<PAGE> 1
EXHIBIT 99.1
MICRO MAGIC, INC.
FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1999
<PAGE> 2
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
Micro Magic, Inc.
In our opinion, the accompanying balance sheet and the related statements of
operations, of stockholders' equity and of cash flows present fairly, in all
material respects, the financial position of Micro Magic, Inc. at December 31,
1998 and 1999, and the results of its operations and its cash flows for the
years then ended, in conformity with accounting principles generally accepted in
the United States of America. 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 of these
statements in accordance with generally accepted auditing standards in the
United States of America, which 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, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
San Jose, California
November 29, 2000
1
<PAGE> 3
MICRO MAGIC, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1998 1999
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 466,040 $ 1,245,166
Short term investment 150,000 156,958
Accounts receivable 152,561 655,127
Prepaid expenses and deposits 58,622 89,094
Deferred income tax -- 206,847
------------ ------------
Total current assets 827,223 2,353,192
Deferred income tax 233,661 813,236
Property and equipment, net 9,570 131,858
------------ ------------
Total assets $ 1,070,454 $ 3,298,286
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 35,689 $ 117,064
Accrued expenses 17,207 62,733
Deferred revenue -- 614,308
------------ ------------
Total current liabilities 52,896 794,105
------------ ------------
Commitments (Note 7)
Stockholders' equity:
Common stock, no par value; 10,000,000 shares authorized;
5,626,668 and 6,186,668 shares issued and outstanding 22,299,666 36,425,442
Deferred stock-based compensation charge (16,122,240) (14,324,922)
Accumulated deficit (5,159,868) (19,596,339)
------------ ------------
Total stockholders' equity 1,017,558 2,504,181
------------ ------------
Total liabilities and stockholders' equity $ 1,070,454 $ 3,298,286
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE> 4
MICRO MAGIC, INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1998 1999
------------ ------------
<S> <C> <C>
Revenue:
Licenses $ 174,000 $ 1,199,179
Services 1,982,050 2,244,688
------------ ------------
2,156,050 3,443,867
------------ ------------
Cost of sales:
Licenses 1,200 8,500
Services 733,223 1,174,333
------------ ------------
734,423 1,182,833
------------ ------------
Gross profit: 1,421,627 2,261,034
------------ ------------
Operating expenses:
Research and development (exclusive of $2,407,054 and $10,367,968
stock-based compensation for the year ended 1998 and 1999) 224,189 269,103
Sales and marketing (exclusive of $1,665,986 and $4,037,031
stock-based compensation for the year ended 1998 and 1999) 461,177 890,810
General and administrative (exclusive of $550,485 and $1,518,095
stock-based compensation for the year ended 1998 and 1999) 144,026 271,000
Non-cash stock-based compensation expense 4,623,525 15,923,094
------------ ------------
Total operating expenses 5,452,917 17,354,007
------------ ------------
Loss from operations: (4,031,290) (15,092,973)
------------ ------------
Other income:
Interest income 15,425 31,696
Other income 83,459 7,658
------------ ------------
Loss before income taxes (3,932,406) (15,053,619)
Income tax benefit (14,629) (617,148)
------------ ------------
Net loss $ (3,917,777) $(14,436,471)
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 5
MICRO MAGIC, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK DEFERRED TOTAL
----------------------------- STOCK-BASED ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT COMPENSATION DEFICIT EQUITY
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1997 7,546,668 $ 12,046,787 $(10,491,686) $ (1,242,091) $ 313,010
Repurchase of common stock (1,920,000) (1,200) -- -- (1,200)
Deferred stock-based compensation charge -- 10,254,079 (10,254,079) -- --
Amortization of stock-based deferred
compensation -- -- 4,623,525 -- 4,623,525
Net loss -- -- -- (3,917,777) (3,917,777)
------------ ------------ ------------ ------------ ------------
Balance, December 31, 1998 5,626,668 22,299,666 (16,122,240) (5,159,868) 1,017,558
Issuance of common stock in exchange
for employees' services 560,000 9,111,200 -- -- 9,111,200
Deferred stock-based
compensation charge -- 5,014,576 (5,014,576) -- --
Amortization of stock-based
deferred compensation -- -- 6,811,894 -- 6,811,894
Net loss -- -- -- (14,436,471) (14,436,471)
------------ ------------ ------------ ------------ ------------
Balance, December 31, 1999 6,186,668 $ 36,425,442 $(14,324,922) $(19,596,339) $ 2,504,181
============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 6
MICRO MAGIC, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1998 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ (3,917,777) $(14,436,471)
Adjustments to reconcile net income to
cash provided by operating activities:
Depreciation and amortization 9,016 23,399
Deferred income tax (233,661) (786,422)
Non-cash stock-based compensation expense 4,623,525 15,923,094
Cash effect of changes in operating assets and liabilities:
Accounts receivable (101,930) (212,566)
Prepaid expenses and deposits (19,975) (320,472)
Accounts payable 7,853 81,375
Accrued expenses 11,297 45,526
Accrued interest -- (6,958)
Deferred revenue (23,250) 614,308
------------ ------------
Net cash provided by operating activities 355,098 924,813
------------ ------------
Cash flows from investing activities:
Acquisition of property and equipment (8,500) (145,687)
Purchases of short-term investments (150,000) --
------------
Net cash used in investing activities (158,500) (145,687)
------------ ------------
Cash flows from financing activities:
Repurchase of common stock (1,200) --
------------ ------------
Net cash used in financing activities (1,200) --
------------ ------------
Net increase in cash 195,398 779,126
Cash and cash equivalents, beginning of period 270,642 466,040
------------ ------------
Cash and cash equivalents, end of period $ 466,040 $ 1,245,166
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest $ -- $ 788
============ ============
Cash paid for income taxes $ 254,133 $ 193,000
============ ============
Issuance of common stock in exchange for employee's services $- $ 9,111,200
============ ============
Deferred compensation arising from issuance of options $ 10,254,079 $ 5,014,576
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 7
MICRO MAGIC, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION:
Micro Magic, Inc. (the "Company"), a California corporation, develops,
markets and supports IC design software and provides design services for
high-speed digital systems including processors, memory sub-systems and complete
IC designs. The Company licenses its products primarily through its direct sales
force to customers in the United States.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reported
period. Actual results could differ from these estimates.
CERTAIN RISKS AND CONCENTRATIONS
Financial instruments that potentially subject the Company to
concentrations of credit risk are comprised principally of cash deposits and
trade accounts receivable. The Company has deposits with two US financial
institutions, which exceeded federal insurance limits at December 31, 1999.
The following table sets forth sales to customers comprising 10% or more
of the Company's total revenues and accounts receivable.
<TABLE>
<CAPTION>
REVENUES FOR THE ACCOUNTS RECEIVABLE AT
YEAR ENDED DECEMBER 31, DECEMBER 31,
----------------------- ----------------------
1998 1999 1998 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Customer A 48% -- 70% --
Customer B 33% -- -- --
Customer C 11% 23% 25% --
Customer D -- 34% -- 34%
Customer E -- 29% -- 42%
Customer F -- -- -- 17%
</TABLE>
The Company's revenue is attributable to the sale of software products
and related services that are subject to rapid technological change. Significant
technological change could adversely affect the Company's operating results.
REVENUE RECOGNITION
The Company's revenue is derived from three sources: (i) product license
revenue, derived primarily from product sales to end-users; (ii) maintenance
revenue, derived primarily from customers who license the customers software;
and (iii) service revenue, derived primarily from providing consulting services.
On January 1, 1998, the Company adopted the provisions of the American Institute
of Certified Public Accountants ("AICPA") Statement of Position 97-2 ("SOP
97-2"), Software Revenue Recognition and SOP 98-9, Modification of SOP 97-2 with
Respect to Certain Transactions.
The Company's licensing arrangements provide for the delivery of a
software license and maintenance and technical support. Because none of these
deliverables are sold separately by the Company, all the amounts received under
the licensing arrangements are initially recorded as deferred revenue and
thereafter, recorded as revenue over the maintenance period, which is twelve
months.
The Company recognizes service revenue as the related consulting
services are performed.
6
<PAGE> 8
MICRO MAGIC, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
CASH EQUIVALENTS AND SHORT TERM INVESTMENT
The Company considers all highly liquid investments with an original
maturity date of three months or less to be cash equivalents. Short-term
investments are classified as available-for-sale securities and consist of a
certificate of deposit and are carried at their market value as of the balance
sheet date.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of a financial instruments is the amount at which the
instrument could be exchanged in a current transaction between willing parties.
The carrying amounts for cash and cash equivalents, short-term investments,
accounts receivable, prepaid expenses and other current assets, accounts
payable, accrued expenses approximate their respective fair values because of
the short-term maturity of these items.
COMPREHENSIVE LOSS
Under Statement of Financial Accounting Standard No. 130, Reporting
Comprehensive Income ("SFAS 130") issued in 1998, companies are required to
report in the financial statements, in addition to net income, comprehensive
income (loss), such as foreign currency translation adjustments, minimum pension
liability adjustments, and unrealized gains and losses on certain investments in
debt and equity securities. For the years ended December 31, 1998 and 1999,
there were no elements of comprehensive loss, except for the net loss.
SOFTWARE DEVELOPMENT COSTS
Costs related to the conceptual formulation and design of software
products are charged to research and development expense during the period
incurred. Costs incurred subsequent to establishing technological feasibility of
software products are capitalized until general release of the product.
Generally, the Company has established technological feasibility upon completion
of a working model. As of December 31, 1998 and 1999, the Company had no
capitalized software development costs.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is calculated using the straight-line method over the asset's
estimated useful lives, generally three years. Amortization of leasehold
improvements is calculated using the straight-line basis over the life of the
lease. Expenditures for repairs and maintenance are charged to expense as
incurred. Upon disposition, the cost and related accumulated depreciation are
removed from the accounts and the resulting gain or loss is reflected in the
statement of operations.
INCOME TAXES
The Company accounts for income taxes using the liability method.
Deferred income taxes are recorded based on the differences between financial
statement and income tax basis of assets and liabilities and available loss or
credit carryforwards. A valuation allowance is established to reduce deferred
tax assets if it is more likely than not that all or some portion of such
deferred tax assets will not be realized.
STOCK-BASED COMPENSATION
The Company accounts for stock-based awards to employees using the
intrinsic value method as prescribed by Accounting Principles Board Opinion No.
25 ("APB No. 25"), Accounting for Stock Issued to Employees, and related
interpretations. Accordingly, no compensation expense is recorded for options
issued to employees in fixed amounts and with fixed exercise prices at least
equal to the fair market value of the Company's common stock at the date of
grant. The Company priced options at below fair market value and has provided a
deferred compensation charge. The Company has adopted the disclosure only
provisions of Statement of Financial Accounting Standards ("SFAS") No. 123,
Accounting for Stock-Based Compensation. Expense associated with stock-based
compensation is amortized on a straight-line basis over the vesting period of
the individual award.
7
<PAGE> 9
MICRO MAGIC, INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
All stock-based awards to non-employees are accounted for at their fair
value in accordance with SFAS No. 123 and Emerging Issues Task Force 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.
Under SFAS 123 and EITF 96-18, stock option awards issued to
non-employees are accounted for at fair value using the Black-Scholes option
pricing model. The Company believes that the fair value of the stock options are
more reliably measured than the fair value of the services received. The fair
value of each non-employee stock award is remeasured at each period end until a
commitment date is reached, which is generally the vesting period.
RECENT ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, Accounting for Derivatives and
Hedging Activities ("SFAS No. 133"). SFAS No. 133, as amended by Statement of
Financial Accounting Standards Nos. 137 and 138, establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. The Company
will adopt SFAS No. 133 in its year ending December 31, 2000 and does not expect
the adoption to have a material impact on its financial position or results of
operations.
In December 1999, the Securities and Exchange Commission Staff issued
Accounting Bulletin 101, Revenue Recognition ("SAB 101"), which outlines
criteria that must be met to recognize revenue and provides guidance for
presentation of revenue and for disclosure related to revenue recognition
policies in financial statements filed with the Securities and Exchange
Commission. The Company has complied with the provisions of SAB 101 for all
periods presented.
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44 ("FIN 44") Accounting for Certain Transactions Involving
Stock Compensation. FIN 44 is an interpretation of APB No. 25 and clarifies
guidance for certain issues that arose in the application of APB No. 25. The
Company will adopt FIN 44 in its fiscal year ending December 31, 2000 and is
currently evaluating the impact it will have on the Company's financial position
or results of operations.
NOTE 3 - BALANCE SHEET COMPONENTS:
PREPAID EXPENSES AND DEPOSITS:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1999
------- -------
<S> <C> <C>
Prepaid expenses and deposits:
Income tax receivable $35,101 $52,986
Other 23,521 36,108
------- -------
$58,622 $89,094
======= =======
</TABLE>
8
<PAGE> 10
MICRO MAGIC, INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
PROPERTY AND EQUIPMENT:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1998 1999
--------- ---------
<S> <C> <C>
Computer equipment and purchased software $ 57,334 $ 185,868
Furniture 4,766 --
Leasehold improvements 4,736 17,152
--------- ---------
66,836 203,020
Less: Accumulated depreciation and amortization (57,266) (71,162)
--------- ---------
$ 9,570 $ 131,858
========= =========
</TABLE>
NOTE 4 - STOCK OPTIONS:
STOCK OPTION PLAN
The Company has a Stock Option Plan (the "Plan") that provides for
3,200,000 shares of the Company's authorized but unissued common stock to be
available for grant as an incentive stock options ("ISO"), and non-qualified
stock options ("NSO"), to employees, consultants and directors of the Company.
ISO's and NSO's must be issued at prices not less than 100% and 85%,
respectively, of the fair market value of the stock on the date of grant as
determined by the Board of Director's except for options granted to a 10%
shareholder, which shall be granted at no less than 110% of the estimated fair
value of the shares on the date of grant. For options granted with an exercise
price below fair market value, a stock-based compensation has been determined.
The exercise period for options granted is generally ten years, from date of
grant. The options generally vest over four years.
A summary of option activity under the 1995 Plan is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
------------------------
WEIGHTED
SHARES AVERAGE
AVAILABLE NUMBER OF EXERCISE
FOR GRANT SHARES PRICE
--------- --------- --------
<S> <C> <C> <C>
Balance at December 31, 1997 900,000 1,500,000 $0.026
Options granted (780,000) 780,000 0.026
Options canceled 460,000 (460,000) 0.025
--------- ---------
Balance at December 31, 1998 580,000 1,820,000 0.026
Additional options authorized 800,000 -- --
Options granted (250,000) 250,000 0.025
--------- ---------
Balance at December 31, 1999 1,130,000 2,070,000 $0.026
========= =========
</TABLE>
All options granted during 1998 and 1999 were granted at exercise prices below
fair market value.
9
<PAGE> 11
MICRO MAGIC, INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
The following table summarizes information about stock options
outstanding at December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
--------------------------------------------------------- OPTIONS EXERCISABLE
WEIGHTED -------------------------
AVERAGE WEIGHTED WEIGHTED
NUMBER REMAINING AVERAGE NUMBER AVERAGE
EXERCISE OF OPTIONS CONTRACTUAL EXERCISE OF OPTIONS EXERCISE
PRICE OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE
------------ ----------- ------------ -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 0.025 1,330,000 8.4 $ 0.025 602,003 $ 0.025
0.028 740,000 7.7 0.028 466,097 0.028
---------- ---------
$0.025-0.028 2,070,000 8.2 $ 0.026 1,068,100 $ 0.026
---------- ---------
</TABLE>
The number of options exercisable at December 31, 1998 was 632,444 at a
weighted average price of $0.025 per share.
The following information is presented in accordance with the disclosure
requirements of SFAS No. 123. The fair value of each option granted to employees
has been established on the date of grant using the minimum value method with
the following weighted average assumptions used for grants:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------
1998 1999
------- -------
(UNAUDITED)
<S> <C> <C>
Volatility 0% 0%
Risk-free interest rate 5.02% 5.40%
Expected life 4 years 4 years
Expected dividend -- --
</TABLE>
The weighted average fair value of the options granted during the years
ended December 31, 1998 and 1999 was $15.40 and $18.67 per share, respectively.
Had compensation expense for the stock plan been determined based on the fair
value at the grant date for options granted in 1998 and 1999, the pro forma net
loss under SFAS 123 would have been reported as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1998 1999
----------- ------------
<S> <C> <C>
Net loss - as reported $(3,917,777) $(14,436,471)
Net loss - pro forma (3,978,358) (14,496,699)
</TABLE>
NOTE 5 - STOCK-BASED COMPENSATION:
In connection with certain option grants to employees and non-employees
during the year ended December 31, 1998, the Company recorded stock-based
compensation of $10,254,079, which is being amortized over the vesting periods
of the related options, which is generally four years. Stock-based compensation
amortization recognized during the year ended December 31, 1998 was $4,623,525.
In connection with option grants to employees and non-employees during
the year ended December 31, 1999, the Company recorded stock-based compensation
of $5,014,576, which is being amortized over the vesting periods of the related
options, which is generally four years. Stock-based compensation amortization
recognized during the year ended December 31, 1999 was $6,811,894.
10
<PAGE> 12
MICRO MAGIC, INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
In connection with the grant of common stock to employees during the
year ended December 31, 1999, the Company recorded stock-based compensation of
$9,111,200, which was expensed during 1999.
NOTE 6 - INCOME TAXES:
Income tax benefit consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1998 1999
--------- ---------
<S> <C> <C>
Current:
Federal $ 216,363 $ 141,258
State 2,667 28,016
--------- ---------
219,030 169,274
--------- ---------
Deferred:
Federal (181,679) (615,170)
State (51,980) (171,252)
--------- ---------
(233,659) (786,422)
--------- ---------
$ (14,629) $(617,148)
========= =========
</TABLE>
Deferred tax assets and liabilities are reflected on a net basis in the
current and noncurrent classifications on the accompanying balance sheet.
Significant components of the Company's net deferred income tax assets and
(liabilities) are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1998 1999
---------- -----------
<S> <C> <C>
Property and equipment $ 2,431 $ (1,009)
Deferred stock compensation 229,844 799,035
State income taxes 908 9,525
Deferred revenue -- 206,847
Allowances and accruals 478 --
Tax credit -- 5,685
---------- -----------
$ 233,661 $ 1,020,083
========== ===========
</TABLE>
A reconciliation between the Company's effective tax rate and the
federal statutory rate are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1998 1999
---- ----
<S> <C> <C>
Federal statutory rate (34)% (34)%
State taxes, net of federal benefit (1)% (1)%
Stock compensation 35% 34%
Research and development credit (1)% --
---- ----
Effective tax rate (1)% (4)%
==== ====
</TABLE>
11
<PAGE> 13
MICRO MAGIC, INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
NOTE 7 - COMMITMENTS:
The Company leases office space under a noncancelable operating lease
expiring in 2002. Future minimum annual payments required under the
noncancelable operating lease are as follows:
YEAR ENDING DECEMBER 31,
<TABLE>
<CAPTION>
<S> <C>
2000 $180,000
2001 180,000
2002 30,000
--------
$390,000
========
</TABLE>
Rent expense for the operating lease for the year ended December 31,
1998 and 1999 was approximately $131,000 and $168,000, respectively.
NOTE 8 - EMPLOYEE 401(k) PLAN
As allowed under Section 401(k) of the Internal Revenue Code, the Plan
provides tax-deferred salary deductions for eligible employees. Under the
Company's 401(k) Profit Sharing Plan, eligible employees may contribute from 1%
to 15% of the annual compensation to the Plan, limited to a maximum annual
amount as set periodically by the Internal Revenue Service. The Plan provides
for discretionary contributions as determined by the Board of Directors . The
Company matching contributions to the Plan totaled $25,244 and $75,334 during
the year ended December 31, 1998 and 1999, respectively.
NOTE 9 - SUBSEQUENT EVENTS:
On November 27, 2000, the Company entered into an agreement with Juniper
Networks, Inc. ("Juniper"), under which the Company agreed to merge with
Juniper.
12
