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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-KSB
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES AND EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED: DECEMBER 31, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
COMMISSION FILE NUMBER: 0-28556
------------------------
BOREALIS TECHNOLOGY CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 88-0238203
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
</TABLE>
4070 SILVER SAGE DRIVE
CARSON CITY, NV 89701
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (702) 888-3200
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No __
The aggregate market value of the voting stock held by non-affiliates of
the Registrant, based on the closing sale price of the Common Stock on February
28, 1997, as reported on the Nasdaq Small Cap Market was approximately
$12,092,664. Shares of Common Stock held by each executive officer and director
and by each person who is known to own 5% or more of the outstanding Common
Stock have been excluded from this computation in that such persons may be
deemed to be affiliates. This determination of affiliate status is not a
conclusive determination for other purposes. As of February 28, 1996, the
Registrant had 3,184,506 shares of Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for its 1996 Annual Meeting of
Stockholders are incorporated by reference in Part III hereof.
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TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
PART I.............................................................................. 3
Item 1. Business................................................................ 3
Item 2. Properties.............................................................. 8
Item 3. Legal Proceedings....................................................... 8
Item 4. Submission of Matters to a Vote of Security Holders..................... 8
PART II............................................................................. 8
Item 5. Market for the Registrant's Common Stock and Related Stockholder
Matters........................................................................ 8
Item 6. Management's Discussion and Analyses of Financial Condition and Results
of Operations........................................................... 9
Item 7. Financial Statements and Supplementary Data............................. 13
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.................................................... 13
PART III............................................................................ 13
Item 9. Directors and Executive Officers of the Registrant...................... 13
Item 10. Executive Compensation.................................................. 13
Item 11. Security Ownership of Certain Beneficial Owners and Management.......... 13
Item 12. Certain Relationships and Related Transactions.......................... 13
Item 13. Exhibits, Financial Statements and Reports on Form 8-K.................. 14
SIGNATURES.......................................................................... 15
</TABLE>
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PART I
ITEM 1. BUSINESS
The following Business section contains forward-looking statements that
involve risks and uncertainties. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth under "Risk Factors" and
elsewhere in this report.
Borealis Technology Corporation ("Borealis" or the "Company") is currently
developing Arsenal, an advanced sales automation development tool which is
designed to assist businesses in building and deploying customized mobile and
client/server-based applications to enhance the productivity and effectiveness
of their sales personnel. Arsenal, which the Company anticipates shipping in the
second quarter of 1997, at the earliest, is designed to enable customers to
automate sales processes and information exchanges between hundreds or thousands
of mobile computer users and central information systems containing
enterprise-wide customer databases. Arsenal is expected to overcome limitations
of commercially available sales automation solutions by combining the
customization and scalability features of custom solutions with rapid
implementation capabilities.
Competitive pressures are causing many organizations to seek new ways to
reduce costs and improve enterprise productivity by automating core business
processes. Over the past decade, information technology has had a substantial
impact on finance, accounting, manufacturing and research and development
functions and, more recently, has made inroads in sales. Core sales processes
that may be automated through the application of information technology include
contact management, calendaring, delivery of pricing updates, sales forecasting,
report generation and network-wide access to customer and other data.
Advances in personal computer, telecommunications and related technologies
in the early 1990's continue to stimulate interest in more effective
client/server approaches to the automation of core business processes. Moreover,
increased use of portable computers, decreased communications costs and the
emergence of the World Wide Web and wireless data communications have increased
the number of businesses seeking to extend core business process automation to
mobile computer users. Organizations seeking to provide their mobile sales
personnel with enterprise-wide sales automation solutions are faced with a
limited number of approaches, each of which, the Company believes, fails to
provide a viable and cost-effective solution.
ARSENAL
The Company's objective is to become the leading supplier of sales
automation development tools to assist businesses in building and deploying
customized mobile and client/server-based applications to enhance the
productivity and effectiveness of their sales personnel.
The Company's initial sales force automation product, Arsenal, is currently
in Beta test at one customer site and several of the Company's solution
providers. Arsenal consists of three separate software components: the Arsenal
Designer, the Arsenal Server and the Arsenal Client.
Arsenal Designer
Using the Arsenal Designer, an MIS administrator without modifying
Arsenal's source code is expected to be able to: extensively modify the database
or third party integrator structure by adding or removing tables, database
fields and indexes; create new screens and forms with graphical and display
editing controls; and through the use of Visual Basic compatible scripting,
alter business rules and functionality. In addition to these built-in
customization capabilities, the Arsenal Designer is designed to allow MIS
administrators or third party integrators to extend the product's functionality
through the use of C++ modifications and plug-in extension modules. Using the
application programming interface, developers are expected to be able to access
native low-level operating system routines directly, making available the full
range of capabilities of the operating system. Changes made with the Arsenal
Designer are expected to be automatically distributed to
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mobile and LAN computer users throughout a customer's sales enterprise through
processes controlled by MIS administrators. The Company believes that the
Arsenal Designer should offer significant functionality not available in
commercially available sales automation products.
Arsenal Server
The Server is designed to manage central-site administration and
synchronization, administer the implementation of enterprise wide sales business
rules and translate higher-level user requests into low-level commands
executable by the Database Management System, the central data repository for
the system. The Server is based upon a three-tier client/server architecture and
is expected to offer the following benefits over two-tier systems used by
certain of the Company's competitors: reduced network traffic, increased ability
to handle a large number of users, and improved system performance.
Arsenal Client
The Arsenal Client is designed to be installed on the computers of
enterprise-wide sales personnel. It is expected to contain Arsenal's graphical
user interface and the individual data subsets that upload and download data to
and from the Server when the Client is detached from the Server. Customization
of individual Arsenal Client applications is expected to allow data to be
displayed and processed in different ways by different users. Some of the
pre-built modules that are expected to be included in an Arsenal Client include
calendaring, account and customer contact management, sales opportunity
management, forecasting and others.
A modular open architecture industry standard scripting language and a
well-defined application programming interface are expected to give MIS
administrators and third party integrators the ability to control and extend
Arsenal's capabilities in ways that isolate these extensions from the Arsenal
source code. Arsenal is designed to allow customers to easily upgrade to new
versions of Arsenal without requiring the replacement or re-entry of data.
In recent periods, the Company ceased sales and marketing activities
related to all of its products and shifted its operational and strategic focus
to the development of its new product under development, Arsenal, and the
establishment of a third-party integrator channel. As a result, the Company
expects to derive substantially all of its revenues, if any, from the sale of
Arsenal licenses and associated maintenance contracts. Consequently, the
Company's future performance is highly dependent on the successful development,
introduction and commercial acceptance of Arsenal. Unless and until Arsenal is
introduced and receives market acceptance, the Company will have no material
source of revenue. Although the Company has completed much of the development of
Arsenal, additional development and testing will be required before commercial
introduction, which introduction is not expected until the second quarter of
1997, at the earliest. There can be no assurance that Arsenal can be
successfully developed and introduced in a timely manner, or at all, or that it
will achieve market acceptance. The Company's ability to effectuate the
introduction of Arsenal will be substantially dependent on the hiring and
training of additional personnel, of which there can be no assurance. Commercial
acceptance of Arsenal will require the Company to successfully establish
additional sales and distribution channels, of which there can be no assurance.
Failure of the Company to achieve significant market acceptance of the Arsenal
product will have a material adverse effect on the Company's business, financial
condition and operating results.
RESEARCH AND DEVELOPMENT
The Company released a Beta version of the Arsenal product in November 1996
to one customer and several of its solution providers. Currently the Company is
focused on completing the testing of the Arsenal product and anticipates release
of the product in the second quarter of 1997, at the earliest. The Company's
research and development expenses were $565,276 and $2,451,544 for the fiscal
years ended December 31, 1995 and 1996, respectively. Software products such as
Arsenal often contain errors or "bugs" that can adversely affect the performance
of the product or damage a user's data. There can be no assurance that despite
testing by the Company and by current and potential customers errors will not be
found in Arsenal,
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resulting in a loss of, or delay in, market acceptance and sales of the product,
diversion of development resources, injury to the Company's reputation or
increased service and warranty costs, any of which could have a material adverse
effect on the Company's business, financial condition and results of operations.
There can be no assurance that Arsenal or any other products can be successfully
developed and introduced.
SALES AND MARKETING
The Company intends to leverage and complement its direct sales efforts by
recruiting and training a network of domestic and international third party
integrators. Traditionally, third-party integrators have functioned as an
implementation rather than a distribution channel of sales automation products.
The Company believes that such integrators have been constrained in their
ability to serve as a distribution channel due to product complexities, long
implementation times and the high cost of licensing and supporting commercially
available sales automation products.
Arsenal is designed to be deployable and modifiable with considerably less
effort and in a more timely and cost-effective manner than current commercially
available products. Reduced design and installation time is expected to enable
third-party integrators to implement an increased number of Arsenal products
without a corresponding increase in staffing and related expenses. As a result,
the Company believes that it will be able to establish an extensive and
efficient network of third-party integrators that will not only provide a more
broad-based implementation capacity than it could establish if implementing
solutions itself, but which should also function as a highly leveraged
incremental distribution channel which complements its direct sales force.
Nonetheless, third-party integrators will be required to undergo a
substantial amount of training to be able to apply the Company's products to the
varied needs of the Company's prospective customers. There can be no assurance
that the Company will be able to attract and retain personnel necessary to train
such integrators. In addition, there can be no assurance that the Company's
training will be sufficient or that such integrators will be able to provide the
level or quality of service required to meet the needs of the Company's
prospective customers. The Company will likely be dependent on third-party
integrators to complete certain post-delivery obligations prior to the Company's
recognition of revenue. Any failure of such integrators to complete such
obligations could prevent the Company from recognizing revenue and the failure
to so recognize revenue could have a material adverse affect on the Company's
business, financial condition and results of operations. If the Company is
unable to develop or maintain effective, long-term relationships with these
integrators, or if such integrators fail to meet the needs of the Company's
prospective customers in a timely fashion, or at all, such failure would result
in a loss of or delay in market acceptance or sales and could result in
increased product support costs and an injury to the Company's reputation, which
would have a material adverse effect on the Company's business, financial
condition and results of operations.
COMPETITION
The sales automation software market is highly-competitive,
highly-fragmented and characterized by rapid technological change, frequent new
product introductions, short product life cycles and evolving industry
standards, and is expected in the future, to be characterized by significant
price erosion over the life of a product. Within specific ranges of
functionality, the Company experiences competition from many sources, including:
(i) companies that directly address the sales automation market; (ii) third
party integrators that design, develop and implement custom sales automation
solutions; (iii) the internal information technology departments of potential
customers that develop proprietary sales automation applications; and (iv) pre-
packaged products, including Personal Information Managers ("PIMs"). In
addition, the Company may experience competition from additional companies to
the extent such companies enter the sales automation market, such as "groupware"
vendors, LAN-based application development tools vendors, remote LAN-access
communication vendors and communications and systems management software
vendors. Among the Company's potential competitors are also a number of large
hardware and software companies that may develop or acquire products that
compete in the sales automation software market.
Current and potential competitors have established or may establish
cooperative relationships with third parties to increase the ability of their
products to address the needs of the Company's prospective customers.
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Accordingly, it is possible that new competitors or alliances among competitors
may emerge and rapidly acquire significant market share. Many of the Company's
current and potential competitors have significantly greater financial,
technical, marketing, name recognition and other resources than the Company. As
a result they may be able to respond more quickly to new or emerging
technologies and to changes in customer requirements or to devote greater
resources to the development, promotion and sale of their products than can the
Company. There can be no assurance that the Company will be able to compete
successfully against current or future competitors or that competitive pressures
will not materially adversely affect the Company's business, financial condition
and results of operations.
The Company believes that the principal competitive factors affecting its
market include product features such as adaptability, scalability, ability to
integrate with third party products, functionality, ease of use, product
reputation, quality, performance, price, customer service and support
effectiveness of sales and marketing efforts and company reputation.
INTELLECTUAL PROPERTY, PROPRIETARY RIGHTS AND LICENSES
The Company relies on a combination of copyright, trademark and trade
secret laws, as well as confidentiality agreements and licensing arrangements,
to establish and protect its proprietary rights. The Company does not have any
patents or patent applications pending, and existing copyright, trademark and
trade secret laws afford only limited protection. The Company intends to license
its products in object code form only although it has in the past and in the
future may have source code escrow arrangements when required by customers.
Despite the Company's efforts to protect its proprietary rights, attempts
may be made to copy or reverse engineer aspects of the Company's products or to
obtain and use information that the Company regards as proprietary. Moreover,
there can be no assurance that others will not develop products that infringe
the Company's proprietary rights, or that are similar or superior to those
developed by the Company. Policing the unauthorized use of the Company's
products is difficult. Litigation may be necessary in the future to enforce the
Company's intellectual property rights, to protect the Company's trade secrets
or to determine the validity and scope of the proprietary rights of others. Such
litigation could result in substantial costs and diversion of resources and
could have a material adverse effect on the Company's business, financial
condition and results of operations. Adverse determinations in such litigation
could result in the loss of the Company's proprietary rights, subject the
Company to significant liabilities, require the Company to seek licenses from
third parties or prevent the Company from manufacturing or selling its products,
any of which would have material adverse effect on the Company's business,
financial condition and results of operations.
In addition, the laws of certain foreign countries treat the protection of
proprietary rights differently from the United States, and in many cases the
protection afforded by such foreign laws is weaker than in the United States.
Accordingly, there can be no assurance that the Company will be able to protect
its proprietary rights against unauthorized third party copying or use which
could materially adversely affect the Company's business, financial condition
and results of operations.
The Company believes that its past products did not and Arsenal will not
infringe the proprietary rights of third parties. There can be no assurance,
however, that infringement claims will not successfully be made. The Company may
receive communications in the future from third parties asserting infringement
upon intellectual property rights of such parties as a result of either features
or content of its software products. Although the Company is not currently
engaged in any intellectual property litigation or proceedings regarding any
claim or a violation by the Company of the intellectual property rights of
others, there can be no assurance that the Company will not become involved in
such proceedings.
The Company currently licenses, and in the future expects to license,
certain software from third parties. The Company believes that it currently has
all the licensed technology that is required to complete
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development of Arsenal. While the Company has not identified any technology for
which it expects to obtain licenses for future product development, the
inability to obtain any such future software licenses could result in delays in
future product development or delays or reductions in shipment until equivalent
software could be developed or identified, licensed and integrated, which could
adversely affect the Company's business, financial condition and results of
operations.
EMPLOYEES
As of December 31, 1996, the Company employed 49 full time people. None of
the Company's employees is represented by a labor union. The Company has
experienced no work stoppages and believes its relationship with its employees
is good. Competition for qualified personnel in the Company's industry is
intense. The Company believes that its future success will depend in part on its
continued ability to attract, hire and retain qualified personnel who are in
great demand. There can be no assurance that the Company will be successful in
attracting and retaining such personnel.
EXECUTIVE OFFICERS
The current executive officers of the Company are as follows:
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<CAPTION>
NAME AGE POSITION
- ------------------------------------ ---- --------------------------------------------------------
<S> <C> <C>
Curtis Faith........................ 33 Chairman of the Board
Peter Pitsker....................... 64 Interim President, Chief Operating Officer and Director
Elizabeth Gasper.................... 43 Executive Vice President and Chief Financial Officer
Jerry Brooks........................ 46 Vice President of Sales
Ed Murphy........................... 43 Vice President of Marketing
Brian Breidenbach................... 35 Vice President of Engineering
Timothy Arnold...................... 31 Vice President of Application Strategies
</TABLE>
Curtis Faith founded Sierra Software Innovations, now Borealis Technology
Corporation, in June 1988 and has served as the Company's Chairman of the Board
since the Company's inception. Mr. Faith also served as the Company's President
and CEO from June 1988 to January 1997. Mr. Faith attended Worcester Polytechnic
Institute in Worcester, Massachusetts.
Peter Pitsker has been interim President and Chief Operating Officer since
January 1997 and has served on the Board of Directors of the Company since
August 1995. Mr. Pitsker was President of Wonderware Corporation from 1989
through 1990 and served as Chairman of the Board from January 1991 to January
1992. Prior to joining Wonderware, Mr. Pitsker served as a sales and marketing
executive in several computer and automation companies, including the Foxboro
Company where he was Vice President of Sales and Marketing. Since December 1993,
Mr. Pitsker has served as President of TechnoManagement, Inc. Mr. Pitsker
graduated from Stanford University in 1955 with a B.S in Chemical Engineering.
Elizabeth Gasper has served as Executive Vice President and Chief Financial
Officer of the Company since November 1996. From March 1993 until joining
Borealis, Ms. Gasper served as Controller of Scopus Technology, a customer asset
management software vendor. From May 1990 through August 1992, Ms. Gasper
managed the Corporate Financial Planning and Treasury Operations groups at
Sybase, Inc., a database vendor. Prior thereto, Ms. Gasper held various
financial positions at Tandem Computers, a manufacturer of fault tolerant
computer hardware. Ms. Gasper earned a B.A. degree in Economics from University
California at Irvine and a M.B.A. degree in Finance from the University of
California at Los Angeles.
Edward Murphy joined the Company in June 1996 as Vice President of
Marketing. From April 1995 to June 1996, Mr. Murphy was Vice President of
Marketing at Live Picture, Inc. and prior thereto, Mr. Murphy served as
Worldwide Director of Marketing Communications at Borland. Mr. Murphy holds a
B.S. in Geology from the University of California at Davis.
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Jerry Brooks joined the Company as Vice President of Strategic Sales in
January 1996, assuming the position of Vice President of Sales in April 1996.
From April 1990 to December 1995, Mr. Brooks served as Executive Vice President
of Sales and Marketing at Wonderware Corporation. Prior thereto, Mr. Brooks
served in various sales and engineering positions at Intellution Corporation,
Modicon Corporation and Westinghouse Corporation. Mr. Brooks has a B.S. in
Engineering from the University of Wisconsin.
Brian Breidenbach joined the Company as Vice President of Engineering in
December 1996. For the last five years Mr. Breidenbach served as Director of
Development at Quarterdeck, an internet software vendor. Prior to joining
Quarterdeck, Mr. Breidenbach held positions at Bell and Howell, Quintar Company
and Integrated Business Systems. Mr. Breidenbach attended the University of
Southern California.
Timothy Arnold joined the Company in September 1992 and has served as Vice
President of Application Strategies since January 1997. Prior thereto, Mr.
Arnold served as Vice President of Operations and Finance from January 1994 to
October 1996, Director of Marketing, Finance and Operations from January 1993 to
January 1994 and as a software engineer from September 1992 to January 1993.
Prior to joining the Company Mr. Arnold served as a Senior Informations Systems
Specialist for Sales at Bose Corporation. Mr. Arnold holds a B.A. in Economics
from Harvard University.
ITEM 2. PROPERTIES
The Company's principal administrative, engineering, marketing and sales
facilities total approximately 19,000 square feet, and are located in a single
building in Carson City, Nevada under a lease which expires in 2002. In
addition, the Company has approximately 3,700 square feet under lease in Incline
Village, Nevada which expires in July 1997. Management believes that its current
facilities are adequate to meet its needs through the next twelve months, and
that, if required, suitable additional space will be available to accommodate
expansion of the Company's operations on commercially reasonable terms.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders in the quarter
ended December 31, 1996.
PART II
ITEM 5. MARKET FOR THE REGISTRANT S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
The Company's common stock is traded on the Nasdaq SmallCap Market under
the symbol "BRLS". Following the Company's initial public offering on June 20,
1996, the following high and low closing prices were reported by Nasdaq each
quarter:
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HIGH LOW
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Quarter ended June 30, 1996 $8.13 $6.75
(subsequent to June 20, 1996)..............................
Quarter ended September 30 1996.............................. $6.88 $3.88
Quarter ended December 31, 1996.............................. $4.75 $3.00
</TABLE>
At December 31, 1996, the Company had approximately 84 holders of record of
its common stock.
The Company has never paid any cash dividends on its capital stock and does
not expect to pay any such dividends in the foreseeable future. Further, an
existing bank credit agreement currently restricts the Compan's ability to pay
cash dividends without the bank's consent.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSES OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis contains forward-looking statements
regarding future events and the future financial performance of Borealis
Technology Corporation (the "Company") that involve risks and uncertainties
including, but not limited to, statements related to the expected introduction
of Arsenal and the adequacy of the Company's cash reserves. The Company's actual
results could differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including those set forth herein
under "Risk Factors" and elsewhere in the report.
OVERVIEW
The Company was incorporated and began operation as a division of a company
founded by Curtis M. Faith, the Chairman of the Board of Directors of the
Company. In September 1992, the Company purchased all of the assets and
operations of such division.
The Company has experienced significant operating losses in each of fiscal
1995 and 1996, and expects to incur significant operating losses for the
foreseeable future. In recent periods, the Company ceased sales and marketing of
its entire product line and shifted its focus to the development of Arsenal and
the establishment of a third-party integrator channel. As a result, the Company
expects to derive substantially all of its revenues, if any, from the sale of
Arsenal licenses and maintenance contracts for Arsenal. The Company does not
expect any Arsenal revenues, if ever, until the second quarter of 1997, at the
earliest. Moreover, there can be no assurance that the Company will ever achieve
profitability.
The Company has experienced a significant decrease in revenues in fiscal
1996 as a result of the Company's decision to cease sales and marketing of its
previous products in order to concentrate its efforts on the development of its
sales automation product, Arsenal. Prior period revenues have been generated
almost entirely from the sale of these products it no longer sells and,
therefore, should not be used as a predictor of future revenue performance.
Although the Company continues to provide product support of such products, this
activity is not expected to be meaningful to future operating results. Due to
the shift to the development of Arsenal, the Company expects to derive
substantially all of its revenues, if any, from the sale of Arsenal licenses and
affiliated maintenance contracts. However, there can be no assurance the Company
will successfully or timely complete the development of Arsenal, that Arsenal
will meet with market acceptance, or that the Company will ever achieve
profitability.
The Company's future operating results will depend on many factors,
including demand for Arsenal, which has not yet been completed or introduced,
the level of product and price competition, the ability of the Company to
develop and market new products and to control costs, the ability of the Company
to expand its direct sales force and indirect distribution channels and the
ability of the Company to attract and retain key personnel. In particular, the
ability of the Company to achieve revenue growth in the future will depend on
its success in adding, assimilating and retaining a substantial number of direct
sales personnel and third party integrators in future periods. Further, any
purchase of Arsenal will be discretionary and will generally involve a
significant commitment of capital. As a result, in the event of any downturn in
any potential customer's business or the economy in general, purchases of the
Company's products may be deferred or canceled, which could have a material
adverse effect on the Company's business, financial condition and results of
operations.
The Company has generally recognized and expects to recognize product and
license revenue which is not subject to significant post-delivery obligations
upon execution of a licensing agreement and delivery of the software and when
collection is deemed probable. Services revenues have been and are expected to
be recognized as services are performed while maintenance revenues have been and
are expected to be recognized ratably over the term of the support period.
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RESULTS OF OPERATIONS
The following table sets forth operations data for the periods indicated
and should be read in conjunction with this "Management's Discussion and
Analysis of Financial Condition and Results of Operations", and the financial
statements and notes thereto, along with the independent auditor's report
included elsewhere in this report. The Company's independent auditors' report on
the Company's financial statements at December 31, 1996 and for the years ended
December 31, 1995 and 1996 contains an explanatory paragraph indicating that the
Company had recurring operating losses that raise substantial doubt about its
ability to continue as a going concern.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1995 1996
---------- -----------
<S> <C> <C>
Total revenues..................................... $ 736,152 $ 176,941
Total cost of revenues............................. 214,325 66,140
---------- -----------
Gross margin....................................... 521,827 110,801
Operating expenses:
Sales and marketing.............................. 187,525 2,743,778
Research and development......................... 565,276 2,451,544
General and administrative....................... 332,671 988,092
---------- -----------
Total operating expenses................. 1,085,472 6,183,414
---------- -----------
Loss from operations..................... (563,645) (6,072,613)
Other income (expenses), net....................... (29,147) 45,532
---------- -----------
Net loss................................. $ (592,792) $(6,027,081)
========== ===========
</TABLE>
REVENUES
Net revenues have historically consisted of revenue from the licensing and
sale of products, revenue from service and maintenance agreements and revenue
from consulting services. Net revenues decreased from $736,152 to $176,941
between the fiscal years ended December 31, 1995 and 1996, respectively. This
decrease was primarily due to the cessation of sales of the Company's previous
products. The majority of the revenues in the fiscal year ended 1996 are
attributable to the recognition of revenues related to sales and maintenance of
products the Company no longer sells. The Company anticipates that revenues will
continue to decrease until the introduction of Arsenal, which is not expected
until the second quarter of 1997, at the earliest.
COST OF REVENUES
Cost of revenues represents primarily amounts incurred pursuant to royalty
obligations and maintenance agreements on certain technology. The cost of
revenues decreased from $214,325 to $66,140 between the fiscal years ended
December 31, 1995 and 1996, respectively. The decrease is primarily the result
of the cessation of sales of the Company's previous products. The Company
believes that the ratio of cost of revenues to revenues is not meaningful in
this period or indicative of future results.
OPERATING EXPENSES
Total operating expenses, which are comprised of sales and marketing,
research and development, and general and administrative expenses increased from
$1,085,472 to $6,183,414 between the fiscal years ended December 31, 1995 and
1996, respectively. Sales and marketing expenses increased from $187,525 to
$2,743,778 between the fiscal years ended December 31, 1995 and 1996,
respectively. This increase was the result of increased staffing as well as
costs associated with the Company's attendance at several trade shows, print
advertising and public relations. Research and development expenses increased
from $565,276 to $2,451,544 between the fiscal years ended December 31, 1995 and
1996, respectively. This increase was the result of additional staffing and
purchases of equipment. General and administrative expenses increased from
$332,671 to $988,092 between fiscal years ended December 31, 1995 and 1996,
respectively. This increase was due primarily to increased staffing. The Company
anticipates that total operating expenses will continue to increase for the
foreseeable future.
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The number of the Company's employees increased from 17 to 49 full time
employees between the end of fiscal year 1995 and 1996.
LIQUIDITY AND CAPITAL RESOURCES
In June 1996, the Company completed an initial public offering of 2,000,000
shares of Common Stock. In July 1996, the Company completed the public sale of
an additional 291,050 shares of Common Stock pursuant to the exercise of an
over-allotment option granted by the Company to the underwriter of the Company's
initial public offering. As a result of these offerings, the Company recorded
proceeds of $9.6 million, net of related underwriting discounts and offering
expenses. The Company invested the proceeds from these offerings in investment
grade, interest-bearing securities, and has not invested in any derivative
securities or other financial instruments that involve a high level of
complexity or risk.
Additional financing activities for the fiscal year ended December 31, 1996
included $375,946 in new long term lease commitments to finance purchases of
equipment and office furniture and a $650,000 bank loan secured by an 18 month
restricted certificate of deposit. The bank loan was secured to repay certain
stockholder debt which was at less favorable terms.
The Company's cash and short-term investments totaled $3.9 million at
December 31, 1996, representing 70% of total assets. Working capital was $3.2
million at December 31, 1996. The Company used $5.6 million of cash to fund
operations during fiscal 1996. Net cash used in operating activities was
primarily for the development, sales and marketing costs associated with
Arsenal. The Company's principal investing activities consisted of expenditures
for computers, computer related equipment, office furniture and leasehold
improvements associated with a new office facility the Company began occupying
in February 1997.
The Company's future capital requirements will depend upon many factors,
including the extent and timing of the introduction of the Company's Arsenal
product, the progress of the Company's research and development, the Company's
operating results and the status of competitive products. The Company believes
that its current cash and short-term investment balances will be sufficient to
meet its working capital and capital expenditure requirements until the
introduction of its Arsenal product. The Company's future capital needs are
difficult to predict and there can be no assurance that the Company will not
require additional capital prior to such time. In addition, the Company will
likely seek additional funding during the next twelve months, although the
Company is unable to predict the amount and timing of such capital needs at this
time. There can be no assurance that any additional financing will be available
to the Company on acceptable terms, or at all when required by the Company. If
additional financing was not available, the Company could be required to reduce
or suspend its operations, seek an acquisition partner or sell securities on
terms that are highly dilutive or otherwise disadvantageous to investors. The
Company has in the past, and may continue to experience difficulties and delays
in its product development due to working capital constraints. If adequate
financing sources are insufficient or not available or the Company experiences
continued delays in the development of Arsenal, the Company's business,
financial position and results of operations will be materially adversely
affected.
ADDITIONAL RISK FACTORS
Going Concern Assumption; Future Capital Needs Uncertain; No Assurance of
Future Financing
The Company's independent auditors' report on the Company's financial
statements at December 31, 1996 and for the years ended December 31, 1995 and
1996 contains an explanatory paragraph indicating that the Company had recurring
operating losses that raise substantial doubt about its ability to continue as a
going concern. The Company may require substantial additional funds in the
future, and there can be no assurance that the Company's future financial
statements will not include a similar explanatory paragraph if the Company is
unable to raise sufficient funds or generate sufficient cash from operations to
cover the cost of its operations. The existence of the explanatory paragraph may
materially adversely affect the Company's relationship with prospective
customers, third party integrators and suppliers, and therefore could have a
material adverse effect on the Company's business, financial condition and
results of operations.
11
<PAGE> 12
Dependence on Systems Integrators and Third Party Consultants
The Company does not plan to enter into or maintain exclusive relationships
with third-party integrators and, consequently, such integrators may have
existing relationships with, or may undertake new relationships with, the
Company's direct competitors. There can be no assurance that such integrators
will promote Arsenal effectively, or at all. The failure of the Company to
sufficiently incent such integrators will materially and adversely affect the
Company's sales of Arsenal which will have a material adverse effect on the
Company's business, financial condition and results of operations.
Quarterly Fluctuations in Performance
In the past, the Company experienced significant fluctuations in its
quarterly operating results, and it anticipates that such fluctuations will
continue and could intensify in the future. Fluctuations in operating results
may result in volatility in the price of the Company's Common Stock. Operating
results may fluctuate as a result of many factors, including the level of
research and development required to complete Arsenal or any future product
enhancements, the extent to which the Company is required to establish and
support a third-party integrator channel, announcements by the Company and its
competitors, volume and timing of orders received, if any, during the period,
the timing of commercial introduction of Arsenal or Arsenal enhancements or
competitive products, and the impact of price competition on the Company's
average selling prices. Almost all of these factors are beyond the Company's
control. In addition, due to the short product life cycles that characterize the
sales automation software market, the Company's failure to introduce Arsenal or
any Arsenal enhancements in a timely manner will have a material adverse effect
on the Company's business, financial condition and results of operations.
The Company's operating expenses are relatively fixed in the short term. As
a result, variations in the timing of the recognition of revenues could cause
significant variations in quarterly operating results. Notwithstanding the
difficulty in forecasting future sales, the Company generally must undertake its
development, sales and marketing activities and other commitments months in
advance. Accordingly, any shortfall in revenues in a given quarter may
materially adversely affect the Company's business, financial condition and
results of operations due to the inability to adjust expenses during the quarter
to match the level of revenues for the quarter. Once commitments for such
expenditures are undertaken, the Company may be unable to reduce them in a
timely manner in order to help offset any shortfall in revenues. In addition,
the Company's sales expectations are based entirely on its internal estimates of
future demand. Due to these and other factors, the Company believes that quarter
to quarter comparisons of its results of operations are not necessarily
meaningful and should not be relied upon as indications of future performance.
Rapid Technological Change; Risk of Product Delays or Defects
The sales automation software market is characterized by ongoing
technological developments, frequent new product announcements and
introductions, evolving industry standards and changing customer requirements.
The introduction of products embodying new technologies and the emergence of new
industry standards and practices can render existing products obsolete and
unmarketable. The Company's future success depends in large part upon its
ability to develop and introduce Arsenal successfully, develop enhancements to
Arsenal to address the changing requirements of its customers, educate
third-party integrators regarding Arsenal and anticipate or respond to
technological advances, competitive products and emerging industry standards and
practices in a timely, cost-effective manner. There can be no assurance that the
Company will be successful in developing, introducing, marketing and supporting
Arsenal or enhancements to Arsenal, if any, or will not experience difficulties
that could delay or prevent the successful development, introduction, marketing,
sale and support of these products, or that Arsenal or any such product
enhancements will adequately meet the requirements of the marketplace and
achieve any significant degree of commercial acceptance. Delays in the
commencement of commercial shipments of Arsenal and delays in enhancements to
Arsenal, if any, may result in customer dissatisfaction and delay or loss of
product revenue.
Software products such as Arsenal often contain errors or "bugs" that can
adversely affect the performance of the product or damage a user's data. As a
result, such software defects can have a materially adverse effect on the
financial condition and operating results of the Company. There can be no
assurance that, despite testing by the Company and by potential customers,
errors will not be found in Arsenal, resulting
12
<PAGE> 13
in a loss of, or delay in, market acceptance and sales, diversion of development
resources, injury to the Company's reputation, or increased service and warranty
costs, any of which could have a material adverse effect on the Company's
business, financial condition and results of operations.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's financial statements together with related notes and the
report of Ernst & Young LLP, independent auditors, are set forth at the pages
indicated at Item 13.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
Certain information required by part III is omitted from this Report on
Form 10-KSB in that the Company will file its definitive Proxy Statement for its
Annual Meeting of Stockholders to be held on May 27, 1997, pursuant to
Regulation 14A of the Securities and Exchange Act of 1934, as amended (the
"Proxy Statement"), not later than 120 days after the end of the fiscal year
covered by this Report, and certain information included in the Proxy Statement
is incorporated herein by reference.
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Executive Officers -- See the section titled "Executive Officers" in
Part I, Item 1 hereof
(b) Directors -- The information required by this Item is incorporated by
reference to the section entitled "Election of Directors" in the Proxy
Statement.
The disclosure required by Item 405 of Regulation S-B is incorporated by
reference to the section entitled "Section 16(a) Reporting Delinquencies" in the
Proxy Statement.
ITEM 10. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the
section entitled "Executive Compensation" in the Proxy Statement.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to the
section entitled "Security Ownership of Certain Beneficial Owners and
Management" in the Proxy Statement.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to the
section entitled "Certain Transactions" in the Proxy Statement.
13
<PAGE> 14
ITEM 13. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Form:
<TABLE>
<CAPTION>
PAGE NUMBER
-----------
<S> <C> <C>
1. Financial Statements
Report of Independent Auditors....................................... F-1
Balance Sheets as of December 31, 1995 and 1996...................... F-2
Statements of Operations For the Two Years Ended December 31, 1996... F-3
Statements of Stockholders' Equity (Deficit) For the Two Years Ended
December 31, 1996.................................................... F-4
Statements of Cash Flows For the Two Years Ended December 31, 1996... F-5
Notes to Financial Statements........................................ F-6
2. Exhibits: See Exhibits and Reports on Form 8-K. The Exhibits listed
in the accompanying Exhibits and Reports on Form 8-K are filed or
incorporated by reference as part of this report.
</TABLE>
(b) Reports on Form 8-K:
None
14
<PAGE> 15
(c) Exhibits
See (a) above
(d) Financial Statement Schedules
See (a) above
15
<PAGE> 16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized in Carson City, Nevada on this 28th day
of March, 1997.
BOREALIS TECHNOLOGY CORPORATION
By: /s/ CURTIS FAITH
------------------------------------
Curtis Faith
Chairman
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints Curtis Faith and Elizabeth Gasper
and each of them acting individually, as his or her attorney-in-fact, each with
full power of substitution, for him or her in any and all capacities to sign any
and all amendments to this Report on Form 10-KSB, and to file the same, with all
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact, and
each of them, full power and authority to do and perform each and every act and
thing requisite and necessary to be done in and about the premises as fully to
all intents and purposes as he or she might or could do in person, hereby
ratifying and confirming our signatures as them may be signed by our said
attorney to any and all amendments to this Report on Form 10-KSB.
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this Report on Form 10-KSB has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ --------------------------------- ---------------
<C> <S> <C>
/s/ CURTIS FAITH Chairman March 28, 1997
- ------------------------------------------
Curtis Faith
/s/ ELIZABETH GASPER Chief Financial Officer, March 28, 1997
- ------------------------------------------ (Principal Financial and
Elizabeth Gasper Accounting Officer)
/s/ PETER PITSKER Director, Interim President and March 28, 1997
- ------------------------------------------ Chief Operating Officer
Peter Pitsker (Principal Executive Officer)
/s/ EDWARD ESBER Director March 28, 1997
- ------------------------------------------
Edward Esber
/s/ PATRICK GRADY Director March 28, 1997
- ------------------------------------------
Patrick Grady
/s/ SHEKAR SWAMY Director March 28, 1997
- ------------------------------------------
Shekar Swamy
</TABLE>
16
<PAGE> 17
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of
Borealis Technology Corporation
We have audited the accompanying balance sheets of Borealis Technology
Corporation (the "Company") as of December 31, 1995 and 1996, and the related
statements of operations, stockholders' equity (deficit), and cash flows for the
years ended December 31, 1995 and 1996. 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 generally accepted auditing
standards. 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, the financial statements referred to above present fairly,
in all material respects, the financial position of Borealis Technology
Corporation at December 31, 1995 and 1996, and the results of its operations and
its cash flows for the years ended December 31, 1995 and 1996, in conformity
with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming Borealis
Technology Corporation will continue as a going concern. As discussed in Note 1
to the financial statements, the Company's recurring operating losses and
uncertainty with regard to future revenues from its new product raise
substantial doubt about its ability to continue as a going concern. Management's
plans as to these matters are also discussed in Note 1. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
/s/ Ernst & Young LLP
Reno, Nevada
January 20, 1997
F-1
<PAGE> 18
BOREALIS TECHNOLOGY CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1995 1996
--------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................ $ 158,840 $ 3,921,506
Accounts receivable.............................................. 36,188 2,000
Other current assets............................................. 7,080 136,073
--------- -----------
Total current assets..................................... 202,108 4,059,579
Property and equipment, net........................................ 128,989 856,653
Long-term investment............................................... -- 650,000
Other assets....................................................... -- 40,850
--------- -----------
Total assets............................................. $ 331,097 $ 5,607,082
========= ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable................................................. $ 82,310 $ 258,377
Accrued employee compensation and benefits....................... 75,218 298,492
Other accrued liabilities........................................ 43,206 60,375
Deferred revenue................................................. 129,028 81,550
Note payable to stockholder...................................... 221,311 --
Current portion of capital lease obligations..................... 25,944 178,814
--------- -----------
Total current liabilities................................ 577,017 877,608
Capital lease obligations.......................................... 29,628 88,800
Convertible promissory notes....................................... 324,000 --
Long-term promissory note.......................................... -- 650,000
--------- -----------
Total liabilities........................................ 930,645 1,616,408
--------- -----------
Commitments and contingency (Notes 1 and 10)
Stockholders' equity (deficit):
Preferred stock, $.001 par value:
Authorized shares: 5,000,000.................................. -- --
Issued and outstanding -- none
Common stock, $.001 par value:
Authorized shares: 10,000,000
Issued and outstanding shares -- 651,658 at 12/31/95 and
3,184,506 at 12/31/96........................................ 652 3,185
Additional paid-in capital......................................... 162,471 10,777,241
Accumulated deficit................................................ (762,671) (6,789,752)
--------- -----------
Total stockholders' equity (deficit)..................... (599,548) 3,990,674
--------- -----------
Total liabilities and stockholders' equity (deficit)..... $ 331,097 $ 5,607,082
========= ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE> 19
BOREALIS TECHNOLOGY CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1995 1996
---------- -----------
<S> <C> <C>
Revenues:
Licenses......................................................... $ 397,207 $ 35,170
Service and maintenance.......................................... 338,945 141,771
--------- -----------
Total revenues........................................... 736,152 176,941
Cost of revenues:
Licenses......................................................... 69,538 2,310
Service and maintenance.......................................... 144,787 63,830
--------- -----------
Total cost of revenues................................... 214,325 66,140
--------- -----------
Gross margin....................................................... 521,827 110,801
Operating expenses:
Sales and marketing.............................................. 187,525 2,743,778
Research and development......................................... 565,276 2,451,544
General and administrative....................................... 332,671 988,092
--------- -----------
Total operating expenses................................. 1,085,472 6,183,414
--------- -----------
Loss from operations..................................... (563,645) (6,072,613)
Interest expense................................................... (29,147) (134,107)
Interest income.................................................... -- 179,639
--------- -----------
Net loss................................................. $ (592,792) $(6,027,081)
========= ===========
Net loss per share................................................. $ (0.64) $ (3.11)
========= ===========
Shares used in computing net loss per share........................ 931,758 1,935,984
========= ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 20
BOREALIS TECHNOLOGY CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
------------------ PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT EQUITY(DEFICIT)
--------- ------ ----------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1994......... 597,569 $ 598 $ 39,925 $ (169,879) $ (129,356)
Issuance of common shares for
compensation..................... 1,682 2 2,598 -- 2,600
Sale of common shares............... 52,407 52 119,948 -- 120,000
Net loss............................ -- -- -- (592,792) (592,792)
--------- ------ ----------- ----------- ----------
Balances at December 31, 1995......... 651,658 652 162,471 (762,671) (599,548)
Issuance of common stock in public
offering, net of issuance costs
of $1,865,678.................... 2,291,050 2,291 9,587,281 -- 9,589,572
onversion of promissory notes....... 241,798 242 1,027,489 -- 1,027,731
Net loss............................ -- -- -- (6,027,081) (6,027,081)
--------- ------ ----------- ----------- ----------
Balances at December 31, 1996......... 3,184,506 $3,185 $10,777,241 $(6,789,752) $ 3,990,674
========= ====== =========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 21
BOREALIS TECHNOLOGY CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1995 1996
--------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss........................................................... $(592,792) $(6,027,081)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization.................................... 76,065 157,387
Common stock issued for compensation............................. 2,600 --
Changes in operating assets and liabilities:
Accounts receivable........................................... 40,847 34,188
Other assets.................................................. (2,913) (169,843)
Accounts payable.............................................. 67,271 176,067
Accrued employee compensation and benefits.................... 30,305 223,274
Other accrued liabilities..................................... 15,918 45,330
Deferred revenue.............................................. 90,803 (47,478)
--------- -----------
Net cash used in operating activities.............................. (271,896) (5,608,156)
INVESTING ACTIVITIES
Purchase of investment............................................. -- (650,000)
Purchases of property and equipment................................ (98,087) (515,707)
Proceeds from disposal of property and equipment................... -- 6,602
--------- -----------
Net cash used in investing activities.............................. (98,087) (1,159,105)
FINANCING ACTIVITIES
Proceeds from issuance of common stock, net........................ 120,000 9,589,572
Proceeds from issuance of convertible promissory notes............. 324,000 675,570
Proceeds from issuance of long-term promissory note................ -- 650,000
Proceeds from issuance of notes payable to stockholder and related
parties.......................................................... 154,472 750,000
Payment on notes payable to stockholder and related parties........ (105,000) (971,311)
Payments under capital lease obligations........................... (12,085) (163,904)
--------- -----------
Net cash provided by financing activities.......................... 481,387 10,529,927
--------- -----------
Net increase in cash and cash equivalents.......................... 111,404 3,762,666
Cash and cash equivalents at beginning of year..................... 47,436 158,840
--------- -----------
Cash and cash equivalents at end of year........................... $ 158,840 $ 3,921,506
========= ===========
Cash paid during the year for:
Interest......................................................... $ 6,078 $ 173,087
Income taxes..................................................... -- --
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 22
BOREALIS TECHNOLOGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
ORGANIZATION
Borealis Technology Corporation (the "Company") was originally incorporated
in Nevada in 1988. (See Note 5.) The Company develops, markets and supports
mobile and client/server software for the sales force automation market.
BASIS OF PRESENTATION
The financial statements have been prepared on a going concern basis. The
Company has incurred significant losses in 1995 and 1996 and at December 31,
1996 had an accumulated deficit of $6,789,752. In addition, the Company
generated substantially all of its historical revenues from sales of products it
no longer sells and will commercially introduce its new product no earlier than
the first quarter of 1997. In 1996, the Company issued 2,291,050 shares of its
common stock (the "Offering"), raising $9,589,572 to fund its operations until
sufficient product revenues are generated. The Company believes that sufficient
product revenues will be generated in the second half of 1997 to fund its
operations, but there can be no assurance that this will occur.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
The Company generally recognizes license revenues upon execution of a
licensing agreement provided there are no significant post delivery obligations
and collection is deemed probable. Royalty revenues are recognized based on the
reporting of usage of certain of the Company's products by third party
manufacturers or end users. Service revenues from training and consulting are
recognized as services are performed while service revenues from customer
maintenance contracts are recognized ratably over the term of the support
period, which is one to three years. At December 31, 1995 and 1996, the
Company's deferred revenue related to maintenance contracts for products sold
during 1994 and 1995.
RESEARCH AND DEVELOPMENT
Research and development expenditures are generally charged to operations
as incurred.
Statement of Financial Accounting Standards No. 86, "Accounting for the
Costs of Computer Software to be Sold, Leased or Otherwise Marketed" ("SFAS
86"), requires that software development costs be capitalized once the
technological feasibility of the software product has been established. To date,
such amounts have been insignificant and have been charged to research and
development expenses in the period incurred.
ADVERTISING
Advertising costs are charged in the period the costs are incurred.
Advertising expense totaled $9,394 and $389,517, for the years ended December
31, 1995 and 1996, respectively.
INCOME TAXES
The Company accounts for income taxes under Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes", which
requires the Company to record deferred income taxes for temporary differences
that are reported in different years for financial reporting and for income tax
purposes, and classifies tax liabilities and assets into current and non-current
amounts based on the classification of the related assets and liabilities.
F-6
<PAGE> 23
BOREALIS TECHNOLOGY CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
STOCK-BASED COMPENSATION
The Company has elected to follow Accounting Principles Board Opinion No.
25 "Accounting for Stock Issued to Employees" ("APB 25") and related
Interpretations in accounting for its employee stock options because, as
discussed in Note 7, the alternative fair value accounting provided for under
FASB Statement No. 123, "Accounting for Stock-Based Compensation," ("Statement
123") requires use of option valuation models that were not developed for use in
valuing employee stock options. Under APB 25, because the exercise price of the
Company's employee stock options equals the market price of the underlying stock
on the date of grant, no compensation expense is recognized.
COMPUTATION OF NET LOSS PER SHARE
Except as noted below, net loss per common share is computed using the
weighted average number of common shares outstanding during each period and
common equivalent shares from common stock options and warrants are excluded
from the computation because their effect is antidilutive. Pursuant to the
Securities and Exchange Commission Staff Accounting Bulletins, common and common
equivalent shares issued by the Company at prices below the initial public
offering price during the twelve-month period prior to the offering have been
included in the computation of net loss per share for the year ended December
31, 1995 as if they were outstanding for the entire period (using the treasury
stock method and the proposed public offering price). Also included in the
computation of net loss per share for the year ended December 31, 1995 was the
conversion of the convertible promissory notes. (See Note 5.)
Fully diluted and primary loss per common share are the same amounts for
each of the periods presented.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents. The Company invests
its excess cash principally in mutual funds which focus on high quality,
short-term money market securities of all types.
PROPERTY AND EQUIPMENT
Depreciation and amortization is calculated using the straight-line method
over the estimated useful lives of three to five years. Assets under capital
leases are amortized over the asset life.
Leasehold improvements at December 31, 1996 include $134,081 of
improvements relating to a new facility that will be occupied in 1997. (See Note
10.) Amortization of these leasehold improvements will commence upon occupation
of the facility.
During the years ended December 31, 1995 and 1996, the Company financed,
under capital lease obligations, the acquisition of property and equipment for
$54,769 and $375,946, respectively.
SIGNIFICANT CUSTOMERS
Sales are not concentrated geographically. The Company received significant
portions of its revenues from Nortel (14%), Scitex American Corp. (27%) and
Synopsys, Inc. (38%) during 1995 and from Nortel (35%) and Synopsys, Inc. (36%)
during 1996.
USE OF ESTIMATES
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles which require the Company's management
to make estimates and assumptions that affect the amounts reported therein.
Actual results could vary from such estimates.
F-7
<PAGE> 24
BOREALIS TECHNOLOGY CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. PROPERTY AND EQUIPMENT
Property and equipment, at cost, consisted of the following at December 31:
<TABLE>
<CAPTION>
1995 1996
-------- ----------
<S> <C> <C>
Computer equipment........................................... $136,877 $ 690,802
Furniture and equipment...................................... 63,081 260,125
Leasehold improvements....................................... 24,214 158,296
-------- ---------
224,172 1,109,223
Less accumulated depreciation and amortization............... (95,183) (252,570)
-------- ---------
Total property and equipment, net............................ $128,989 $ 856,653
======== =========
</TABLE>
4. LONG-TERM PROMISSORY NOTE
At December 31, 1996, the Company has a promissory note payable to a bank
for $650,000. The note matures on January 11, 1998 and bears interest of 7.55%
per annum. The note is collaterallized by the $650,000 long-term investment
(certificate of deposit) and places certain business and borrowing restrictions
on the Company.
5. COMMON STOCK
CONVERTIBLE PROMISSORY NOTES
During the period November 1995 through February 1996, the Company issued
unsecured Convertible Promissory Notes (the "Notes") in the aggregate amount of
$999,570 of which $324,000 had been issued by December 31, 1995. The notes bore
interest at 6%. The Notes plus accrued interest converted to 241,798 shares of
common stock upon the effective date of the initial public offering of the
Company's common stock.
REINCORPORATION AND STOCK SPLIT
In May 1996, the Board of Directors and stockholders approved the
reincorporation of the Company in Delaware and a split of the Company's common
stock of 1.294 to one. With the reincorporation, the authorized shares of common
stock were increased to 10,000,000 and the authorized shares of preferred stock
were established at 5,000,000. All common stock, common equivalent shares, and
per share amounts were adjusted retroactively to give effect to the stock split.
PUBLIC OFFERING
In 1996, the Company sold 2,291,050 shares of common stock in an initial
public offering which generated net proceeds of $9,589,572 after deducting
underwriting discounts and expenses. The Company is using the proceeds to fund
the development of their new product and to fund operations.
WARRANTS
As part of its initial public offering, the Company issued 200,000 warrants
to its underwriter at an exercise price of $7.75, exercisable for 4 years
commencing one year from the effective date of the registration statement, and
3,000 warrants to its legal firm at an exercise price of $5.00, exercisable for
4 years commencing from the date of issuance.
In addition, during 1996 the Company issued 7,000 warrants to an officer
and 2,000 warrants to a director, both at an exercise price of $5.00,
exercisable for 5 years from the execution of the warrant.
F-8
<PAGE> 25
BOREALIS TECHNOLOGY CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. STOCK OPTION PLANS
STOCK PLANS
The Company's 1994 Stock Plan (the "1994 Plan") provides for the grant of
incentive stock options and nonstatutory stock options or the issuance of the
Company's common stock to employees, directors, and consultants of the Company.
The Company's 1996 Stock Plan (the "1996 Plan") provides for the grant of
incentive stock options to employees and the grant of nonstatutory stock options
and stock purchase rights to employees and consultants of the Company. Both
plans stipulate that the exercise prices cannot be less than the fair market
value of the common stock on the date of grant. A total of 185,786 and 224,304
shares of common stock are reserved for issuance under the 1994 Plan and 1996
Plan, respectively. The vesting and exercise provisions for the plans are
determined by the Board of Directors, with a maximum term for exercise of ten
years. Options granted and shares issued under the 1994 Plan vest over various
periods (grant date to seven years) while options granted under the 1996 Plan
generally vest in two or four year periods.
A summary of the Company's 1994 Plan's stock option activity, and related
information for the years ended December 31 are as follows:
<TABLE>
<CAPTION>
1995 1996
-------------------------- --------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
-------- ---------------- ------- ----------------
<S> <C> <C> <C> <C>
Outstanding-beginning of year............... 54,833 $ 1.55 151,495 $ 2.29
Granted..................................... 96,662 2.71 34,284 2.71
Exercised................................... -- -- -- --
Forfeited................................... -- -- (7,117) 2.71
------- ----- ------- -----
Outstanding-end of year..................... 151,495 $ 2.29 178,662 $ 2.35
======= ===== ======= =====
Exercisable at end of year.................. 47,554 $ 1.55 83,991 $ 1.95
Weighted-average fair value of options
granted during the year................... $ 1.88 $ 2.09
</TABLE>
Exercise prices for options outstanding, under the 1994 Plan, as of
December 31, 1996 ranged from $1.55 to $2.71. The weighted-average remaining
contractual life of those options is 8.4 years.
A summary of the Company's 1996 Plan's stock option activity, and related
information for the year ended December 31, 1996 are as follows:
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
OPTIONS EXERCISE PRICE
------- ----------------
<S> <C> <C>
Outstanding-beginning of year.............................. -- $ --
Granted.................................................... 146,726 4.14
Exercised.................................................. -- --
Forfeited.................................................. (5,823) 4.00
------- -----
Outstanding-end of year.................................... 140,903 $ 4.15
======= =====
Exercisable at end of year................................. 472 $ 4.00
Weighted-average fair value of options granted during the
year..................................................... $ 2.60
</TABLE>
Exercise prices for options outstanding, under the 1996 Plan, as of
December 31, 1996 ranged from $3.81 to $5.00. The weighted-average remaining
contractual life of those options is 9.6 years.
F-9
<PAGE> 26
BOREALIS TECHNOLOGY CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
1996 DIRECTOR OPTION PLAN
The Company's 1996 Director Option Plan (the "Director Plan") provides for
the automatic grant of 20,000 shares of common stock to each non-employee
director and an additional automatic grant of 6,667 shares each year on the day
immediately following the annual stockholder's meeting of the Company, if on
such date he or she has served on the Board for at least three years. A total of
75,000 shares of common stock have been reserved for issuance under the Director
Plan. Each option will have a term of 10 years. The exercise prices of options
will be the fair market value per share of the common stock on the date of
grant.
A summary of the Company's 1996 Director Plan's stock option activity, and
related information for the year ended December 31, 1996 are as follows:
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
OPTIONS EXERCISE PRICE
------- ----------------
<S> <C> <C>
Outstanding-beginning of year............................... -- $ --
Granted..................................................... 75,000 4.73
Exercised................................................... -- --
Forfeited................................................... -- --
------ -----
Outstanding-end of year..................................... 75,000 $ 4.73
====== =====
Exercisable at end of year.................................. -- --
Weighted-average fair value of options granted during the
year...................................................... $ 3.01
</TABLE>
Exercise prices for options outstanding as of December 31, 1996 ranged from
$4.50 to $5.00. The weighted-average remaining contractual life of those options
is 9.5 years.
7. STOCK-BASED COMPENSATION
The Company has three stock based compensation plans: the 1994 Stock Plan,
the 1996 Stock Plan, and the 1996 Director Option Plan, all of which are
described in Note 6.
Pro forma information regarding net loss and loss per share is required by
Statement 123, which also requires that the information be determined as if the
Company has accounted for its employee stock options granted subsequent to
December 31, 1994 under the fair value method of that Statement. The fair value
for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions for 1995
and 1996, respectively: risk-free interest rates of 6.4% and 6.2%; dividend
yields of 0% and 0%; volatility factors of the expected market price of the
Company's common stock of .823 and .823; and a weighted-average expected life of
the options of 5.3 and 4.3 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information for years ended December 31 is as follows:
<TABLE>
<CAPTION>
1995 1996
-------- ----------
<S> <C> <C>
Pro forma net loss........................................... $611,113 $6,141,084
Pro forma net loss per share................................. $ .66 $ 3.17
</TABLE>
F-10
<PAGE> 27
BOREALIS TECHNOLOGY CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
8. CONTINGENT STOCK
The Company's Board of Directors authorized the issuance of 1,000,000
shares of common stock (the "Contingent Shares") issuable to holders of record
of the Company's common stock and stock options issued by the Company as of the
effective date of the Company's initial public offering ("Participants"),
contingent upon the Company achieving certain milestones. In the event that the
Company achieves net revenues for the year ended December 31, 1997 in excess of
$12,000,000 and a net loss of $2,500,000 or less for that year, then rights to
purchase 350,000 shares of common stock for one dollar per share will be issued
to the Participants. In the event that the Company achieves net revenues for the
year ended December 31, 1998 in excess of $18,000,000 and pre-tax profits of at
least $2,730,000 for that year, then rights to purchase 650,000 shares of common
stock for one dollar per share will be issued to the Participants. The
compensation expense related to the contingent stock will be recorded as
operating expenses periodically through the date the contingent shares are
issued when, in the opinion of the Company's management, it becomes probable
that the milestones will be achieved. This expense could adversely affect
results of operations for a number of quarters. If the Company's management does
not determine that it is probable that the shares will be issued until the
milestones are met, it could result in a substantial one-time charge and a
material adverse effect on the Company's operating results.
In addition, all of the unissued rights to purchase contingent shares can
be issued if certain events, as defined, occur. The Contingent Shares expire no
later than 1999.
9. INCOME TAXES (SECTION 382) LOSS LIMITATIONS
There is no provision for income taxes for the years ended December 31,
1996 and 1995, as the Company has incurred net operating losses.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
and income tax purposes. The Company uses the cash method of accounting for
income tax purposes. Significant components of the Company's deferred tax assets
and liabilities are as follows at December 31:
<TABLE>
<CAPTION>
1995 1996
--------- -----------
<S> <C> <C>
Deferred tax assets:
Accounts payable and other accruals...................... $ 68,250 $ 209,863
Deferred revenue......................................... 43,870 27,727
Net operating loss carryforwards......................... 115,600 2,061,304
--------- -----------
Total deferred tax assets.................................. 227,720 2,298,894
Valuation allowance........................................ (215,415) (2,261,905)
--------- -----------
Net deferred tax assets.................................... 12,305 36,989
Deferred tax liabilities:
Receivables and prepaid expenses......................... (12,305) (36,989)
--------- -----------
Net deferred tax assets.................................... $ -- $ --
========= ===========
</TABLE>
Based upon the weight of available evidence, which includes the Company's
historical operating losses and the uncertainties regarding future results, the
Company has provided a full valuation allowance against its net deferred tax
assets, as it is more likely than not that the deferred tax assets will not be
realized. The valuation allowance increased by $2,046,490 during 1996.
At December 31, 1995 and 1996, the Company had federal net operating loss
carryforwards of approximately $340,000 and $6,060,000, respectively. These
carryforwards will expire beginning in the year
F-11
<PAGE> 28
BOREALIS TECHNOLOGY CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2011. Utilization of these carryforwards may be limited due to the ownership
change provisions as enacted by the Tax Reform Act of 1986 and subsequent
legislation.
10. COMMITMENTS
LEASES
The Company leases its facilities under operating leases expiring at
various dates through May 2000. The Company has an option to extend their new
facility lease discussed in Note 2 for two consecutive terms of five years each.
The Company leases certain equipment under noncancelable lease agreements
that are accounted for as capital leases. Equipment under capital lease
arrangements and included in property and equipment aggregated $502,531 at
December 31, 1996. Related accumulated amortization was $111,541 at December 31,
1996. In addition, the capital leases are secured by the related equipment, and
the Company is required to maintain liability and property damage insurance.
Future minimum lease payments under noncancelable capital and operating
leases are as follows at December 31, 1996:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
--------- --------
<S> <C> <C>
1997.......................................................... $ 216,020 $269,740
1998.......................................................... 73,486 266,278
1999.......................................................... 23,915 275,597
2000.......................................................... 2,244 118,381
--------- --------
Total minimum payments........................................ 315,665 $929,996
========
Less amount representing interest............................. (48,051)
---------
Present value of minimum lease payments....................... 267,614
---------
Less current obligations...................................... (178,814)
---------
Long-term obligations......................................... $ 88,800
=========
</TABLE>
Total rental expense for 1995 and 1996 was approximately $42,143 and
$103,109, respectively.
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of the Company's financial instruments which include the
long-term investment, the long-term promissory note, the note payable to
stockholder and the convertible promissory notes approximate their recorded book
values at December 31, 1995 and 1996. The fair values are based on quoted market
prices and discounted cash flow using the Company's incremental borrowing rate.
F-12
<PAGE> 29
EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ ----------------------------------------------------------------------------
<C> <S>
2.1(1) Agreement and Plan of Merger between Borealis Corporation, a Nevada
corporation, and Borealis Technology Corporation, a Delaware corporation,
dated June 7, 1996.
3.1(1) Registrant's Certificate of Incorporation, as currently in effect.
3.2(1) Registrant's Bylaws, as currently in effect.
10.1(1) Real Property Lease between Registrant and Incline Investors Group, dated
June 15, 1995.
10.2(1) Real Property Sublease between Registrant and U.S. Bank of Nevada, dated
November 7, 1995.
10.3(1) 1994 Stock Plan.
10.4(1) 1996 Stock Plan.
10.5(1) 1996 Director Option Plan.
10.6(1) Form of Indemnification Agreement.
10.7(1) Asset License and Purchase Agreement between the Registrant and Sales
Technologies, Inc., dated April 15, 1994.
10.8(1) Lease between the Registrant and DBB Holdings, Inc., dated June 11, 1996.
10.9(2) Promissory Note between the Registrant and US Bank dated July 11, 1996.
23.1 Consent of Ernst & Young LLP, independent auditors.
</TABLE>
- ---------------
(1) Incorporated by reference to exhibits filed with Registrant's Registration
Statement on Form SB-2 which became effective on June 20, 1996.
(2) Incorporated by reference to exhibits with Registrant's Quarterly Report on
Form 10-QSB filed August 13, 1996.
(B) REPORTS ON FORM 8-K.
No reports on Form 8-K were filed by the Registrant during the quarter
ended December 31, 1996.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 333-13001) pertaining to the 1994 Stock Plan, the 1996 Stock Plan
and the 1996 Director Option Plan of Borealis Technology Corporation of our
report dated January 20, 1997, with respect to the financial statements of
Borealis Technology Corporation included in the Annual Report (Form 10-KSB) for
the year ended December 31, 1996.
/s/ Ernst & Young LLP
----------------------
Ernst & Young LLP
Reno, Nevada
March 25, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ANNUAL AUDIT
REPORT AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 3,921,506
<SECURITIES> 0
<RECEIVABLES> 2,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 4,059,579
<PP&E> 1,109,223
<DEPRECIATION> 252,570
<TOTAL-ASSETS> 5,607,082
<CURRENT-LIABILITIES> 877,608
<BONDS> 0
0
0
<COMMON> 3,185
<OTHER-SE> 3,987,489
<TOTAL-LIABILITY-AND-EQUITY> 5,607,082
<SALES> 35,170
<TOTAL-REVENUES> 176,941
<CGS> 2,310
<TOTAL-COSTS> 6,249,554
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 134,107
<INCOME-PRETAX> (6,027,081)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,072,613)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,027,081)
<EPS-PRIMARY> (3.11)
<EPS-DILUTED> (3.11)
</TABLE>
