<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported): September 7, 2000
BROADCOM CORPORATION
(Exact Name of Registrant as Specified in Charter)
<TABLE>
<CAPTION>
<S> <C> <C>
California 000-23993 33-0480482
(State or Other (Commission File Number) (IRS Employer Identification No.)
Jurisdiction of Incorporation)
</TABLE>
16215 Alton Parkway, Irvine, California 92618
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (949) 450-8700
Not Applicable
-------------------------------------------------------------
(Former Name or Former Address, if Changed since Last Report)
<PAGE> 2
This amendment to the Current Reports on Form 8-K originally dated as of
September 7, 2000, October 3, 2000 and October 6, 2000, is being filed in
order to include the historical financial statements of Altima Communications,
Inc. ("Altima"), NewPort Communications, Inc. ("NewPort") and Silicon Spice Inc.
("Silicon Spice"), collectively the "Acquired Companies," and the unaudited pro
forma financial information listed below.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial statements of business acquired.
The following financial statements of Acquired Companies are included in
this report:
Audited consolidated balance sheets of Altima as of June 30, 2000 and 1999
and the related consolidated statements of operations, shareholders' equity,
and cash flows for the years then ended and for the period from July 16,
1997 (inception) to June 30, 1998.
Audited balance sheets of NewPort as of December 31, 1999 and 1998, and June
30, 2000 (unaudited) and the related audited statements of operations,
stockholders' equity and cash flows for the years ended December 31, 1997,
1998 and 1999, and for the six months ended June 30, 1999 and 2000
(unaudited).
Audited balance sheets of Silicon Spice as of December 31, 1999 and 1998 and
the related audited statements of operations, shareholders' equity and cash
flows for the years ended December 31, 1999, 1998 and 1997 and for the
period from inception (September 26, 1996) through December 31, 1999.
Unaudited balance sheet of Silicon Spice as of June 30, 2000 and the
unaudited statements of operations and cash flows for the six months ended
June 30, 2000 and 1999, and for the period from September 26, 1996
(inception) through June 30, 2000.
(b) Pro forma financial information.
The following unaudited pro forma condensed financial information is being
filed herewith:
Unaudited Pro Forma Condensed Combined Balance Sheet as of June 30, 2000.
Unaudited Pro Forma Condensed Combined Statements of Operations for the six
months ended June 30, 2000 and the twelve months ended December 31, 1999.
(c) Exhibits.
23.1 Consent of Ernst & Young LLP
23.2 Consent of PricewaterhouseCoopers LLP
23.3 Consent of Deloitte & Touche LLP
23.4 Consent of Ernst & Young LLP
<PAGE> 3
Report of Independent Auditors
The Board of Directors and Shareholders
Altima Communications, Inc.
We have audited the consolidated balance sheet of Altima Communications, Inc. as
of June 30, 2000, and the related consolidated statements of operations,
shareholders' equity, and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit. The consolidated financial statements of Altima Communications, Inc.
for the year ended June 30, 1999 and for the period from July 16, 1997
(inception) to June 30, 1998 were audited by other auditors whose report, dated
March 1, 2000, expressed an unqualified opinion on those consolidated
statements.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Altima
Communications, Inc. at June 30, 2000, and the consolidated results of its
operations and its cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States.
/s/ ERNST & YOUNG LLP
Orange County, California
August 20, 2000
Report of Independent Accountants
To the Board of Directors and Shareholders
of Altima Communications, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of shareholders' equity and of cash flows
present fairly, in all material respects, the financial position of Altima
Communications, Inc. and its subsidiary at June 30, 1999 and the results of
their operations and their cash flows for the year ended June 30, 1999 and the
period from July 16, 1997 (date of inception) to June 30, 1998 then ended in
conformity with accounting principles generally accepted in the United States.
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
auditing standards generally accepted in the United States, 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 the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
San Jose, California
March 1, 2000
1
<PAGE> 4
Altima Communications, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
JUNE 30,
---------------------------------
2000 1999
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 4,109,000 $ 4,660,000
Restricted cash 936,000 -
Accounts receivable 4,432,000 613,000
Inventories 2,413,000 280,000
Royalties receivable 1,321,000 -
Deferred tax assets 520,000 -
Prepaid expenses and other current assets 190,000 137,000
------------ ------------
Total current assets 13,921,000 5,690,000
Property and equipment, net 939,000 893,000
Goodwill, net 940,000 -
Other assets 74,000 455,000
------------ ------------
Total assets $ 15,874,000 $ 7,038,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 3,159,000 $ 790,000
Notes payable 939,000 -
Taxes payable 660,000 -
Accrued liabilities 634,000 175,000
Deferred revenue 3,030,000 1,340,000
------------ ------------
Total current liabilities 8,422,000 2,305,000
Commitments
Shareholders' equity:
Convertible preferred stock, par value $0.005 per share,
22,000,000 shares authorized, issuable in series:
Series A convertible preferred stock:
Designated shares - 12,000,000
Issued and outstanding shares - 10,657,998 2,132,000 2,132,000
Series B convertible preferred stock:
Designated shares - 4,914,500
Issued and outstanding shares - 3,391,006 6,900,000 6,900,000
Common stock, no par value:
Authorized shares - 30,000,000
Issued and outstanding shares - 9,634,250 in 2000
and 8,613,750 in 1999 14,875,000 2,353,000
Deferred compensation (12,610,000) (1,801,000)
Accumulated deficit (3,845,000) (4,851,000)
------------ ------------
Total shareholders' equity 7,452,000 4,733,000
------------ ------------
Total liabilities and shareholders' equity $ 15,874,000 $ 7,038,000
============ ============
</TABLE>
See accompanying notes
2
<PAGE> 5
Altima Communications, Inc.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
PERIOD FROM
JULY 16, 1997
(INCEPTION) TO
YEARS ENDED JUNE 30, JUNE 30,
2000 1999 1998
----------- ----------- -------------
<S> <C> <C> <C>
Net revenues:
Product sales $16,481,000 $ 130,000 $ -
Royalty revenue 2,516,000 - -
Service and other 1,041,000 120,000 -
----------- ----------- -----------
Total net revenues 20,038,000 250,000 -
Costs of net revenues:
Product sales 8,641,000 85,000 -
Service and other 181,000 120,000 -
----------- ----------- -----------
Total cost of net revenues 8,822,000 205,000 -
----------- ----------- -----------
Gross profit 11,216,000 45,000 -
Research and development 5,424,000 2,813,000 989,000
Sales and marketing 1,423,000 333,000 -
General and administrative 3,504,000 816,000 157,000
----------- ----------- -----------
Total costs and expenses 10,351,000 3,962,000 1,146,000
----------- ----------- -----------
Income (loss) from operations 865,000 (3,917,000) (1,146,000)
Interest income 197,000 132,000 34,000
Other income 84,000 35,000 11,000
----------- ----------- -----------
Income (loss) before income tax 1,146,000 (3,750,000) (1,101,000)
Provision for income tax 140,000 - -
----------- ----------- -----------
Net income (loss) $ 1,006,000 $(3,750,000) $(1,101,000)
=========== =========== ===========
</TABLE>
See accompanying notes
3
<PAGE> 6
Altima Communications, Inc.
Consolidated Statements of Shareholders' Equity
<TABLE>
<CAPTION>
SERIES A CONVERTIBLE SERIES B CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK COMMON STOCK
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Issuance of Series A
convertible preferred 10,657,998 $ 2,132,000 - $ - - $ -
stock
Issuance of common stock - - - - 9,000,000 15,000
Deferred stock - - - - - 619,000
compensation
Stock compensation - - - - - -
expense
Net loss - - - - - -
------------ ------------ ------------ ------------ ------------ ------------
Balance at June 30, 1998 10,657,998 2,132,000 - - 9,000,000 634,000
Issuance of Series B
convertible preferred - - 3,391,006 6,900,000 - -
stock
Issuance of common stock - - - - 120,000 2,000
Repurchase of common - - - - (506,250) (1,000)
stock
Deferred stock - - - - - 1,718,000
compensation
Stock compensation - - - - - -
expense
Net loss - - - - - -
------------ ------------ ------------ ------------ ------------ ------------
Balance at June 30, 1999 10,657,998 2,132,000 3,391,006 6,900,000 8,613,750 2,353,000
Exercise of options to
purchase common stock - - - - 1,020,500 72,000
Deferred stock - - - - - 12,450,000
compensation
Stock compensation - - - - - -
expense
Net income - - - - - -
============ ============ ============ ============ ============ ============
Balance at June 30, 2000 10,657,998 $ 2,132,000 3,391,006 $ 6,900,000 9,634,250 $ 14,875,000
============ ============ ============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
DEFERRED TOTAL
STOCK ACCUMULATED SHAREHOLDERS'
COMPENSATION DEFICIT EQUITY
------------ ------------ ------------
<S> <C> <C> <C>
Issuance of Series A
convertible preferred $ - $ - $ 2,132,000
stock
Issuance of common stock - - 15,000
Deferred stock (619,000) - -
compensation
Stock compensation 87,000 - 87,000
expense
Net loss - (1,101,000) (1,101,000)
------------ ------------ ------------
Balance at June 30, 1998 (532,000) (1,101,000) 1,133,000
Issuance of Series B
convertible preferred - - 6,900,000
stock
Issuance of common stock - - 2,000
Repurchase of common - - (1,000)
stock
Deferred stock (1,718,000) - -
compensation
Stock compensation 449,000 - 449,000
expense
Net loss - (3,750,000) (3,750,000)
------------ ------------ ------------
Balance at June 30, 1999 (1,801,000) (4,851,000) 4,733,000
Exercise of options to
purchase common stock - - 72,000
Deferred stock (12,450,000) - -
compensation
Stock compensation 1,641,000 - 1,641,000
expense
Net income - 1,006,000 1,006,000
============ ============ ============
Balance at June 30, 2000 $(12,610,000) $ (3,845,000) $ 7,452,000
============ ============ ============
</TABLE>
See accompanying notes
4
<PAGE> 7
Altima Communications, Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
PERIOD FROM
JULY 16, 1997
(INCEPTION) TO
YEARS ENDED JUNE 30, JUNE 30
2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 1,006,000 $(3,750,000) $(1,101,000)
Adjustments to reconcile net income (loss) to
net cash provided by (used in)
operating activities:
Depreciation and amortization 848,000 228,000 51,000
Amortization of deferred compensation 1,641,000 449,000 87,000
Changes in operating assets and liabilities:
Accounts receivable (3,819,000) (613,000) -
Royalty receivables (1,321,000) - -
Inventory (2,133,000) (280,000) -
Deferred tax asset (520,000) - -
Prepaid expenses and other current assets (53,000) 155,000 (292,000)
Restricted cash (936,000) - -
Other assets 381,000 (38,000) (17,000)
Accounts payable 2,369,000 676,000 114,000
Taxes payable 660,000 - -
Accrued liabilities 459,000 67,000 108,000
Notes payable 19,000 - -
Deferred revenue 1,690,000 1,340,000 -
----------- ----------- -----------
Net cash provided by (used in) operating
activities 291,000 (1,766,000) (1,050,000)
INVESTING ACTIVITIES
Capital expenditures (429,000) (819,000) (353,000)
Cash paid for subsidiary (485,000) - -
Deposit for acquisition - (400,000) -
----------- ----------- -----------
Net cash used in investing activities (914,000) (1,219,000) (353,000)
FINANCING ACTIVITIES
Net proceeds from issuance of Series A
convertible preferred stock - - 2,132,000
Net proceeds from issuance of Series B
convertible preferred stock - 6,900,000 -
Proceeds from issuance of common stock - 2,000 15,000
Proceeds from issuance of common stock relating
to exercise of options 72,000 - -
Repurchase of common stock - (1,000) -
----------- ----------- -----------
Net cash provided by financing activities 72,000 6,901,000 2,147,000
----------- ----------- -----------
Net (decrease) increase in cash and cash
equivalents (551,000) 3,916,000 744,000
Cash and cash equivalents at beginning of period 4,660,000 744,000 -
=========== =========== ===========
Cash and cash equivalents at end of period $ 4,109,000 $ 4,660,000 $ 744,000
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid $ - $ - $ -
Cash paid for taxes $ 60,000 $ - $ -
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Acquisition of subsidiary $ 920,000 $ - $ -
</TABLE>
See accompanying notes
5
<PAGE> 8
Altima Communications, Inc.
Notes to Consolidated Financial Statements
June 30, 2000
1. SUMMARY OF THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Altima Communications, Inc. (the Company) was incorporated in the state of
California on July 16, 1997. The Company is engaged in designing, manufacturing,
and marketing low-powered, high-performance communications silicon solutions for
high-speed networking and Internet infrastructure applications.
Domestic operations primarily consist of product development, sales, and
marketing. Foreign operations consist of a subsidiary in Taiwan, established in
2000 and engaged in research and development and general administration of
contractor manufacturers located in Taiwan.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiary in Taiwan. Intercompany accounts and transactions
have been eliminated in consolidation.
Certain items in the prior year financial statement captions have been
reclassified to conform with the current year presentation.
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 amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
REVENUE RECOGNITION
The Company recognizes product revenue on sales to distributors and resellers at
the point of time when products have been sold to the final customer. Upon
shipment to the final customers, the Company provides for estimated returns and
allowances and for the estimated costs that can be incurred for product
warranties and post-sale customer support.
6
<PAGE> 9
Altima Communications, Inc.
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION (CONTINUED)
The Company provides nonrecurring research and development engineering services
to certain customers under fixed price contracts. Because of uncertainties
regarding the cost to complete these contracts, revenue recognition is deferred
until the contract is completed. Due to uncertainties surrounding the successful
completion of the services, the Company expenses the cost of research and
development in the period incurred. Under the contracts, the Company is entitled
to bill certain amounts prior to completion of the contracts. Such amounts
billed are included in accounts receivable until collected and included in
deferred revenue until the contracts are completed. Deferred nonrecurring
engineering services amounted to $1,425,000 and $975,000 as of June 30, 2000 and
1999, respectively.
The Company accrues royalty revenue based on the licensees' production that
incorporates certain licensed technology.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as they are incurred. There were no
research and development costs capitalized during the year. The technological
feasibility of the Company's research and development projects is not
established until the project is entered into production.
SIGNIFICANT CONCENTRATIONS
Financial instruments that potentially subject the Company to concentrations of
credit risk primarily consist of cash equivalents and trade receivables. The
Company generally invests its excess cash in money market funds.
As of June 30, 2000 two customers represented 79% and 11% of the total accounts
receivable balance. One customer represented 78% of total product sales during
the year ended June 30, 2000.
As of June 30, 1999, four customers represented 35%, 32%, 17%, and 12% of the
total accounts receivable balance. Two customers represented 54% and 27% of
total product sales during the year ended June 30, 1999.
7
<PAGE> 10
Altima Communications, Inc.
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SIGNIFICANT CONCENTRATIONS (CONTINUED)
One supplier currently manufactures all of the Company's wafers that are used in
all of the Company's networking products. Any interruption or delay in the
supply of any of these components or the inability to produce these components
from alternative sources at acceptable prices and within a reasonable time would
have a material adverse effect on the Company's business, operating results, and
financial condition. The Company attempts to mitigate these risks by working
closely with its supplier regarding production planning and product introduction
timing.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand and held in banks in the form of
checking accounts and Certificates of Deposit that are reissued every 31 days
with maximum penalties for early withdrawal of the amount of interest earned.
INVENTORIES
Inventories are stated at the lower of cost or market, net of the provision for
obsolescence of $1,020,000 and $0 as of June 30, 2000 and 1999, respectively,
and cost is determined using the first-in, first-out method. Inventories consist
of the following:
<TABLE>
<CAPTION>
JUNE 30,
----------------------------
2000 1999
---------- ----------
<S> <C> <C>
Work-in-process $1,963,000 $ 113,000
Finished goods 450,000 167,000
---------- ----------
$2,413,000 $ 280,000
========== ==========
</TABLE>
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, net of accumulated depreciation.
Property and equipment are depreciated on a straight-line basis over the
estimated useful lives of the assets, generally three to seven years. Leasehold
improvements are amortized over the term of the lease.
8
<PAGE> 11
Altima Communications, Inc.
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
GOODWILL
Goodwill is being amortized over its estimated useful live, which was estimated
as three years. Accumulated amortization at June 30, 2000 was $465,000. Goodwill
is reviewed for impairment at least annually or whenever events or circumstances
indicate impairment might exist.
NEW ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin 101 "Revenue Recognition" (SAB 101). The Company is evaluating the
impact of SAB 101 on its financial statements and its future revenue recognition
policy, but does not believe the application of SAB 101 will result in a
material change to its financial statements upon adoption in the fourth quarter
of 2000.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (FAS 133). The Company is required to adopt FAS 133 for
the year ending June 30, 2001. FAS 133 establishes methods of accounting for
derivative financial instruments and hedging activities related to those
instruments as well as other hedging activities. Because the Company holds no
derivative financial instruments and does not currently engage in hedging
activities, the adoption of FAS 133 is not expected to have a material impact on
the Company's financial condition or results of operations.
In March 2000, the Financial Accounting Standard Board issued FASB
Interpretation, "Accounting for Certain Transactions Involving Stock
Compensation an Interpretation of APB Opinion No. 25" (FIN 44). FIN 44 primarily
clarifies (a) the definition of an employee for purposes of applying APB Opinion
No. 25, (b) the criteria for determining whether a plan qualifies as a
noncompensatory plan, (c) the accounting consequence of awards, and (d) the
accounting for an exchange of stock compensation awards in a business
combination. FIN 44 is effective July 1, 2000, but certain conclusions in FIN 44
cover specific events that occurred after either December 15, 1988 or January
12, 2000. The Company is evaluating the impact of FIN 44 on its financial
statements but does not believe the application of FIN 44 will result in a
material change to its financial statements upon adoption.
9
<PAGE> 12
Altima Communications, Inc.
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK-BASED COMPENSATION
As permitted by Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" (FAS 123), the Company accounts for stock option
grants to employees using the intrinsic value method prescribed by Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB
25), and complies with the disclosure provisions of FAS 123.
The Company accounts for stock option grants to nonemployees in accordance with
Emerging Issue Task Force Consensus No. 96-18, "Accounting Equity Instruments
That are Issued to Others Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services," which requires certain options subject to vesting
to be periodically revalued and expensed over their vesting period.
COMPREHENSIVE INCOME (LOSS)
For the years ended June 30, 2000 and 1999, there was no significant difference
between the Company's net income and comprehensive income.
STOCK SPLIT
The Company declared a two-for-one stock split of its common stock in February
2000. All applicable share amounts of common stock have been retroactively
adjusted to reflect the stock split.
10
<PAGE> 13
Altima Communications, Inc.
Notes to Consolidated Financial Statements (continued)
2. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
JUNE 30,
-------------------------------
2000 1999
----------- -----------
<S> <C> <C>
Computer hardware and software $ 1,408,000 $ 928,000
Testing equipment 119,000 175,000
Office furniture and fixtures 70,000 69,000
Leasehold improvement 4,000 -
----------- -----------
1,601,000 1,172,000
Less accumulated depreciation (662,000) (279,000)
=========== ===========
$ 939,000 $ 893,000
=========== ===========
</TABLE>
3. ADVERTISING COSTS
The Company expenses its advertising costs as incurred. The advertising costs
were $111,000, $6,000, and $0 for the years ended June 30, 2000 and 1999 and for
the period from July 16, 1997 (inception) to June 30, 1998, respectively.
4. RESTRICTED CASH
As of June 30, 2000, the Company had cash deposits used to secure irrevocable
letters of credit payable in July 2000 that totaled $936,000.
5. RELATED PARTY TRANSACTIONS
The Company sells products and delivers services to Advanced Micro Devices, Inc.
(AMD), a shareholder of the Company. The product sales to AMD amounted to
$69,000 for year ended June 30, 1999. The Company had no sales to AMD for the
year ended June 30, 2000 and for the period July 16, 1997 (inception) to June
30, 1998. The royalty revenue amounted to $2,336,000 for the year ended June 30,
2000. The Company recognized no royalty revenue from AMD for the year ended June
30, 1999 and for the period from July 16, 1997 (inception) to June 30, 1998. The
amount receivable from AMD was $1,300,000 and $73,000 at June 30, 2000 and 1999,
respectively.
11
<PAGE> 14
Altima Communications, Inc.
Notes to Consolidated Financial Statements (continued)
6. INVESTMENT IN SUBSIDIARY
On July 1, 1999, the Company acquired 93% of Altima Communications, Asia (ACA)
in order to facilitate its research and development activity in Hsin Chu,
Taiwan. The total amount paid in the acquisition was $1,749,000, including
$296,000 allocated to property and equipment, $48,000 to general and
administrative expenses, and $1,405,000 to goodwill. The Company accounted for
the acquisition using the purchase method. The Company consolidated ACA's
financial results for the 12-month period ending June 30, 2000. ACA's capital
consists of 1,500,000 shares of common stock, and 1,400,000 shares were assigned
to the Company in the course of the acquisition. The remaining 100,000 shares
owned by certain minority interests are to be assigned to the Company after a
statutory period has lapsed. The Company has entered into an agreement to
transfer the shares upon lapse of the statutory period. Since all profits and
losses of ACA inure for the benefit of the Company, no minority interest has
been recorded.
Goodwill is recorded for the difference between the fair market value of the
acquired assets and purchase price and is subject to amortization over three
years using the straight-line method.
In the acquisition, the Company issued notes payable for an aggregate amount of
$920,000, which has been paid in July 2000.
7. COMMITMENTS
The Company leases its existing facility, equipment, and furniture under
operating lease agreements that expire between 2000 and 2003. All of these
agreements are cancelable after 2001. Future minimum lease payments, net of
sublease payments of $62,000, at June 30, 2000 were as follows:
<TABLE>
<CAPTION>
FACILITIES EQUIPMENT TOTAL
---------- ---------- ----------
<S> <C> <C> <C>
Year ended June 30, 2001 $ 678,000 $ 4,000 $ 682,000
Year ended June 30, 2002 346,000 3,000 349,000
Year ended June 30, 2003 - 2,000 2,000
---------- ---------- ----------
$1,024,000 $ 9,000 $1,033,000
========== ========== ==========
</TABLE>
12
<PAGE> 15
Altima Communications, Inc.
Notes to Consolidated Financial Statements (continued)
7. COMMITMENTS (CONTINUED)
Rental expense was approximately $507,000, $198,000, and $63,000 for the years
ended June 30, 2000 and 1999 and for the period from July 16, 1997 (inception)
to June 30, 1998, respectively.
8. SHAREHOLDERS' EQUITY
CONVERTIBLE PREFERRED STOCK
At June 30, 2000, the Company was authorized to issue up to 22,000,000 shares of
preferred stock, issuable in Series A, B, and C preferred stock. A total of
12,000,000 and 4,914,500 shares have been designated as Series A and B
convertible preferred stock, respectively.
Each share of the Series A and B convertible preferred stock has voting rights
equal to an equivalent number of shares of common stock into which it is
convertible and votes together as one class with the common stock.
At such time and for so long as at least 1,965,800 shares of Series B preferred
stock are issued and remain outstanding, the Company shall not, without the
consent of the holders of two-thirds of the then outstanding shares of Series B
preferred stock (i) increase or decrease the aggregate number of authorized
shares of Series B preferred stock; (ii) change the rights, preferences,
privileges, or restrictions of the Series B preferred stock, including the
voting rights of the Series B holders; and (iii) create a new class of shares
having rights, preferences, or privileges prior to the shares of Series B
preferred stock or increase the rights, preferences, or privileges or the number
of authorized shares of any class having rights, preferences, or privileges
prior to the shares of Series B preferred stock.
13
<PAGE> 16
Altima Communications, Inc.
Notes to Consolidated Financial Statements (continued)
8. SHAREHOLDERS' EQUITY (CONTINUED)
CONVERTIBLE PREFERRED STOCK (CONTINUED)
At such time and for so long as at least 1,965,800 shares of Series B preferred
stock but less than 3,800,000 shares of Series B preferred stock are issued and
remain outstanding (as adjusted appropriately to reflect any subsequent stock
splits, stock dividends, and the like), the Series B holders, voting separately
as a class, shall be entitled to elect one of the directors of the Company. At
such time and for so long as at least 3,800,000 shares of Series B preferred
stock are issued and remain outstanding, the Series B holders, voting separately
as a class, shall be entitled to elect two of the directors of the Company. At
such time and for so long as at least 3,000,000 shares of Series A preferred
stock are issued and remain outstanding, the Series A holders, voting separately
as a class, shall be entitled to elect one of the directors of the Company.
The holders of Series A and B convertible preferred stock are entitled to
receive noncumulative dividends when and if declared by the Board of Directors.
The holders of Series A and B convertible preferred stock will also be entitled
to participate in dividends on common stock, when and if declared by the Board
of Directors, based on the number of shares of common stock held on an
as-if-converted basis. No dividends on convertible preferred stock or common
stock have been declared by the Board of Directors from inception through June
30, 2000.
In the event of any liquidation, dissolution, or winding up of the Company,
including a merger, acquisition, or sale of assets where the beneficial owner of
the Company's common stock and convertible preferred stock owns less than 51% of
the resulting voting power of the surviving entity, the holders of Series A and
B convertible preferred stock are entitled to receive an amount of $0.40 and
$4.07 per share, respectively, plus any declared but unpaid dividends prior to
and in preference to any distribution to the holders of common stock.
14
<PAGE> 17
Altima Communications, Inc.
Notes to Consolidated Financial Statements (continued)
8. SHAREHOLDERS' EQUITY (CONTINUED)
CONVERTIBLE PREFERRED STOCK (CONTINUED)
Each share of the Company's preferred stock shall automatically be converted
into one share of common stock at the then effective applicable conversion price
upon the earlier of: (i) the closing of a firm commitment underwritten public
offering pursuant to an effective registration statement under the Securities
Act of 1933, as amended, covering the offer and sale of the common stock by the
Company to the public in which: (a) the gross public offering price is not less
than $3.75 per share (as adjusted appropriately to reflect any subsequent stock
splits, stock dividends, and the like); and (b) the aggregate gross offering
price to the public (prior to underwriter commissions and offering expenses) is
not less than $10,000,000 or (ii) the receipt by the Company of the affirmative
vote at a duly noticed shareholders' meeting or pursuant to a duly solicited
written consent of the holders of more than two-thirds of the then outstanding
shares of preferred stock in favor of the conversion of all of the shares of
preferred stock.
Upon the closing of the agreement with Broadcom Corporation and its subsidiary,
AC Acquisition Corp. (see Note 12), all of the Company's outstanding preferred
stock will be exchanged for shares of common stock of Broadcom Corporation at
the same ratio as its outstanding common stock.
COMMON STOCK
In July and August 1997, the Company issued and sold an aggregate of 9,000,000
shares of its common stock under the Restricted Common Stock Purchase
Agreements. The stock generally vests over a four-year period. Until shares are
vested, certain restrictions are placed on the transferability of such shares
and provide the Company with the right to repurchase the shares. As of June 30,
2000, 2,208,516 shares are subject to repurchase at the repurchase price of
$0.002 per share.
As of June 30, 2000, the Company has reserved 14,049,004 shares of its common
stock for issuance upon conversion of its Series A and B convertible preferred
stock and 4,979,500 shares of common stock for issuance upon the exercise of
options then outstanding and available for grant under the Company's 1997 Stock
Option Plan.
15
<PAGE> 18
Altima Communications, Inc.
Notes to Consolidated Financial Statements (continued)
8. SHAREHOLDERS' EQUITY (CONTINUED)
1997 STOCK OPTION PLAN
In July 1997, the Company adopted the 1997 Stock Option Plan (the Plan) for
issuance of common stock to eligible participants. The Plan provides for the
granting of options for up to 6,000,000 shares of common stock of the Company.
Incentive stock options (ISOs) and nonstatutory stock options (NSOs) may be
granted under the Plan at prices not less than 100% and 85% of the fair value on
the date of grant. The exercise prices of ISOs and NSOs granted to a 10%
shareholder shall not be less than 110% of fair market value on the date of
grant. Options granted under the Plan generally become exercisable over a
four-year period and generally expire ten years from the date of grant. Expired
options become available under the Plan.
During the years ended June 30, 2000 and 1999 and for the period from July 16,
1997 (inception) to June 30, 1998, the Company recorded $12,450,000, $1,718,000,
and $619,000 of deferred stock compensation for the excess of the deemed fair
market value over the exercise price at the date of grant related to certain
options granted. Stock-based compensation amortized during the years ended June
30, 2000 and 1999 and for the period from July 16, 1997 (inception) to June 30,
1998, totaled $1,641,000, $449,000, and $87,000, respectively. Compensation
expense is being recognized over the options' vesting period of four years.
Pro forma information regarding net income (loss) is required by FAS 123 and has
been determined as if the Company had accounted for its employee stock options
under the fair value method prescribed by FAS 123. The fair value of these
options was estimated at the date of grant using the Black-Scholes option
valuation model for 2000 and a minimum value option pricing model for 1999 and
1998 with the following assumptions: risk-free interest rates: 5.72% to 6.33%,
4.23% to 5.44%, and 5.37% to 6.20% for 2000, 1999, and 1998, respectively; an
expected life of four years; expected volatility of 75% for 2000 and no
dividends for all periods presented. 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 is as follows:
<TABLE>
<CAPTION>
PERIOD FROM
JULY 16, 1997
YEARS ENDED JUNE 30, (INCEPTION) TO
----------------------------- JUNE 30,
2000 1999 1998
----------- ----------- --------------
<S> <C> <C> <C>
Reported net income (loss) $ 1,006,000 $(3,750,000) $(1,101,000)
Pro forma net loss $(2,124,000) $(3,793,000) $(1,104,000)
</TABLE>
16
<PAGE> 19
Altima Communications, Inc.
Notes to Consolidated Financial Statements (continued)
8. SHAREHOLDERS' EQUITY (CONTINUED)
1997 STOCK OPTION PLAN (CONTINUED)
A summary of activity under the Plans is as follows:
<TABLE>
<CAPTION>
SHARES WEIGHTED
AVAILABLE OPTIONS AVERAGE
FOR GRANT OUTSTANDING EXERCISE PRICE
---------- ----------- --------------
<S> <C> <C> <C>
Options authorized 3,000,000 - $-
Options granted (1,314,000) 1,314,000 $0.02
---------- ----------
Balance at June 30, 1998 1,686,000 1,314,000 $0.02
Additional shares reserved 3,000,000 - $-
Options granted (1,949,600) 1,949,600 $0.14
---------- ----------
Balance at June 30, 1999 2,736,400 3,263,600 $0.09
Options granted (2,087,100) 2,087,100 $0.33
Options exercised - (1,020,500) $0.07
Options canceled 343,325 (343,325) $0.05
========== ==========
Balance at March 31, 2000 992,625 3,986,875 $0.22
========== ==========
</TABLE>
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------- -------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICE OUTSTANDING LIFE PRICE EXERCISABLE PRICE
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$0.02 701,250 7.55 $0.02 429,531 $0.02
$0.13 733,750 8.19 $0.13 332,893 $0.13
$0.21 1,393,375 8.94 $0.21 222,436 $0.21
$0.40 982,000 9.66 $0.40 - $0.40
$0.60 176,500 9.82 $0.60 - $0.60
$0.020-$0.60 3,986,875 8.77 $0.020-$0.60 984,860 $0.020-$0.60
</TABLE>
The weighted average exercise price for all options outstanding as of June 30,
2000 was $0.22. The weighted average fair value of options granted during 2000
and 1999 was $6.92.
17
<PAGE> 20
Altima Communications, Inc.
Notes to Consolidated Financial Statements (continued)
8. SHAREHOLDERS' EQUITY (CONTINUED)
1997 STOCK OPTION PLAN (CONTINUED)
In February 2000, the Company granted nonemployees options to purchase 7,000
shares of common stock at $0.40 per share. The Company will recognize general
and administrative expenses related to nonemployee stock options over the
respective consultants' service periods, and that expense will be based on the
fair value of the stock options using the minimum value option valuation model.
Stock-based compensation recognized in connection with nonemployee options in
2000 totaled $10,000.
9. 401(k) RETIREMENT PLAN
The Company maintains a 401(k) retirement savings plan for its full-time
employees over the age of 21 years. Each participant in the plan may elect to
contribute up to 15% of annual compensation to the plan. The Company, at its
discretion, may make contributions to the plan. There were no matching
contributions made during the years ended June 30, 2000 and 1999 and for the
period from July 16, 1997 (inception) to June 30, 1998. The Company's expenses
related to the plan have been immaterial.
10. INCOME TAXES
The provision for income taxes consists of the following (in thousands):
<TABLE>
<CAPTION>
PERIOD FROM
JULY 16, 1997
YEARS ENDED JUNE 30, (INCEPTION) TO
--------------------- JUNE 30,
2000 1999 1998
----- ----- -------------
<S> <C> <C> <C>
Current:
Federal $ 660 $ - $ -
State - - -
----- ----- -----
Total current 660 - -
Deferred:
Federal (520) - -
State - - -
----- ----- -----
Total deferred (520) - -
----- ----- -----
Provision for income taxes $ 140 $ - $ -
===== ===== =====
</TABLE>
18
<PAGE> 21
Altima Communications, Inc.
Notes to Consolidated Financial Statements (continued)
10. INCOME TAXES (CONTINUED)
Significant components of the Company's deferred tax assets are as follows (in
thousands):
<TABLE>
<CAPTION>
JUNE 30,
--------------------
2000 1999
------- -------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ - $ 875
Deferred revenue 1,207 470
Reserves and accruals not currently deductible 1,120 -
Other reserves and accruals 43 -
------- -------
Total deferred tax assets 2,370 1,345
Valuation allowance (1,850) (1,345)
------- -------
Net deferred tax assets $ 520 $ -
======= =======
</TABLE>
The net valuation allowance increased by $505,000, $1,045,000, and $300,000
during the years ended June 30, 2000 and 1999 and for the period from July 16,
1997 (inception) to June 30, 1998, respectively. The valuation allowance has
been provided due to the uncertainty of the realizability of the respective
amount of deferred tax assets.
As of June 30, 2000, the Company had federal and state research and development
tax credit carryforwards of approximately $45,000 and $25,000, respectively.
Utilization of the net operating losses and tax credits may be subject to a
substantial annual limitation due to the ownership change limitations provided
by the Internal Revenue Code of 1986, as amended, and similar state provisions.
The annual limitation may result in the expiration of net operating losses and
tax credits before utilization. Events that cause limitations in the amount of
net operating losses that the Company may utilize in any one year include, but
are not limited to, a cumulative ownership change of more than 50%, as defined,
over a three-year period.
19
<PAGE> 22
Altima Communications, Inc.
Notes to Consolidated Financial Statements (continued)
11. LITIGATION
On December 17, 1999 a plaintiff filed an action in the Eastern District of
California, United States District Court, alleging that the Company's AC 108R
series of Switched Repeater products infringes its patent. The Company has also
been named as respondent in an International Trade Commission investigation of
the same case. The Company believes that it has meritorious defense to the claim
made by the plaintiff and intend to vigorously defend itself against the claim.
Although the ultimate outcome cannot be predicted, management believes that the
outcome will not have a material adverse effect on the Company's financial
condition, results of operations, and cash flows.
12. SUBSEQUENT EVENTS (UNAUDITED)
Subsequent to June 30, 2000, the Company granted 7,493,000 options to purchase
shares of common stock at a weighted average exercise price of $3.17 per share.
In July 2000, the Company entered into a number of sales agreements whereby
certain customers were granted warrants to purchase the Company's common stock
in the aggregate amount of 41,202,000 shares at the exercise price of $0.001 per
share. The warrants vest as the customers meet certain minimum purchase
requirements and the customers are subject to substantial penalties if they do
not purchase the minimum amounts. The penalty provisions included in the
agreements represent sufficiently large disincentives for nonperformance. As
such, the measurement date of the fair value of the warrants is the grant date.
In addition, the fair value of the warrants are based on the fair value of the
consideration received, which is considered to be more readily measurable than
the fair value of the warrants. The Company will reduce future revenues by the
fair value of the warrants as they are earned.
On July 28, 2000, the Company entered into an agreement with Broadcom
Corporation and its subsidiary, AC Acquisition Corp., whereby all of the capital
stock of the Company will be exchanged for shares of common stock of Broadcom
Corporation. Under the terms of the agreement, the Company will merge with AC
Acquisition Corp. with the Company being the surviving entity.
*****
20
<PAGE> 23
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
of NewPort Communications, Inc.:
We have audited the accompanying balance sheets of NewPort Communications, Inc.
(the Company) as of December 31, 1998 and 1999, and the related statements of
operations, stockholders' equity, and cash flows for each of the three years in
the period ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of NewPort Communications, Inc. as of December
31, 1998 and 1999, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1999 in conformity with
accounting principles generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
Costa Mesa, California
October 24, 2000
21
<PAGE> 24
NEWPORT COMMUNICATIONS, INC.
BALANCE SHEETS
AS OF DECEMBER 31, 1998 AND 1999, AND JUNE 30, 2000 (UNAUDITED)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31,
------------------------------ June 30,
1998 1999 2000
----------- ----------- -----------
(unaudited)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 3,803,332 $23,051,719 $18,120,113
Accounts receivable 56,425 53,904
Prepaid expenses and other current assets 40,640 254,714 205,193
----------- ------------ -----------
Total current assets 3,843,972 23,362,858 18,379,210
PROPERTY AND EQUIPMENT, net 233,751 2,078,919 3,695,877
OTHER ASSETS 13,287 1,700
----------- ------------ -----------
$ 4,077,723 $25,455,064 $22,076,787
=========== ============ ===========
</TABLE>
See notes to financial statements.
22
<PAGE> 25
NEWPORT COMMUNICATIONS, INC.
BALANCE SHEETS
AS OF DECEMBER 31, 1998 AND 1999, AND JUNE 30, 2000 (UNAUDITED) (CONTINUED)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31,
--------------------------------- June 30,
1998 1999 2000
------------ ------------ ------------
(unaudited)
<S> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 245,653 $ 241,535 $ 699,431
Accrued expenses 193,897 255,689
Current portion of long-term debt 463,730 889,056
------------ ------------ ------------
Total current liabilities 245,653 899,162 1,844,176
LONG-TERM DEBT 1,862,051 2,450,531
DEFERRED REVENUE 60,000 60,000
OTHER LIABILITIES 85,131
------------ ------------ ------------
Total liabilities 245,653 2,821,213 4,439,838
COMMITMENTS AND CONTINGENCIES
(Note 8)
STOCKHOLDERS' EQUITY:
Convertible preferred stock, no par value;
13,577,115 shares authorized; 6,184,616,
11,542,175, and 11,542,175 shares of Series A and
Series B preferred stock issued and outstanding
as of December 31, 1998 and 1999, and June 30,
2000 (unaudited), respectively 5,025,000 28,025,001 28,025,001
Common stock, no par value; 45,000,000 shares
authorized; 6,000,000, 11,239,125, and 12,250,809
shares issued and outstanding as of December 31,
1998 and 1999, and June 30, 2000 (unaudited),
respectively 10,000 359,275 688,462
Additional paid-in capital 70,459 336,655
Subscriptions receivable (1,000,002)
Accumulated deficit (202,928) (5,820,884) (11,413,169)
------------ ------------ ------------
Net stockholders' equity 3,832,070 22,633,851 17,636,949
------------ ------------ ------------
$ 4,077,723 $ 25,455,064 $ 22,076,787
============ ============ ============
</TABLE>
See notes to financial statements.
23
<PAGE> 26
NEWPORT COMMUNICATIONS, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999, AND
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 2000 (UNAUDITED)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year ended December 31, Six months ended June 30,
----------------------------------------------- -----------------------------
1997 1998 1999 1999 2000
----------- ----------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C>
NET REVENUES $ 682,480 $ 686,245 $ 658,082 $ 640,600 $ 507,405
OPERATING EXPENSES:
Selling, general, and
administrative (68,590) (198,501) (1,874,279) (474,984) (1,882,930)
Research and
development (436,131) (643,270) (3,797,345) (1,094,185) (4,548,331)
----------- ----------- ----------- ----------- -----------
Total operating
expenses (504,721) (841,771) (5,671,624) (1,569,169) (6,431,261)
----------- ----------- ----------- ----------- -----------
INCOME (LOSS) FROM
OPERATIONS 177,759 (155,526) (5,013,542) (928,569) (5,923,856)
OTHER INCOME:
Interest income 7,251 26,796 168,980 75,621 547,047
Interest expense (72,594) (1,353) (214,676)
----------- ----------- ----------- ----------- -----------
Total other income 7,251 26,796 96,386 74,268 332,371
----------- ----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE
INCOME TAX (BENEFIT)
PROVISION 185,010 (128,730) (4,917,156) (854,301) (5,591,485)
INCOME TAX (BENEFIT)
PROVISION (33,733) (5,335) 800 800 800
----------- ----------- ----------- ----------- -----------
NET INCOME (LOSS) $ 218,743 $ (123,395) $(4,917,956) $ (855,101) $(5,592,285)
=========== =========== =========== =========== ===========
</TABLE>
See notes to financial statements.
24
<PAGE> 27
NEWPORT COMMUNICATIONS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999, AND
FOR THE SIX MONTHS ENDED JUNE 30, 2000 (UNAUDITED)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
RETAINED
ADDITIONAL EARNINGS NET
COMMON STOCK PREFERRED STOCK PAID-IN SUBSCRIPTIONS (ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL RECEIVABLE DEFICIT) EQUITY
--------- ----------- ---------- ----------- --------- ------------- ----------- ------------
BALANCE,
<S> <C> <C> <C> <C> <C> <C> <C> <C>
January 1, 1997 6,000,000 $ 10,000 - $ - $ - $ - $ 85,018 $ 95,018
Net income 218,743 218,743
--------- ----------- ---------- ----------- --------- ---------- ----------- -----------
BALANCE, 6,000,000 10,000 303,761 313,761
December 31, 1997
Issuance of Series A
preferred stock 5,876,924 4,775,001 (1,000,002) 3,774,999
Preferred stock
distribution 307,692 249,999 (249,999)
Distributions paid (133,295) (133,295)
Net loss (123,395) (123,395)
--------- ----------- ---------- ----------- --------- ---------- ----------- -----------
BALANCE,
December 31, 1998 6,000,000 10,000 6,184,616 5,025,000 (1,000,002) (202,928) 3,832,070
</TABLE>
See notes to financial statements.
25
<PAGE> 28
NEWPORT COMMUNICATIONS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999, AND
FOR THE SIX MONTHS ENDED JUNE 30, 2000 (UNAUDITED) (CONTINUED)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ADDITIONAL
COMMON STOCK PREFERRED STOCK PAID-IN SUBSCRIPTIONS ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL RECEIVABLE DEFICIT
---------- ------- ---------- ---------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Payment of
subscription
receivable - $ - - $ - $ - $ 1,000,002 $ -
Issuance of Series B
preferred stock 5,357,559 23,000,001
Issuance of
common stock 5,239,125 349,275
Distributions paid (700,000)
Common stock options
and warrant expense 70,459
Net loss (4,917,956)
---------- ------------ ---------- ---------- ------------ ------------ ------------
BALANCE,
December 31, 1999 11,239,125 359,275 11,542,175 28,025,001 70,459 (5,820,884)
Unaudited:
Issuance of
common stock 1,011,684 329,187
Common stock
options and
warrant expense 266,196
Net loss (5,592,285)
---------- ------------ ---------- ---------- ------------ ------------ ------------
BALANCE,
June 30, 2000
(unaudited) 12,250,809 $ 688,462 11,542,175 $ 28,025,001 $ 336,655 $ $(11,413,169)
========== ============ ========== ============ ============ ============ ============
</TABLE>
<TABLE>
NET
STOCKHOLDERS'
EQUITY
------------
<S> <C>
Payment of
subscription
receivable $ 1,000,002
Issuance of Series B
preferred stock 23,000,001
Issuance of
common stock 349,275
Distributions paid (700,000)
Common stock options
and warrant expense 70,459
Net loss (4,917,956)
------------
BALANCE,
December 31, 1999 22,633,851
Unaudited:
Issuance of
common stock 329,187
Common stock
options and
warrant expense 266,196
Net loss (5,592,285)
------------
BALANCE,
June 30, 2000
(unaudited) $ 17,636,949
============
</TABLE>
See notes to financial statements.
26
<PAGE> 29
NEWPORT COMMUNICATIONS, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999, AND
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 2000 (UNAUDITED)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
-------------------------------------------------- -------------------------------
1997 1998 1999 1999 2000
------------ ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net income (loss) $ 218,743 $ (123,395) $ (4,917,956) $ (855,101) $ (5,592,285)
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 31,365 38,318 468,607 117,627 589,008
Loss on disposal of property and
equipment 23,875
Stock compensation expense 95 266,196
Accretion of deferred financing
costs 20,836
Changes in operating assets and
liabilities:
Accounts receivable (84,880) 164,880 (56,425) (54,000) 2,521
Prepaid expenses and other
current assets (37,140) (214,074) (19,044) 49,521
Other assets (13,287) (32,860) 11,587
Income taxes payable 800 (2,416)
Deferred taxes (34,533) (2,919)
Accounts payable 2,125 239,209 (4,118) 134,012 457,896
Accrued expenses 193,897 34,248 61,792
Deferred revenue and other
liabilities 60,000 85,131
------------ ------------ ------------ ------------ ------------
Net cash provided by (used in)
operating activities 133,620 276,537 (4,462,425) (675,118) (4,044,758)
CASH FLOWS FROM
INVESTING ACTIVITIES:
Purchases of property and
equipment (40,243) (209,620) (2,313,775) (656,068) (2,229,841)
CASH FLOWS FROM
FINANCING ACTIVITIES:
Proceeds from long-term borrowings 2,375,309 1,013,806
Proceeds from issuance of Series A
preferred stock 3,774,999 1,000,002 1,000,002
Proceeds from issuance of Series B
preferred stock 23,000,001
Proceeds from issuance of common
stock 349,275 131,500 329,187
Distributions paid (133,295) (700,000) (700,000)
------------ ------------ ------------ ------------ ------------
Net cash provided by financing
activities 3,641,704 26,024,587 431,502 1,342,993
------------ ------------ ------------ ------------ ------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
27
<PAGE> 30
NEWPORT COMMUNICATIONS, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999, AND
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 2000 (UNAUDITED) (CONTINUED)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
-------------------------------------------- -----------------------------
1997 1998 1999 1999 2000
------------ ------------ ------------ ------------ ------------
(unaudited)
<S> <C> <C> <C> <C> <C>
NET INCREASE (DECREASE)
IN CASH AND CASH
EQUIVALENTS $ 93,377 $ 3,708,621 $ 19,248,387 $ (899,684) $ (4,931,606)
CASH AND CASH
EQUIVALENTS, beginning of
period 1,334 94,711 3,803,332 3,803,332 23,051,719
------------ ------------ ------------ ------------ ------------
CASH AND CASH
EQUIVALENTS, end of period $ 94,711 $ 3,803,332 $ 23,051,719 $ 2,903,648 $ 18,120,113
============ ============ ============ ============ ============
SUPPLEMENTAL DISCLOSURES
OF CASH FLOW INFORMATION -
Cash paid during the year for:
Interest $ 617 $ 3,664 $ 51,758 $ 1,948 $ 184,277
============ ============ ============ ============ ============
Income taxes $ 1,616 $ 1,742 $ 9,451 $ 7,066 $ 800
============ ============ ============ ============ ============
SUPPLEMENTAL SCHEDULE OF
NONCASH FINANCING
ACTIVITIES:
Warrants issued in connection debt
financing $ 70,364
============
Preferred stock distribution $ 249,999
============
</TABLE>
See notes to financial statements.
28
<PAGE> 31
NEWPORT COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999, AND
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 2000 (UNAUDITED)
--------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF OPERATIONS
Nature of Business - NewPort Communications Inc. (the Company), a
California corporation, is a supplier of mixed-signal integrated circuits
for the high-speed communications infrastructure market. The Company was
incorporated in 1996 and in fiscal 1997 and 1998, the Company derived its
revenue principally from consulting work done by its two founders. In
fiscal 1999, the Company began to develop highly innovative, integrated
chips for the high-speed Synchronous Optical Network (SONET) based fiber
infrastructure in North America and Synchronous Digital Hierarchy (SDH)
networks in Europe and Asia. The Company's products are specifically
designed for economical optical networking applications such as Dense-WDM
applications, and other optical transport and switching systems. The
Company's products will enable the increase of bandwidth of the existing
installed-base of fiber worldwide.
Unaudited Information - The information set forth in these financial
statements as of June 30, 2000 and for the six months ended June 30, 1999
and 2000 is unaudited and reflects all adjustments, consisting only of
normal recurring adjustments, that, in the opinion of management, are
necessary to present fairly the financial position and results of
operations of the Company for the period. Results of operations for the
interim periods are not necessarily indicative of the results of
operations for the full fiscal year.
Reverse Stock Split and Stock Split - On November 3, 1998, the Company's
Board of Directors approved and effected a .5714286-for-1 reverse stock
split of the Company's common stock, and on April 4, 2000, the Company's
Board of Directors approved and effected a 3-for-2 stock split. All common
share amounts in the accompanying financial statements and footnotes have
been restated to reflect the stock splits for all periods presented.
Basis of Presentation - The accompanying financial statements have been
prepared in accordance with accounting principles generally accepted in
the United States of America.
Cash and Cash Equivalents - The Company considers all highly liquid
investments with an original maturity of three months or less to be cash
equivalents. Historically, the Company has invested excess cash in U.S.
Treasury-backed money market funds. Approximately $22,800,000 and
$17,545,000 (unaudited) was invested in one money market fund at December
31, 1999 and June 30, 2000, respectively.
Accounts Receivable - The Company's 1997, 1998, and the majority of 1999
revenue is composed primarily of Integrated Circuit design services.
Therefore, the year-end accounts receivable for those years represent
uncollected design services revenue. During 1999, the Company transitioned
from a service-based organization to a product-based company, following
the "fabless" semiconductor
29
<PAGE> 32
NEWPORT COMMUNICATIONS, INC.
business model. As a result, the June 30, 2000 accounts receivable balance
represents uncollected product sales revenue. The Company performs ongoing
credit evaluations of its customers and generally does not require
collateral. The Company periodically evaluates the need for reserves for
credit losses and returns and has determined that no reserve was necessary
for the period January 1, 1997 through June 30, 2000. It is the Company's
intention to evaluate the need for allowances for product returns as
future production volumes may require.
Property and Equipment - Property and equipment are stated at cost, net of
accumulated depreciation and amortization. Depreciation and amortization
are calculated under the straight-line basis over the estimated useful
lives of the respective assets, generally three to five years. Computer
software consists of purchased software.
Revenue Recognition - Revenues are recognized upon shipment of the related
product or performance of the related service. The Company's deferred
revenue at June 30, 2000 and December 31, 1999 relates to cash received in
advance of product shipments to a customer. The Company will recognize
this revenue when it meets product delivery and acceptance requirements in
accordance with the related customer contract.
Warranties and Returns - The Company warrants products against substantial
nonconformance to customer specifications for up to one year from the date
of shipment. As of December 31, 1999 and June 30, 2000, there have been no
warranty costs or returns associated with product shipments.
Research and Development - Research and development costs are expensed
as incurred.
Income Taxes - The Company accounts for income taxes under the provisions
of Statement of Financial Accounting Standards (SFAS) No. 109, Accounting
for Income Taxes, which requires an asset and liability approach in
accounting for income taxes. Under this method, a deferred tax liability
or asset is recognized for the estimated future tax effects attributable
to temporary differences in the recognition of accounting transactions for
tax and financial statement reporting purposes and from tax loss or credit
carryforwards. Measurement of the deferred items is based on enacted tax
laws. In the event the future consequence of differences result in a
deferred tax asset, SFAS No. 109 requires an evaluation of the probability
of being able to realize the future benefits indicated by such asset. A
valuation allowance related to a deferred asset is recorded when it is
more likely than not that some portion or all of the deferred tax asset
will not be realized.
Stock-Based Compensation - The Company accounts for stock-based awards to
employees using the intrinsic value method in accordance with Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees.
30
<PAGE> 33
NEWPORT COMMUNICATIONS, INC.
Use of Estimates - The financial statements have been prepared in
conformity with accounting principles generally accepted in the United
States of America, which require management to make estimates and
assumptions that affect the amounts and disclosures reported in the
financial statements and accompanying notes. Actual results could differ
from these estimates.
Comprehensive Income - The Company has adopted SFAS No. 130, Reporting
Comprehensive Income. This statement established standards for the
reporting of comprehensive income and its components. Comprehensive
income, as defined, includes all changes in equity (net assets) during a
period from nonowner sources. For the years ended December 31, 1997, 1998,
and 1999, and for the six months ended June 30, 1999 and 2000 there were
no differences between net income (loss) and comprehensive income (loss).
New Accounting Pronouncements - In June 1998, the Financial Accounting
Standards Board issued SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities (as amended), which the Company is required to
adopt effective in its fiscal year 2001. SFAS No. 133 will require the
Company to record all derivatives on the balance sheet at fair value. The
Company does not currently hold derivatives or engage in hedging
activities but will continue to evaluate the effect of adopting SFAS No.
133. The Company will adopt SFAS No. 133 in its fiscal year 2001.
2. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------- JUNE 30,
1998 1999 2000
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Computer hardware $ 75,636 $ 362,300 $ 663,186
Lab and testing equipment 387,799 1,559,266
Furniture and fixtures 12,101 62,740 146,356
Computer software 227,203 1,811,866 2,440,334
Leasehold improvements 838
----------- ----------- -----------
314,940 2,625,543 4,809,142
Less accumulated depreciation and
amortization (81,189) (546,624) (1,113,265)
----------- ----------- -----------
$ 233,751 $ 2,078,919 $ 3,695,877
=========== =========== ===========
</TABLE>
31
<PAGE> 34
NEWPORT COMMUNICATIONS, INC.
Depreciation and amortization for the years ended December 31, 1997, 1998,
1999, and the six months ended June 30, 1999 and 2000 was $31,365,
$38,318, $468,607, $117,627 (unaudited), and $589,008 (unaudited),
respectively.
3. LONG-TERM DEBT
Long-term debt consists of the following at:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1999 2000
---------- ----------
(UNAUDITED)
<S> <C> <C>
Loan and lease payable to bank, collateralized by specific
software and fixed assets, bearing interest at 12.69% and
12.82%, respectively, payable in 36 monthly payments for
each debt facility, followed by a final payment equal to 9%
of the original debt amount. In connection with this debt, the
Company issued warrants to purchase 34,940 shares of the
Company's preferred stock (Note 5). The warrants were
valued at $66,948 using the Black-Scholes model and the
value is being amortized as additional interest expense over
14 months (draw-down period). The total amount amortized
as of December 31, 1999 and June 30, 2000 was $19,128 and
$47,820, respectively $ 993,780 $1,393,798
Loans payable to a finance company, collateralized by
specific fixed assets and software, bearing interest at
13.71%, payable in interest-only payments for the first six
months of each loan period, followed by 36 monthly fixed
payments of principal and interest, and ending with a final
payment equal to 15% of the original loan amount. Loans
mature between March and December 2003. In connection
with such loans, the Company issued warrants to purchase
123,457 shares of the Company's common stock (Note 5)
The warrants have been valued at $3,416 using the Black-
Scholes model and the value is being amortized as
additional interest expense over 12 months (draw-down
period). The total amount amortized as of December 31, 1999
and June 30, 2000, was $1,708 and $3,416, respectively 1,332,001 1,933,732
</TABLE>
32
<PAGE> 35
NEWPORT COMMUNICATIONS, INC.
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1999 2000
----------- -----------
(UNAUDITED)
<S> <C> <C>
Capital lease payable to finance company, collateralized by a
specific fixed asset, bearing interest at 26.86%, payable
monthly through February 2001 $ $ 12,057
----------- -----------
Total 2,325,781 3,339,587
Less current portion of long-term debt (463,730) (889,056)
----------- -----------
Total long-term debt $ 1,862,051 $ 2,450,531
=========== ===========
</TABLE>
Long term debt at December 31, 1999 matures as follows:
<TABLE>
<CAPTION>
<S> <C>
2000 $ 463,730
2001 677,888
2002 767,949
2003 416,214
-----------
$ 2,325,781
===========
</TABLE>
Interest expense related to long-term debt was $72,594, $1,353
(unaudited), and $214,676 (unaudited) for the year ended December 31, 1999
and the six months ended June 30, 1999 and 2000, respectively.
4. INCOME TAXES
At December 31, 1999, the Company had net operating loss carryforwards of
approximately $4,800,000 and $2,400,000 for federal and state income tax
purposes, respectively. These net operating loss carryforwards will
completely expire in the year 2019 and 2004 for federal and state
purposes, respectively. These net operating loss carryforwards are
available to offset future federal and state taxable income. The ability
of the Company to utilize the federal and state net operating loss carry
forwards may be subject to annual limitations under certain provisions of
the Internal Revenue Code, as a result of ownership changes. The Company
has recorded a full valuation allowance for all deferred tax assets
generated to date, as a result of losses incurred since its inception. The
provision for income taxes represents the minimum required for state
taxes.
Effective for the period beginning January 1, 1997 and ending December 31,
1997, the Company elected to be taxed for federal and state purposes under
the provisions of Subchapter S of the Internal Revenue Code and applicable
sections of the California Revenue and Taxation Code. Accordingly, the tax
accounts and taxable
33
<PAGE> 36
NEWPORT COMMUNICATIONS, INC.
income as of December 31, 1997 are treated as if they were distributed to
the shareholders, who were responsible for any taxes due. However, in
accordance with the provisions of the California Revenue and Taxation
Code, regarding S corporations, the Company paid tax equal to 1.5% of the
Company's taxable income for the year ended December 31, 1997. The
Company's election to be taxed as a Subchapter S corporation was rescinded
effective January 1, 1998.
As a result of the Company's S corporation election, effective January 1,
1997, the Company was no longer subject to federal income taxes. However,
the Company was subject to a 1.5% income tax on its California taxable
income for the year ended December 31, 1997. As a result of the change in
the Company's tax status, the Company reduced its deferred tax liability
by $36,052 as of January 1, 1997 which amount has been included in the
deferred tax provision for the year ended December 31, 1997.
On January 1, 1998, the company rescinded its election to be treated as an
S corporation. As a result of the termination of S corporation status, the
Company became subject to federal and state income taxes at statutory C
corporation rates. The Company recorded a $75,177 deferred tax liability
to reflect the deferred tax items accruing up to the date of the S
corporation revocation, pursuant to the Company's C corporation rates.
The income tax (benefit) provision consists of the following for the years
ended December 31, 1997, 1998, and 1999:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Current:
Federal $ -- $ -- $ --
State 800 (2,416) 800
----------- ----------- -----------
800 (2,416) 800
Deferred:
Federal (28,774) (764) 1,663,462
State (5,759) (2,155) 220,702
----------- ----------- -----------
(34,533) (2,919) 1,884,164
Change in valuation allowance (1,884,164)
----------- ----------- -----------
Total (benefit) provision for income taxes $ (33,733) $ (5,335) $ 800
=========== =========== ===========
</TABLE>
34
<PAGE> 37
NEWPORT COMMUNICATIONS, INC.
A reconciliation of the income tax (benefit) provision to the amount of
income tax (benefit) provision that would result from applying the federal
statutory rate (35%) to income (loss) before income tax (benefit)
provision is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1997 1998 1999
------ ------ ------
<S> <C> <C> <C>
Income tax expense/benefit at statutory rate 0.0 % (35.0)% (35.0)%
State taxes and other (3.0)% 1.0 % 1.0 %
Valuation allowance 34.0 %
Change in tax status (15.0)% 30.0 %
----- ----- -----
(18.0)% (4.0)% - %
===== ===== =====
</TABLE>
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred taxes are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1998 1999
----------- -----------
<S> <C> <C>
Accrued compensation and other accruals $ 22,321 $ 28,614
Depreciation (22,321) 17,842
Net operating loss carryforwards 1,837,708
----------- -----------
Gross deferred income taxes 1,884,164
Valuation allowance (1,884,164)
----------- -----------
Net deferred income taxes $ - $ -
=========== ===========
</TABLE>
5. STOCKHOLDERS' EQUITY
In November 1998, the Company raised $5,025,000 from the sale of 6,184,616
shares of Series A preferred stock at $0.8125 per share to private
investors.
In December 1999, the Company raised $23,000,001 from the sale of
5,357,559 shares of Series B preferred stock at $4.293 per share to
private investors.
35
<PAGE> 38
NEWPORT COMMUNICATIONS, INC.
The holders of convertible preferred stock have various rights and
preferences as follows:
Voting - Each holder of shares of preferred stock shall be entitled to the
number of votes equal to an equivalent number of shares of common stock
into which it is convertible, voting together as a single class with
holders of common stock. In addition to these voting rights, the following
protective provisions exist for holders of preferred stock:
As long as at least 1,000,000 shares of Series A preferred stock are
outstanding (adjusted for stock splits of, stock dividends on, or
recapitalizations of the Series A preferred stock), the Company must
obtain approval from a majority of the holders of Series A preferred stock
in order to: (i) increase the number of authorized shares of common stock
or Series A preferred stock; (ii) change or materially alter the rights of
the shares of Series A preferred stock; (iii) authorize or issue any
equity security having liquidation or dividend preferences on parity with
or priority over the Series A preferred stock; (iv) increase or decrease
the authorized number of members on the Company's Board of Directors; (v)
redeem, purchase or otherwise acquire any share or shares of common stock
or preferred stock (except Series A preferred stock) other than by the
normal repurchase provisions associated with various agreements that
enable the Company to repurchase shares upon certain events, such as the
termination of employment; (vi) declare or pay any dividends or
distributions (other than a dividend payable solely in shares of common
stock) on any shares of common stock or preferred stock (other than Series
A and Series B preferred stock); and (vii) effect a merger,
reorganization, consolidation or a sale of all or substantially all of the
Company's assets where the existing stockholders retain less than 50% of
the voting power of the successor to the Company's business.
As long as at least 1,000,000 shares of Series B preferred stock are
outstanding (adjusted for stock splits of, stock dividends on, or
recapitalizations of the Series B preferred stock), the Company must
obtain approval from a majority of the holders of Series B preferred stock
in order to: (i) increase the number of authorized shares of common stock
or preferred stock; (ii) change or materially alter the rights of the
shares of Series B preferred stock; (iii) authorize or issue any equity
security having liquidation or dividend preferences on parity with or
priority over the Series B preferred stock; (iv) increase or decrease the
authorized number of members on the Company's Board of Directors; (v)
redeem, purchase or otherwise acquire any share or shares of common stock
other than by the normal repurchase provisions associated with various
agreements that enable the Company to repurchase shares upon certain
events, such as the termination of employment; (vi) declare or pay any
dividends or distributions (other than a dividend payable solely in shares
of common stock) on any shares of common stock; and (vii) effect a merger,
reorganization, consolidation, or a sale of all or substantially all of
the Company's assets where the existing stockholders retain less than 50%
of the voting power of the successor to the Company's business.
Dividends - Holders of Series A and B preferred stock are entitled to
receive noncumulative dividends at the annual rate of $0.65 and $0.34 per
share, respectively, when and if declared by the Board of Directors. The
holders of Series A and Series B preferred stock are also entitled to
participate in cash
36
<PAGE> 39
NEWPORT COMMUNICATIONS, INC.
dividends on common stock, when and if declared by the Board of Directors,
based upon the number of shares of common stock held on an as-converted
basis. The Board of Directors has not declared the foregoing dividends
from inception through June 30, 2000.
Conversion - Each share of Series A and Series B preferred stock is
convertible, at the option of the holder thereof, into shares of common
stock at a specific conversion ratio subject to adjustment for dilutive
issuances, stock splits and combinations. As of June 30, 2000, the current
conversion ratio for Series A and Series B preferred stock is 1.5 shares
of common stock for each share of preferred stock. Each share of preferred
stock shall automatically be converted into shares of common stock at the
then effective conversion ratio immediately preceding the closing of a
public offering of common stock in which the public price per share of
common stock is not less than $9.00 and the gross proceeds received by the
Company in such offering is at least $20,000,000.
Liquidation Preference - In the event of any liquidation, dissolution or
winding up of the Company, distributions to the preferred stockholders
shall be made in accordance with the following provisions: The holders of
preferred stock shall be entitled to receive, prior and in preference to
any distribution of any of the assets of the Corporation to holders of
common stock: (i) in the case of Series A preferred stock, an amount per
share equal to the sum of (a) $0.8125 (the original Series A issue price)
for each outstanding share of Series A preferred stock, adjusted for stock
splits of, stock dividends on, or recapitalization of, the Series A
preferred stock, and (b) an amount equal to any declared but unpaid
dividends in respect of such share; and (ii) in the case of Series B
preferred stock, an amount per share equal to the sum of (a) $4.2930 (the
original Series B issue price) for each outstanding share of Series B
preferred stock, adjusted for stock splits of, stock dividends on, or
recapitalization of, the Series B preferred stock, and (b) an amount equal
to any declared but unpaid dividends in respect of such share. If the
assets and funds distributed among the holders of the preferred stock
shall be insufficient to permit the payment of the aforementioned amounts,
then the available assets of the Company shall be distributed ratably
among holders of the Series A preferred stock and Series B preferred stock
in proportion to the liquidation preference of each series. Upon the
completion of the distribution to the preferred stock described above, the
remaining assets, if any, of the Company available for distribution to
stockholders shall be distributed ratably among the holders of common
stock in proportion to the number of shares of common stock owned by each
holder.
6. EMPLOYEE BENEFIT PLAN
Effective January 1, 1999, the Company adopted a 401(k) savings plan
covering all employees. Employees who work for the Company are eligible
for participation on the first day of the month following their employment
start date. Company contributions to the 401(k) savings plan are made at
the discretion of the Company's Board of Directors. The Company made no
contributions for the year ending December 31, 1999 or for the six months
ending June 30, 2000.
37
<PAGE> 40
NEWPORT COMMUNICATIONS, INC.
7. STOCK OPTION PLAN
On November 16, 1998, the Company adopted the 1998 Stock Option/Stock
Issuance Plan (the 1998 Plan). Under the terms of the 1998 Plan, options
to purchase 9,000,000 shares of the Company's common stock are available
for issuance to employees, directors and consultants.
At December 31, 1999, options to purchase 457,125 shares of the Company's
common stock were outstanding under the 1998 Plan. Options are granted at
exercise prices which approximate the fair value of the common stock on
the date of grant as determined by the Company's Board of Directors.
Generally, 25% of the options vest at the end of one year, while the
remainder are exercisable ratably over the next 36-month period, provided
the optionee remains in service to the Company. The options expire within
ten years from the date of grant or upon three months after termination of
employment for reasons other than death, disability or misconduct. At
December 31, 1999 and June 30, 2000, 3,303,750 and 1,743,875 shares
(unaudited), respectively, were available for future grants under the
plan.
Stock option activity for each of the three years in the period ended
December 31, 1999 and for the six months ended June 30, 2000 is as
follows:
<TABLE>
<CAPTION>
OPTION PRICE
NUMBER PER SHARE
OF SHARES (U.S. DOLLARS)
--------- -------------
<S> <C> <C>
Outstanding, December 31, 1997 - -
Granted 1,845,000 0.0667
----------
Outstanding, December 31, 1998 1,845,000 0.0667
Granted 5,145,000 0.0667
Lapsed or canceled (1,293,750) 0.0667
Exercised (5,239,125) 0.0667
----------
Outstanding and exercisable, December 31, 1999 457,125 0.0667
(Unaudited):
Granted 1,664,375 0.4400
Lapsed or canceled (4,500) 0.0667
0.4400-
Exercised (1,011,684) 0.0667
----------
0.4400-
Outstanding and exercisable (unaudited), June 30, 2000 1,105,316 0.0667
==========
</TABLE>
38
<PAGE> 41
NEWPORT COMMUNICATIONS, INC.
The weighted average contractual life of stock options outstanding was 9.3
years as of December 31, 1999.
The Company will record future compensation expense of approximately
$3,500,000 relating to options granted at a fair value of $2.86 during the
six months ended June 30, 2000, to purchase 1,434,450 shares of common
stock. The expense equals the difference between the deemed fair market
value of the Company's common stock on the grant date and the exercise
price of the stock options and will be recognized ratably over the
four-year vesting period of the stock options. The Company recorded
$200,561 of expense associated with such option grants during the six
months ended June 30, 2000.
Additionally, the Company will record future compensation expense of
approximately $557,000 relating to options granted to consultants during
the six months ended June 30, 2000 to purchase 229,925 shares of common
stock. The Company recorded $63,237 of expense associated with such option
grants during the six months ended June 30, 2000. Additionally, such
options will be subject to variable plan accounting which may result in
additional compensation expense as the options vest.
Accounting for Stock-Based Compensation - SFAS No. 123, Accounting for
Stock-Based Compensation, requires the disclosure of pro forma net income
and earnings per share had the Company adopted the fair value approach to
account for all its employee stock-based compensation plans. After taking
into account the fair value method of stock compensation using a dividend
yield of 0%, a risk-free interest rate of 6%, an expected life of three
months, and a volatility factor of 0%, management determined that the
difference between reported net income and pro forma net income is not
material for any of the periods presented.
8. COMMITMENTS AND CONTINGENCIES
Leases - In October 1999, the Company entered into a 66 month lease for
approximately 17,100 square feet of office space. The new lease amounts
are approximately $13,250 per month through March 31, 2000, and
approximately $26,500 per month through October 15, 2000. Thereafter, the
monthly lease payment increases every 12 months in accordance with a
prenegotiated rent schedule. The Company is also a party to various
equipment operating leases.
39
<PAGE> 42
NEWPORT COMMUNICATIONS, INC.
The minimum lease payments under such lease agreements at December 31,
1999 are as follows (in thousands):
EQUIPMENT OFFICE
LEASES LEASE TOTAL
--------- ------ ------
Year ending December 31:
2000 $ 10 $ 317 $ 327
2001 10 373 383
2002 5 383 388
2003 5 394 399
2004 1 402 403
Thereafter 119 119
---- ------ ------
$ 31 $1,988 $2,019
==== ====== ======
Rent expense for the years ended December 31, 1997, 1998, 1999, and for
the six months ended June 30, 1999 and 2000 totaled $30,089, $27,037,
$120,748, $45,260 (unaudited), and $219,157 (unaudited), respectively.
Litigation - The Company, in the normal course of business, is subject to
various legal matters. However, management believes that none of these
matters will have a material adverse effect on the Company's financial
statements.
9. RELATED-PARTY TRANSACTIONS
During the year ended December 31, 1998, the Company raised $1,250,002
from the sale of 1,538,464 shares of Series A preferred stock to the
Chairman of the Board. Additionally, the two co-founders of the Company
were distributed 307,692 shares of Series A preferred stock at a value of
$249,999 and a cash distribution of $133,295.
During the year ended December 31, 1999, the Company raised $1,250,001
from the sale of 291,172 shares of Series B preferred stock to the
Chairman of the Board. During the same period, the Company raised $100,000
from the sale of 1,500,000 shares of common stock to the Chairman of the
Board.
During the year ended December 31, 1999, the Company paid a $350,000
distribution to each of its two co-founders in conjunction with the
recapitalization of the Company.
40
<PAGE> 43
NEWPORT COMMUNICATIONS, INC.
10. SUBSEQUENT EVENTS
Foreign Operations - On July 1, 2000, the Company established an
engineering design center in Ottawa, Canada. This entity is organized as a
branch of the United States Company. In preparation for the expected
transactions associated with this entity, the Company established a
Canadian dollar bank account in June 2000. The financial statements of the
Company as of June 30, 2000 include the translated Canadian dollar funds
on that date. Transaction adjustments on June 30, 2000 are not considered
material.
Acquisition - On August 9, 2000, the Company signed a definitive agreement
to merge into and with Broadcom Corporation, with Broadcom Corporation as
the surviving entity. On October 3, 2000, the merger was completed, and
Broadcom Corporation issued approximately 5.6 million shares of its Class
A common stock in exchange for all outstanding stock and stock options of
the Company.
* * * *
41
<PAGE> 44
Report of Independent Auditors
The Board of Directors
Silicon Spice Inc.
We have audited the accompanying balance sheets of Silicon Spice Inc. (a
development stage company) as of December 31, 1999 and 1998 and the related
statements of operations, shareholders' equity and cash flows for each of the
three years in the period ended December 31, 1999, and for the period from
inception (September 26, 1996) through December 31, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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 Silicon Spice Inc. at December
31, 1999 and 1998, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1999, and for the period
from inception (September 26, 1996) through December 31, 1999, in conformity
with accounting principles generally accepted in the United States.
/s/ ERNST & YOUNG, LLP
San Jose, California
March 3, 2000
42
<PAGE> 45
Silicon Spice Inc.
(a development stage company)
Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 56,246,004 $ 16,934,823
Short-term investments 6,383,108 -
Prepaid expenses and other current assets 758,463 126,713
------------ ------------
Total current assets 63,387,575 17,061,536
Property and equipment, net 5,242,445 3,745,325
Other assets 393,516 161,162
------------ ------------
Total assets $ 69,023,536 $ 20,968,023
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 1,625,683 $ 575,089
Accrued compensation and related expenses 387,258 286,900
Current portion of equipment financing 2,553,567 1,436,925
Current portion of subordinated debt 1,126,937 -
------------ ------------
Total current liabilities 5,693,445 2,298,914
Equipment financing 2,781,673 2,428,335
Subordinated debt 1,611,734 -
Commitments
Shareholders' equity:
Convertible preferred stock, no par value, issuable in
series; 31,516,462 shares authorized at December
31,1999; 29,801,402 shares issued and outstanding
(17,399,636 shares in 1998); aggregate liquidation
preferences of $87,674,969 87,678,949 26,752,373
Common stock, no par value; 75,000,000 shares
authorized; 8,068,875 shares issued and outstanding
in 1999 (6,321,175 and 2,300,000 shares in 1998 and
1997, respectively) 1,010,207 485,630
Notes receivable from shareholders (502,016) (268,016)
Unrealized loss on available-for-sale investments (12,343) -
Deficit accumulated during the development stage (29,238,113) (10,729,213)
------------ ------------
Total shareholders' equity 58,936,684 16,240,774
------------ ------------
Total liabilities and shareholders' equity $ 69,023,536 $ 20,968,023
============ ============
</TABLE>
See accompanying notes.
43
<PAGE> 46
Silicon Spice Inc.
(a development stage company)
Statements of Operations
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(SEPTEMBER 26,
YEARS ENDED DECEMBER 31, 1996) THROUGH
-------------------------------------------------- DECEMBER 31,
1999 1998 1997 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Operating expenses:
Research and development $ 13,935,377 $ 6,599,694 $ 988,400 $ 21,541,088
General and administrative 4,645,126 2,620,597 532,216 7,807,425
------------ ------------ ------------ ------------
Total operating expenses 18,580,503 9,220,291 1,520,616 29,348,513
Operating loss (18,580,503) (9,220,291) (1,520,616) (29,348,513)
Interest income 766,775 197,947 89,190 1,053,912
Interest expense (695,172) (208,480) (39,860) (943,512)
============ ============ ============ ============
Net loss $(18,508,900) $ (9,230,824) $ (1,471,286) $(29,238,113)
============ ============ ============ ============
</TABLE>
See accompanying notes.
44
<PAGE> 47
Silicon Spice Inc.
(a development stage company)
Statement of Shareholders' Equity
Period from inception (September 26, 1996) to December 31, 1999
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED STOCK COMMON STOCK
---------------------------- -----------------------------
SHARES AMOUNT SHARES AMOUNT
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balances, inception (September 26, 1996) - $- - $-
Issuance of common stock to founders at
$0.05 per share and exercise of stock
options for cash in September 1996 - - 2,473,913 122,000
Net loss and comprehensive loss - - - -
----------- ----------- ----------- -----------
Balances, December 31, 1996 - - 2,473,913 122,000
Conversion of founders' common stock into
Series A convertible preferred stock in
March 1997 255,318 120,000 (173,913) (120,000)
Issuance of Series A convertible preferred
stock at $0.61 per share in March 1997 for
cash and conversion of notes payable, net
of issuance costs of $47,731 5,520,168 3,319,571 - -
Net loss and comprehensive loss - - - -
----------- ----------- ----------- -----------
Balances, December 31, 1997 5,775,486 3,439,571 2,300,000 2,000
Issuance of Series B convertible preferred
stock at $1.13 and $2.00 per share in
February and April 1998, respectively, net
of issuance costs of $28,144 6,242,027 7,042,972 - -
Issuance of Series C convertible preferred
stock at $3.00 per share in November 1998,
net of issuance costs of $37,701 5,382,123 16,108,668 - -
Exercise of stock options for cash - - 1,666,750 185,614
Issuance of notes receivable from - - 2,354,425 268,016
shareholders
Issuance of warrants to purchase Series B convertible
preferred stock in November 1998 in connection
with equipment financing
- 161,162 - -
Issuance of common stock options to vendor
in August 1998 for services previously
provided - - - 30,000
Net loss and comprehensive loss - - - -
Balances, December 31, 1998 (carried forward) 17,399,636 26,752,373 6,321,175 485,630
</TABLE>
<TABLE>
UNREALIZED DEFICIT
NOTES LOSS ON ACCUMULATED
RECEIVABLE AVAILABLE-FOR- DURING THE TOTAL
FROM SALE DEVELOPMENT SHAREHOLDERS'
SHAREHOLDERS INVESTMENTS STAGE EQUITY
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balances, inception (September 26, 1996) $- $- $- $-
Issuance of common stock to founders at
$0.05 per share and exercise of stock
options for cash in September 1996 - - - 122,000
Net loss and comprehensive loss - - (27,103) (27,103)
----------- ----------- ----------- -----------
Balances, December 31, 1996 - - (27,103) 94,897
Conversion of founders' common stock into
Series A convertible preferred stock in
March 1997 - - - -
Issuance of Series A convertible preferred
stock at $0.61 per share in March 1997 for
cash and conversion of notes payable, net
of issuance costs of $47,731 - - - 3,319,571
Net loss and comprehensive loss - - (1,471,286) (1,471,286)
----------- ----------- ----------- -----------
Balances, December 31, 1997 (1,498,389) 1,943,182
Issuance of Series B convertible preferred
stock at $1.13 and $2.00 per share in
February and April 1998, respectively, net
of issuance costs of $28,144 - - - 7,042,972
Issuance of Series C convertible preferred
stock at $3.00 per share in November 1998,
net of issuance costs of $37,701 - - - 16,108,668
Exercise of stock options for cash - - - 185,614
Issuance of notes receivable from (268,016) - - -
shareholders
Issuance of warrants to purchase Series B convertible
preferred stock in November 1998 in connection
with equipment financing
- - - 161,162
Issuance of common stock options to vendor
in August 1998 for services previously
provided - - - 30,000
Net loss and comprehensive loss - - (9,230,824) (9,230,824)
Balances, December 31, 1998 (carried forward) (268,016) - (10,729,213) 16,240,774
</TABLE>
See accompanying notes.
45
<PAGE> 48
Silicon Spice Inc.
(a development stage company)
Statement of Shareholders' Equity (continued)
Period from inception (September 26, 1996) to December 31, 1999
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED STOCK COMMON STOCK
------------------------------ -------------------------------
SHARES AMOUNT SHARES AMOUNT
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balances, December 31, 1998 (brought forward) 17,399,636 $ 26,752,373 6,321,175 $ 485,630
Issuance of Series C convertible preferred
stock at $3.00 per share in March 1999,
net of issuance costs of $21,471 2,709,209 8,106,157 - -
Issuance of Series D convertible preferred
stock at $5.45 per share in December
1999, net of issuance costs of $31,377 9,692,557 52,793,063 - -
Exercise of stock options for cash - - 927,769 205,266
Exercise of stock options for notes - - 780,000 234,000
receivable
Repurchase of common stock - - (315,209) (21,231)
Issuance of warrants to purchase Series C
convertible preferred stock in connection
with equipment financing - 27,356 - -
Issuance of common stock for patent rights - - 355,140 106,542
Change in unrealized loss on
available-for-sale investments - - - -
Net loss - - - -
Comprehensive loss - - - -
------------ ------------ ------------ ------------
Balances, December 31, 1999 29,801,402 $ 87,678,949 8,068,875 $ 1,010,207
============ ============ ============ ============
</TABLE>
<TABLE>
UNREALIZED DEFICIT
NOTES LOSS ON ACCUMULATED
RECEIVABLE AVAILABLE-FOR- DURING THE TOTAL
FROM SALE DEVELOPMENT SHAREHOLDERS'
SHAREHOLDERS INVESTMENTS STAGE EQUITY
------------ ------------- ------------- -------------
<S> <C> <C> <C> <C>
Balances, December 31, 1998 (brought forward) $ (268,016) $ - $(10,729,213) $ 16,240,774
Issuance of Series C convertible preferred
stock at $3.00 per share in March 1999,
net of issuance costs of $21,471 - - - 8,106,157
Issuance of Series D convertible preferred
stock at $5.45 per share in December
1999, net of issuance costs of $31,377 - - - 52,793,063
Exercise of stock options for cash - - - 205,266
Exercise of stock options for notes (234,000) - - -
receivable
Repurchase of common stock - - - (21,231)
Issuance of warrants to purchase Series C
convertible preferred stock in connection
with equipment financing - - - 27,356
Issuance of common stock for patent rights - - - 106,542
Change in unrealized loss on
available-for-sale investments - (12,343) - (12,343)
Net loss - - (18,508,900) (18,508,900)
------------
Comprehensive loss - - - (18,521,243)
------------ ------------ ------------ ------------
Balances, December 31, 1999 $ (502,016) $ (12,343) $(29,238,113) $ 58,936,684
============ ============ ============ ============
</TABLE>
See accompanying notes.
46
<PAGE> 49
Silicon Spice Inc.
(a development stage company)
Statements of Cash Flows
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(SEPTEMBER 26,
YEARS ENDED DECEMBER 31, 1996) THROUGH
-------------------------------------------------- DECEMBER 31,
1999 1998 1997 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $(18,508,900) $ (9,230,824) $ (1,471,286) $(29,238,113)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 1,916,059 613,000 96,768 2,632,893
Issuance of common stock for services
previously provided - 30,000 - 30,000
Changes in operating assets and liabilities:
Prepaids and other current assets (631,750) 138,444 (259,094) (758,463)
Accounts payable and accrued liabilities 1,050,594 426,150 135,849 1,625,683
Accrued compensation and related expenses
100,358 286,900 - 387,258
------------ ------------ ------------ ------------
Net cash used in operating activities (16,073,639) (7,736,330) (1,497,763) (25,320,742)
------------ ------------ ------------ ------------
INVESTING ACTIVITIES
Purchases of short-term investments (10,492,000) - - (10,492,000)
Sale of short-term investments at maturity 4,096,549 - - 4,096,549
Purchases of property and equipment - - (732,732) (764,442)
Other assets (134,272) - - (134,272)
------------ ------------ ------------ ------------
Net cash used in investing activities (6,529,723) - (732,732) (7,294,165)
------------ ------------ ------------ ------------
FINANCING ACTIVITIES
Issuance of common stock 205,266 185,614 - 512,880
Repurchase of common stock (21,231) - - (21,231)
Issuance of convertible preferred stock, net
of issuance costs 60,899,220 23,151,640 3,132,071 87,182,931
Proceeds from issuance of notes payable to
shareholders - - 187,500 187,500
Proceeds from equipment financing - - 750,000 750,000
Repayments on equipment financing (1,907,383) (478,707) (103,750) (2,489,840)
Proceeds from issuance of subordinated debt 3,000,000 - - 3,000,000
Repayments on subordinated debt (261,329) - - (261,329)
------------ ------------ ------------ ------------
Net cash provided by financing activities 61,914,543 22,858,547 3,965,821 88,860,911
------------ ------------ ------------ ------------
Net increase in cash and cash equivalents 39,311,181 15,122,217 1,735,326 56,246,004
Cash and cash equivalents at beginning of
period 16,934,823 1,812,606 77,280 -
------------ ------------ ------------ ------------
Cash and cash equivalents at end of period $ 56,246,004 $ 16,934,823 $ 1,812,606 $ 56,246,004
============ ============ ============ ============
</TABLE>
See accompanying notes.
47
<PAGE> 50
Silicon Spice Inc.
(a development stage company)
Statements of Cash Flows (continued)
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(SEPTEMBER 26,
YEARS ENDED DECEMBER 31, 1996) THROUGH
----------------------------------------- DECEMBER 31,
1999 1998 1997 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES
Cash paid for interest $ 659,356 $ 208,480 $ 39,806 $ 907,666
========== ========== ========== ==========
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING
ACTIVITIES
Issuance of warrants in connection with
equipment financing $ 27,356 $ 161,162 $ - $ 188,518
========== ========== ========== ==========
Notes receivable from shareholders $ 234,000 $ 268,016 $ - $ 502,016
========== ========== ========== ==========
Issuance of common stock for patent rights $ 106,542 $ - $ - $ 106,542
========== ========== ========== ==========
Acquisition of property and equipment under
equipment financing $3,377,803 $3,697,717 $ - $7,075,520
========== ========== ========== ==========
Conversion of notes payable to shareholders
into shares of Series A convertible
preferred stock $ - $ - $ 187,500 $ 187,500
========== ========== ========== ==========
Conversion of founder's common stock into
Series A convertible preferred stock $ - $ - $ 120,000 $ 120,000
========== ========== ========== ==========
</TABLE>
See accompanying notes.
48
<PAGE> 51
Silicon Spice Inc.
(a development stage company)
Notes to Financial Statements
December 31, 1999
1. DESCRIPTION OF BUSINESS
Silicon Spice Inc. (the "Company") was incorporated in the state of California
on September 26, 1996. The Company is a development stage entity focused on the
development and marketing of telecommunications processing solutions based on
signal processing chips and related software tools.
The Company's activities to date have consisted principally of conducting
research and development activities, raising capital, arranging for facilities
and recruiting management and technical personnel. Accordingly, the Company is
considered to be a development stage company.
In the course of these activities, the Company has incurred significant losses
and expects additional losses in the year ending December 31, 2000. The Company
continues to work on unproven technology and development projects which require
substantial expenditures to complete, and ultimately may be unsuccessful.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original maturity of
three months or less to be cash equivalents.
SHORT-TERM INVESTMENTS
The company classifies its short-term investments as available-for-sale. Such
investments are recorded at fair value based on quoted market prices with
unrealized gains and losses, which are considered to be temporary, recorded as
other comprehensive income or loss until realized.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is provided using the
straight-line method over the shorter of the lease term or the estimated useful
lives of the assets, which range from three to five years.
49
<PAGE> 52
Silicon Spice Inc.
(a development stage company)
Notes to Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RESEARCH AND DEVELOPMENT
Costs to develop the Company's products are expensed as incurred in accordance
with Statement of Financial Accounting Standards No. 2, "Accounting for Research
and Development Costs," which established accounting and reporting standards for
research and development costs.
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 amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
STOCK-BASED COMPENSATION
The Company accounts for employee stock options using the intrinsic value method
in accordance with Accounting Principles Board Opinion No. 25 ("APB 25"), and
has adopted the disclosure-only alternative of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("FAS 123").
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes," which requires the
use of the liability method in accounting for income taxes. Under this method,
deferred tax assets and liabilities are measured using enacted tax rates and
laws that will be in effect when the differences are expected to reverse.
50
<PAGE> 53
Silicon Spice Inc.
(a development stage company)
Notes to Financial Statements (continued)
3. SHORT-TERM INVESTMENTS
The following is a summary of available-for-sale securities as of December 31,
1999:
<TABLE>
<CAPTION>
COST FAIR VALUE
----------- -----------
<S> <C> <C>
Money market funds $55,763,197 $55,763,197
Corporate debt securities 6,395,451 6,383,108
----------- -----------
62,158,648 62,146,305
Less amounts classified as cash equivalents 55,763,197 55,763,197
----------- -----------
Securities available for sale $ 6,395,451 $ 6,383,108
=========== ===========
</TABLE>
As of December 31, 1999, all securities have a maturity of less than one year.
The Company had no short-term investments as of December 31, 1998.
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1999 1998
----------- -----------
<S> <C> <C>
Equipment $ 3,486,033 $ 1,927,890
Purchased software 3,623,058 1,854,735
Furniture and fixtures 467,161 438,274
Leasehold improvements 263,710 241,260
----------- -----------
7,839,962 4,462,159
Less accumulated depreciation and
amortization (2,597,517) (716,834)
----------- -----------
$ 5,242,445 $ 3,745,325
=========== ===========
</TABLE>
Substantially all of the Company's property and equipment have been acquired
under equipment financing arrangements.
51
<PAGE> 54
Silicon Spice Inc.
(a development stage company)
Notes to Financial Statements (continued)
5. EQUIPMENT FINANCING
Equipment financing consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1999 1998
----------- -----------
<S> <C> <C>
Note payable with bank; interest at prime plus
2% per annum (10.5% at December 31, 1999);
secured by substantially all assets of the
Company; payable through September 2000 $ 176,249 $ 411,976
Costella Kirsch capital leases; $1,500,000 lease
line; interest at rates ranging from 9.0% to
14.8% per annum; monthly payments totaling
$49,957; secured by the financed equipment;
payment schedules ending February 2001
through August 2001 727,811 1,219,760
Comdisco capital leases; $3,000,000 lease line;
interest rates at 8.0% per annum; monthly
payments totaling $92,549; secured by the
financed equipment; payment schedules
ending September 2001 through July 2002 1,983,947 2,233,524
Finova Capital Corporation capital leases;
$5,000,000 lease line; interest rates ranging
from 9.7% to 10.1% per annum; monthly
payments totaling $85,232; secured by the
financed equipment; payment schedules
ending August 2001 2,447,233 --
----------- -----------
5,335,240 3,865,260
Less current portion (2,553,567) (1,436,925)
----------- -----------
Long-term equipment financing $ 2,781,673 $ 2,428,335
=========== ===========
</TABLE>
Equipment financings mature in the following amounts:
<TABLE>
<CAPTION>
<S> <C>
2000 $ 2,907,038
2001 2,331,359
2002 801,729
-----------
6,040,126
Less amounts representing interest (704,886)
-----------
$ 5,335,240
===========
</TABLE>
52
<PAGE> 55
Silicon Spice Inc.
(a development stage company)
Notes to Financial Statements (continued)
6. SUBORDINATED DEBT
Subordinated debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1999 1998
----------- -----------
<S> <C> <C>
Note payable with lending institution of
$3,000,000; interest at 12% per annum;
$116,244 due monthly including principal
and interest through April 2002 $ 2,738,671 $ --
----------- -----------
2,738,671 --
Less current portion (1,126,937) --
----------- -----------
Long-term subordinated debt $ 1,611,734 $ --
=========== ===========
</TABLE>
Subordinated debt matures in the following amounts:
<TABLE>
<CAPTION>
<S> <C> <C>
2000 $1,126,937
2001 1,269,861
2002 341,873
----------
$2,738,671
==========
</TABLE>
7. SHAREHOLDERS' EQUITY
CONVERTIBLE PREFERRED STOCK
Convertible preferred stock at December 31, 1999 consists of the following, by
series:
<TABLE>
<CAPTION>
PER SHARE
NON-
SHARES ISSUED AND LIQUIDATION LIQUIDATION CUMULATIVE
SERIES AUTHORIZED OUTSTANDING PREFERENCE PREFERENCE DIVIDEND
---------- ---------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
A 5,775,486 5,775,486 $ 3,523,046 $ 0.61 $ 0.04
B 6,547,137 6,242,027 7,053,491 1.13 0.07
C 8,184,665 8,091,332 24,273,996 3.00 0.19
D 11,009,174 9,692,557 52,824,436 5.45 0.35
---------- ---------- -----------
31,516,462 29,801,402 $87,674,969
========== ========== ===========
</TABLE>
53
<PAGE> 56
Silicon Spice Inc.
(a development stage company)
Notes to Financial Statements (continued)
7. SHAREHOLDERS' EQUITY (CONTINUED)
CONVERTIBLE PREFERRED STOCK (CONTINUED)
Each share of convertible preferred stock is convertible into fully paid and
nonassessable shares of common stock at the option of the holder based upon the
conversion rate then in effect, which initially is one share of common stock for
each share of preferred stock. Such conversion is subject to certain
anti-dilution provisions. Mandatory conversion into common stock for convertible
preferred stock occurs upon the closing of an underwritten public offering of
the Company's common stock at an aggregate public offering price of at least $25
million and a per share price of at least $8.17 or upon approval of the holders
of two-thirds or more of the total number of shares of convertible preferred
stock outstanding; however, Series D convertible preferred stock will only
convert if two-thirds of the holders of Series D convertible preferred stock
approve the conversion.
The holder of each share of convertible preferred stock has the right to one
vote for each share of common stock into which the preferred stock can be
converted.
The holders of Series A, Series B, Series C, and Series D convertible preferred
stock are entitled to noncumulative annual dividends of $0.04, $0.07, $0.19, and
$0.35 per share, respectively, as declared by the Board of Directors, prior to
the payment of dividends to the holders of the common stock. No dividends had
been declared as of December 31, 1999.
In the event of liquidation, dissolution, or winding up of the Company, holders
of Series A, Series B, Series C, and Series D convertible preferred stock are
entitled to receive a liquidation preference equal to $0.61, $1.13, $3.00, and
$5.45 per share, respectively, plus declared and unpaid dividends. If upon the
occurrence of such event, the assets and funds available for distribution among
the holders of convertible preferred stock shall be insufficient to permit the
payment to such holders of the full preferential amounts, then the entire assets
and funds of the Company legally available for distribution to the shareholders
shall be distributed among the holders of the convertible preferred stock pro
rata to the full preferential amount each such holder is entitled to receive.
After payment has been made to the holders of convertible preferred stock, the
remaining assets and funds legally available for distribution shall be
distributed ratably among the holders of common stock and convertible preferred
stock pro rata, on the basis of number of shares of common stock outstanding and
issuable upon the assumed conversion of the preferred stock, until the holders
of Series A, Series B, Series C, and Series D convertible preferred stock have
received $1.83, $2.26, $6.00, and $8.17 per share, respectively.
54
<PAGE> 57
Silicon Spice Inc.
(a development stage company)
Notes to Financial Statements (continued)
7. SHAREHOLDERS' EQUITY (CONTINUED)
CONVERTIBLE PREFERRED STOCK (CONTINUED)
In January 2000, the Company issued an additional 1,250,523 of Series D
convertible preferred stock with cash proceeds to the Company of approximately
$6.8 million, net of issuance costs.
In 1997, the Company entered into short-term loan agreements with certain
shareholders under which it borrowed $187,500 with interest at 5.83% per annum.
The notes automatically converted into 307,377 shares of Series A convertible
preferred stock in March 1997.
SHARES RESERVED FOR FUTURE ISSUANCE
At December 31, 1999, the Company has reserved shares of capital stock for
future issuance as follows:
<TABLE>
<CAPTION>
COMMON CONVERTIBLE
STOCK PREFERRED STOCK
---------- ---------------
<S> <C> <C>
Convertible preferred stock 31,516,462 --
Stock options outstanding 2,233,751 --
Stock options available for grant 1,369,492 --
Warrants to purchase convertible preferred
stock -- 398,443
---------- ----------
35,119,705 398,443
========== ==========
</TABLE>
55
<PAGE> 58
Silicon Spice Inc.
(a development stage company)
Notes to Financial Statements (continued)
7. SHAREHOLDERS' EQUITY (CONTINUED)
STOCK OPTIONS AND COMMON STOCK
The Company's 1996 Stock Incentive Plan (the "Plan"), as amended, provides for
7,891,978 shares of common stock reserved for the issuance of incentive stock
options ("ISO's") to employees or non-statutory stock options ("NSO's") to
consultants and directors. The ISO's may be granted at a price per share not
less than the fair market value at the date of grant. The NSO's may be granted
at a price per share not less than 85% of the fair market value at the date of
grant. Options may be exercised immediately and generally vest over four years.
Common shares purchased under the Plan are subject to certain restrictions,
including the right of first refusal by the Company for sale or transfer of
these shares to outside parties. As of December 31, 1999, 3,547,197 shares of
common stock have been issued in connection with the exercise of stock options
or restricted stock grants which have not vested and are subject to repurchase.
The company has issued 3,425,000 shares of common stock to certain founders and
executives that are subject to repurchase by the Company until they vest, which
occurs ratably over 48 months of continued employment. As of December 31, 1999,
1,314,448 of these shares are unvested and are subject to repurchase at amounts
ranging from $0.05 to $0.125 per share (weighted-average of $0.097 per share).
Activity under the Plan is summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED-
OUTSTANDING AVERAGE
NUMBER OF EXERCISE
SHARES PRICES
---------- --------
<S> <C> <C>
Balance at January 1, 1997 -- $ --
Granted 830,500 $0.049
---------- ------
Balance at January 1, 1998 830,500 $0.049
Granted 3,380,425 $0.125
Exercised (2,896,175) $0.107
Canceled (2,500) $0.125
---------- ------
Balance at December 31, 1998 1,312,250 $0.116
Granted 3,090,000 $0.300
Exercised (1,707,769) $0.262
Canceled (460,730) $0.141
---------- ------
Outstanding and exercisable at
December 31, 1999 2,233,751 $0.245
========== ======
</TABLE>
56
<PAGE> 59
Silicon Spice Inc.
(a development stage company)
Notes to Financial Statements (continued)
7. SHAREHOLDERS' EQUITY (CONTINUED)
STOCK OPTIONS AND COMMON STOCK (CONTINUED)
The following table summarizes information concerning outstanding and
exercisable stock options at December 31, 1999.
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------------------------------
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE WEIGHTED-
REMAINING EXERCISE AVERAGE
EXERCISE CONTRACTUAL PRICE PER EXERCISE PRICE
PRICES NUMBER LIFE SHARE NUMBER PER SHARE
------------------------------------------------------------------------------------
(Years)
<S> <C> <C> <C> <C> <C>
$ 0.060 216,000 7.90 $0.060 216,000 $0.060
0.125 397,001 8.57 0.125 397,001 0.125
0.300 1,620,750 9.31 0.300 1,620,750 0.300
--------- ---------
2,233,751 9.03 0.245 2,233,751 0.245
========= =========
</TABLE>
The following table summarizes information about shares subject to repurchase at
December 31, 1999:
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE WEIGHTED-AVERAGE
RANGE OF NUMBER OF REMAINING REPURCHASE
EXERCISE PRICES SHARES CONTRACTUAL LIFE PRICE
-----------------------------------------------------------------------------
(Years)
<S> <C> <C> <C>
$0.030-$0.060 260,549 7.79 $0.053
$ 0.125 1,161,130 8.71 0.125
$ 0.300 1,307,271 9.51 0.300
---------
2,728,950 8.18 $0.201
=========
</TABLE>
The Company accounts for its stock-based awards to employees using the intrinsic
value method in accordance with APB 25. Under APB 25, the Company has recorded
no compensation expense with respect to such awards.
57
<PAGE> 60
Silicon Spice Inc.
(a development stage company)
Notes to Financial Statements (continued)
7. SHAREHOLDERS' EQUITY (CONTINUED)
STOCK OPTIONS AND COMMON STOCK (CONTINUED)
FAS 123 requires the disclosure of pro forma net income (loss) as if the Company
had adopted the fair value method since the Company's inception. The fair value
of options was estimated at the date of grant using the minimum value method
with a risk-free interest rate of 5.5%, a weighted-average expected option life
of 5 years and 0% volatility, for both 1999 and 1998. Based on the application
of the fair value methodology, the pro forma losses of the Company for 1999 and
1998 were not materially different from the reported historical losses.
WARRANTS
At December 31, 1999, the Company has 232,102 warrants outstanding to purchase
shares of Series B convertible preferred stock with an exercise price of $2.07
per share and 93,333 warrants outstanding to purchase Series C convertible
preferred stock with an exercise price of $3.00 per share. These warrants have
terms ranging from seven years to ten years (or three years from the effective
date of the Company's initial public offering, whichever is earlier). The
Company has also committed to issue 73,008 warrants to purchase shares of Series
B convertible stock with an exercise price of $1.13 per share. These warrants
were issued, or committed to, in connection with the Company's equipment
financing activities. Using the Black-Scholes valuation model, the warrants were
determined to have a fair value of $188,518, which is being charged to interest
expense over the term of the related financings.
Certain Series D Preferred Stock investors were issued warrants granting them,
in the aggregate, the right to purchase shares of common stock equal to 3% of
the number of shares of common stock issued at the time of the Company's initial
public offering.
STOCK ISSUED FOR PATENT RIGHTS
In May 1999, the Company entered into an exclusive patent license agreement
under which it issued 355,140 shares of common stock and paid $69,251 in
exchange for certain exclusive patent rights. The Company recognized $175,793 as
the value of the patents which will be amortized straight-line over a 5-year
life. Under the agreement, the Company must make a first commercial sale of a
licensed product and/or a first commercial performance of a licensed process on
or before January 1, 2001 to be in compliance with the agreement.
58
<PAGE> 61
Silicon Spice Inc.
(a development stage company)
Notes to Financial Statements (continued)
7. SHAREHOLDERS' EQUITY (CONTINUED)
NOTES RECEIVABLE
The Company has full-recourse notes receivable of $502,016 at December 31, 1999
($268,016 at December 31, 1998) related to the exercise of stock options by
certain employees of the Company. The notes bear interest at 8% per annum, are
secured by the employee's shares of common stock of the Company and are due on
dates ranging from February 2002 to December 2004.
8. DEFINED CONTRIBUTION PLAN
The Company has a defined contribution plan ("401(k) Plan") under the provisions
of Section 401(k) of the Internal Revenue Code covering all eligible employees.
Employees may contribute to the 401(k) Plan annually up to the Internal Revenue
Service limit. The plan provides for discretionary employer contributions.
Expenses recognized related to the Company's contribution to the plan totaled
approximately $280,000, $78,000, and $0 in the years ended December 31, 1999,
1998, and 1997, respectively.
9. INCOME TAXES
At December 31, 1999, the Company has available federal net operating loss
carryforwards of approximately $29.0 million for federal income tax purposes,
which will expire in the years 2012 through 2019. Due to the "change in
ownership" provisions of the Tax Reform Act of 1986, utilization of the
Company's net operating loss carryforwards may be limited.
At December 31, 1999 and 1998, the Company had deferred tax assets of
approximately $11.9 million and $4.2 million, respectively, which relate
primarily to the future tax benefits of net operating loss carryforwards. The
deferred tax assets have been entirely offset by a valuation allowance, which
increased by approximately $7.7 million and $3.6 million in the years ended
December 31, 1999 and 1998, respectively, primarily as a result of the increase
in the net operating loss carryforwards.
59
<PAGE> 62
Silicon Spice Inc.
(a development stage company)
Notes to Financial Statements (continued)
10. COMMITMENTS
The Company leases its facilities under operating leases. Obligations under
capital leases are classified as equipment financings. Minimum payments under
the operating leases as of December 31, 1999 are as follows:
<TABLE>
<CAPTION>
<S> <C>
2000 $1,757,130
2001 1,716,720
2002 1,785,391
2003 1,856,820
2004 1,931,082
Thereafter 161,441
----------
$9,208,584
==========
</TABLE>
Rent expense amounted to $788,848, $591,811, $67,824, and $1,448,483 for the
years ended December 31, 1999, 1998, and 1997 and for the period from inception
(September 26, 1996) through December 31, 1999, respectively. Sublease income,
which is netted against rental expense, totaled $168,480, $80,435, $0, and
$248,915 for the years ended December 31, 1999, 1998, and 1997 and for the
period from inception (September 26, 1996) through December 31, 1999,
respectively.
60
<PAGE> 63
Silicon Spice Inc.
(a development stage company)
Condensed Balance Sheets
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
------------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 49,716,233 $ 56,246,004
Short-term investments 3,144,924 6,383,108
Prepaid expenses and other current assets 1,036,682 758,463
------------ ------------
Total current assets 53,897,839 63,387,575
Property and equipment, net 9,368,385 5,242,445
Other assets 585,061 393,516
------------ ------------
Total assets $ 63,851,285 $ 69,023,536
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 2,863,737 $ 1,625,683
Accrued compensation and related expenses 449,236 387,258
Current portion of LT debt 4,635,908 3,680,504
------------ ------------
Total current liabilities 7,948,881 5,693,445
Equipment financing, less current portion 2,509,790 2,781,673
Subordinated debt, less current portion 1,007,600 1,611,734
Commitments
Shareholders' equity:
Convertible preferred stock 94,473,478 87,678,949
Common stock 2,337,833 1,010,207
Notes receivable from shareholders (1,024,516) (502,016)
Unrealized gain (loss) on investment (8,827) (12,343)
Deficit accumulated during the development stage (43,392,954) (29,238,113)
------------ ------------
Total shareholders' equity 52,385,014 $ 58,936,684
------------ ------------
Total liabilities and shareholders' equity $ 63,851,285 $ 69,023,536
============ ============
</TABLE>
See accompanying notes.
61
<PAGE> 64
Silicon Spice Inc.
(a development stage company)
Unaudited Condensed Statements of Operations
<TABLE>
<CAPTION>
PERIOD FROM
SEPTEMBER 26,
1996 (INCEPTION)
SIX MONTHS ENDED JUNE 30, THROUGH
--------------------------------- JUNE 30,
2000 1999 2000
------------ ------------ ------------
<S> <C> <C> <C>
Operating expenses:
Research and development $ 11,562,180 $ 6,374,175 $ 33,103,268
General and administrative 3,857,627 2,124,725 11,665,052
------------ ------------ ------------
Total operating expenses 15,419,807 8,498,900 44,768,320
------------ ------------ ------------
Operating loss (15,419,807) (8,498,900) (44,768,320)
Interest income 1,741,759 385,701 2,795,671
Interest expense (476,793) (275,472) (1,420,305)
------------ ------------ ------------
Net loss $(14,154,841) $ (8,388,671) $(43,392,954)
============ ============ ============
</TABLE>
See accompanying notes.
62
<PAGE> 65
SILICON SPICE INC.
(A DEVELOPMENT STAGE COMPANY)
UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
SEPTEMBER 26,
1996
(INCEPTION)
SIX MONTHS ENDED JUNE 30, THROUGH
--------------------------------- JUNE 30,
2000 1999 2000
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $(14,154,841) $ (8,388,671) $(43,392,954)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 1,532,802 823,320 4,165,695
Issuance of common stock for services provided - - 30,000
Changes in operating assets and liabilities:
Prepaids and other assets (278,219) (209,649) (1,036,682)
Accounts payable and accrued liabilities 1,238,054 (2,986) 2,833,737
Accrued compensation and related expenses 61,978 - 449,236
------------ ------------ ------------
Net cash used in operating activities (11,600,226) (7,777,986) (36,950,968)
------------ ------------ ------------
INVESTING ACTIVITIES
Purchases of short-term investments (1,989,684) (5,311,191) (12,481,684)
Sale of short-term investments at maturity 5,231,384 - 9,327,933
Purchases of property and equipment (3,475,359) (1,557,021) (4,239,801)
Other assets (191,545) 374,543 (325,817)
------------ ------------ ------------
Net cash used in investing activities (425,204) (6,493,669) (7,719,369)
------------ ------------ ------------
FINANCING ACTIVITIES
Issuance of common stock 829,488 112,816 1,372,368
Repurchase of common stock (24,362) (12,268) (45,593)
Issuance of convertible preferred stock, net of 6,794,529 8,061,159 93,977,460
issuance costs
Proceeds from issuance of notes payable to - - 187,500
shareholders
Proceeds from equipment financing - - 750,000
Repayments of equipment financing (1,557,342) (1,048,340) (4,047,182)
Proceeds from issuance of subordinated debt - 3,000,000 3,000,000
Repayments of subordinated debt (546,654) - (807,983)
------------ ------------ ------------
Net cash provided by financing activities 5,495,659 10,113,367 94,386,570
------------ ------------ ------------
Net increase (decrease) in cash and cash (6,529,771) (4,158,288) 49,716,233
equivalents
Cash and cash equivalents at beginning of period 56,246,004 16,934,823 -
------------ ------------ ------------
Cash and cash equivalents at end of period $ 49,716,233 $ 12,776,535 $ 49,716,233
============ ============ ============
SUPPLEMENTAL DISCLOSURES
Cash paid for interest $ 476,793 $ 275,472 $ 1,384,459
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING
ACTIVITIES
Issuance of warrants $ - $ - $ 188,518
Notes receivable from shareholders $ 522,500 $ 90,000 $ 1,024,516
Issuance of common stock for patent rights $ - $ 106,542 $ 106,542
Acquisition of property and equipment under $ 2,183,383 $ 909,207 $ 9,258,903
equipment financing
Conversion of notes payable to shareholders into - $ - $ 187,500
shares of Series A convertible preferred stock
Conversion of founder's common stock into Series - $ - $ 120,000
A convertible preferred stock
</TABLE>
See accompanying notes.
63
<PAGE> 66
SILICON SPICE INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
JUNE 30, 2000
1. Basis of Presentation
The condensed financial statements included herein are unaudited;
however, they contain all normal recurring accruals and adjustments which, in
the opinion of management, are necessary to present fairly the financial
position of Silicon Spice, Inc. (the "Company") at June 30, 2000 and the results
of its operations and cash flows for the six months ended June 30, 2000 and
1999. The results of operations for the six months ended June 30, 2000 are not
necessarily indicative of the results to be expected for the full year.
The accompanying unaudited condensed financial statements do not
include footnotes and certain financial presentations normally required under
generally accepted accounting principles. Therefore, these financial statements
should be read in conjunction with the audited financial statements and notes
thereto for the year ended December 31, 1999, included in Broadcom Corporation's
Current Report on Form 8-K/A filed with the Securities and Exchange Commission
on or about November 9, 2000 within which these unaudited condensed financial
statements have been included.
Recent Accounting Pronouncements
In June 1997, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 was effective for all fiscal
quarters for fiscal years beginning after June 15, 1999. In August 1999, the
FASB issued SFAS No. 137, Accounting for Derivative Instruments and Hedging
Activities -- Deferral of the Effective Date of FASB Statement No. 133, An
Amendment of FASB Statement No. 133, which defers the effective date of SFAS No.
133 to all fiscal quarters for fiscal years beginning after June 15, 2000. In
June 2000, the FASB issued SFAS No. 138, Accounting for Certain Derivative
Instruments and Certain Hedging Activities, an Amendment of FASB Statement No.
133. SFAS No. 133, as amended, establishes accounting and reporting standards
for derivative instruments embedded in other contracts and for hedging
activities. The Company does not currently hold
64
<PAGE> 67
Silicon Spice Inc.
(a development stage company)
Notes to Financial Statements (continued)
any derivatives and does not expect this pronouncement to have a material impact
on the Company's financial position, results of operations or liquidity.
In March 2000, the FASB issued Interpretation No. 44 Accounting for
Certain Transactions Involving Stock Compensation - an interpretation of APB
Opinion No. 25 (FIN 44). This Interpretation clarifies the definition of an
employee for purposes of applying APB 25, the criteria for determining whether a
plan qualifies as a noncompensatory plan, the accounting consequence of various
modifications to the terms of a previously fixed stock option or award, and the
accounting for an exchange of stock compensation awards in a business
combination. This Interpretation is effective July 1, 2000, but certain
conclusions in this Interpretation cover specific events that occur after either
December 15, 1998 or January 12, 2000. The adoption of FIN 44 is not expected to
have a material impact on the Company's financial position, results of
operations or liquidity.
2. Subsequent Event
In October 2000, the Company completed a transaction whereby it was acquired
by Broadcom Corporation. In connection with the acquisition, Broadcom
Corporation issued an aggregate of approximately 5.0 million shares of its Class
A Common Stock in exchange for all outstanding shares of the Company's preferred
and common stock and the assumed exercise of outstanding employee stock options,
warrants and other rights, including approximately 9.3 million employee stock
options that were granted in July 2000.
* * * * *
65
<PAGE> 68
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
June 30, 2000
(In thousands)
<TABLE>
<CAPTION>
Historical
-------------------------------------------------- Pro Forma Pro Forma
Broadcom Altima NewPort Silicon Spice Adjustments Combined
-------- -------- -------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 280,880 $ 5,045 $ 18,120 $ 49,716 $ -- $ 353,761
Short-term investments 98,982 -- -- 3,145 -- 102,127
Accounts receivable, net 117,075 5,753 54 -- -- 122,882
Inventory 38,617 2,413 -- -- -- 41,030
Deferred taxes 8,380 520 -- -- -- 8,900
Prepaid expenses and other current assets 26,317 190 205 1,037 -- 27,749
--------- -------- -------- -------- ----------- -----------
Total current assets 570,251 13,921 18,379 53,898 -- 656,449
Property and equipment, net 62,786 939 3,696 9,368 -- 76,789
Deferred taxes 293,160 -- -- -- (116,460)(a) 176,700
Goodwill and purchased intangibles, net -- 940 -- -- 2,590,965 (a) 2,591,905
Other assets 15,309 74 2 585 -- 15,970
--------- -------- -------- -------- ----------- -----------
Total assets $ 941,506 $ 15,874 $ 22,077 $ 63,851 $ 2,474,505 $ 3,517,813
========= ======== ======== ======== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 62,400 $ 3,159 $ 699 $ 2,864 $ -- $ 69,122
Wages and related benefits 11,025 -- -- 449 -- 11,474
Accrued liabilities 22,139 4,324 401 -- 13,770(b) 40,634
Current portion of long-term debt 1,167 939 889 4,636 -- 7,631
--------- -------- -------- -------- ----------- -----------
Total current liabilities 96,731 8,422 1,989 7,949 13,770 128,861
Long-term debt, less current portion 966 -- 2,451 3,518 -- 6,935
Shareholders' equity
Common stock 681,092 23,907 29,050 96,802 (149,759)(c) 4,322,562
3,641,470 (d)
Notes receivable from employees (1,426) -- -- (1,025) -- (2,451)
Deferred stock-based compensation (10,414) (12,610) -- -- (680,717)(a) (691,131)
12,610 (c)
Retained earnings (accumulated deficit) 174,557 (3,845) (11,413) (43,393) (421,520)(e) (246,963)
58,651 (c)
--------- -------- -------- -------- ----------- -----------
Total shareholders' equity 843,809 7,452 17,637 52,384 2,460,735 3,382,017
--------- -------- -------- -------- ----------- -----------
Total liabilities and shareholders'
equity $ 941,506 $ 15,874 $ 22,077 $ 63,851 $ 2,474,505 $ 3,517,813
========= ======== ======== ======== =========== ===========
</TABLE>
See accompanying notes to unaudited pro forma condensed combined financial
information.
66
<PAGE> 69
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
For the Six Months Ended June 30, 2000
(In thousands, except per share data)
<TABLE>
<CAPTION>
Historical
----------------------------------------------- Pro Forma Pro Forma
Broadcom Altima NewPort Silicon Spice Adjustments Combined
-------- ------- ------- ------------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenue $436,768 $14,722 $ 507 $ -- $ -- $ 451,997
Cost of revenue 181,597 6,627 -- -- -- 188,224
-------- ------- ------- -------- --------- ---------
Gross profit 255,171 8,095 507 -- -- 263,773
Operating expense:
Research and development 97,558 3,846 4,548 11,562 -- 117,514
Selling, general and administrative 42,761 3,456 1,883 3,858 -- 51,958
Amortization of goodwill and
purchased intangibles -- -- -- -- 259,922 (f) 259,922
Stock-based compensation expense -- -- -- -- 98,380 (g) 98,380
Merger related costs 4,745 -- -- -- -- 4,745
-------- ------- ------- -------- --------- ---------
Income (loss) from operations 110,107 793 (5,924) (15,420) (358,302) (268,746)
Interest and other income, net 8,050 130 333 1,265 -- 9,778
-------- ------- ------- -------- --------- ---------
Income (loss) before income taxes 118,157 923 (5,591) (14,155) (358,302) (258,968)
Provision (benefit) for income taxes 23,631 140 1 -- (28,810)(h) (5,038)
-------- ------- ------- -------- --------- ---------
Net income (loss) $ 94,526 $ 783 $(5,592) $(14,155) $(329,492) $(253,930)
======== ======= ======= ======== ========= =========
Basic earnings (loss) per share $ 0.44 $ (1.14)
======== =========
Diluted earnings (loss) per share $ 0.37 $ (1.14)
======== =========
Weighted average shares (basic) 212,911 222,199
======== =========
Weighted average shares (diluted) 253,261 222,199
======== =========
</TABLE>
See accompanying notes to unaudited pro forma condensed combined financial
information.
67
<PAGE> 70
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
For the Twelve Months Ended December 31, 1999
(In thousands, except per share data)
<TABLE>
<CAPTION>
Historical
---------------------------------------------- Pro Forma Pro Forma
Broadcom Altima NewPort Silicon Spice Adjustments Combined
-------- ------- ------- ------------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenue $521,225 $ 5,041 $ 658 $ -- $ -- $ 526,924
Cost of revenue 211,991 2,400 -- -- -- 214,391
-------- ------- ------- -------- --------- ---------
Gross profit 309,234 2,641 658 -- -- 312,533
Operating expense:
Research and development 121,733 3,302 3,797 13,936 -- 142,768
Selling, general and administrative 62,602 2,275 1,874 4,645 -- 71,396
Amortization of goodwill and
purchased intangibles -- -- -- -- 519,845 (f) 519,845
Stock-based compensation expense -- -- -- -- 196,760 (g) 196,760
Merger related costs 15,210 -- -- -- -- 15,210
Litigation settlement costs 17,036 -- -- -- -- 17,036
-------- ------- ------- -------- --------- ---------
Income (loss) from operations 92,653 (2,936) (5,013) (18,581) (716,605) (650,482)
Interest and other income, net 8,648 288 96 72 -- 9,104
-------- ------- ------- -------- --------- ---------
Income (loss) before income taxes 101,301 (2,648) (4,917) (18,509) (716,605) (641,378)
Provision (benefit) for income taxes 28,830 -- 1 -- (52,253)(h) (23,422)
-------- ------- ------- -------- --------- ---------
Net income (loss) $ 72,471 $(2,648) $(4,918) $(18,509) $(664,352) $(617,956)
======== ======= ======= ======== ========= =========
Basic earnings (loss) per share $ 0.36 $ (2.93)
======== =========
Diluted earnings (loss) per share $ 0.31 $ (2.93)
======== =========
Weighted average shares (basic) 201,667 210,955
======== =========
Weighted average shares (diluted) 235,651 210,955
======== =========
</TABLE>
See accompanying notes to unaudited pro forma condensed combined financial
information.
68
<PAGE> 71
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
1. BASIS OF PRESENTATION
The following unaudited pro forma condensed combined financial statements
give effect to the acquisitions by Broadcom Corporation (the "Company") of
Altima Communications, Inc. ("Altima"), NewPort Communications, Inc. ("NewPort")
and Silicon Spice Inc. ("Silicon Spice"), collectively, the "Acquired
Companies." These acquisitions were completed on September 7, 2000, October 3,
2000 and October 6, 2000, respectively.
The accompanying Unaudited Pro Forma Condensed Combined Statements of
Operations (the "Pro Forma Statements of Operations") for the twelve months
ended December 31, 1999 and the six months ended June 30, 2000 give effect to
each of the acquisitions of the Acquired Companies, accounted for as purchase
business combinations, as if each had occurred on January 1, 1999. The Pro Forma
Statements of Operations are based on historical results of operations of the
Company and each of the Acquired Companies for the twelve months ended December
31, 1999 and the six months ended June 30, 2000. The Unaudited Pro Forma
Condensed Combined Balance Sheet (the "Pro Forma Balance Sheet") gives effect to
each acquisition as if each had occurred on June 30, 2000. The Pro Forma
Statements of Operations and Pro Forma Balance Sheet and accompanying notes (the
"Pro Forma Financial Information") should be read in conjunction with, and are
qualified by reference to, the historical financial statements of the Company
and the Acquired Companies and the related notes thereto.
The Pro Forma Financial Information is intended for informational purposes
only and is not necessarily indicative of the future financial position or
future results of operations of the Company after the acquisitions of the
Acquired Companies, or of the financial position or results of operations of the
Company that would have actually occurred had the acquisitions of the Acquired
Companies been effected on January 1, 1999.
2. PRO FORMA ASSUMPTIONS
The following represents the preliminary allocation of the purchase price
over the historical net book values of the acquired assets and assumed
liabilities of the Acquired Companies at June 30, 2000, and is included for
illustrative pro forma purposes only. The Company is in the process of obtaining
independent appraisals of the fair value of acquired in-process research and
development and identifiable intangible assets as of the acquisition dates.
Accordingly, these allocations are preliminary and are subject to change upon
the completion of the independent third party valuations. Assuming the
transactions had occurred on June 30, 2000, the preliminary allocations would
have been as follows (in thousands):
<TABLE>
<CAPTION>
Silicon
Altima NewPort Spice Total
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Assumed value of shares of the
Company's common stock issued and
value of Company's restricted common
stock, employee stock options and
performance-based warrants exchanged $1,219,874 $1,285,578 $1,136,018 $3,641,470
Estimated transaction costs 1,025 175 12,570 13,770
---------- ---------- ---------- ----------
Estimated total acquisition costs 1,220,899 1,285,753 1,148,588 3,655,240
Less: net assets assumed 7,452 17,637 53,409 78,498
---------- ---------- ---------- ----------
Unallocated excess of acquisition
costs over net assets assumed $1,213,447 $1,268,116 $1,095,179 $3,576,742
========== ========== ========== ==========
Preliminary allocation to:
In-process research and development $ 3,970 $ 198,250 $ 219,300 $ 421,520
Goodwill and purchased intangibles 1,071,254 889,260 630,451 2,590,965
Deferred taxes (21,268) (80,396) (14,796) (116,460)
Deferred stock-based compensation 159,491 261,002 260,224 680,717
---------- ---------- ---------- ----------
$1,213,447 $1,268,116 $1,095,179 $3,576,742
========== ========== ========== ==========
</TABLE>
The purchase price of Altima consists of approximately 5,427,000 shares of
common stock which includes a) approximately 1,530,000 shares of common stock
valued at $332.9 million based upon the Company's stock price for a short period
just before and after the Company and Altima reached agreement and the proposed
transaction was announced, b) approximately 2,890,000 shares for
performance-based warrants valued at $689.4 million based upon the Company's
stock price on the day the acquisition closed, and c) approximately 1,007,000
shares of restricted common stock and employee stock
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options valued at $197.6 million in accordance with FASB Interpretation No. 44,
"Accounting for Certain Transactions Involving Stock Compensation - an
Interpretation of APB No. 25" ("FIN 44").
The purchase price of NewPort consists of approximately 5,622,000 shares of
common stock which includes a) approximately 4,254,000 shares of common stock
valued at $1,001.6 million based upon the Company's stock price for a short
period just before and after the Company and NewPort reached agreement and the
proposed transaction was announced and b) approximately 1,368,000 shares of
restricted common stock and employee stock options valued at $284.0 million in
accordance with FIN 44.
The purchase price of Silicon Spice consists of approximately 4,991,000
shares of common stock which includes a) approximately 3,504,000 shares of
common stock valued at $834.9 million based upon the Company's stock price for a
short period just before and after the Company and Silicon Spice reached
agreement and the proposed transaction was announced, b) approximately 40,000
shares for performance-based warrants valued at $9.0 million based upon the
Company's stock price on the day the acquisition closed, and c) approximately
1,447,000 shares of restricted common stock and employee stock options valued at
$292.1 million in accordance with FIN 44.
For purposes of the pro forma financial information, the estimated amount of
the in-process research and development is $421.5 million for the Acquired
Companies, which is based upon preliminary independent third party valuations.
Because such in-process research and development did not reach the stage of
technological feasibility by the acquisition date and is expected to have no
alternative future use, this amount shall be immediately written-off by the
Company and has been reflected in the pro forma balance sheet as a charge
against retained earnings.
3. PRO FORMA ADJUSTMENTS
The pro forma financial information reflects the following adjustments:
a) To record the preliminary allocation of the purchase price to goodwill and
purchased intangibles, deferred tax liabilities and deferred stock-based
compensation.
b) To accrue estimated transaction costs.
c) To eliminate the Acquired Companies' common stock and retained earnings
accounts.
d) To record the acquisitions of the Acquired Companies' equity securities by
the issuance of the Company's common stock, restricted common stock and
assumption of employee stock options and performance-based warrants.
e) To record the allocation of purchase price to in-process research and
development.
f) To record amortization expense for goodwill and purchased intangibles over
an expected estimated period of benefit ranging from two to five years.
g) To record stock-based compensation expense generally over a three to
four-year period.
h) Reflects the estimated tax effects of the pro forma adjustments. The pro
forma adjustments for the amortization of goodwill and purchased
intangibles, in-process research and development, and certain stock-based
compensation are excluded from such computations, as the Company does not
expect to realize any benefit from these items.
4. EARNINGS PER SHARE
Basic and diluted earnings (loss) per share for each period is calculated by
dividing pro forma net income (loss) by the shares used to calculate earnings
(loss) per share in the historical period plus the effect of the shares and
options which were exchanged or assumed in connection with the acquisitions of
the Acquired Companies. Potential common shares are excluded from the
calculation of diluted earnings (loss) per share in a loss period as the effect
would be antidilutive.
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SIGNATURE
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 hereunto duly authorized.
BROADCOM CORPORATION,
a California corporation
November 9, 2000 By: /s/ WILLIAM J. RUEHLE
-----------------------------
William J. Ruehle
Vice President and
Chief Financial Officer
/s/ SCOTT J. POTERACKI
------------------------------
Scott J. Poteracki
Senior Director of Finance and
Corporate Controller
(Principal Accounting Officer)
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EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------- -----------
23.1 Consent of Ernst & Young LLP, Independent Auditors
23.2 Consent of PricewaterhouseCoopers LLP, Independent Accountants
23.3 Consent of Deloitte & Touche LLP, Independent Auditors
23.4 Consent of Ernst & Young LLP, Independent Auditors
