SEC Info  
    Home      Search      My Interests      Help      Sign In      Please Sign In

Google Inc. – IPO: ‘S-1’ on 4/29/04 – EX-99.1

On:  Thursday, 4/29/04, at 1:53pm ET   ·   Accession #:  1193125-4-73639   ·   File #:  333-114984

Previous ‘S-1’:  None   ·   Next:  ‘S-1/A’ on 5/21/04   ·   Latest:  ‘S-1/A’ on 11/23/04

Find Words in Filings emoji
 
  in    Show  and   Hints

  As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

 4/29/04  Google Inc.                       S-1                   26:5.5M                                   RR Donnelley/FA

Initial Public Offering (IPO):  Registration Statement (General Form)   —   Form S-1
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: S-1         Registration Statement (General Form)               HTML   1.88M 
 2: EX-2.01     Merger Agreement and Plan of Reorganization         HTML    507K 
 3: EX-3.01     Amended and Restated Certificate of Incorporation   HTML    101K 
 4: EX-3.02     Bylaws of Registrant                                HTML    134K 
 5: EX-4.01     Third Amended and Restated Investor Rights          HTML    114K 
                          Agreement                                              
 6: EX-10.01    Form of Indemnification Agreement                   HTML     59K 
 7: EX-10.02    1998 Stock Plan, as Amended, and Form of Stock      HTML    144K 
                          Option Agreement                                       
 8: EX-10.03    1999 Stock Option/Stock Incentive Plan              HTML    262K 
 9: EX-10.04    2000 Stock Plan, as Amended, and Form of Stock      HTML    153K 
                          Option Agreement                                       
10: EX-10.05    2003 Stock Plan, as Amended, and Form of Stock      HTML    142K 
                          Option Agreement                                       
11: EX-10.06    2003 Stock Plan (No. 2), and Form of Stock Option   HTML    180K 
                          Agreement                                              
12: EX-10.07    2003 Stock Plan (No. 3), and Form of Stock Option   HTML    182K 
                          Agreement                                              
13: EX-10.08    2004 Stock Plan                                     HTML     86K 
14: EX-10.09    Google Technology Sublease Agreement Dated July 9,  HTML    187K 
                          2003                                                   
15: EX-10.09.1  Amendment No. 1 to Sublease Dated November 18,      HTML     33K 
                          2003                                                   
16: EX-10.09.2  Amendment No. 2 to Sublease Dated December 17,      HTML     25K 
                          2003                                                   
17: EX-10.09.3  Landlord-Subtenant Agreement Dated July 9,2003      HTML     81K 
18: EX-10.09.4  Second Amendment to Commercial Lease Dated July 9,  HTML     80K 
                          2003                                                   
19: EX-10.09.5  Amendment to Commercial Lease Dated April 19, 2001  HTML     21K 
20: EX-10.09.6  Lease Between the Goldman Sachs Group               HTML    386K 
21: EX-10.09.7  Nondisturbance and Attornment Agreement             HTML     43K 
22: EX-21.01    List of Subsidiaries of Registrant                  HTML     17K 
23: EX-23.01    Consent of Ernst & Young LLP, Independent Auditors  HTML     11K 
24: EX-23.02    Consent of Ernst & Young LLP, Independent Auditors  HTML     11K 
25: EX-99.1     Significant Subsidary Financial Statements of       HTML    167K 
                          Applied Semantics, Inc.                                
26: EX-99.3     Unaudited Pro Forma Combined Consolidated           HTML     60K 
                          Financial Information                                  


EX-99.1   —   Significant Subsidary Financial Statements of Applied Semantics, Inc.


This exhibit is an HTML Document rendered as filed.  [ Alternative Formats ]



  Significant Subsidary Financial Statements of Applied Semantics, Inc.  

Exhibit 99.1

 

APPLIED SEMANTICS, INC.

 

FINANCIAL STATEMENTS

 

Year ended December 31, 2002

 

Contents

 

Report of Ernst & Young LLP, Independent Auditors

   1

Audited Financial Statements

    

Balance Sheet

   2

Statement of Operations

   3

Statement of Redeemable Convertible Preferred Stock and Net Capital Deficiency

   4

Statement of Cash Flows

   5

Notes to Financial Statements

   6


Report of Ernst & Young LLP, Independent Auditors

 

The Board of Directors and Shareholders

Applied Semantics, Inc.

 

We have audited the accompanying balance sheet of Applied Semantics, Inc. as of December 31, 2002, and the related statements of operations, redeemable convertible preferred stock and net capital deficiency, and cash flows for the year then ended. 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 audit.

 

We conducted our audit in accordance with auditing standards generally accepted in the United States. 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 audit provides a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Applied Semantics, Inc. at December 31, 2002, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States.

 

/s/    Ernst & Young LLP

 

San Francisco, California

 

June 20, 2003


APPLIED SEMANTICS, INC.

 

Balance Sheet

(In thousands, except per share data)

 

     December 31,
2002


 

Assets

        

Current assets:

        

Cash and cash equivalents

   $ 1,953  

Accounts receivable, net of allowance of $11

     3,659  

Prepaid expenses and other current assets

     74  
    


Total current assets

     5,686  

Property and equipment, net

     526  

Other assets

     6  
    


Total assets

   $ 6,218  
    


Liabilities, redeemable convertible preferred stock, and net capital deficiency

        

Current liabilities:

        

Accounts payable

   $ 36  

Accrued revenue share

     2,278  

Accrued commissions

     196  

Other accrued expenses

     145  

Deferred revenue

     246  

Income taxes payable

     25  

Current portion of equipment leases

     28  
    


Total current liabilities

     2,954  

Noncurrent portion of equipment leases

     60  

Commitments

        

Series B redeemable convertible preferred stock, par value $0.001 (liquidation preference of $5,453); 2,536 shares authorized; 1,976 issued and outstanding

     5,394  

Net capital deficiency:

        

Undesignated preferred stock, par value $0.001; 6,504 authorized; none outstanding

        

Series A-1 convertible preferred stock, par value $0.001; 500 shares authorized, issued, and outstanding (liquidation preference of $500)

     500  

Series A-2 convertible preferred stock, par value $0.001; 100 shares authorized, issued, and outstanding (liquidation preference of $125)

     125  

Series A-3 convertible preferred stock, par value $0.001; 360 shares authorized; 205 issued, and outstanding (liquidation preference of $410)

     410  

Common stock, par value $0.001; 40,000 shares authorized; 10,202 shares issued and outstanding

     2,936  

Deferred stock-based compensation

     (413 )

Accumulated deficit

     (5,748 )
    


Total net capital deficiency

     (2,190 )
    


Total liabilities, redeemable convertible preferred stock, and net capital deficiency

   $ 6,218  
    


 

See accompanying notes.

 

2


APPLIED SEMANTICS, INC.

 

Statement of Operations

(In thousands)

 

     Year ended
December 31,
2002


 

Net revenues

   $ 6,187  

Costs and expenses:

        

Cost of revenues

     566  

Research and development expenses

     1,711  

Selling and marketing expense

     1,483  

General and administrative expenses(1)

     2,361  
    


Total costs and expenses

     6,121  
    


Income from operations

     66  

Interest income

     8  

Interest expense and other

     (5 )
    


Income before income taxes

     69  

Provision for income taxes

     25  
    


Net income

   $ 44  
    


 

(1) Includes stock-based compensation expense of $1,029 consisting of amortization of deferred stock-based compensation and the fair value of options and warrants issued to nonemployees for services rendered.

 

See accompanying notes.

 

 

3


APPLIED SEMANTICS, INC.

 

Statement of Redeemable Convertible Preferred Stock and Net Capital Deficiency

(In thousands)

 

   

Redeemable

Convertible

Preferred Stock

Series B


  Convertible Preferred Stock

                         
      Series A-1

  Series A-2

  Series A-3

  Common Stock

 

Deferred
Stock-Based

Compensation


   

Accumulated

Deficit


   

Net
Capital

Deficiency


 
    Shares

  Amount

  Shares

  Amount

  Shares

  Amount

  Shares

  Amount

  Shares

  Amount

     

Balance at December 31, 2001

  1,976   $ 5,394   500   $ 500   100   $ 125   205   $ 410   10,202   $ 2,450   $ (956 )   $ (5,792 )   $ (3,263 )

Fair value of options granted to nonemployees

                              26                 26  

Deferred stock-based compensation

                              460     (460 )            

Amortization of deferred stock-based compensation

                                  1,003             1,003  

Net income and comprehensive income

                                        44       44  
   
 

 
 

 
 

 
 

 
 

 


 


 


Balance at December 31, 2002

  1,976   $ 5,394   500   $ 500   100   $ 125   205   $ 410   10,202   $ 2,936   $ (413 )   $ (5,748 )   $ (2,190 )
   
 

 
 

 
 

 
 

 
 

 


 


 


 

See accompanying notes.

 

4


APPLIED SEMANTICS, INC.

 

Statement of Cash Flows

(In thousands)

 

     Year ended
December 31,
2002


 

Operating activities

        

Net income

   $ 44  

Adjustments to reconcile net income to net cash provided by operating activities:

        

Depreciation and amortization

     496  

Loss on disposal of property and equipment

     5  

Stock-based compensation

     1,029  

Changes in assets and liabilities:

        

Accounts receivable

     (2,694 )

Prepaid expenses and other current assets

     (21 )

Accounts payable

     12  

Accrued revenue share

     1,929  

Other accrued expenses

     224  

Deferred revenue

     209  

Income taxes payable

     25  
    


Net cash provided by operating activities

     1,258  
    


Investing activities

        

Purchases of property and equipment

     (151 )

Decrease in other assets

     37  
    


Net cash used in investing activities

     (114 )
    


Financing activities

        

Payments of principal on equipment leases

     (22 )
    


Net cash used in financing activities

     (22 )
    


Net increase in cash and cash equivalents

     1,122  

Cash and cash equivalents at beginning of year

     831  
    


Cash and cash equivalents at end of year

   $ 1,953  
    


Supplemental disclosures of cash flow information

        

Property and equipment acquired under capital leases

   $ 108  
    


Cash paid for interest

   $ 2  
    


 

See accompanying notes.

 

5


Applied Semantics, Inc.

 

Notes to Financial Statements

 

December 31, 2002

 

1. Summary of the Company and Significant Accounting Policies

 

Nature of Operations

 

Applied Semantics, Inc. (the “Company”), a California corporation, formerly known as Oingo, Inc., is a developer and provider of software technology solutions that enable businesses, their customers, and their employees to create value by better organizing, managing, and retrieving unstructured information in enterprise, Web-enabled, and e-commerce environments. The Company’s solutions are based on its CIRCA Technology, which understands, organizes, and extracts knowledge from unstructured content in a way that mimics human thought and language, allowing for more effective information retrieval. Focusing on specific markets, the Company has introduced products through each of its business units: Naming Solutions (DomainAppraise, DomainPark, DomainSense, Error Page Assistant) and Enterprise Solutions (Auto-Categorizer, Metadata Creator, and Page Summarizer).

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported and disclosed in the financial statements and the accompanying notes. Actual results could differ materially from these estimates.

 

6


1. Summary of the Company and Significant Accounting Policies (continued)

 

Revenue Recognition

 

The Company primarily derives its revenue from revenue share agreements for application services. These are three-way revenue share arrangements wherein the Company receives advertising content from one of its content providers, and then subsequently distributes that content to a third party’s (“Partner”) Web sites. Revenue is generated when end users click-through to the content providers’ advertisements listed on the Partner’s Web sites. The revenues earned by the Company from its customers under these types of arrangements are reported net of the payment due to partners. The Company’s gross revenues and cost of revenues would have been $6.4 million higher for the year ended December 31, 2002, if these transactions had been accounted for on a gross basis. Amounts due to partners under these revenue share arrangements are reported as accrued revenue share in the accompanying balance sheet. The Company also has revenue from licensing agreements. Revenues from the licensing agreements are recognized on a straight-line basis over the term of the related contracts. These amounts, however, have not been a significant revenue stream to date. Any set-up and support fees are also recognized on a straight-line basis over the service period.

 

Deferred revenue is recorded when payments are received in advance of the Company’s performance in the underlying agreement.

 

Cost of Revenues

 

Cost of revenues consists primarily of the expenses associated with the operation of the Company’s server networks, including depreciation of hardware, amortization of capitalized computer software for internal use, datacenter expenses, and royalties related to a patent license agreement.

 

Cash and Cash Equivalents

 

Cash and cash equivalents include all highly liquid investments having an original maturity of three months or less.

 

7


1. Summary of the Company and Significant Accounting Policies (continued)

 

Certain Risks and Concentrations

 

Certain financial instruments potentially subject the Company to concentrations of credit risk. These financial instruments consist primarily of cash and cash equivalents and accounts receivable. The Company places its cash and cash equivalents with high-credit quality financial institutions and has not experienced losses with respect to these items. Cash equivalents consist of cash on deposit with a bank and money market deposits. As of December 31, 2002, two customers represented approximately 64% and 19% of accounts receivable. For the year ended December 31, 2002, two customers represented approximately 53% and 16% of total revenues. The Company regularly evaluates its customers’ ability to satisfy credit obligations and maintains an allowance for potential credit losses, when deemed necessary. Credit and losses incurred to date have not been significant.

 

Property and Equipment

 

Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets, which range from three to seven years. Leasehold improvements are amortized on a straight-line basis over the shorter of the lease term or estimated useful life of the asset. Equipment under capital leases is amortized over the shorter of the estimated useful life or the related lease term.

 

Long-Lived Assets

 

The Company assesses the impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment loss would be recognized when estimated future cash flows expected to result from the use of the asset and its eventual disposition are less than its carrying amount.

 

8


1. Summary of the Company and Significant Accounting Policies (continued)

 

Fair Value of Financial Instruments

 

The carrying amounts of the Company’s financial instruments, including cash and cash equivalents, accounts receivable, accounts payable, and accrued liabilities approximate fair value because of their short maturities. The carrying amounts of the Company’s equipment leases approximate fair value of these obligations based upon management’s best estimates of interest rates that would be available for similar debt obligations at December 31, 2002.

 

Income Taxes

 

The Company recognizes income taxes under the liability method. Deferred income taxes are recognized for differences between the financial statements and tax bases of assets and liabilities at enacted statutory tax rates in effect for the years in which the differences are expected to reverse. In addition, valuation allowances are established when necessary to reduce deferred taxes to the amounts expected to be realized.

 

Stock-Based Compensation

 

As permitted by the Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (“FAS 123”), as amended, the Company accounts for employee stock-based compensation using the intrinsic-value method in accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (“APB 25”), and related interpretations. Under APB 25, when the exercise price of the Company’s employee stock options equals the market price of the underlying stock on the date of the grant, no compensation expense is recognized. Deferred compensation for options granted to employees is determined as the difference between the deemed fair value of the Company’s stock on the date options were granted and the exercise price.

 

Pro forma information regarding net income (loss) has been determined as if the Company had accounted for its employee stock options under the fair-value method prescribed by FAS 123. The resulting effect on pro forma net income (loss) disclosed is not likely to be representative of the effects of income (loss) on a pro forma basis in future years due to additional grants and vesting in subsequent years.

 

9


1. Summary of the Company and Significant Accounting Policies (continued)

 

Stock-Based Compensation (continued)

 

Had compensation cost for options granted under the Company’s option plan been determined based on the fair value at the grant dates for the awards under a method prescribed by FAS 123, the Company’s net income (loss) would have been adjusted to the pro forma amounts below (in thousands):

 

     Year ended
December 31, 2002


 

Net income, as reported

   $ 44  

Add: Stock-based employee compensation expense included in reported net income, net of related tax effects

     1,003  

Deduct: Total stock-based employee compensation expense under the fair-value-based method for all rewards, net of related tax effects

     (1,120 )
    


Net income (loss), pro forma

   $ (73 )
    


 

1.    The fair value of each option granted was estimated on the date of grant using the minimum-value method with the following weighted-average assumptions:

 

     Year ended
December 31, 2002


 

Risk-free interest rate

   4.65 %

Expected life (in years)

   5  

Dividend yield

   —    

 

The weighted-average deemed fair market value of an option granted during 2002 was $0.36.

 

10


1. Summary of the Company and Significant Accounting Policies (continued)

 

The Company accounts for stock awards issued to nonemployees in accordance with the provisions of FAS 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 (“EITF 96-18”). Under FAS 123 and EITF 96-18, stock awards to nonemployees are accounted for at their fair value using the Black-Scholes method. The fair value of options granted to nonemployees is periodically remeasured as the underlying options vest.

 

Advertising Expenses

 

The Company expenses advertising costs in the period in which they are incurred. For the year ended December 31, 2002, advertising expenses totaled approximately $5,000.

 

Comprehensive Income

 

Comprehensive income generally represents all changes in net capital deficiency except those resulting from investments or contributions by shareholders. To date, the Company’s comprehensive income has equaled its net income.

 

Reclassifications

 

Certain prior-period amounts have been reclassified to conform to the current-period presentation.

 

11


1. Summary of the Company and Significant Accounting Policies (continued)

 

Recent Accounting Pronouncements

 

In November 2002, the EITF reached a consensus on Issue 00-21, Accounting for Multiple Element Revenue Arrangements, addressing how to account for arrangements that involve the delivery or performance of multiple products, services, and/or rights to use assets. Revenue arrangements with multiple deliverables are divided into separate units of accounting if the deliverables in the arrangement meet the following criteria: (1) the delivered item has value to the customer on a stand-alone basis; (2) there is objective and reliable evidence of the fair value of undelivered items; and (3) delivery of any undelivered item is probable. Arrangement consideration should be allocated among the separate units of accounting based on their relative fair values, with the amount allocated to the delivered item being limited to the amount that is not contingent on the delivery of additional items or meeting other specified performance conditions. The final consensus will be applicable to agreements entered into in fiscal periods beginning after June 15, 2003, with early adoption permitted. The Company is evaluating the impact of this consensus on its financial position and operating results.

 

In November 2002, the FASB issued Interpretation No. 45 (or “FIN 45”), Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others — an interpretation of FASB Statements No. 5, 57, and 107 and rescission of FASB Interpretation No. 34. FIN 45 elaborates on the existing disclosure requirements for most guarantees, including residual value guarantees issued in conjunction with operating lease agreements. It also clarifies that at the time a company issues a guarantee, the company must recognize an initial liability for the fair value of the obligation it assumes under that guarantee and must disclose that information in its interim and annual financial statements. The disclosure requirements are effective for interim periods or fiscal years ending after December 15, 2002, and have been adopted. The initial recognition and measurement provisions apply on a prospective basis to guarantees issued or modified after December 31, 2002. The Company is evaluating the impact of this interpretation on the Company’s financial position and operating results.

 

12


1. Summary of the Company and Significant Accounting Policies (continued)

 

Recent Accounting Pronouncements (continued)

 

In December 2002, the FASB issued FAS No. 148, Accounting for Stock-Based Compensation — Transition and Disclosure (“FAS 148”). This statement amends FAS 123 to provide alternative methods of transition for a voluntary change to the fair-value-based method of accounting for stock-based employee compensation. While FAS 148 does not amend FAS 123 to require companies to account for employee stock options using the fair-value method, the disclosure provisions of FAS 148 are applicable to all companies with stock-based employee compensation, regardless of whether they account for that compensation using the fair-value method of FAS 123 or the intrinsic-value method of APB 25. Since the Company accounts for stock-based compensation under APB 25 and has no current plans to switch to FAS 123, the impact of FAS 148 will be limited to the reporting of the effects on net income (loss) if the Company accounted for stock-based compensation under FAS 123. FAS 148 is effective for fiscal years ending after December 15, 2002, and the disclosure provisions have been reflected in these financial statements.

 

2. Commitments

 

Operating Lease

 

The Company leases its office space under an operating lease that expired in January 2003. Rent expense under this operating lease amounted to approximately $157,000 during 2002 and was recognized on a straight-line basis over the term of the lease. The Company entered into another operating lease for a new facility in December 2002 that began in February 2003 and expires in May 2006.

 

Capitalized Leases

 

The Company leases certain equipment, which is accounted for as capital leases. The gross assets under capital lease at December 31, 2002, were $114,000, with accumulated depreciation of $21,000. The Company has recorded $12,000 of depreciation expense for leased assets during 2002, which is included in the accompanying statement of operations.

 

13


2. Commitments (continued)

 

Capitalized Leases (continued)

 

Future minimum lease payments as of December 31, 2002, under capital and noncancelable operating leases are as follows (in thousands):

 

     Capital Leases

   Operating
Lease


2003

   $ 38    $ 256

2004

     43      281

2005

     26      286

2006

     —        121
    

  

Total minimum payments required

     107    $ 944
           

Less amounts representing interest

     19       
    

      

Minimum future payments of principal

     88       

Current portion

     28       
    

      

Noncurrent portion

   $ 60       
    

      

 

3. Property and Equipment

 

Property and equipment consist of the following (in thousands):

 

     December 31,
2002


 

Computers and equipment

   $ 1,049  

Computer software for internal use

     567  

Furniture and fixtures

     24  

Leasehold improvements

     15  
    


       1,655  

Accumulated depreciation and amortization

     (1,129 )
    


Property and equipment, net

   $ 526  
    


 

14


4. Redeemable Convertible Preferred Stock

 

In August 2000, the Company issued 1,976,756 shares of Series B redeemable convertible preferred stock (the “Series B shares”) for $2.76 per share and net proceeds of approximately $5.4 million. The declaration of dividends rests in the sole discretion of the Company’s Board of Directors. The right to dividends is not cumulative. Each Series B share has a liquidation preference of $2.76 per share. Each Series B share may be converted at any time, at the holder’s option, into a share of common stock at a conversion price of $2.76 per share. Such shares shall automatically convert into common stock immediately prior to the closing of an underwritten public offering, as defined. The holders of the Series B shares are entitled to vote on all matters and are entitled to the number of votes equal to the number of full common shares into which such holders’ series of preferred shares could be converted. The Series B shares are redeemable at the option of at least 20% of the holders if a qualified initial public offering, as defined, has not occurred five years subsequent to the Series B purchase date. Each Series B share is redeemable at a redemption price equal to the original Series B issue price plus any declared and unpaid dividends.

 

5. Net Capital Deficiency

 

Convertible Preferred Stock

 

In May 2000, the Company issued 500,000, 100,000, and 205,000 shares of Series A-l, A-2, and A-3 convertible preferred stock, respectively (collectively, the “Series A shares”) in exchange for 1,610,000 shares of common stock representing a 1-for-2 ratio. The value of each Series A share is equal to the price originally paid for the share of common stock for which it was exchanged. The price per share was $1.00, $1.25, and $2.00 for a Series A-l, A-2, and A-3 share, respectively. The declaration of dividends rests in the sole discretion of the Company’s Board of Directors, and the right to dividends is not cumulative. Each Series A share has a liquidation preference equal to the original issue price per share, as defined above, plus any declared and unpaid dividends. Each Series A share may be converted at any time, at the holder’s option, into a share of common stock at a conversion price equal to the original issue price of the Series A share. Such shares shall automatically convert into common stock immediately prior to the closing of a firm commitment underwritten public offering, as defined. The holders of the Series A shares are entitled to vote on all matters and are entitled to the number of votes equal to the number of full common shares into which such holders’ Series of preferred shares could be converted.

 

15


5. Net Capital Deficiency (continued)

 

Founders Stock

 

Concurrent with the issuance of the Series B shares, the Company entered into Stock Restriction Agreements with the two founders of the Company. Pursuant to the terms of these agreements, all 10,200,000 common shares owned by the founders of the Company became restricted and subject to a right of repurchase by the Company at a per share amount equal to the original per share issuance price applicable to each share being repurchased. Such right of repurchase shall be exercisable only during the 60-day period following the date of the shareholder’s termination. This right of repurchase shall lapse, with respect to the shares, over 48 equal monthly installments measured from January 1, 1999. The Company’s management determined that at December 31, 2000, the Stock Restriction Agreements were compensatory. As of the date of execution of the Stock Restriction Agreements, 6,162,500 shares of common stock with a value of $2.3 million were subject to repurchase upon termination of the shareholders. Accordingly, the Company recorded deferred stock compensation in this amount, which was amortized to stock compensation expense, as the repurchase right lapses. Amortization for the year ended December 31, 2002, resulted in stock compensation charges of $956,000. As of December 31, 2002, no shares were subject to the restriction.

 

Additionally, on August 7, 2000, the Company and the purchasers of the Series B shares (the “Investors”) entered into Right of First Refusal and Co-sale Agreements (the “Agreements”) with the two founders of the Company. The Agreements state that should the founders propose to sell to a third party any shares held by them, the Company will have the first right to purchase such shares at the price and on the terms offered by the third party. If the Company does not exercise such right within the specified period of time, then the Investors will have the right to purchase all or a portion of such shares at the same price and terms offered by the third party. Should neither the Company nor the Investors purchase all the shares through their right of first refusal, then each Investor shall have the right to participate in the proposed sale (the “Co-Sale”). The Investor may sell up to that number of common and/or preferred shares equal to the product of the number of shares under the Co-Sale agreement and the Investor’s proportionate share of equity holdings. The rights under these Agreements expire on the earlier to occur of (i) the point in time at which the Investor no longer owns shares of the Company, (ii) the closing of a public offering, as defined, (iii) a sale of a majority of the Company shares, as defined, or (iv) 15 years.

 

16


5. Net Capital Deficiency (continued)

 

1999 Stock Plan

 

Under the Company’s 1999 Stock Option/Stock Issuance Plan (the “1999 Stock Plan”), incentive stock options and nonqualified options, as well as other stock-based awards, may be granted to employees, directors, and consultants. All awards have a maximum term of 10 years. Options are granted at exercise prices that approximated the fair value of the common stock and generally vest over four years or as specifically defined by the stock option agreement. All options granted through December 31, 2002, are immediately exercisable into restricted shares of common stock. Any shares issued upon the exercise of options are subject to a right of repurchase by the Company at the original exercise price, which right generally lapses over a four-year period. As of December 31, 2002, none of the options granted, subject to this repurchase right, had been exercised.

 

The following table summarizes the activity under the Company’s 1999 Stock Plan (shares in thousands):

 

           Options Outstanding

     Shares
Available
for Grant


    Number
of Shares


    Weighted-
Average
Exercise
Price


Balance at December 31, 2001

   3,180     2,820     $ 0.25

Options granted

   (1,423 )   1,423     $ 0.38

Options canceled

   597     (597 )   $ 0.35
    

 

     

Balance at December 31, 2002

   2,354     3,646     $ 0.28
    

 

     

 

17


5. Net Capital Deficiency (continued)

 

1999 Stock Plan (continued)

 

The following table summarizes additional information regarding outstanding and exercisable options as of December 31, 2002 (shares in thousands):

 

Options Outstanding and Exercisable


Exercise Price


 

Number Outstanding


 

Weighted-Average Remaining
Contractual Life


        (In years)

$0.15

  1,706   7.44

$0.38

  1,940   9.08
   
   
    3,646   8.83
   
   

 

Stock-Based Compensation

 

In 2002, the Company recorded deferred stock-based compensation cost totaling $460,000 in connection with stock option grants to employees. These amounts are being amortized over the vesting period of the related options using the straight-line vesting method. The amount represents the difference between the exercise price and the deemed fair value of the Company’s common stock on the date the stock options were granted. Amortization of deferred stock-based compensation totaled $47,000 during 2002.

 

Options Granted to Nonemployees

 

The Company has granted options to nonemployees in exchange for services. These options have a vesting period of 36 months. The Company granted options under the 1999 Stock Plan to nonemployees to purchase 60,000 shares of common stock in 2001. No options were granted to nonemployees during 2002. The Company determined the value of the options granted to nonemployees using the Black-Scholes option pricing model using the following assumptions: 131% volatility, no dividends, risk-free interest rate of 3.83%, and an expected life of 10 years. For the year ended December 31, 2002, the Company recognized approximately $26,000 of stock-based compensation expense related to the fair value of options granted to nonemployees.

 

18


5. Net Capital Deficiency (continued)

 

Warrants

 

In January 2001, the Company issued fully vested nonforfeitable warrants to purchase 36,142 shares of common stock at a purchase price of $0.38 per share in connection with recruitment fees. The Company determined the value of the warrants at the date of grant using the Black-Scholes option pricing model to be approximately $11,000 using the following assumptions: 119% volatility, 0% dividend yield, risk-free interest rate of 4.88%, and a contractual life of five years. The entire fair value of the warrants was expensed as stock-based compensation within general and administrative expenses during 2001, as it related to past services rendered. As of December 31, 2002, the warrants remain outstanding and unexercised.

 

In 2000, in conjunction with a convertible financing arrangement, the Company issued fully vested nonforfeitable warrants to purchase 12,655 shares of Series A-3 convertible preferred stock at a purchase price of $2.00 per share. These warrants, with a contractual life of three years, remain outstanding and unexercised at December 31, 2002. The Company determined the value of the warrants using the Black-Scholes option pricing model to be approximately $18,000 using the following assumptions: 116% volatility, no dividends, risk-free interest rate of 5.13%, and an expected life of three years.

 

Reserved Shares

 

Common stock reserved for future issuance was as follows at December 31, 2002 (in thousands):

 

Warrants

   49

1999 Stock Plan

   6,000

Conversion of preferred stock

   2,781
    

Total common stock reserved for future issuance

   8,830
    

 

19


6. 401(k) Plan

 

The Company has a 401(k) Savings Plan (the “401(k) Plan”) that qualifies as a deferred salary arrangement under Section 401(k) of the Internal Revenue Code. Under the 401(k) Plan, participating employees may elect to contribute up to 15% of their eligible compensation, subject to certain limitations. The Company did not make any contributions for 2002.

 

7. Income Taxes

 

The provision for income taxes consisted of the following (in thousands):

 

    

Year ended

December 31, 2002


Current:

      

Federal

   $ —  

State

     25
    

Total

     25

Deferred:

      

Federal

     —  

State

     —  
    

Total

     —  
    

Provision for income taxes

   $ 25
    

 

20


7. Income Taxes (continued)

 

The reconciliation of the federal statutory income tax rate to the Company’s effective income tax rate is as follows (in thousands):

 

    

Year ended

December 31, 2002


 

Expected provision at federal statutory rate

   $ 24  

State taxes, net of federal benefit

     25  

Stock-based compensation expense

     325  

Valuation allowance

     (351 )

Other individually immaterial items

     2  
    


Provision for income taxes

   $ 25  
    


 

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities are as follows (in thousands):

 

     December 31, 2002

 

Deferred tax assets:

        

Net operating loss carryforwards

   $ 1,277  

Research and development credit carryforwards

     83  

Deferred compensation

     37  

State taxes

     9  

Accruals and reserves not currently deductible

     30  

Depreciation

     14  
    


Total deferred tax assets

     1,450  

Valuation allowance

     (1,450 )
    


Net deferred tax assets

   $ —    
    


 

21


7. Income Taxes (continued)

 

The net valuation allowance decreased by approximately $503,000 during the year ended December 31, 2002.

 

As of December 31, 2002, the Company had federal and state net operating loss carryforwards of approximately $3.0 million and $4.1 million, respectively. The Company also had federal research and development credit carryforwards of approximately $83,000. The net operating loss and credit carryforwards will begin to expire in 2020 if not utilized.

 

Utilization of the net operating loss carryforwards may be subject to substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code of 1986, as amended, and similar state provisions. The annual limitation may result in the expiration of net operating losses before utilization.

 

8. Subsequent Event

 

In April 2003, all of the outstanding shares of the Company were purchased by Google Technology, Inc. (“Google”). The Company was acquired for approximately 1.2 million shares of Google common stock and $41.5 million in cash.

 

22


Dates Referenced Herein   and   Documents Incorporated by Reference

This ‘S-1’ Filing    Date    Other Filings
Filed on:4/29/0410-12G
6/20/03
6/15/03
12/31/02
12/15/02
12/31/01
12/31/00
8/7/00
1/1/99
 List all Filings 
Top
Filing Submission 0001193125-04-073639   –   Alternative Formats (Word / Rich Text, HTML, Plain Text, et al.)

Copyright © 2024 Fran Finnegan & Company LLC – All Rights Reserved.
AboutPrivacyRedactionsHelp — Fri., Apr. 26, 12:06:04.1pm ET