<PAGE>
Exhibit 99.1
--------------------------------------------------------------------------------
MANGOSOFT CORPORATION
(A DEVELOPMENT STAGE
COMPANY)
Unaudited Financial Statements for the Six Months Ended
June 30, 1999 and 1998 and Cumulative for the
Period from June 15, 1995 (Inception) to
June 30, 1999
<PAGE>
MANGOSOFT CORPORATION
(A Development Stage Company)
UNAUDITED BALANCE SHEETS
June 30, 1999 and December 31, 1998
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
ASSETS 1999 1998
---- ----
<S> <C> <C>
CURRENT ASSETS:
Cash and equivalents $ 165,859 $ 232,637
Accounts receivable, net of an allowance of $9,702 in 1998 -- 9,458
Prepaid expenses and other current assets 21,991 3,591
Inventory -- 275
------------ ------------
Total current assets 187,850 245,961
------------ ------------
PROPERTY AND EQUIPMENT:
Computer equipment 1,514,385 1,529,654
Furniture and fixtures 309,302 309,302
Leasehold improvements 198,052 198,052
------------ ------------
Total property and equipment 2,021,739 2,037,008
Less accumulated depreciation and amortization (1,864,556) (1,830,744)
------------ ------------
Property and equipment - net 157,183 206,264
------------ ------------
DEPOSITS AND OTHER ASSETS 5,943 5,943
------------ ------------
TOTAL $ 350,976 $ 458,168
============ ============
<CAPTION>
JUNE 30, DECEMBER 31,
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) 1999 1998
---- ----
<S> <C> <C>
CURRENT LIABILITIES:
12% senior secured convertible notes - related parties $ 3,752,500 $ --
12% senior secured convertible notes - others 2,000,000 --
Demand notes payable to related parties -- 2,000,000
Other short-term debt -- 750,000
Accounts payable - including amounts past due 1,783,483 1,768,456
Accrued expenses to related parties 667,398 647,795
Accrued payroll 302,968 142,834
Other accrued expenses 868,076 424,172
Deferred revenue -- 19,160
------------ ------------
Total current liabilities 9,374,425 5,752,417
------------ ------------
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 11,042,771 10,536,748
Redeemable convertible preferred stock, Series D, at redemption value -
1,000,000 shares authorized; 799,751 shares issued and outstanding:
liquidation preference, $6,398,008 7,522,685 7,193,384
Redeemable convertible preferred stock, Series E,
at redemption value - 1,450,000 shares authorized, issued and
outstanding; liquidation preference, $13,050,000 14,811,930 14,233,546
------------ ------------
Total redeemable convertible preferred stock 33,377,386 31,963,678
------------ ------------
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; 761,250 shares issued and outstanding 761 761
Additional paid-in capital -- --
Deficit accumulated during the development stage (42,431,596) (37,288,688)
------------ ------------
Total stockholders' equity (deficiency) (42,400,835) (37,257,927)
------------ ------------
TOTAL $ 350,976 $ 458,168
============ ============
</TABLE>
See notes to unanudited financial statements.
<PAGE>
MANGOSOFT CORPORATION
(A DEVELOPMENT STAGE COMPANY)
UNAUDITED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1999 AND 1998 AND CUMULATIVE FOR THE PERIOD
FROM JUNE 15, 1995 (INCEPTION) TO JUNE 30, 1999
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CUMULATIVE
SIX MONTHS ENDED JUNE 30, SINCE
1999 1998 INCEPTION
<S> <C> <C> <C>
REVENUES $ 7,991 $ 244,268 $ 253,397
COST OF REVENUES 363 87,043 91,892
------------ ------------ ------------
GROSS MARGIN 7,628 157,225 161,505
COSTS AND EXPENSES:
Research and development 2,097,751 3,623,451 20,662,319
Selling and marketing 59,625 2,343,837 9,146,295
General and administrative 1,319,479 1,815,092 9,693,133
Consulting fees to related party 19,603 -- 667,398
------------ ------------ ------------
LOSS FROM OPERATIONS (3,488,830) (7,625,155) (40,007,640)
------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest income 3,271 147,167 568,347
Interest expense to related parties (166,109) (3,590) (185,835)
Other interest expense (76,833) (4,348) (126,340)
Other income (expense), net (715) -- (67,915)
------------ ------------ ------------
Total other income (expense), net (240,386) 139,229 188,257
------------ ------------ ------------
NET LOSS (3,729,216) (7,485,926) (39,819,383)
ACCRETION OF REDEEMABLE CONVERTIBLE
PREFERRED STOCK (1,413,692) (1,317,641) (6,132,793)
------------ ------------ ------------
NET LOSS APPLICABLE TO COMMON
STOCKHOLDERS $ (5,142,908) $ (8,803,567) $(45,952,176)
============ ============ ============
NET LOSS PER SHARE (BASIC AND DILUTED) $ (6.76) $ (11.66) $ (60.99)
============ ============ ============
SHARES USED IN CALCULATING NET LOSS
PER SHARE 761,250 755,221 753,425
============ ============ ============
</TABLE>
See notes to unaudited financial statements.
<PAGE>
MANGOSOFT CORPORATION
(A DEVELOPMENT STAGE COMPANY)
UNAUDITED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
SIX MONTHS ENDED JUNE 30, 1999 AND CUMULATIVE FOR THE PERIOD FROM JUNE 15, 1995
(INCEPTION) TO JUNE 30, 1999
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CONVERTIBLE CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK
--------------------------- ---------------------------
SERIES A SERIES B
SHARES AMOUNT SHARES AMOUNT
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
BALANCE, JUNE 30, 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
Accretion of redeemable convertible
preferred stock -- -- -- --
Net loss -- -- -- --
------------ ------------ ------------ ------------
BALANCE, JUNE 30, 1999 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 30, 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) 1,283,815 (2,634,482)
Net loss -- -- -- (13,073,913) (13,073,913)
------------ ------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 1998 761,250 761 -- (37,288,688) (37,257,927)
Accretion of redeemable convertible
preferred stock -- -- -- (1,413,692) (1,413,692)
Net loss -- -- -- (3,729,216) (3,729,216)
------------ ------------ ------------ ------------ ------------
BALANCE, JUNE 30, 1999 761,250 $ 761 $ -- $(42,431,596) $(42,400,835)
============ ============ ============ ============ ============
</TABLE>
See notes to unaudited financial statements.
<PAGE>
MANGOSOFT CORPORATION
(A DEVELOPMENT STAGE COMPANY)
UNAUDITED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1999 AND 1998 AND CUMULATIVE FOR THE PERIOD
JUNE 15, 1995 (INCEPTION) TO JUNE 30, 1999
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, CUMULATIVE
-------------------------- SINCE
1999 1998 INCEPTION
---- ---- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (3,729,216) $ (7,485,926) $(39,819,383)
------------ ------------ ------------
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 49,566 397,367 1,985,380
Loss on disposal of equipment -- -- 71,942
Changes in assets and liabilities:
Accounts receivable 9,458 (148,350) --
Inventory 275 62,707 --
Prepaid expenses and other current assets (10,700) 39,756 (14,291)
Deposits and other assets -- 174,100 (5,943)
Accounts payable 15,044 28,469 1,783,500
Accrued expenses to related parties 19,603 -- 667,398
Accrued payroll 160,133 265,077 302,967
Other accrued expenses 443,904 (105,782) 868,076
Deferred revenue (19,160) (127,951) --
------------ ------------ ------------
Total adjustments 668,123 585,393 5,659,029
------------ ------------ ------------
Net cash used in operating activities (3,061,093) (6,900,533) (34,160,354)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment -- -- 12,749
Expenditures for property and equipment (8,185) (198,405) (2,234,954)
------------ ------------ ------------
Net cash used in investing activities (8,185) (198,405) (2,222,205)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of notes to related parties 1,752,500 175,000 3,752,500
Proceeds from other debt financings 2,000,000 575,000 2,750,000
Repayments of other debt financings (750,000) -- (750,000)
Net proceeds from issuances of common and preferred stock -- 203,835 30,795,918
------------ ------------ ------------
Net cash from financing activities 3,002,500 953,835 36,548,418
------------ ------------ ------------
NET (DECREASE) INCREASE IN CASH AND EQUIVALENTS (66,778) (6,145,103) 165,859
CASH AND EQUIVALENTS, BEGINNING OF PERIOD 232,637 9,366,392 --
------------ ------------ ------------
CASH AND EQUIVALENTS, END OF PERIOD $ 165,859 $ 3,221,289 $ 165,859
============ ============ ============
SUPPLEMENTAL CASH FLOW INFORMATION -
Cash paid for interest $ 11,102 $ -- $ 80,335
NONCASH FINANCING ACTIVITY:
Conversion of demand notes payable to related parties into 12% Senior
Secured Convertible Notes 2,000,000 -- 2,000,000
Accretion of redeemable convertible preferred stock 1,413,692 1,521,476 6,132,793
Conversion of accounts payable to common stock -- 90,000 90,000
</TABLE>
See notes to unaudited financial statements.
<PAGE>
MANGOSOFT CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1999 AND 1998 AND CUMULATIVE FOR
THE PERIOD FROM JUNE 15, 1995 (INCEPTION) TO JUNE 30, 1999
--------------------------------------------------------------------------------
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 accompanying
financial statements, during the six months ended June 30, 1999 and 1998 and
cumulative for the period from June 15, 1995 (inception) to June 30, 1999,
the Company incurred net losses of $3,729,216, $7,485,926 and $39,819,383,
respectively, and at June 30, 1999 and 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
BASIS OF PRESENTATION - The Company, without audit, has prepared the
accompanying financial statements. In the opinion of management, these
unaudited interim financial statements furnished herein reflect all
adjustments, which in the opinion of management are of a normal recurring
nature, necessary to fairly state MangoSoft Corporation's financial
position, cash
<PAGE>
flows and the results of operations for the periods presented and have been
prepared on a basis substantially consistent with the audited financial
statements at December 31,1998. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with
generally accepted accounting principles for annual periods have been
condensed or omitted. Accordingly, these unaudited interim financial
statements should be read in conjunction with the Company's audited
financial statements for the year ended December 31, 1998.
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 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 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 ("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
<PAGE>
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 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 and warrants of 1,994,737
and 180,000, respectively, have not been included in the 1999 and 1998
calculations as their effect is antidilutive. In addition, the potential
dilution due to conversion of the 12% Senior Secured Convertible Notes has
also been excluded from the 1999 calculation as the 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
financial statements and cumulative since inception amounts to conform to
the 1999 presentation.
3. SHORT-TERM DEBT
12% SENIOR SECURED CONVERTIBLE NOTES - On February 11, 1999, the Company
issued 12% Senior Secured Convertible Notes (the "12% convertible notes") in
the amount of $2,000,000. Proceeds from the issuance of the 12% convertible
notes were used to pay in full and terminate the agreement related to the
$1,250,000 financing agreement entered into with a bank. In addition, the
$2,000,000 demand notes payable outstanding to two stockholders at December
31, 1999 were converted and incorporated into the issuance of these 12%
convertible notes. An additional $1,752,500 of the 12% convertible notes
were issued to these same two stockholders as of June 30, 1999. The 12%
convertible notes bear interest on the outstanding principal amount, until
they are either converted or paid in full, at 12% per
<PAGE>
annum. Principal and interest are due 182 days from the issuance dates but
the Company has the option to extend the maturity date up to an additional
365 days upon payment of an extension fee. The 12% convertible notes are
secured by substantially all of the assets of the Company, including
equipment, inventory and intangible property. The 12% convertible 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.
DEMAND NOTES PAYABLE TO RELATED PARTIES - 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 of the 12% convertible notes on
February 11, 1999, the demand notes were converted into the 12% convertible
notes.
OTHER 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. The
Company was not in compliance with its financial covenants at December 31,
1998 or subsequent thereto. Using proceeds from the Company's issuance of
the 12% convertible notes on February 11, 1999, the amounts outstanding
under this agreement were paid in full and the agreement was terminated.
4. REDEEMABLE CONVERTIBLE PREFERRED STOCK
At June 30, 1999 and 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:
<PAGE>
<TABLE>
<CAPTION>
Issuance Date Net Proceeds
------------- ------------
<S> <C> <C>
Series C Redeemable Preferred Stock, 1,500,000 shares at $6.00 per June 1996 $ 8,216,645
share, net of offering costs of $783,355
Series D Redeemable Preferreed Stock, 799,751 shares at $8.00 per April 1997 6,046,988
share, net of offering costs of $351,020
Series E Redeemable Preferred Stock, 1,450,000 shares at $9.00 per December 1997 12,777,107
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.
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
<PAGE>
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 June 30, 1999 and 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 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 June 30, 1999 and December 31, 1998, the Company had
authorized 25,000,000 shares of $.001 par value common stock (the "common
stock"), of which, 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
<PAGE>
conversion of the Series D Preferred Stock; 1,450,000 shares are reserved
for issuance upon conversion of the Series E Preferred Stock; 1,643,571
shares are reserved for issuance upon conversion of the 12% convertible
notes; 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.
6. INCOME TAXES
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 June 30, 1999 and December 31, 1998.
The Company did not pay any income taxes in 1998 and 1997.
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 1999 and 1998.
8. 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
operating leases. Total rent expense was approximately $276,135 and $354,844
for the six months ended June 30, 1999 and 1998, respectively.
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.
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
<PAGE>
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
NOTES PAYABLE - As discussed in Note 3, the Company received $1,752,500 of
financing from the issuance of 12% convertible notes to two stockholders in
1999. In 1998, the Company received $2,000,000 of financing from the same
two stockholders in the form of demand notes with interest at an annual rate
of 8%. The $2,000,000 demand notes were converted into 12% convertible notes
on February 11, 1999.
ADMINISTRATIVE SERVICES - During 1999 and 1998, a stockholder provided
administrative assistance to the Company. Amounts expensed and accrued for
such services during the six months ended June 30, 1999 and 1998 were
$19,603 and $0, respectively which are included in accrued liabilities in
the accompanying balance sheets.
10. SUBSEQUENT EVENTS
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.
In connection with the merger, the $6,000,000 of 12% convertible notes
outstanding at September 7, 1999 was exchanged for 9,000,000 common shares
of Clock. 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 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
September 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
<PAGE>
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 combined results of operations for the six months ended June 30, 1999,
assuming the merger had occurred on January 1, 1998, the beginning of the
earliest period presented in the accompanying financial statements. These
pro forma combined 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.
<TABLE>
<CAPTION>
Six Months Ended
June 30, 1999
(Unaudited)
-----------
<S> <C>
Revenue $ 7,991
Loss from operations (3,489,368)
Net loss (3,497,914)
Net loss applicable to common shares (3,497,914)
Net loss per common share (basic and diluted) $ (0.19)
Shares used in calculating net loss per common share 18,883,998
</TABLE>
