, 1998 and 1997, the Company had authorized
25,000,000 and 12,000,000 shares, respectively, of $.001 par value common
stock (the "common stock"), of which, at December 31, 1998, 761,250 shares
are issued and outstanding; 2,250,000 shares are reserved for issuance upon
conversion of the Series A Preferred Stock; 750,002 shares are reserved for
issuance upon conversion of the Series B Preferred Stock; 1,500,000 shares
are reserved for issuance upon conversion of the Series C Preferred Stock;
799,751 shares are reserved for issuance upon conversion of the Series D
Preferred Stock; 1,450,000 shares are reserved for issuance upon conversion
of the Series E Preferred Stock; 180,000 shares are reserved for issuance
upon exercise of outstanding common stock warrants; and 2,000,000 shares are
reserved for issuance pursuant to the Company's 1995 Stock Plan.
WARRANTS - In connection with the offering of the Series C Preferred Stock,
the Company issued warrants to purchase 180,000 shares of common stock at
$8.00 per share, with 120,780 of such warrants expiring on May 22, 2001 and
59,220 expiring on June 28, 2001. In connection with the offering of the
Series D Preferred Stock, the Company issued warrants to purchase 51,800
shares of common stock at $10.00 per share, with 45,300 of such warrants
expiring on April 9, 2002 and 6,500 expiring on April 29, 2002.
STOCK OPTIONS - The Company's 1995 Stock Plan, as amended, provides for the
issuance of nonqualified and incentive stock options to employees, officers,
directors and consultants to purchase up to 2,000,000 shares of common stock
at exercise prices not less than the fair market value at the date of grant
as determined by the Company's Board of Directors. Options generally become
exercisable over a four-year period as specified at the date of the grant
and expire ten years from the date of the grant.
WEIGHTED-
AVERAGE
EXERCISE
PRICE
SHARES PER SHARE
Outstanding at January 1, 1997 522,165 $ 1.34
Granted 785,475 3.18
Canceled (179,079) 2.10
Exercised -- --
---------
Outstanding at December 31, 1997 1,128,561 2.50
Granted 1,300,081 3.55
Canceled (433,905) 3.23
Exercised -- --
---------
Outstanding at December 31, 1998 1,994,737 3.02
=========
Exercisable at December 31, 1998 379,565 1.74
=========
Exercisable at December 31, 1997 196,186 1.26
=========
- 11 -
<PAGE>
5. STOCKHOLDERS' EQUITY (DEFICIENCY) (CONTINUED)
The following table sets forth information regarding options outstanding at
December 31, 1998:
<TABLE>
<CAPTION>
WEIGHTED-
WEIGHTED- WEIGHTED- AVERAGE EXERCISE
AVERAGE AVERAGE NUMBER PRICE OF CURRENTLY
EXERCISE NUMBER OF EXERCISE REMAINING CURRENTLY EXERCISABLE
PRICES SHARES PRICE LIFE (YEARS) EXERCISABLE OPTIONS
<S> <C> <C> <C> <C> <C>
$0.35 191,000 $0.35 6.8 143,251 $0.35
1.33 50,000 1.33 6.5 50,000 1.33
1.35 50,250 1.35 7.3 25,124 1.35
3.00 155,250 3.00 8.1 76,664 3.00
3.25 317,776 3.25 8.7 79,713 3.25
3.50 1,179,198 3.50 9.9 -- --
4.00 51,263 4.00 9.3 4,813 4.00
--------- -------
1,994,737 379,565
========= =======
</TABLE>
PRO FORMA DISCLOSURE - As discussed in Note 2, the Company uses the
intrinsic value method to measure compensation expense associated with
grants of stock options to employees. Had the Company used the fair value
method of SFAS No. 123, "Accounting for Stock-Based Compensation," to
measure compensation, the reported net loss for 1998 and 1997 would have
been $13,309,507 and $15,943,460, respectively. For purposes of calculating
the pro forma effects on net loss, the fair value of options on their grant
date was measured using the minimum value method with a risk-free interest
rate of 6% and an option life of ten years. Options granted during 1998 and
1997 had a weighted-average grant date fair value of $1.00 and $1.01,
respectively.
6. INCOME TAXES
The tax effect of significant items comprising the Company's deferred tax
assets at December 31 are as follows:
1998 1997
Deferred tax assets:
Net operating loss carryforwards $ 13,849,000 $ 8,573,000
Research and development credits 1,442,000 852,000
Depreciation and amortization 316,000 312,000
Organization costs and software 103,000 161,000
Allowance for doubtful accounts 29,000 --
Accrued vacation 46,000 44,000
------------ ------------
15,785,000 9,942,000
Valuation allowance (15,785,000) (9,942,000)
------------ ------------
Net deferred tax assets $ -- $ --
============ ============
- 12 -
<PAGE>
6. INCOME TAXES (CONTINUED)
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, 1998 and 1997. The
valuation allowance increased by $5,843,000 and $6,781,000 during 1998 and
1997, respectively, as it is more likely than not that the Company would not
realize the value of the deferred tax assets.
The Company has federal and state tax net operating loss carryforwards
available for future periods of approximately $34,550,000, which expire
beginning in 2010, and state tax net operating loss carryforwards of
approximately $34,368,000, which expire beginning in 2000. As a result of
changes in 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 $756,000 and $576,000, respectively, which
expire beginning in 2011.
The Company did not pay any income taxes in 1998 and 1997.
A reconciliation between the amount of income tax determined by applying the
applicable U.S. statutory tax rate to the pretax loss is as follows:
1998 1997
Federal statutory rate (34)% (34)%
State tax, net of federal impact (6) (6)
Provision for valuation allowance on deferred tax assets 40 40
--- ---
- % - %
=== ===
7. RETIREMENT SAVINGS PLAN
The Company has a 401(k) retirement savings plan covering substantially all
of its employees. Under the 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
contributions in 1998 and 1997.
- 13 -
<PAGE>
8. COMMITMENTS AND CONTINGENCIES
The Company has a cancelable operating lease for office space which expires
in 2001. The Company also leases various office equipment under operating
leases. Total rent expense was approximately $632,000 and $465,000 for the
years ended December 31, 1998 and 1997, respectively. Future minimum rental
payments under the cancelable operating lease are $505,000, $511,000 and
$341,000 for the years ending December 31, 1999, 2000 and 2001,
respectively.
At December 31, 1998, there was pending litigation against the Company that
was brought by a former chief executive officer of the Company. The Company
filed countersuit, and in June 1999, the case was subsequently settled. In
the settlement agreement, the Company agreed to repurchase for $100,000,
200,000 shares of common stock held by the former chief executive officer
and to permit the former chief executive officer to retain certain common
stock options. In the ordinary course of its business, the Company is party
to various legal actions that management believes are routine in nature and
incidental to the operations of its business. While the outcome of such
actions cannot be predicted with certainty, management believes that, based
on the experience of the Company in dealing with these matters, the ultimate
resolution of these matters will not have a material adverse impact on the
financial condition or results of operations of the Company.
9. TRANSACTIONS WITH STOCKHOLDERS
DEMAND NOTES PAYABLE - As discussed in Note 3, 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%.
ADMINISTRATIVE SERVICES - During 1998, a stockholder provided administrative
assistance to the Company. Amounts expensed and accrued for such services
were $647,795 which are reflected as accrued liabilities in the accompanying
balance sheet. No administrative assistance was provided in 1997.
10. GEOGRAPHIC SALES INFORMATION AND MAJOR CUSTOMERS
The Company's sales in Japan and North America were 88% and 15%,
respectively, in 1998. There were no sales in 1997. One customer accounted
for 100% of accounts receivable as of December 31, 1998 and one customer
accounted for 85% of revenues during 1998.
11. SUBSEQUENT EVENTS
12% SENIOR SECURED CONVERTIBLE NOTES - On February 11, 1999, the Company
issued 12% Senior Secured Convertible Notes (the "Notes") in the amount of
$6,000,000. Proceeds from the issuance of the Notes were used to pay in full
and terminate the agreement related to the $1,250,000 financing agreement
entered into with a bank as discussed in Note 3. In addition, the $2,000,000
demand notes entered into with stockholders (Note 3) were converted and
incorporated into the $6,000,000 issuance of these Notes. The Notes bear
interest on the outstanding principal amount, until the Notes are either
converted or paid in full, at 12% per annum. Principal and interest are due
182 days from the issuance dates but the Company has the option to extend
the maturity date of the Notes up to an additional 365 days upon payment of
an extension fee. The Notes are secured by substantially all of the assets
of the Company, including equipment, inventory and intangible property. The
Notes are convertible into common stock at the option of the holder at a
conversion price of $3.50 per common stock share, or at 75% of the lowest
cash price paid in any equity offering during the period the Notes are
outstanding. In addition, the conversion price will continue to decrease by
5% per month for each month following the initial six-month period the
Notes remain unpaid, provided that the final conversion value will never be
less than 50% of the lowest price paid by investors in any equity financing.
- 14 -
<PAGE>
11. SUBSEQUENT EVENTS (CONTINUED)
MERGER - On September 7, 1999, the Company entered into a merger agreement
with MangoSoft, Inc. (formerly First American Clock Co.) ("Clock"). Under
the terms of the merger agreement, the Company merged with and into Clock,
and the holders of the Company's capital stock received 6,008,998 shares of
common stock (par value $.001 per share) of Clock. The Company's capital
stock includes all common shares as well as shares of Series A, B, C, D and
E preferred stock. All of the Company's existing common stock options and
common stock warrants were canceled, and the 1999 Incentive Compensation
Plan was adopted. As part of the merger, the Company completed a private
placement ("Private Placement") of 3,000,000 shares of its common stock for
net proceeds of $3,098,827.
As a result of the merger, the $6,000,000 Notes issued by the Company in
February 1999 were exchanged for 9,000,000 common shares of Clock. The 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 Notes were outstanding. At the time of
the merger, the terms of the Notes allowed for their conversion at 65% of
the $1.25 per share equity offering price, or $.81 per share. To facilitate
the completion of the merger, a Note Conversion Agreement was entered into
between the Company and the holders of the Notes, which allowed for their
conversion at $.71 per share (including accrued interest), or $.54 per share
below the 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 will be recognized as a beneficial
conversion feature through a charge to interest expense and a credit to
additional paid-in capital in the Company's 1999 financial statements.
At the time of the merger, the common shares issued to the Company's former
stockholders represented a majority of the combined companies' common stock,
enabling the Company's former stockholders to retain voting and operating
control of the Company. Because Clock 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 stockholders of MangoSoft received
the larger portion of the voting interests in the combined enterprise.
PRO FORMA DISCLOSURE - The following table represents the unaudited pro
forma results of operations for the years ended December 31, 1998 and 1997,
assuming the merger had occurred on January 1, 1997, the beginning of the
earliest period presented in the accompanying financial statements. 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.
- 15 -
<PAGE>
11. SUBSEQUENT EVENTS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1998 1997
(UNAUDITED)
<S> <C> <C>
Revenue $ 245,406 $ --
Loss from operations (13,133,180) (15,992,094)
Net loss (13,101,389) (15,794,944)
Net loss applicable to common shares (13,101,389) (15,794,944)
Net loss per common share (basic and diluted) (1.55) (3.09)
Shares used in calculating net loss per common share 8,428,664 5,118,734
</TABLE>
STOCK OPTION GRANTS TO A DIRECTOR - On September 7, 1999, the Company
entered into an agreement with one of its directors whereby the director
receives stock otion grants 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.
COMMON AND SERIES A CONVERTIBLE PREFERRED STOCK - In March and April 2000,
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.
In March 2000, 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.
STOCK OPTION PLAN - 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 for grant under the Plan
from 3,500,000 to 8,000,000 shares.
- 16 -
