<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 17, 1999
REGISTRATION NO. 333-85351
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
BSQUARE CORPORATION
(NAME OF ISSUER IN ITS CHARTER)
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<S> <C> <C>
WASHINGTON 7371 91-1650880
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
3633 136TH PLACE S.E., SUITE 100
BELLEVUE, WASHINGTON 98006
(425) 519-5900
(ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES AND PRINCIPAL PLACE
OF BUSINESS)
WILLIAM T. BAXTER
CHAIRMAN OF THE BOARD, PRESIDENT AND CHIEF EXECUTIVE OFFICER
3633 136TH PLACE S.E., SUITE 100
BELLEVUE, WASHINGTON 98006
(425) 519-5900
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
COPIES OF ALL COMMUNICATIONS TO BE SENT TO:
MICHAEL J. ERICKSON, ESQ.
KAREN A. ANDERSEN, ESQ.
LAURA A. BERTIN, ESQ.
MARK F. WORTHINGTON, ESQ.
SUMMIT LAW GROUP, PLLC
1505 WESTLAKE AVENUE NORTH, SUITE 300
SEATTLE, WASHINGTON 98109
(206) 281-9881
WILLIAM D. SHERMAN, ESQ.
CORI M. ALLEN, ESQ.
COREY A. LEVENS, ESQ.
MORRISON & FOERSTER LLP
755 PAGE MILL ROAD
PALO ALTO, CALIFORNIA 94304
(650) 813-5600
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
- ------------------
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
- ------------------
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
- ------------------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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<S> <C> <C> <C> <C>
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PROPOSED MAXIMUM
AGGREGATE OFFERING PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES TO BE AMOUNT TO BE PRICE PER AGGREGATE OFFERING REGISTRATION
REGISTERED REGISTERED SHARE(1)(2) PRICE(1)(2) FEE(3)
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Common Stock, no par value................ 4,600,000 $14.00 $64,400,000 $17,904
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</TABLE>
(1) Includes shares that the Underwriters have the option to purchase to cover
over-allotments, if any.
(2) Estimated solely for the purpose of computing the amount of the registration
fee pursuant to Rule 457(a) promulgated under the Securities Act of 1933, as
amended.
(3) Includes $16,680 paid in connection with the original filing on August 17,
1999.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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<PAGE> 2
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED SEPTEMBER , 1999
4,000,000 Shares
[COMPANY LOGO]
Common Stock
------------------
Prior to this offering, there has been no public market for our common
stock. The initial public offering price is expected to be between $12.00 and
$14.00 per share. We have applied to list our common stock on The Nasdaq Stock
Market's National Market under the symbol "BSQR."
The underwriters have an option to purchase a maximum of 600,000 additional
shares to cover over-allotments of shares.
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" ON PAGE 5.
<TABLE>
<CAPTION>
UNDERWRITING
DISCOUNTS AND PROCEEDS TO
PRICE TO PUBLIC COMMISSIONS BSQUARE
--------------- ------------- -----------
<S> <C> <C> <C>
Per Share............................................ $ $ $
Total................................................ $ $ $
</TABLE>
Delivery of the shares of common stock will be made on or about
, 1999.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
CREDIT SUISSE FIRST BOSTON LEHMAN BROTHERS
A.G. EDWARDS & SONS, INC. WIT CAPITAL CORPORATION
The date of this prospectus is , 1999.
<PAGE> 3
[Description of Artwork]
Front Inside Cover
[BSQUARE LOGO]
[Text]
BSQUARE
BSQUARE provides products and services
that facilitate the integration of the
Windows CE operating system into
intelligent computing devices
in these target markets
TELEVISION SET-TOP BOXES
HANDHELD INDUSTRIAL DEVICES
WINDOWS-BASED TERMINALS
GAMING SYSTEMS
PALM-SIZE PCs
CONSUMER INTERNET APPLIANCES
<PAGE> 4
INSIDE GATEFOLD
[Text]
BSQUARE CORPORATION
BSQUARE - WINDOWS CE SOLUTIONS PROVIDER
The growth of the market for intelligent computing devices, compounded by the
growth of the Windows CE operating system, has created an emerging market
opportunity for Windows CE-based software and services. BSQUARE provides
software engineering services to Microsoft to develop the Windows CE operating
system and related integration tools. BSQUARE provides OEMs with software
products and services to help integrate Windows CE into their intelligent
computing devices. Consumers license BSQUARE's mobile productivity software
products, such as bFAX[R], to extend the use of intelligent computing devices.
Off-the-shelf software products help OEMs achieve a faster time-to-market, and
consumers to increase the functionality of intelligent computing devices.
BSQUARE's experienced software engineering team has been developing Windows
CE-based software solutions since prior to the commercial release of Windows CE.
[Pictures reflecting BSQUARE products and models posing
as BSQUARE engineering team]
<PAGE> 5
Inside Gatefold
[Text]
From the operating system to run-time software to consumer applications, BSQUARE
provides end-to-end software solutions for the development and use of Windows
CE-based intelligent computing devices.
Intelligent Computing Device Development Process
[Chart reflecting]
Microsoft
Semiconductor Vendors
Intelligent Computing Device Manufacturers (OEMs)
Consumers
Software services for development of Windows CE operating system and
accompanying tools
Software services for development of Windows CE tools and system level software
support
Software products and services for the integration of Windows CE into devices.
Consumer applications for bundling on devices
After-market software products to extend the use of intelligent computing
devices
BSQUARE supplies software products and services throughout the process
[BSQUARE LOGO]
Windows CE
<PAGE> 6
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TABLE OF CONTENTS
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PAGE
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<S> <C>
PROSPECTUS SUMMARY.................... 3
RISK FACTORS.......................... 5
FORWARD-LOOKING STATEMENTS............ 16
USE OF PROCEEDS....................... 16
DIVIDEND POLICY....................... 16
CAPITALIZATION........................ 17
DILUTION.............................. 18
SELECTED CONSOLIDATED FINANCIAL
DATA................................ 19
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS....................... 20
BUSINESS.............................. 29
</TABLE>
<TABLE>
<CAPTION>
PAGE
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MANAGEMENT............................ 44
RELATED-PARTY TRANSACTIONS............ 51
PRINCIPAL SHAREHOLDERS................ 52
DESCRIPTION OF CAPITAL STOCK.......... 54
SHARES ELIGIBLE FOR FUTURE SALE....... 57
UNDERWRITING.......................... 59
NOTICE TO CANADIAN RESIDENTS.......... 61
LEGAL MATTERS......................... 62
EXPERTS............................... 62
WHERE TO FIND ADDITIONAL DOCUMENTS.... 62
INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS.......................... F-1
</TABLE>
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YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR TO
WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT. THIS DOCUMENT MAY ONLY BE USED WHERE IT IS LEGAL
TO SELL THESE SECURITIES. THE INFORMATION IN THIS DOCUMENT MAY ONLY BE ACCURATE
ON THE DATE OF THIS DOCUMENT.
DEALER PROSPECTUS DELIVERY OBLIGATION
UNTIL , 1999 (25 DAYS AFTER THE COMMENCEMENT OF THIS OFFERING),
ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS
IN ADDITION TO THE DEALER'S OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS AN
UNDERWRITER AND WITH RESPECT TO UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
2
<PAGE> 7
PROSPECTUS SUMMARY
The following summary highlights information that we present more fully
elsewhere in this prospectus. You should read this entire prospectus carefully.
BSQUARE CORPORATION
We provide a broad range of software products and services that facilitate
the integration of the Microsoft Windows CE operating system into a variety of
intelligent computing devices, or ICDs, and enhance the functionality of those
devices. Original equipment manufacturers, or OEMs, semiconductor vendors and
Windows CE software developers rely on our products and services to help bring
customized ICDs and ICD applications to market in a timely fashion. We have been
providing Windows CE-based software services since prior to the commercial
release of Windows CE, and therefore we believe that we offer a greater breadth
and depth of Windows CE expertise than any of our current competitors.
ICDs are an emerging class of products with sophisticated processing power
that are designed for specific computing and communications applications.
Examples of ICDs include Internet-enabled television set-top boxes, handheld and
palm-size PCs, gaming systems, handheld industrial data collectors, consumer
Internet appliances such as kiosk terminals and vehicle navigational devices,
and Windows-based terminals. Compared to traditional computers, ICDs are often
less expensive and more adaptable in terms of their size, weight and shape,
while still providing sophisticated computing and communications capabilities,
including Internet connectivity.
As businesses and consumers increasingly use the Internet to transact
business, OEMs are developing new ICDs to better meet the needs of end users.
Because of space constraints and other design and resource limitations inherent
in the ICD environment, OEMs require a computer operating system that is both
scaleable and highly customizable, with lower system requirements than
traditional PC operating systems. Windows CE, a versatile and highly adaptable
operating system modeled after Microsoft's Windows operating system, is gaining
market acceptance among OEMs as an operating system that meets these
requirements.
We develop products and provide services that enable the development of
Windows CE-based ICDs. We generate revenue in three distinct ways. First, we
provide engineering services to Microsoft and semiconductor vendors to adapt
Windows CE to different microprocessors and to enhance Windows CE's
user-specific features and functions. Second, we offer a comprehensive set of
software products and services that help enable OEMs to cost-effectively
integrate Windows CE into their ICDs. Third, we license a wide range of Windows
CE-based software applications to both OEMs and ICD consumers to provide
additional functions to Windows CE-based ICDs, such as printing and faxing
capabilities. To date, we have provided our products and services to companies
such as Microsoft, Hitachi, NEC and ARM.
We intend to become a primary provider of software products and services
for facilitating the integration of operating systems into ICDs. The key
elements of our strategy include building on our expertise as a provider of
Windows CE software products and services, expanding our strategic relationships
with semiconductor vendors and OEMs, maintaining and expanding our relationship
with Microsoft, developing additional software applications and expanding our
international presence.
We were incorporated in the State of Washington in July 1994. Our principal
executive offices are located at 3633 136th Place S.E., Suite 100, Bellevue,
Washington 98006, and our telephone number is (425) 519-5900. Our World Wide Web
address is www.bsquare.com. Information on our website does not constitute a
part of this prospectus.
3
<PAGE> 8
THE OFFERING
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Common stock offered by us...................... 4,000,000 shares
Common stock to be outstanding after this
offering...................................... 32,196,656 shares
Use of proceeds................................. For general corporate purposes, including planned
relocation expenses. See "Use of Proceeds" on page
16.
Proposed Nasdaq National Market Symbol.......... BSQR
</TABLE>
Unless otherwise indicated, the information in this prospectus reflects the
number of shares outstanding on August 31, 1999, after giving effect to the sale
of 1,518,378 shares of common stock to Vulcan Ventures Incorporated in September
1999, and assumes the conversion of all outstanding shares of preferred stock
into common stock upon the closing of this offering.
Please see "Capitalization" on page 17 for a more complete discussion
regarding the outstanding shares of common stock, options to purchase common
stock and other related matters.
SUMMARY CONSOLIDATED FINANCIAL DATA
The pro forma consolidated balance sheet data summarized below gives effect
to the issuance of 1,518,378 shares of common stock to Vulcan Ventures in
September 1999 and the conversion of all outstanding preferred stock into common
stock upon completion of this offering. The pro forma as adjusted consolidated
balance sheet data summarized below reflects the application of the net proceeds
from the sale of the 4,000,000 shares of common stock offered by us at the
assumed initial public offering price of $13.00 per share and after deducting
the underwriting discounts and commissions and estimated offering expenses.
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION SIX MONTHS ENDED
(JULY 15) TO YEAR ENDED DECEMBER 31, JUNE 30,
DECEMBER 31, ---------------------------------------- -----------------
1994 1995 1996 1997 1998 1998 1999
------------ ----------- ------ ------- ------- ------- -------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenue.................... $ 151 $1,573 $4,179 $14,405 $24,612 $10,802 $18,543
Gross profit............... 68 778 2,775 8,761 13,311 5,774 9,644
Income from operations..... 64 692 1,964 4,564 3,170 1,704 1,448
Net income................. $ 64 $ 693 $1,971 $ 3,806 $ 2,300 $ 1,217 $ 866
======= ====== ====== ======= ======= ======= =======
Basic earnings per share... $ -- $ 0.03 $ 0.09 $ 0.18 $ 0.12 $ 0.06 $ 0.04
======= ====== ====== ======= ======= ======= =======
Shares used in computation
of basic earnings per
share................... 21,000 21,000 22,106 21,400 18,372 18,615 18,206
======= ====== ====== ======= ======= ======= =======
Pro forma basic earnings
per share............... $ 0.09 $ 0.03
======= =======
Shares used in computation
of pro forma basic
earnings per share...... 26,021 26,539
======= =======
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1999 (UNAUDITED)
-----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................ $ 9,284 $27,986 $75,346
Working capital.......................................... 10,675 29,377 76,737
Total assets............................................. 18,749 37,451 84,811
Long term obligations, net of current portion............ 210 210 210
Mandatorily redeemable convertible preferred stock....... 14,475 -- --
Shareholders' equity (deficit)........................... (255) 32,922 80,282
</TABLE>
4
<PAGE> 9
RISK FACTORS
You should carefully consider the following risk factors and all other
information contained in this prospectus before purchasing our common stock.
Investing in our common stock involves a high degree of risk. Any of the
following risks could materially adversely affect our business, operating
results and financial condition and could result in a complete loss of your
investment.
UNANTICIPATED FLUCTUATIONS IN OUR QUARTERLY OPERATING RESULTS DUE TO FACTORS
SUCH AS ADVERSE CHANGES IN OUR RELATIONSHIP WITH MICROSOFT OR A DECLINE IN THE
MARKET FOR WINDOWS CE-BASED ICDS COULD CAUSE OUR STOCK PRICE TO DECLINE
SIGNIFICANTLY.
Our operating results have fluctuated in the past, and we expect that they
will continue to do so. We believe that period-to-period comparisons of our
operating results are not meaningful, and you should not rely on such
comparisons to predict our future performance. If our operating results fall
below the expectations of stock analysts and investors, the price of our common
stock may fall. Factors that may cause our quarterly operating results to
fluctuate include:
- the failure or perceived failure of Windows CE, the operating system upon
which demand for our products and services is dependent, to achieve
widespread market acceptance;
- the failure of the ICD market to develop;
- adverse changes in our relationship with Microsoft, from whom a
substantial portion of our revenue is generated and on whom we rely to
continue to develop and promote Windows CE;
- our inability to develop and market new and enhanced products and
services on a timely basis;
- unanticipated delays, or announcement of delays, by Microsoft of Windows
CE product releases, which could cause us to delay our product
introductions and adversely affect our customer relationships;
- changes in demand for our products and services;
- increased competition and changes in our pricing as a result of increased
competitive pressure;
- our ability to control our expenses, a large portion of which are
relatively fixed and which are budgeted based on anticipated revenue
trends, in the event that customer projects, particularly Microsoft
projects, are delayed, curtailed or discontinued;
- changes in the mix of our services and product revenue, which have
different gross margins;
- underestimates by us of the costs to be incurred in significant fixed-fee
service projects; and
- varying customer buying patterns which are often influenced by year-end
budgetary pressures.
In addition, our stock price may fluctuate due to conditions unrelated to our
operating performance, including general economic conditions in the software
industry and the market for technology stocks.
IF THE MARKET FOR THE WINDOWS CE OPERATING SYSTEM FAILS TO DEVELOP FULLY OR
DEVELOPS MORE SLOWLY THAN WE EXPECT, OUR BUSINESS AND OPERATING RESULTS WILL BE
MATERIALLY HARMED.
Windows CE is one of many operating systems developed for the ICD market
and the extent of its future acceptance is uncertain. Because all of our revenue
to date has been generated by software products and services dependent on the
Windows CE operating system, if the market for Windows CE fails to develop fully
or develops more slowly than we expect, our business and operating results will
be significantly harmed. Market acceptance of Windows CE will depend on many
factors, including:
- Microsoft's development and support of the Windows CE market. As the
developer and primary promoter of Windows CE, if Microsoft were to decide
to discontinue or lessen its support of the Windows CE operating system,
potential customers could select competing operating systems, which would
reduce the demand for our Windows CE-based software products and
services. In addition,
5
<PAGE> 10
Microsoft has developed a version of its Windows NT operating system for
ICDs and could decide to shift its support to this operating system to
the detriment of Windows CE;
- the ability of the Windows CE operating system to compete against
existing and emerging operating systems for the ICD market including:
VxWorks from WindRiver Systems Inc., pSOS from Integrated Systems, Inc.,
VRTX from Mentor Graphics Corporation, JavaOS from Sun Microsystems, Inc.
and LINUX. In particular, in the market for palm-size devices, Windows CE
faces intense competition from PalmOS used on 3Com Corporation's Palm
devices and to date has had limited success in this market. In the market
for cellular phones, Windows CE faces intense competition from the EPOC
operating system from Symbian. Windows CE may be unsuccessful in
capturing a significant share of these two segments of the ICD market, or
in maintaining its market share in those other segments of the ICD market
on which our business currently focuses, including the markets for
Internet-enabled television set-top boxes, handheld industrial devices,
consumer Internet appliances such as kiosk terminals and vehicle
navigational devices, and Windows-based terminals;
- the acceptance by OEMs and consumers of the mix of features and functions
offered by Windows CE; and
- the willingness of software developers to continue to develop and expand
the applications that run on Windows CE. To the extent that software
developers write applications for competing operating systems that are
more attractive to ICD end users than those available on Windows CE,
potential purchasers could select competing operating systems over
Windows CE.
IF THE MARKET FOR ICDS FAILS TO DEVELOP FULLY OR DEVELOPS MORE SLOWLY THAN WE
EXPECT, OUR REVENUE WILL NOT GROW AS FAST AS ANTICIPATED, IF AT ALL.
The market for ICDs is emerging and the potential size of this market and
the timing of its development are not known. As a result, our profit potential
is uncertain and our revenue may not grow as fast as we anticipate, if at all.
We are dependent upon the broad acceptance by businesses and consumers of a wide
variety of Windows CE-based ICDs, which will depend on many factors, including:
- the development of content and applications for ICDs;
- the willingness of large numbers of businesses and consumers to use
devices such as handheld and palm-size PCs and handheld industrial data
collectors to perform functions currently carried out manually or by
traditional PCs, including inputing and sharing data, communicating among
users and connecting to the Internet; and
- the evolution of industry standards that facilitate the distribution of
content over the Internet to these devices via wired and wireless
telecommunications systems, satellite or cable.
A SUBSTANTIAL PORTION OF OUR REVENUE IS GENERATED FROM OUR RELATIONSHIP WITH
MICROSOFT, WHICH CAN BE MODIFIED OR TERMINATED BY MICROSOFT AT ANY TIME.
In 1997 and 1998, and for the six months ended June 30, 1999, 39%, 79% and
87% of our revenue, respectively, was generated under our master development and
license agreement with Microsoft. The master agreement, which concludes in
October 2000, includes a number of project-specific work plans. We bill
Microsoft on a time-and-materials basis, although each project has a maximum
dollar cap. We expect the revenue generated from work plans with Microsoft will
continue to comprise the majority of our revenue for the next several years. We
presently have dedicated approximately 200 of our 270 engineers to these
projects. However, the master agreement and each of the individual work plans
may be terminated or modified by Microsoft at any time. In addition, there is no
guarantee that Microsoft will continue to enter into additional work plans with
us. In the past, Microsoft has modified the timing and scope of certain
projects, requesting that our engineers be moved from one project to another, as
well as our relationships with our customers. For example, in late 1997
Microsoft decided to contract with us to provide Windows CE support services to
semiconductor vendors with whom we had previously contracted directly. As a
result, from late 1997 through late 1998 our revenue shifted from being
generated by a variety of semiconductor vendors to
6
<PAGE> 11
being generated primarily by Microsoft. We do not believe that we could replace
the Microsoft revenue in the short- or medium-term if existing work plans were
canceled or curtailed, and such cancellations or curtailments would
substantially reduce our revenue.
IF MICROSOFT ADDS FEATURES TO ITS WINDOWS CE OPERATING SYSTEM THAT DIRECTLY
COMPETE WITH SOFTWARE PRODUCTS AND SERVICES WE PROVIDE, OUR REVENUE COULD BE
REDUCED AND OUR PROFIT MARGINS COULD SUFFER.
As the developer of Windows CE, Microsoft could add features to its
operating system that directly compete with the software products and services
we provide to our customers. Such features could include, for example, faxing,
hardware-support packages and quality-assurance tools. The ability of our
customers or potential customers to obtain software products and services
directly from Microsoft that compete with our software products and services
could harm our business. Even if the standard features of future Microsoft
operating system software were more limited than our offerings, a significant
number of our customers and potential customers might elect to accept more
limited functionality in lieu of purchasing additional software. Moreover, the
resulting competitive pressures could lead to price reductions for our products
and reduce our profit margins.
IF WE DO NOT MAINTAIN OUR FAVORABLE RELATIONSHIP WITH MICROSOFT, WE WILL HAVE
DIFFICULTY MARKETING OUR SOFTWARE PRODUCTS AND SERVICES AND MAY NOT RECEIVE
DEVELOPER RELEASES OF WINDOWS CE, AND OUR REVENUE AND OPERATING MARGINS WILL
SUFFER.
In the event that our relationship with Microsoft or with individuals
within Microsoft were to deteriorate, then our efforts to market and sell our
software products and services to OEMs could be adversely affected and our
business would be harmed. Microsoft has great influence over the development
plans and buying decisions of OEMs utilizing Windows CE for ICDs. Many of our
OEM customers are referred to us by Microsoft. Moreover, Microsoft controls the
marketing campaigns related to its operating systems, including Windows CE.
Microsoft's marketing activities, including trade shows, direct mail campaigns
and print advertising, are important to the continued promotion and market
acceptance of Windows CE and, consequently, of our Windows CE-based software
products and services. We must maintain mutually successful relationships with
Microsoft and individuals within Microsoft so that we may continue to
participate in joint marketing activities with Microsoft, including
participating with Microsoft in "partner pavilions" at trade shows and listing
our services on Microsoft's website, and to receive referrals from Microsoft. In
the event that we are unable to continue our joint marketing efforts with
Microsoft or fail to receive referrals from Microsoft, we would be required to
devote significant additional resources and incur additional expenses to market
our software products and services directly to potential customers. In addition,
we depend on receiving from Microsoft developer releases of new versions of and
upgrades to Windows CE and related Microsoft software in order to timely develop
and ship our products and provide services. If we are unable to receive these
developer releases, our revenue and operating margins would suffer.
UNANTICIPATED DELAYS, OR ANNOUNCEMENT OF DELAYS, BY MICROSOFT OF WINDOWS CE
PRODUCT RELEASES COULD ADVERSELY AFFECT OUR SALES.
Unanticipated delays, or announcement of delays, in Microsoft's delivery
schedule for new versions of its Windows CE operating system could cause us to
delay our product introductions and impede our ability to complete customer
projects on a timely basis. These delays or announcements by Microsoft could
also cause our customers to delay or cancel their project development activities
or product introductions. Any resulting delays in, or cancellations of, our
planned product introductions or in our ability to commence or complete customer
projects may adversely affect our revenue and could cause our quarterly
operating results to fluctuate. For example, in 1998 Microsoft delayed the
release of a version of its Windows CE Platform Builder, which delayed our
introduction of a complementary product for an OEM customer.
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<PAGE> 12
WE HAVE SIGNED A NON-COMPETITION PROVISION WITH MICROSOFT WHICH COULD LIMIT OUR
ABILITY TO SUSTAIN OR GROW OUR BUSINESS.
We must receive written permission from Microsoft in order to design or
develop products, or provide services in connection with products, which compete
with the Microsoft Windows CE operating system or related products in existence
or under development as of October 1, 1998. The term of our non-competition
provision coincides with the term of our master agreement with Microsoft, which
concludes in October 2000. Therefore, if there is a significant shift away from
Microsoft operating systems in the ICD market segments that we are targeting,
including the markets for Internet-enabled television set-top boxes, handheld
and palm-size PCs, handheld industrial data collectors, consumer Internet
appliances such as kiosk terminals and vehicle navigational devices, and
Windows-based terminals, we will be unable to target and support other operating
system platforms during the term of our non-competition provision. Similarly,
because the non-competition provision effectively requires us to devote all of
our resources to supporting the Windows CE operating system, if our relationship
with Microsoft is curtailed or terminated we would be required to invest
significant time and resources to transition our operations to target and
support competing operating systems. Moreover, to the extent that Microsoft
challenges any of our activities which we believe are not prohibited by the
non-competition provision, we may become involved in litigation to enforce our
rights under the agreement. Litigation, whether successful or not, could harm
our relationship with Microsoft, result in substantial costs and divert our
resources, any of which could harm our business.
THE FIXED-FEE ARRANGEMENTS WE HAVE WITH MANY OF OUR CUSTOMERS EXPOSE US TO THE
RISK THAT WE MAY UNDERESTIMATE OUR COSTS FOR PROJECTS, WHICH COULD LOWER OUR
PROFIT MARGINS.
In addition to the capped-fee arrangements we have with Microsoft, we
provide our services to many of our customers under fixed-fee arrangements. In
1998 and for the six months ended June 30, 1999, approximately 12% and 10%,
respectively, of our total revenue was derived from fixed-fee contracts. In the
event that we underestimate the scope or work effort required for a customer's
project, we may be required to complete the project at a loss or at a
significantly reduced gross margin. If we underestimate the fees for a series of
projects and/or a very large project, our gross margins for a fiscal period may
decline. In addition, revenue from these contracts is recognized on the
percentage-of-completion method, measured by the cost incurred to date relative
to the estimated total cost for the contract. If we underestimate the time
necessary to complete these projects, we may be required to recognize revenue at
a later time than we had anticipated, which would have a negative impact on our
financial condition and cause our quarterly results to fluctuate.
IF WE FAIL TO SECURE CONTRACTS ON SUFFICIENTLY PROFITABLE TERMS, OR AT ALL, WITH
THE LIMITED NUMBER OF MARKET-LEADING OEMS OUR REVENUE AND PROFIT MARGINS WOULD
SUFFER.
Currently substantially all of our non-Microsoft revenue is generated from
sales to OEMs. For the six months ended June 30, 1999, approximately 13% of our
revenue was from sales to OEM customers. There are a limited number of OEM
customers that are capable of building and shipping large quantities of ICDs. In
some market segments, one or two OEMs account for a majority of all unit sales.
Competition for the business of these OEMs is intense. If we fail to secure and
maintain service and licensing contracts with the limited number of OEMs in
these markets we may not be able to participate in those market segments. In
addition, as a result of their strong market position, these companies are
typically able to secure favorable terms, including favorable pricing, in their
technology licensing and service agreements. Further, many of these potential
OEM customers have the capability to replace our services and products by
utilizing internal resources. For these reasons, there is no guarantee that we
will be able to secure contracts on profitable terms, or at all, with the
market-leading OEMs, which could harm our business.
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<PAGE> 13
OUR MARKET IS BECOMING INCREASINGLY COMPETITIVE, WHICH MAY RESULT IN PRICE
REDUCTIONS, LOWER GROSS MARGINS AND LOSS OF MARKET SHARE.
The market for Windows CE-based software products and services is becoming
increasingly competitive. Increased competition may result in price reductions,
lower gross margins and loss of market share, which would harm our business. We
face competition from:
- our current and potential customers' internal research and development
departments that may seek to develop their own proprietary solutions;
- large professional engineering services firms such as Cadence Design
Systems, Inc. and Electronic Data Systems Corporation that may enter the
market;
- established ICD software and tools manufacturers such as Applied
Microsystems Corporation, Spyglass, Inc., Phoenix Technologies, Inc.,
Mentor Graphics and Integrated Systems;
- small- and medium-size engineering services companies such as VenturCom,
Inc., Eclipse International, Inc., BlueWater Systems, Inc. and Vadem; and
- software and component distributors such as Avnet/Hamilton Hallmark,
Pioneer and Annasoft Systems.
As we develop new products, particularly products focused on specific
industries, we may begin competing with companies with whom we have not
previously competed. It is also possible that new competitors will enter the
market or that our competitors will form alliances, including alliances with
Microsoft, that may enable them to rapidly increase their market share. Although
we are subject to a non-competition provision with Microsoft, Microsoft has not
agreed to any exclusive arrangement with us nor has it agreed not to compete
with us. The barrier to entering the market as a provider of Windows CE-based
ICD software and services is low. In addition, Microsoft has created a marketing
program to encourage systems integrators to work on Windows CE. These systems
integrators are given the same access by Microsoft to the Windows CE technology
as we are with respect to system integration. New competitors may have lower
overhead than us and therefore be able to offer advantageous pricing. We expect
that competition will increase as other established and emerging companies enter
the Windows CE-based ICD market and as new products and technologies are
introduced.
WE DEPEND ON THE CONTINUED SERVICES OF OUR PRESIDENT AND CHIEF EXECUTIVE
OFFICER, AND OUR SUCCESS DEPENDS UPON OUR CONTINUED ABILITY TO ATTRACT, TRAIN
AND RETAIN ADDITIONAL QUALIFIED PERSONNEL AT ACCEPTABLE COMPENSATION LEVELS.
We depend substantially on the continued services of William T. Baxter, our
chairman of the board, president and chief executive officer. The loss of the
services of Mr. Baxter could harm our business. None of our executive officers,
including Mr. Baxter, has a contract that guarantees employment. In addition, we
depend on our ability to attract, train and retain qualified personnel,
specifically those with management, technical and product development skills.
Competition for such personnel is intense, particularly in geographic areas
recognized as high technology centers such as the greater-Seattle area, where
substantially all of our employees are located. There can be no assurance that
we will be able to attract, train or retain additional highly qualified
technical and managerial personnel in the future, which could harm our business.
Moreover, to remain competitive we have had to increase employee compensation
and our gross margins have been adversely impacted. To the extent such
competitive wage pressure continues or increases our gross margins could suffer.
IF WE FAIL TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY RIGHTS, COMPETITORS
MAY BE ABLE TO USE OUR TECHNOLOGY OR TRADEMARKS, WHICH COULD WEAKEN OUR
COMPETITIVE POSITION, REDUCE OUR REVENUE AND INCREASE OUR COSTS.
If we fail to adequately protect our intellectual property, our competitive
position could be weakened and our revenue adversely affected. We rely primarily
on a combination of patent, copyright, trade secret and
9
<PAGE> 14
trademark laws, confidentiality procedures and contractual provisions to protect
our intellectual property. These laws and procedures provide only limited
protection. We have applied for three patents relating to our engineering work.
These patents, if issued, may not provide sufficiently broad protection or they
may not prove to be enforceable against alleged infringers. There can be no
assurance that any of our pending patents will be granted. Even if granted,
patents may be circumvented or challenged and, if challenged, may be
invalidated. Any patents obtained may provide limited or no competitive
advantage to us. It is also possible that another party could obtain patents
that block our use of some, or all, of our products and services. If that
occurred, we would need to obtain a license from the patent holder or design
around their patent. The patent holder may or may not choose to make a license
available to us at all or on acceptable terms. Similarly, it may not be possible
to design around such a blocking patent.
In general, there can be no assurance that our efforts to protect our
intellectual property rights through patent, copyright, trade secret and
trademark laws will be effective to prevent misappropriation of our technology,
or to prevent the development and design by others of products or technologies
similar to or competitive with those developed by us. We frequently license the
source code of our products and the source code results of our services to
customers. There can be no assurance that customers with access to our source
code will comply with the license terms or that we will discover any violations
of the license terms or, in the event of discovery of violations, that we will
be able to successfully enforce the license terms and/or recover the economic
value lost from such violations. To license many of our software products, we
rely in part on "shrinkwrap" and "clickwrap" licenses that are not signed by the
end user and, therefore, may be unenforceable under the laws of certain
jurisdictions. As with other software products, our products are susceptible to
unauthorized copying and uses that may go undetected, and policing such
unauthorized use is difficult.
A significant portion of our marks include the word "BSQUARE" or the
preface "b." Other companies use forms of "BSQUARE" or the preface "b" in their
marks alone or in combination with other words, and we cannot prevent all such
third-party uses. We license certain trademark rights to third parties. Such
licensees may not abide by compliance and quality control guidelines with
respect to such trademark rights and may take actions that would harm our
business.
The computer software market is characterized by frequent and substantial
intellectual property litigation, which is often complex and expensive, and
involves a significant diversion of resources and uncertainty of outcome.
Litigation may be necessary in the future to enforce our intellectual property
or to defend against a claim of infringement or invalidity. Litigation could
result in substantial costs and the diversion of resources and could harm our
business and operating results.
THIRD PARTIES COULD ASSERT THAT OUR SOFTWARE PRODUCTS AND SERVICES INFRINGE
THEIR INTELLECTUAL PROPERTY RIGHTS, WHICH COULD EXPOSE US TO ADDITIONAL COSTS
AND LITIGATION.
Third parties may claim that our current or future software products and
services infringe their proprietary rights, and these claims, regardless of
their merit, could increase our costs and harm our business. We have not
conducted patent searches to determine whether the technology used in our
products infringes patents held by third parties. In addition, it is difficult
to determine whether our software products and services infringe third-party
intellectual property rights, particularly in a rapidly evolving technological
environment in which there may be numerous patent applications pending, many of
which are confidential when filed, with regard to similar technologies. If we
were to discover that one of our software products violated a third party's
proprietary rights, we may not be able to obtain a license on commercially
reasonable terms, or at all, to continue offering that software product.
Moreover, any indemnification we obtain against claims that the technology we
license from third parties infringes the proprietary rights of others may not
always be available or may be limited in scope or amount. Even if we receive
broad third-party indemnification, these indemnitors may not have the financial
capability to indemnify us in the event of infringement. In addition, in some
circumstances we could be required to indemnify our customers for claims made
against them that are based on our solutions.
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<PAGE> 15
There can be no assurance that infringement or invalidity claims related to
the software products and services we provide or arising from the incorporation
by us of third-party technology, and claims for indemnification from our
customers resulting from such claims, will not be asserted or prosecuted against
us. We expect that software product developers will be increasingly subject to
infringement claims as the number of products and competitors in the software
industry grows and the functionality of products in different industry segments
overlaps. Such claims, even if not meritorious, could result in the expenditure
of significant financial and managerial resources in addition to potential
product redevelopment costs and delays.
IF WE DO NOT RESPOND ON A TIMELY BASIS TO TECHNOLOGICAL ADVANCES AND EVOLVING
INDUSTRY STANDARDS, OUR FUTURE PRODUCT SALES COULD BE NEGATIVELY IMPACTED.
The market for Windows CE-based software products and services is new and
evolving. As a result, the life cycles of our products are difficult to
estimate. To be successful, we must continue to enhance our current product line
and develop new products. We have experienced delays in enhancements and new
product release dates in the past and may be unable to introduce enhancements or
new products successfully or in a timely manner in the future. Our business may
be harmed if we must delay releases of our products and product enhancements or
if these products and product enhancements fail to achieve market acceptance
when released. In addition, our customers may defer or forego purchases of our
products if we, Microsoft, our competitors or major hardware, systems or
software vendors introduce or announce new products or product enhancements.
Such deferrals or failures to purchase would decrease our revenue.
OUR LIMITED OPERATING HISTORY MAKES IT DIFFICULT TO EVALUATE OUR FUTURE
PROSPECTS, AND WE CANNOT ASSURE YOU THAT WE WILL BE ABLE TO SUSTAIN OR INCREASE
OUR PROFITABILITY.
We were founded in July 1994, generated our first revenue in October 1994
and shipped our first product in November 1996. Accordingly, we have a limited
operating history and you should not rely on our past results to predict our
future performance. Recent growth in our revenue may not continue and we may not
be able to sustain or increase profitability in the future. We anticipate that
our expenses will increase substantially in the foreseeable future as we
continue to develop our technology and expand our product and service offerings.
These efforts may prove more expensive than we currently anticipate, and we may
not succeed in increasing our revenue sufficiently to offset these higher
expenses. If we fail to increase our revenue to keep pace with our expenses, we
may experience losses.
IF WE ARE UNABLE TO MANAGE OUR GROWTH OUR BUSINESS WILL SUFFER.
Our rapid growth has placed, and is expected to continue to place, a
significant strain on our managerial, technical, operational and financial
resources. From August 1996 to July 1999, we grew from 21 employees to 348
employees, and we expect this rapid growth to continue for the foreseeable
future. To manage our growth, we must implement additional management
information systems, further develop our operational, administrative and
financial systems and expand, train and manage our work force. We will also need
to manage an increasing number of complex relationships with customers,
marketing partners and other third parties. We cannot guarantee that our
systems, procedures or controls will be adequate to support our current or
future operations or that our management will be able to effectively manage our
expansion. Our failure to do so could seriously harm our ability to deliver
products and services in a timely fashion, fulfill existing customer commitments
and attract and retain new customers.
OUR INTERNATIONAL OPERATIONS EXPOSE US TO GREATER INTELLECTUAL PROPERTY,
MANAGEMENT, COLLECTIONS, REGULATORY AND OTHER RISKS.
In 1998 we opened offices in Munich, Germany and Tokyo, Japan. For 1998 and
the six months ended June 30, 1999, approximately 3.9% and 1.5%, respectively,
of our total revenue was derived from our international operations. Our
international operations expose us to a number of risks, including the
following:
- greater difficulty in protecting intellectual property due to less
stringent foreign intellectual property laws and enforcement policies;
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<PAGE> 16
- greater difficulty in managing foreign operations due to the lack of
proximity between our home office and our foreign operations;
- longer collection cycles in Japan than we typically experience in the
U.S.;
- unfavorable changes in regulatory practices and tariffs;
- adverse changes in tax laws;
- seasonal European sales declines in the summer months;
- the impact of fluctuating exchange rates between the U.S. dollar and
foreign currencies; and
- general economic and political conditions in Asian and European markets.
These risks could have a material adverse effect on the financial and
managerial resources required to operate our foreign offices, as well as on our
future international revenue, which could harm our business.
IF WE CONDUCT FUTURE ACQUISITIONS, THEY COULD PROVE DIFFICULT TO INTEGRATE,
DISRUPT OUR BUSINESS, DILUTE SHAREHOLDER VALUE AND ADVERSELY AFFECT OUR
OPERATING RESULTS.
Although we currently have no specific understandings, commitments or
agreements for any acquisition, we may make investments in complementary
companies, services and technologies in the future. We have not made any
material acquisitions or investments to date, and therefore our ability as an
organization to conduct acquisitions or investments is unproven. If we fail to
properly evaluate and execute acquisitions and investments, they may seriously
harm our business and prospects. To successfully complete an acquisition, we
must properly evaluate the technology, accurately forecast the financial impact
of the transaction, including accounting charges and transaction expenses,
integrate and retain personnel, combine potentially different corporate cultures
and effectively integrate products and research and development, sales,
marketing and support operations. Our non-compete provision with Microsoft could
impede our acquisition of companies or technologies that compete with the
Windows CE operating system or related products. If we fail to do any of these,
we may suffer losses or our management may be distracted from our day-to-day
operations. In addition, if we conduct acquisitions using debt or equity
securities, existing shareholders may be diluted, which could affect the market
price of our stock.
IF WE ARE UNABLE TO LICENSE KEY SOFTWARE FROM THIRD PARTIES OUR BUSINESS COULD
BE HARMED.
We often integrate third-party software with our internally developed
software to provide software products and services for our OEM customers. If our
relationships with our third-party vendors were to deteriorate, we might be
unable to obtain licenses on commercially reasonable terms, if at all, for newer
versions of their software required to maintain compatibility. In the event that
we are unable to obtain additional licenses, we would be required to develop
this technology internally, which could delay or limit our ability to introduce
enhancements or new products or to continue to sell existing products.
OUR SOFTWARE PRODUCTS OR THE THIRD-PARTY HARDWARE OR SOFTWARE INTEGRATED WITH
OUR SOFTWARE PRODUCTS AND SERVICES MAY SUFFER FROM DEFECTS OR ERRORS THAT COULD
IMPAIR OUR ABILITY TO SELL OUR SOFTWARE PRODUCTS AND SERVICES.
Software and hardware components as complex as those needed for ICDs
frequently contain errors or defects, especially when first introduced or when
new versions are released. We have had to delay commercial release of certain
versions of our software products until software problems were corrected, and in
some cases have provided product enhancements to correct errors in released
products. Some of our contracts require us to repair or replace products that
fail to work. To the extent that we repair or replace products our expenses may
increase resulting in a decline in our gross margins. In addition, it is
possible that by the time defects are fixed the market opportunity may have been
missed which may result in lost revenue. Moreover, errors that are discovered
after commercial release could result in loss of revenue or delay in market
acceptance, diversion of development resources, damage to our reputation or
increased service and warranty costs, all of which could harm our business.
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<PAGE> 17
WE MAY BE SUBJECT TO PRODUCT LIABILITY CLAIMS THAT COULD RESULT IN SIGNIFICANT
COSTS.
Our license agreements with our customers typically contain provisions
designed to limit our exposure to potential product liability claims. It is
possible, however, that these provisions may be ineffective under the laws of
certain jurisdictions. Although we have not experienced any product liability
claims to date, the sale and support of our software products and services
entail the risk of such claims and we may be subject to such claims in the
future. A product liability claim brought against us, whether successful or not,
could harm our business and operating results.
THE LENGTHY SALES CYCLE OF OUR PRODUCTS AND SERVICES MAKES OUR REVENUE
SUSCEPTIBLE TO FLUCTUATIONS.
Our sales cycle is typically three to six months because the expense and
complexity of our products and services generally require a lengthy customer
approval process, and may be subject to a number of significant risks over which
we have little or no control, including:
- customers' budgetary constraints and internal acceptance review
procedures;
- the timing of budget cycles; and
- the timing of customers' competitive evaluation processes.
In addition, to successfully sell our products and services, we frequently must
educate our potential customers about the full benefits of our products and
services, which can require significant time. If our sales cycle lengthens
unexpectedly, it could adversely affect the timing of our revenue which could
cause our quarterly results to fluctuate.
A SMALL NUMBER OF OUR EXISTING SHAREHOLDERS CAN EXERT CONTROL OVER US.
After this offering, our executive officers, directors and principal
shareholders holding more than 5% of our common stock, consisting of nine
persons and the several entities affiliated with such persons, will together
control approximately 82% of our outstanding common stock. As a result, these
shareholders, if they act together, will be able to control our management and
affairs of the company and all matters requiring shareholder approval, including
the election of directors and approval of significant corporate transactions.
This concentration of ownership may have the effect of delaying or preventing a
change in control of us and might affect the market price of our common stock.
IT MIGHT BE DIFFICULT FOR A THIRD PARTY TO ACQUIRE US EVEN IF DOING SO WOULD BE
BENEFICIAL TO OUR SHAREHOLDERS.
Certain provisions of our amended and restated articles of incorporation,
bylaws and Washington law may discourage, delay or prevent a change in the
control of us or a change in our management even if doing so would be beneficial
to our shareholders. Our board of directors has the authority under our amended
and restated articles of incorporation to issue preferred stock with rights
superior to the rights of the holders of common stock. As a result, preferred
stock could be issued quickly and easily with terms calculated to delay or
prevent a change in control of our company or make removal of our management
more difficult. In addition, as of the first annual meeting of shareholders
following the closing of this offering, our board of directors will be divided
into three classes. The directors in each class will serve for three-year terms,
one class being elected each year by our shareholders. This system of electing
and removing directors may tend to discourage a third party from making a tender
offer or otherwise attempting to obtain control of our company because it
generally makes it more difficult for shareholders to replace a majority of our
directors.
In addition, Chapter 19 of the Washington Business Corporation Act
generally prohibits a "target corporation" from engaging in certain significant
business transactions with a defined "acquiring person" for a period of five
years after the acquisition, unless the transaction or acquisition of shares is
approved by a majority of the members of the target corporation's board of
directors prior to the time of acquisition. This provision may have the effect
of delaying, deterring or preventing a change in control of our company. The
existence of these antitakeover provisions could limit the price that investors
might be willing to pay in the future for shares of our common stock.
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<PAGE> 18
WE WILL HAVE BROAD DISCRETION IN THE USE OF THE PROCEEDS OF THIS OFFERING. OUR
FAILURE TO APPLY SUCH FUNDS EFFECTIVELY COULD HARM OUR BUSINESS.
We have not designated any specific use for a substantial portion of the
net proceeds from this offering. We intend to use the net proceeds primarily for
general corporate purposes, including working capital and relocation expenses.
Management will have significant flexibility in applying the net proceeds of the
offering. Our failure to apply such funds effectively could harm our business.
THE SUBSTANTIAL NUMBER OF SHARES THAT WILL BE ELIGIBLE FOR SALE IN THE FUTURE
MAY ADVERSELY AFFECT THE MARKET PRICE OF OUR COMMON STOCK.
Sales of a substantial number of shares of our common stock in the public
market following this offering could adversely affect the market price of the
common stock. As additional shares of our common stock become available for
resale in the public market, the supply of our common stock will increase which
could decrease the price. The number of shares of common stock available for
sale in the public market is limited by restrictions under the federal
securities laws and under agreements some of our shareholders, directors and
employees have entered into with the underwriters. The following table shows the
timing of when shares outstanding on August 31, 1999 may be eligible for resale
in the public market after this offering:
<TABLE>
<CAPTION>
DAYS AFTER DATE OF THIS PROSPECTUS SHARES FIRST ELIGIBLE FOR RESALE COMMENT
- ---------------------------------- -------------------------------- -------------------------------
<S> <C> <C>
- - Upon effectiveness............ 4,000,000 - Freely tradable shares sold
in this offering
- - Upon filing of Form S-8
registration statement
immediately after effectiveness - Outstanding shares registered
of this offering.............. 76,328 on Form S-8 and not locked up
- - 90 days....................... 47,200 - Shares eligible for sale
under Rules 144 and 701 and
not registered on Form S-8 or
locked up
- - 180 days...................... 179,750 - Freely tradable upon
expiration of lock-up
agreements
27,893,378 - Tradable subject to Rule 144
</TABLE>
NEW INVESTORS WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION.
Investors in our common stock in this offering will experience immediate
and substantial dilution in the net tangible book value of their shares.
Assuming an initial public offering price of $13.00 per share, dilution to new
investors would be $10.50 per share. Additional dilution will occur upon
exercise of outstanding stock options.
YEAR 2000 ISSUES MAY NEGATIVELY IMPACT OUR BUSINESS.
Many computer systems are not currently capable of distinguishing 21st
century dates from 20th century dates. As a result, beginning on January 1,
2000, computer systems and software used by many companies and organizations in
a wide variety of industries, including technology, transportation, utilities,
finance and telecommunications, will produce erroneous results or fail unless
they have been modified or upgraded to process date information correctly.
Significant uncertainty exists in the software industry and other industries
concerning the scope and magnitude of problems associated with the century
change.
We may discover that some or all of our software products are not "Year
2000 compliant" -- that is, they are not capable of adequately distinguishing
21st century dates from 20th century dates. In the majority of our software
licenses, we have warranted that dates on or after January 1, 2000 will not
adversely affect the performance of our products. In addition, our software is
generally integrated into customer products involving sophisticated hardware and
complex software products. If this third-party equipment or our own products do
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<PAGE> 19
not operate properly with respect to the Year 2000, we may face claims or incur
unexpected expenses to remedy any resulting problems. The costs of defending and
resolving Year 2000-related disputes, regardless of the merits of such disputes,
and any liability we may have for Year 2000-related damages, including
consequential damages, could adversely affect our operating results. Moreover,
if third parties cannot provide us with products, services or systems that meet
the Year 2000 requirements on a timely basis, our business could be harmed.
Further, many of our computer systems are connected to Microsoft's computer
systems, and we depend on this connectivity to communicate and transact business
with Microsoft on various levels. Any failure of this connectivity or of
Microsoft's computers to be Year 2000 compliant may disrupt our communications
with Microsoft and interfere with our ability to transact business.
In addition, we believe that the purchasing patterns of our customers and
potential customers may be affected by Year 2000 issues as companies expend
significant resources to correct or upgrade their current software systems for
Year 2000 compliance. These expenditures may result in reduced funds available
to purchase software products and services such as those we offer. To the extent
Year 2000 issues cause a significant delay in, or cancellation of, decisions to
purchase our products or services, our business would be harmed. If we fail to
identify and remediate all significant Year 2000 problems on a timely basis, our
business could be harmed. Remediation efforts may involve significant time and
expense, and unremediated problems could harm our business. For a more detailed
description of our Year 2000 preparedness, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Year 2000
Compliance" on page 27.
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<PAGE> 20
FORWARD-LOOKING STATEMENTS
Some of the statements under "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business" and elsewhere in this prospectus constitute
forward-looking statements. These statements relate to future events or our
future financial performance. In some cases, you can identify forward-looking
statements by terminology such as "may," "will," "should," "could," "expects,"
"plans," "intends," "anticipates," "believes," "estimates," "predicts,"
"potential" or "continue" or the negative of such terms and other comparable
terminology. These statements involve known and unknown risks, uncertainties and
other factors, including those listed under "Risk Factors," that may cause our
actual results, levels of activity, performance or achievements to be materially
different from any future results, levels of activity, performance or
achievements expressed or implied by such forward-looking statements. Although
we believe that the expectations reflected in the forward-looking statements are
reasonable, we cannot guarantee future results, levels of activity, performance
or achievements.
USE OF PROCEEDS
We expect to receive approximately $47.4 million in net proceeds from the
sale of the shares of common stock in this offering, assuming the initial public
offering price is $13.00 per share. If the underwriters exercise their
over-allotment option to purchase additional shares, we will not receive any
proceeds from this purchase because all of these shares are being sold by six of
our shareholders.
The principal purposes of this offering are to create a public market for
our stock and to raise working capital. We plan to use approximately $4.0
million of the net proceeds for capital equipment purchases associated with our
planned relocation of our principal administrative, sales, marketing, support
and research and development facilities in October 1999. We have no specific
uses planned for the remainder of the net proceeds other than for general
corporate purposes. Pending such uses, we intend to invest the net proceeds of
this offering in investment grade, interest-bearing securities. We may use a
portion of the net proceeds to acquire additional businesses, products and
technologies or to establish joint ventures that we believe will complement our
current or future business. However, we have no specific plans, agreements or
commitments to do so, and are not currently engaged in any negotiations for any
such acquisition or joint venture.
DIVIDEND POLICY
We have never paid cash dividends on our common stock. We currently intend
to retain any future earnings to fund the development and growth of our
business. Therefore, we do not currently anticipate paying any cash dividends in
the foreseeable future. In addition, the terms of our current credit facility
prohibit us from paying dividends without our lender's consent.
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<PAGE> 21
CAPITALIZATION
The following table sets forth our capitalization as of June 30, 1999 on
the following three bases:
- on an actual basis;
- on a pro forma basis after giving effect to the issuance of 1,518,378
shares of common stock to Vulcan Ventures in September 1999 and the
conversion of 8,333,333 outstanding shares of mandatorily redeemable
convertible preferred stock into shares of common stock; and
- on a pro forma as adjusted basis after giving effect to our receipt of
the net proceeds from the sale of 4,000,000 shares of common stock at an
assumed offering price of $13.00 per share in this offering.
The outstanding share information excludes 2,996,562 shares of common stock
that are reserved for issuance upon exercise of stock options under our stock
option plan outstanding as of June 30, 1999 at a weighted average exercise price
of $0.73 per share.
The capitalization information set forth in the table below is qualified by
and should be read in conjunction with the more detailed consolidated financial
statements and related notes appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1999 (UNAUDITED)
-----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------- --------- -----------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
Long-term obligations, net of current portion.............. $ 210 $ 210 $ 210
Mandatorily redeemable convertible preferred stock, no par
value: 10,000,000 shares authorized, 8,333,333 shares
issued and outstanding, actual; 10,000,000 shares
authorized, no shares issued and outstanding, pro forma
and pro forma as adjusted................................ 14,475 -- --
Shareholders' equity:
Common stock, no par value: 50,000,000 authorized,
18,225,205 shares issued and outstanding, actual;
50,000,000 authorized, 28,076,916 outstanding, pro
forma; 50,000,000 authorized, 32,076,916 shares issued
and outstanding, pro forma as adjusted................ 3,209 36,386 83,746
Deferred stock option compensation....................... (1,157) (1,157) (1,157)
Stock subscription....................................... (29) (29) (29)
Cumulative foreign currency translation adjustment....... (61) (61) (61)
Retained earnings (accumulated deficit).................. (2,217) (2,217) (2,217)
------- ------- -------
Total shareholders' equity (deficit)............. (255) 32,922 80,282
------- ------- -------
Total capitalization........................ $14,430 $33,132 $80,492
======= ======= =======
</TABLE>
17
<PAGE> 22
DILUTION
If you invest in our common stock, your interest will be diluted to the
extent of the difference between the public offering price per share of our
common stock and the pro forma as adjusted net tangible book value per share of
our common stock after this offering. We calculate net tangible book value by
dividing the net tangible book value, which equals total assets less intangible
assets and total liabilities, by the number of outstanding shares of common
stock.
At June 30, 1999, our pro forma net tangible book value, after giving
effect to the issuance of 1,518,378 shares of common stock to Vulcan Ventures in
September 1999 and the automatic conversion of all outstanding shares of
mandatorily redeemable convertible preferred stock into 8,333,333 shares of
common stock upon the closing of this offering, was $32.9 million, or $1.17 per
share of common stock. After giving effect to the sale of the 4,000,000 shares
of common stock in this offering at an assumed initial public offering price of
$13.00 per share, less estimated underwriting discounts and commissions and
estimated expenses we expect to pay in connection with this offering, our pro
forma as adjusted net tangible book value at June 30, 1999 would be $80.3
million, or $2.50 per share. This represents an immediate increase in the pro
forma as adjusted net tangible book value of $1.33 per share to existing
shareholders and an immediate dilution of $10.50 per share to new investors or
approximately 81% of the assumed offering price of $13.00 per share.
The following table illustrates this dilution on a per share basis:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $13.00
------
Pro forma net tangible book value per share at June 30,
1999...................................................... $1.17
Increase per share attributable to new investors............ 1.33
-----
Pro forma as adjusted net tangible book value per share
after this offering....................................... 2.50
------
Dilution per share to new investors......................... $10.50
======
</TABLE>
The following table shows on a pro forma as adjusted basis at June 30,
1999, after giving effect to the sale of 1,518,378 shares of common stock to
Vulcan Ventures in September 1999 and the automatic conversion of all
outstanding shares of mandatorily redeemable convertible preferred stock into
shares of common stock upon the closing of this offering, the number of shares
of common stock purchased from us, the total consideration paid to us and the
average price paid per share by existing shareholders and by new investors
purchasing common stock in this offering, before deducting underwriting
discounts and commissions and estimated offering expenses, at an assumed public
offering price of $13.00 per share:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
--------------------- ---------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing shareholders.............. 28,076,916 87.5% $33,705,000 39.3% $ 1.20
New investors...................... 4,000,000 12.5 52,000,000 60.7 $13.00
---------- ---- ----------- ----
Total.................... 32,076,916 100% $85,705,000 100%
========== ==== =========== ====
</TABLE>
The above computations assume no exercise of options after June 30, 1999.
The number of shares outstanding at June 30, 1999 excludes 2,996,562 shares of
common stock issuable upon exercise of options outstanding as of June 30, 1999
having a weighted average exercise price of $0.73 per share. To the extent that
any shares are issued upon exercise of options, there will be further dilution
to new investors. To the extent the option holders exercise these outstanding
options, or any options we grant in the future, there will be further dilution
to new investors. For a more detailed discussion of our stock plans and
outstanding options to purchase common stock, see Notes 7 and 8 of the Notes to
Consolidated Financial Statements included elsewhere in this prospectus.
18
<PAGE> 23
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data as of and for the years
ended December 31, 1996, 1997 and 1998 are derived from our consolidated
financial statements, which have been audited by Arthur Andersen LLP,
independent public accountants. The consolidated financial data as of and for
the periods ending December 31, 1994 and 1995 are derived from unaudited
financial statements. The consolidated financial data as of and for the six
months ended June 30, 1998 and 1999 are derived from unaudited financial
statements included elsewhere in this prospectus. We have prepared this
unaudited information on the same basis as the audited consolidated financial
statements and have included all adjustments, consisting of only normal
recurring adjustments, that we consider necessary for a fair presentation of our
financial position and operating results. When you read this selected
consolidated financial data, it is important that you also read the historical
consolidated financial statements and related notes included in this prospectus,
as well as the section of this prospectus related to "Management's Discussion
and Analysis of Financial Condition and Results of Operations." Our historical
results are not necessarily indicative of our future results.
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION SIX MONTHS ENDED
(JULY 15) TO YEAR ENDED DECEMBER 31, JUNE 30,
DECEMBER 31, ----------------------------------------- -----------------
1994 1995 1996 1997 1998 1998 1999
------------ ----------- ------- ------- ------- ------- -------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenue............................................ $ 151 $ 1,573 $ 4,179 $14,405 $24,612 $10,802 $18,543
Cost of revenue.................................... 83 795 1,404 5,644 11,301 5,028 8,899
------- ------- ------- ------- ------- ------- -------
Gross profit....................................... 68 778 2,775 8,761 13,311 5,774 9,644
Operating expenses
Research and development......................... -- -- 205 1,391 3,671 1,452 2,960
Selling, general and administrative.............. 4 86 606 2,806 6,470 2,618 5,236
------- ------- ------- ------- ------- ------- -------
Total operating expenses................... 4 86 811 4,197 10,141 4,070 8,196
------- ------- ------- ------- ------- ------- -------
Income from operations............................. 64 692 1,964 4,564 3,170 1,704 1,448
Interest income (expense), net..................... -- 1 7 (12) 319 179 130
------- ------- ------- ------- ------- ------- -------
Income before income taxes......................... 64 693 1,971 4,552 3,489 1,883 1,578
Provision for income taxes......................... -- -- -- 746 1,189 666 712
------- ------- ------- ------- ------- ------- -------
Net income......................................... $ 64 $ 693 $ 1,971 $ 3,806 $ 2,300 $ 1,217 $ 866
======= ======= ======= ======= ======= ======= =======
Basic earnings per share(1)........................ $ -- $ 0.03 $ 0.09 $ 0.18 $ 0.12 $ 0.06 $ 0.04
======= ======= ======= ======= ======= ======= =======
Shares used to compute basic earnings per
share(1)......................................... 21,000 21,000 22,106 21,400 18,372 18,615 18,206
======= ======= ======= ======= ======= ======= =======
Pro forma basic earnings per share(2).............. $ 0.09 $ 0.03
======= =======
Shares used to compute pro forma basic earnings per
share(2)......................................... 26,021 26,539
======= =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30, 1999
------------------------------------------------------------- ----------------------
1994 1995 1996 1997 1998 ACTUAL PRO FORMA(3)
----------- ----------- ------- ------- ------------- ------- ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments............................ $ 61 $ 103 $ 187 $ 2,286 $ 6,906 $ 9,284 $27,986
Working capital.......................... 65 236 658 2,918 10,280 10,675 29,377
Total assets............................. 96 514 1,057 6,453 16,158 18,749 37,451
Long-term obligations, net of current
portion................................ -- -- -- 1,743 289 210 210
Mandatorily redeemable convertible
preferred stock........................ -- -- -- -- 14,417 14,475 --
Shareholders' equity (deficit)........... 66 261 924 2,330 (1,298) (255) 32,922
</TABLE>
- ---------------
(1) See Note 12 to the Consolidated Financial Statements for a reconciliation of
the numerators and denominators used in computing basic and diluted earnings
per share.
(2) Shares used to compute pro forma basic earnings per share is defined as the
weighted average number of shares of common stock outstanding for the period
plus the weighted average number of shares of common stock resulting from
the assumed conversion of all outstanding shares of the mandatorily
redeemable convertible preferred stock as if converted on date of issuance.
(3) Gives effect to the issuance of 1,518,378 shares of common stock to Vulcan
Ventures in September 1999 and the conversion of all outstanding preferred
stock into common stock upon completion of this offering.
19
<PAGE> 24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
We provide a broad range of software products and services that facilitate
the integration of Windows CE into a variety of ICDs and enhance the
functionality of these devices. Our revenue totaled $14.4 million in 1997, $24.6
million in 1998 and $18.5 million for the six months ended June 30, 1999. We
generated net income of $3.8 million in 1997, $2.3 million in 1998 and $866,000
for the six months ended June 30, 1999.
We began operations in July 1994, generated our first revenue in October
1994 and shipped our first product in November 1996. Through late 1997, we
provided software engineering services directly to semiconductor vendors. In
late 1997, Microsoft decided to contract with us to provide our services to the
semiconductor customers with whom we had previously contracted directly. As a
result, we began to experience a shift from providing services directly to
semiconductor vendors to contracting directly with Microsoft for the benefit of
these companies. This shift was completed in the second quarter of 1998.
In 1997 we began research and development activities that produced software
applications for ICD integration tools and handheld devices. We also hired
personnel to build our human resource, finance, legal and administrative
infrastructure. In early 1998, we accelerated our investments in research and
development, marketing and domestic and international sales channels. Since
March 1998, we have:
- hired more than 165 employees;
- provided software products and services for the development of more than
30 different ICDs;
- established direct sales offices in Germany and Japan; and
- released more than 20 localized versions of our products in German,
Spanish, French, Italian, Japanese, Portugese and International English.
Beginning in early 1999, we expanded our marketing and sales force to
penetrate the growing market for our products and services. These investments
have significantly increased our operating expenses, contributing to reduced
profitability compared to 1997. We anticipate that our operating expenses will
increase substantially for the foreseeable future as we expand our product
development, sales and marketing and professional services staff. If we fail to
increase our revenue to keep pace with these increased expenses, we may
experience quarterly losses.
To date, we have derived substantially all of our revenue from the
provision of services to Microsoft, semiconductor vendors and OEMs. We also
generate product revenue from software sales and royalty licenses. We perform
our services under both time-and-materials contracts and fixed-fee contracts. We
also receive a small portion of service revenue from the provision of contract
support services upon the purchase of our software products. We sell our
packaged software products through standard retail channels, our direct sales
force and through indirect channels, such as resellers. In addition, we receive
royalty payments from OEMs related to the bundling of our software on their ICDs
and, more recently, from the license to them of software products contained in
our ICD integration tool kits.
We recognize revenue on the following bases:
- Time-and-materials consulting contracts. We recognize service revenue
performed under time-and-materials consulting contracts as the services
are rendered.
- Fixed-fee consulting contracts. Service revenue from fixed-fee contracts
is recognized on the percentage-of-completion method, measured by the
ratio of the cost incurred to date to the estimated total cost for the
contract. This method is used because we consider expended costs to be
the best available measure of contract performance. Contract costs
include all direct labor, material and any other costs related to
contract performance. Selling, general and administrative costs are
expensed as incurred. Provisions for estimated losses on uncompleted
contracts are made in the period in which such losses are determined.
Changes in job performance, job conditions and estimated profitability
may result in
20
<PAGE> 25
revisions in the estimate of total costs. Any required adjustments due to
these changes are recognized in the period in which such revisions are
determined.
- Product revenue. Product revenue, including advanced production royalty
payments, is generally recognized when a customer license agreement has
been executed, the software has been shipped, remaining obligations are
insignificant and collection of the resulting account receivable is
probable. We recognize license royalty income as reported by the reseller
when it ships its product to distributors.
HISTORICAL RESULTS OF OPERATIONS
The following table presents certain financial data as a percentage of
total revenue for the years ended December 31, 1996, 1997 and 1998 and for the
six months ended June 30, 1998 and 1999. Our historical operating results are
not necessarily indicative of the results for any future period.
<TABLE>
<CAPTION>
AS A PERCENTAGE OF TOTAL REVENUE
-----------------------------------------
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
----------------------- --------------
1996 1997 1998 1998 1999
----- ----- ----- ----- -----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA
Revenue:
Service....................................... 100% 97% 95% 94% 96%
Product....................................... -- 3 5 6 4
----- ----- ----- ----- -----
Total revenue............................ 100 100 100 100 100
----- ----- ----- ----- -----
Cost of revenue:
Service....................................... 34 39 46 46 47
Product....................................... -- -- -- 1 1
----- ----- ----- ----- -----
Total cost of revenue.................... 34 39 46 47 48
----- ----- ----- ----- -----
Gross margin..................................... 66 61 54 53 52
Operating expenses:
Research and development...................... 5 10 15 13 16
Selling, general and administrative........... 14 20 26 24 28
----- ----- ----- ----- -----
Total operating expenses................. 19 30 41 37 44
----- ----- ----- ----- -----
Income from operations........................... 47 31 13 16 8
Interest income, net............................. -- -- 1 1 1
----- ----- ----- ----- -----
Income before income taxes....................... 47 31 14 17 9
Provision for income taxes....................... -- 5 5 6 4
----- ----- ----- ----- -----
Net income....................................... 47% 26% 9% 11% 5%
===== ===== ===== ===== =====
</TABLE>
COMPARISON OF SIX MONTHS ENDED JUNE 30, 1998 AND 1999
Revenue
Revenue consists of service and product revenue, which includes software
license fees and royalties. Total revenue increased 72% from $10.8 million for
the six months ended June 30, 1998 to $18.5 million for the six months ended
June 30, 1999. Microsoft accounted for 73% and 87% of total revenue for the six
months ended June 30, 1998 and 1999, respectively. This increase was the result
of the completion of the shift from providing engineering services directly to
semiconductor vendors to providing such services to Microsoft for the benefit of
such vendors. We anticipate that we will continue to receive a substantial
portion of our revenue from the provision of services to Microsoft. Revenue
outside of the U.S. totaled $545,000 for the six months ended June 30, 1998 and
$271,000 for the six months ended June 30, 1999. The decrease in international
revenue resulted primarily from the shift from working directly with
international semiconductor vendors to working directly with Microsoft on behalf
of those customers.
21
<PAGE> 26
Service revenue. Service revenue increased by 75% from $10.2 million for
the six months ended June 30, 1998 to $17.8 million for the six months ended
June 30, 1999. This increase was due to an increase in the number and size of
consulting service projects. As a percentage of total revenue, service revenue
did not increase materially.
Product revenue. Product revenue increased 12% from $621,000 for the six
months ended June 30, 1998 to $695,000 for the six months ended June 30, 1999.
This increase resulted primarily from an increase in sales of pre-packaged
application products including the newly introduced CEValidator quality
assurance test suite. As a percentage of total revenue, product revenue did not
change materially.
Cost of Revenue
Cost of service revenue. Cost of service revenue consists primarily of
salaries and benefits for software developers and quality assurance personnel,
plus an allocation of facilities and depreciation costs. Cost of service revenue
increased 79% from $4.9 million for the six months ended June 30, 1998 to $8.8
million for the six months ended June 30, 1999. The increase in absolute dollars
resulted primarily from the hiring and training of additional employees to
support an increased number of projects. At June 30, 1998 and 1999, we had 135
and 212 employees, respectively, engaged in engineering consulting. Cost of
service revenue as a percentage of related service revenue was 48% for the six
months ended June 30, 1998 and 49% for the six months ended June 30, 1999. The
increase in cost of service revenue as a percentage of the related service
revenue in the first half of 1999 was primarily the result of an increase in
software engineering salaries due to competitive employee recruiting and
retention pressures in the greater-Seattle area.
Cost of product revenue. Cost of product revenue consists of license fees
and royalties for third-party software, product media, product duplication and
manuals. Cost of product revenue decreased from $121,000 for the six months
ended June 30, 1998 to $108,000 for the six months ended June 30, 1999.
Operating Expenses
Research and development. Research and development expenses consist
primarily of salaries and benefits for software developers, quality assurance
personnel, program managers and an allocation of our facilities and depreciation
costs. Research and development expenses increased 104% from $1.5 million for
the six months ended June 30, 1998 to $3.0 million for the six months ended June
30, 1999. This increase resulted from an increase in the number of software
developers and quality assurance personnel to expand our product offerings and
to support development and testing activities. Research and development expenses
represented 13% of our total revenue for the six months ended June 30, 1998 and
16% for the six months ended June 30, 1999. The increase in research and
development expenses as a percentage of total revenue primarily reflects the
more rapid increase of our investment in product development activities as
compared to the growth in revenue during this period. We anticipate that
research and development expenses will continue to increase in absolute dollars
in future periods.
Selling, general and administrative. Selling expenses are comprised of
salaries and benefits earned by sales and marketing personnel, travel expenses,
corporate advertising and promotional expenses, plus an allocation of facilities
and depreciation costs. General and administrative expenses consist primarily of
salaries, benefits and related costs for our executive, finance, legal,
administrative and information services personnel and professional service fees.
Selling expenses increased 68% from $967,000 for the six months ended June
30, 1998 to $1.6 million for the six months ended June 30, 1999. This increase
resulted primarily from our continued investment in sales and marketing
infrastructure, both domestically and internationally, which included
significant personnel-related expenses, travel expenses and related facility and
equipment costs, as well as increased marketing activities, including trade
shows, public relations and other promotional expenses. Selling expenses
represented 9% of our total revenue for the six months ended June 30, 1998 and
June 30, 1999. We anticipate that sales and marketing expenses will increase in
absolute dollars in future periods as we expand our sales and marketing staff
both domestically and internationally.
22
<PAGE> 27
General and administrative expenses increased 119% from $1.7 million for
the six months ended June 30, 1998 to $3.6 million for the six months ended June
30, 1999. General and administrative expenses represented 15% of our total
revenue for the six months ended June 30, 1998 and 19% for the six months ended
June 30, 1999. This increase in absolute dollars and as a percentage of total
revenue resulted primarily from the addition of executive, finance and
administrative personnel to support the growth of our business as well as
personnel and facility costs associated with our international offices. Our
general and administrative expenses have increased and we anticipate they will
continue to increase in absolute dollars as we expand our administrative staff
and incur expenses associated with becoming a public company.
Interest income (expense), net. Interest income (expense), net consists of
earnings on our cash, cash equivalents and short-term investment balances offset
by interest expense associated with debt obligations. Interest income (expense),
net was $179,000 for the six months ended June 30, 1998 and $130,000 for the six
months ended June 30, 1999. The decrease resulted from an increase in interest
expense on our long-term obligations.
Income taxes. Our provision for federal, state and international income
taxes was $666,000 for the six months ended June 30, 1998 as compared to
$712,000 for the six months ended June 30, 1999, yielding effective rates of
35.4% in 1998 and 45.1% in 1999. The increase in the effective rate was due to
the effect of the non-deductibility of losses from our international operations.
COMPARISON OF YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
Revenue
Total revenue increased 245% from $4.2 million in 1996 to $14.4 million in
1997, and an additional 71% to $24.6 million in 1998. Microsoft accounted for
5%, 39% and 79% of total revenue in 1996, 1997 and 1998, respectively. Revenue
outside of North America totaled $1.8 million in 1996, $4.3 million in 1997 and
$954,000 in 1998. The decreases in international revenue from 1996 to 1998 and
the increases in Microsoft revenue resulted from the shift from working directly
with semiconductor vendors to working with Microsoft for the benefit of those
customers during this period.
Service revenue. Service revenue increased 236% from $4.2 million in 1996
to $14.0 million in 1997, and an additional 67% to $23.4 million in 1998. The
increases in service revenue for all periods were due to the increasing number
and size of service projects and related hiring of engineering personnel to
fulfill project requirements.
Product revenue. Product revenue increased from zero in 1996 to $384,000 in
1997, and an additional 217% to $1.2 million in 1998. The increases in product
revenue from 1996 to 1997 resulted primarily from an increase in the volume of
our software applications bundled on handheld PCs. The increases in product
revenue from 1997 to 1998 resulted from the expansion of product offerings from
software applications for handheld PCs to ICD integration tool kits.
Cost of Revenue
Cost of service revenue. Cost of service revenue increased 298% from $1.4
million in 1996 to $5.6 million in 1997, and an additional 100% to $11.1 million
in 1998. These increases resulted from the hiring and training of additional
employees to support our growing customer base. At December 31, 1996, 1997 and
1998, we had 28, 87 and 152 employees, respectively, engaged in engineering
consulting. Cost of service revenue as a percentage of related service revenue
was 34% in 1996, 40% in 1997 and 48% in 1998. The increases in cost of service
revenue as a percentage of related service revenue reflect higher personnel
costs related to the personnel pressures in the greater-Seattle area, as well as
higher facilities and depreciation costs associated with expansion.
Cost of product revenue. Cost of product revenue increased from zero in
1996 to $78,000 in 1997, and an additional 113% to $166,000 in 1998. Cost of
product revenue as a percentage of related product revenue was zero in 1996, 20%
in 1997 and 14% in 1998.
23
<PAGE> 28
Operating Expenses
Research and development. Research and development expenses increased 579%
from $205,000 in 1996 to $1.4 million in 1997, and an additional 164% to $3.7
million in 1998. These increases primarily related to the increase in the number
of software developers and quality assurance personnel hired to expand our
product offerings and to support our product development and testing activities.
Research and development expenses represented 5% of our total revenue in 1996,
10% in 1997 and 15% in 1998. The increases in research and development expenses
as a percentage of total revenue primarily reflect the more rapid investment in
our research and development activities compared to the growth of our revenue
during these periods.
Selling, general and administrative. Selling expenses increased 451% from
$152,000 in 1996 to $837,000 in 1997, and an additional 172% to $2.3 million in
1998. These increases resulted primarily from our investment in sales and
marketing infrastructure, both domestically and internationally, which included
significant personnel-related expenses, travel expenses and related facility and
equipment costs, as well as increased marketing activities, including trade
shows, public relations and other promotional expenses. Selling expenses
represented 4% of our total revenue in 1996, 6% in 1997 and 9% in 1998. The
increases in selling expenses as a percentage of total revenue primarily
reflects the more rapid investment in our sales and marketing infrastructure
compared to the growth of our revenue during these periods.
General and administrative expenses increased 334% from $454,000 in 1996 to
$2.0 million in 1997, and an additional 113% to $4.2 million in 1998. The
increases from 1996 to 1998 primarily resulted from the addition of finance,
executive and administrative personnel to support the growth of our business
during these periods. General and administrative costs represented 11%, 14% and
17% of our total revenue in 1996, 1997 and 1998, respectively.
Interest income (expense), net. Interest income (expense), net was $7,000
in 1996, ($12,000) in 1997 and $319,000 in 1998. The increase in interest income
in 1998 over prior periods resulted from higher average cash and cash equivalent
and short-term investment balances in that year.
Income taxes. Our provision for federal, state and international income
taxes was zero for 1996, $746,000 for 1997 and $1.2 million for 1998, yielding
effective rates of 0.0%, 16.4% and 34.1% in 1996, 1997 and 1998, respectively.
We were taxed as a subchapter S corporation until October 15, 1997, when our
shareholders elected to convert to a C corporation. Accordingly, taxes on our
income were the responsibility of the shareholders until the conversion.
24
<PAGE> 29
QUARTERLY RESULTS OF OPERATIONS
The following table presents our unaudited quarterly results of operations
for 1998 and the six months ended June 30, 1999. You should read the following
table in conjunction with our consolidated financial statements and related
notes included elsewhere in this prospectus. We have prepared this unaudited
information on the same basis as our audited consolidated financial statements.
This table includes all adjustments, consisting only of normal recurring
adjustments, that we consider necessary for a fair presentation of our financial
position and operating results for the quarters presented. You should not draw
any conclusions about our future results from the results of operations for any
quarter.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30,
1998 1998 1998 1998 1999 1999
--------- -------- --------- -------- --------- --------
(IN THOUSANDS, EXCEPT AS A PERCENTAGE OF TOTAL REVENUE)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA
Revenue:
Service............................... $5,159 $5,022 $6,334 $6,878 $8,461 $9,387
Product............................... 333 288 245 353 348 347
------ ------ ------ ------ ------ ------
Total revenue.................... 5,492 5,310 6,579 7,231 8,809 9,734
------ ------ ------ ------ ------ ------
Cost of revenue:
Service............................... 2,360 2,547 2,978 3,250 4,150 4,641
Product............................... 68 53 9 36 58 50
------ ------ ------ ------ ------ ------
Total cost of revenue............ 2,428 2,600 2,987 3,286 4,208 4,691
------ ------ ------ ------ ------ ------
Gross profit............................. 3,064 2,710 3,592 3,945 4,601 5,043
Operating expenses:
Research and development.............. 575 877 1,023 1,196 1,474 1,486
Selling, general and administrative... 1,201 1,417 1,373 2,479 2,405 2,831
------ ------ ------ ------ ------ ------
Total operating expenses......... 1,776 2,294 2,396 3,675 3,879 4,317
------ ------ ------ ------ ------ ------
Income from operations................... 1,288 416 1,196 270 722 726
Interest income, net..................... 33 146 58 82 53 77
------ ------ ------ ------ ------ ------
Income before income taxes............... 1,321 562 1,254 352 775 803
Provision for income taxes............... 465 201 452 71 343 369
------ ------ ------ ------ ------ ------
Net income............................... $ 856 $ 361 $ 802 $ 281 $ 432 $ 434
====== ====== ====== ====== ====== ======
AS PERCENTAGE OF TOTAL REVENUE
Revenue:
Service............................... 94% 95% 96% 95% 96% 96%
Product............................... 6 5 4 5 4 4
------ ------ ------ ------ ------ ------
Total revenue.................... 100 100 100 100 100 100
------ ------ ------ ------ ------ ------
Cost of revenue:
Service............................... 43 48 45 45 47 48
Product............................... 1 1 -- -- 1 --
------ ------ ------ ------ ------ ------
Total cost of revenue............ 44 49 45 45 48 48
------ ------ ------ ------ ------ ------
Gross margin............................. 56 51 55 55 52 52
Operating expenses:
Research and development.............. 10 16 16 17 17 15
Selling, general and administrative... 22 27 21 34 27 29
------ ------ ------ ------ ------ ------
Total operating expenses......... 32 43 37 51 44 44
------ ------ ------ ------ ------ ------
Income from operations................... 24 8 18 4 8 8
Interest income, net..................... -- 3 1 1 1 1
------ ------ ------ ------ ------ ------
Income before income taxes............... 24 11 19 5 9 9
Provision for income taxes............... 8 4 7 1 4 4
------ ------ ------ ------ ------ ------
Net income............................... 16% 7% 12% 4% 5% 5%
====== ====== ====== ====== ====== ======
</TABLE>
25
<PAGE> 30
The trends discussed in the annual comparisons of operating results from
1996 through 1998 and for the six months ended June 30, 1998 and 1999 generally
apply to the comparison of results of operations for these six quarters. Revenue
decreased during the three months ended June 30, 1998 due to the shift from
working directly with semiconductor vendors on a fixed-fee basis to working with
Microsoft on a time-and-materials basis. Research and development expenses
increased significantly as a percentage of total revenue during the three months
ended June 30, 1998 due to substantial investments related to the development of
integration tool kits and end-user applications. Selling, general and
administrative expenses increased during the three months ended December 31,
1998 due to the increased personnel and facility costs associated with opening
sales offices in Germany and Japan as well as expenses related to seasonal trade
show activities. Our quarterly operating results have varied widely in the past,
and we expect that they will continue to fluctuate in the future as a result of
a number of factors, many of which are outside our control.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have financed our operations primarily through cash
flow from operations. As of June 30, 1999, we had $9.3 million of cash and cash
equivalents. This represents an increase of $2.4 million over December 31, 1998.
In January 1998, we issued mandatorily redeemable convertible preferred stock
from which we received net proceeds of approximately $14.3 million. Concurrent
with this transaction, we repurchased 3,333,333 shares of our common stock for
an aggregate of $6.0 million. To a lesser extent, we have financed software
system purchases through traditional financing arrangements. Our working capital
at June 30, 1999 was $10.7 million compared to $10.3 million at December 31,
1998.
We have a working capital revolving line of credit with Imperial Bank that
is secured by our accounts receivable. This facility allows us to borrow up to
the lesser of 80% of our eligible accounts receivable or $5.0 million and bears
interest at the bank's prime rate, which was 8.25% at August 31, 1999. The
facility expires in July 2000. The agreement under which the line of credit was
established contains certain covenants, including a provision requiring us to
maintain specified financial ratios. We were in compliance with these covenants
at June 30, 1999, and at that time there were no borrowings outstanding under
this credit facility. We also maintain with Imperial Bank a $1.5 million term
loan for equipment purchases, which bears interest at the bank's prime rate plus
0.25%, and a $4.0 million term loan for leasehold improvement purchases, which
bears interest at the bank's prime rate plus 0.50%. These facilities operate as
a revolver through June 2000, after which time any outstanding balances must be
paid over 36-month and 60-month terms, respectively. These loans also require us
to comply with certain financial covenants, including a requirement that we
maintain certain financial ratios. We were in compliance with these covenants at
June 30, 1999 and, at that time, there was approximately $367,000 outstanding
under the equipment term loan.
Our operating activities resulted in net cash inflows of $1.6 million in
1996, $4.3 million in 1997, $188,000 in 1998 and $3.6 million for the six months
ended June 30, 1999. The sources of cash in 1996, 1997, 1998 and for the six
months ended June 30, 1999 were primarily income from operations, and increases
in accounts payable and accrued liabilities, partially offset by increases in
accounts receivable. Investing activities used cash of $248,000 in 1996, $1.4
million in 1997 and $3.7 million in 1998, primarily for the purchase of capital
equipment and short-term investments. Investing activities provided cash of
$512,000 during the six months ended June 30, 1999, primarily due to proceeds
from the maturity of investments offset by cash used for purchases of capital
equipment. Financing activities used cash of $1.3 million in 1996, $775,000 in
1997 and $98,000 for the six months ended June 30, 1999, primarily for
shareholder draws and repayment of long-term obligations. Financing activities
generated $6.5 million in 1998, primarily through the issuance of mandatorily
convertible preferred stock, partially offset by repayment of shareholder loans
and the $6.0 million repurchase of shares of common stock.
In addition, in September 1999, we sold 1,518,378 shares of our common
stock to Vulcan Ventures for approximately $18.7 million.
We currently anticipate that we will continue to experience significant
increases in our operating expenses for the foreseeable future as we enter new
markets for our products and services, increase research and development
activities and sales and marketing activities, develop new distribution channels
and broaden our
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<PAGE> 31
professional service capabilities. Our operating expenses will consume a
material amount of our cash resources, including a portion of the net proceeds
of this offering. We believe that the net proceeds of this offering, together
with our existing cash and cash equivalents and available bank borrowings, will
be sufficient to meet our anticipated cash needs for working capital and capital
expenditures for at least the next 12 months. Although we do not anticipate the
need to raise additional capital after that time, if we do seek to raise
additional capital, there can be no assurance that additional financing will be
available on acceptable terms, if at all. We currently intend to use the net
proceeds of this offering for general corporate purposes. We may use a portion
of the net proceeds to acquire additional businesses, products and technologies
or to establish joint ventures that we believe will complement our current or
future business. However, we have no specific plans, agreements or commitments
to do so, and are not currently engaged in any negotiations for any such
acquisition or joint venture. Pending such uses, we will invest the net proceeds
of this offering in government securities and other short-term, investment
grade, interest-bearing instruments.
YEAR 2000 COMPLIANCE
Based on our assessment to date, we believe our software products are "Year
2000 compliant." However, we may learn that our software does not contain all
the necessary routines and codes necessary for the accurate calculation,
display, storage and manipulation of data involving dates.
We are reviewing our internal management information and other systems to
identify any products, services or systems that are not Year 2000 compliant and
to take corrective action. To date, we have not encountered any material Year
2000 problems with our computer systems or any other equipment that might be
subject to such problems. We plan to verify compliance by external vendors that
supply us with software and information systems and to communicate with
significant suppliers to determine the status of third parties' remediation of
their own Year 2000 issues. As part of our assessment, we are evaluating the
level of validation we will require of third parties to ensure their Year 2000
compliance.
We will be relocating our principal offices in October 1999 to a new office
location currently under construction. Before the relocation, we will complete
our evaluation of whether the infrastructure and building systems associated
with our new facility, such as security and sprinkler systems, and all
information technology systems, such as telephony and computer network systems,
are Year 2000 compliant.
We do not expect the total cost of these Year 2000 compliance activities to
be material to our business, financial condition and operating results. To date,
we have spent less than $100,000 for Year 2000 compliance and do not expect to
expend more than $100,000 in the aggregate. These costs and the timing of our
plans to complete our Year 2000 modifications and testing processes are based on
our management's estimates.
We have not developed a contingency plan for addressing Year 2000 problems
that are not detected and corrected prior to their occurrence. Upon completion
of testing and implementation activities, we will be able to assess areas
requiring contingency planning, and we expect to conduct appropriate contingency
planning at that time. Any failure to address any Year 2000 issue could harm our
business.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1 (SOP 98-1), "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use," which establishes
guidelines for the accounting for the costs of all computer software developed
or obtained for internal use. We were required to adopt SOP 98-1 for the fiscal
year beginning January 1, 1999. Our adoption of SOP 98-1 did not have a material
impact on our financial statements.
In April 1998, the American Institute of Public Accountants issued
Statement of Position 98-5 (SOP 98-5), "Reporting on the Costs of Start-up
Activities." SOP 98-5, which is effective for fiscal years beginning after
December 15, 1998, provides guidance on the financial reporting of start-up
costs and organization costs. It requires costs of start-up activities and
organization costs to be expensed as incurred. The implementation of SOP 98-5
did not have a material impact on our financial position or results of
operations.
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In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." This statement requires that all derivative instruments
be recorded on the balance sheet at their fair value. Changes in the fair value
of derivatives are recorded each period in current earnings or other
comprehensive income, depending on whether a derivative is designated as a part
of a hedge transaction and, if it is, the type of hedge transaction. This
statement is effective for all fiscal quarters of all fiscal years beginning
after June 15, 2000. We do not use derivative instruments, therefore the
adoption of this statement will not have any effect on our results of operations
or financial position.
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BUSINESS
OVERVIEW
We provide a broad range of software products and services that facilitate
the integration of the Microsoft Windows CE operating system into a variety of
intelligent computing devices, or ICDs, and enhance the functionality of those
devices. Original equipment manufacturers, or OEMs, semiconductor vendors and
Windows CE software developers rely on our products and services to help bring
customized ICDs and ICD applications to market in a timely fashion. We have been
providing Windows CE-based software services since before the commercial release
of Windows CE, and therefore we believe that we offer a greater breadth and
depth of Windows CE expertise than any of our current competitors.
ICDs are an emerging class of products with sophisticated processing power
that are designed for specific computing and communications applications.
Examples of ICDs include Internet-enabled television set-top boxes, handheld and
palm-size PCs, gaming systems, handheld industrial data collectors, consumer
Internet appliances such as kiosk terminals and vehicle navigational devices,
and Windows-based terminals. Compared to traditional computers, ICDs are often
less expensive and more adaptable in terms of their size, weight and shape,
while still providing sophisticated computing and communications capabilities,
including Internet connectivity. As businesses and consumers increasingly use
the Internet to transact business, OEMs are developing new ICDs to better meet
the needs of end users. Because of space constraints and other design and
resource limitations inherent in the ICD environment, OEMs require a computer
operating system that is both scaleable and highly customizable, with lower
system requirements than traditional PC operating systems. Windows CE, a
versatile and highly adaptable operating system modeled after Microsoft's
Windows operating system, is gaining market acceptance among OEMs as an
operating system that meets these requirements.
We develop products and provide services that enable the development of
Windows CE-based ICDs. We generate revenue in three distinct ways. First, we
provide engineering services to Microsoft and semiconductor vendors to adapt
Windows CE to different microprocessors and to enhance Windows CE's
user-specific features and functions. Second, we offer a comprehensive set of
software products and services that help enable OEMs to cost-effectively
integrate Windows CE into their ICDs. Third, we license a wide range of Windows
CE-based software applications to both OEMs and ICD consumers to provide
additional functions to Windows CE-based ICDs, such as printing and faxing
capabilities.
INDUSTRY BACKGROUND
The increasingly widespread use of electronic communications, including the
Internet, is enabling networks of businesses and consumers to collaborate,
access information and conduct business and personal interactions more
effectively. According to International Data Corporation, the number of
worldwide Internet users is expected to grow from 159 million in 1998 to 510
million in 2003. As the number of Internet users grows, so does the diversity of
content, services and applications available via the Internet. While the
Internet is already having a significant and highly visible impact on
business-to-consumer and consumer-to-consumer relationships, the market for
business-to-business Internet transactions is expected to expand at a greater
rate. According to Forrester Research, U.S.-based Internet commerce between
businesses is expected to grow from $109 billion in 1999 to $1.3 trillion in
2003.
As more businesses and consumers access the Internet, new ways of
conducting business electronically are emerging. Examples of users who are
leveraging this ability to communicate electronically include:
- businesses that use mobile computing devices to permit their employees to
access server-based network applications and the Internet from remote
sites;
- retail businesses that use handheld point-of-sale terminals to provide
real-time inventory tracking, automate their procurement processes and
publish information instantly to both internal and external users via the
Internet;
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- healthcare professionals who use mobile computing devices to record and
access patient information that can then be shared via the Internet among
a broader group of professionals responsible for providing medical care;
and
- consumers who use Internet-enabled television set-top boxes, smart
cellular phones, gaming systems and other devices to access Internet
content, communicate and conduct transactions online.
The increasing need for connectivity among both business and consumer users
is driving demand for easy-to-use, cost-effective and customizable methods of
electronic communication. Although the PC has been the traditional means of
electronically connecting suppliers, partners and customers, a class of
computing devices, including Internet-enabled television set-top boxes, handheld
and palm-size PCs, gaming systems, handheld industrial data collectors, consumer
Internet appliances such as kiosk terminals and vehicle navigational devices,
and Windows-based terminals, among others, is emerging. These ICDs are
particularly attractive to business and consumer users because they are often
less expensive than traditional computers; have adaptable configurations,
including size, weight and shape; and are able to support a variety of
customized applications and user interfaces that can be designed for particular
tasks. In addition, these devices are typically compatible with existing
business information systems. According to International Data Corporation, the
market for consumer information appliances, a subset of the overall ICD market,
is expected to grow from $2.2 billion in 1998 to $18.7 billion in 2003.
Because ICDs can be used for a number of purposes, from consumer
information to industrial automation, and can be designed for a range of unique
applications, the ICD industry is characterized by a wide variety of hardware
configurations, and end-user applications, each often designed for a specific
market. To accommodate these diverse characteristics in a cost-effective manner,
semiconductor vendors and OEMs require an operating system that can be
integrated with a number of different ICDs and support an expanding range of
industry-specific content and applications. The Microsoft Windows CE operating
system helps satisfy these requirements because it leverages the existing
industry-wide base of Microsoft Windows developers and technology standards; can
be customized to operate across a variety of ICDs and integrate with existing
information systems; offers Internet connectivity; and reduces systems
requirements compared to traditional PC operating systems. Because of these
characteristics, we believe Windows CE is emerging as an operating system of
choice for many hardware and software applications vendors.
To take advantage of the multiple benefits of the Windows CE operating
system, many OEMs and semiconductor vendors require the services of a software
product and service provider with the breadth of experience and depth of
capabilities to fully support the Windows CE operating system and related
applications across different semiconductors and ICDs. These products and
services should encompass the full cycle of the ICD development process,
including hardware support, software development products and services, system
validation and end-user software applications. In addition, these products and
services should leverage existing Microsoft and other industry technologies and
standards to promote rapid and low-cost development, reduced time-to-market and
integration with existing enterprise software applications. These products and
services should also be designed to accommodate the varying industry-specific
needs of semiconductor, equipment and software developers without compromising
functionality and performance.
THE BSQUARE SOLUTION
We provide a variety of software products and services that facilitate the
integration of the Microsoft Windows CE operating system into a wide range of
intelligent computing devices and enhance the functionality of those devices.
OEMs, semiconductor vendors and Windows CE software developers rely on our
products and services to help bring customized ICDs and ICD applications to
market in a timely fashion. Key elements of our solution include:
A BROAD SET OF END-TO-END WINDOWS CE DEVELOPMENT PRODUCTS AND SERVICES TO
SUPPORT A DIVERSE RANGE OF ICD HARDWARE, SYSTEMS AND APPLICATIONS DEVELOPMENT
REQUIREMENTS:
- Software development. We provide software services to Microsoft related
to the development and modification of the Windows CE operating system,
and to both Microsoft and semiconductor vendors to assist with the
creation of software development tools sold in conjunction with Windows
CE and the
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integration of Windows CE with various microprocessors. Software
development tools are software packages that help engineers develop new
software applications.
- Hardware support. We provide software products and services to OEMs that
support a variety of microprocessors and other computer hardware upon
which ICDs are based. For example, our CE Xpress Kits provide
pre-configured software packages that enable OEMs to integrate Windows CE
into their ICDs.
- System validation. We provide software products and services to assist
OEMs in the validation and verification of their hardware and software
executing Windows CE, including services designed to help OEMs develop
testing programs to validate the performance and reliability of their
ICDs.
- Applications software. We provide software packages that facilitate the
third-party development of Windows CE-based ICD user interfaces. We also
license software applications to both OEMs and ICD end users that enhance
the functionality of their ICDs.
PRODUCTS AND SERVICES THAT LEVERAGE EXISTING MICROSOFT TECHNOLOGIES AND
STANDARDS. Our Windows CE-based products and services leverage existing
Microsoft technologies and standards to enable semiconductor vendors and OEMs to
deliver highly customizable and cost-efficient ICDs to their end users. These
technologies enable OEMs to efficiently utilize the existing pool of programmers
familiar with the Windows operating system to develop differentiating
applications for ICDs based upon Windows CE. Our use of common programming
standards also allows ICDs designed with our development products and services
to integrate with existing information systems as well as with other Microsoft
technologies and applications. By enabling OEMs to standardize on a given
software platform, our products and services help OEMs more rapidly deploy new
hardware technologies without having to re-implement their software investments
across multiple platforms.
LEVERAGING OUR DEPTH OF EXPERIENCE IN DEVELOPING WINDOWS CE-BASED SOFTWARE
PRODUCTS AND SERVICES AND OUR VARIETY OF STRATEGIC RELATIONSHIPS TO DELIVER
TANGIBLE BENEFITS TO WINDOWS CE-BASED ICD DEVELOPERS. We have been providing
Windows CE-based services for the development, integration and deployment of the
Windows CE operating system and industry-specific applications since prior to
the commercial release of Windows CE. In addition, we have developed strategic
relationships with Microsoft. We are a provider of software engineering services
to Microsoft under our master agreement, a Microsoft-sanctioned Windows CE
systems integrator, a licensed distributor of Windows CE and a developer of
Windows CE-based software applications. Moreover, we have worked with several
semiconductor vendors, including Hitachi, NEC and ARM, to help integrate Windows
CE with their proprietary microprocessors. This depth and breadth of experience
enable us to bring tangible benefits to Microsoft and to a variety of OEMs,
semiconductor vendors and software developers. Such benefits include:
- Reduced time-to-market. By using our software services and pre-configured
software components, our customers can leverage our experience with the
Windows CE platform to help bring quality ICDs to market faster than if
they had chosen to develop their hardware, operating systems and software
applications internally.
- Lower development costs and reduced risks. By using our extensive library
of software tools for developing Windows CE-based ICDs instead of
developing these tools internally, our customers can reduce the
implementation and training time required for their engineers and lower
their ICD development costs. Our software components are thoroughly
tested for performance and reliability, reducing the risk of project
failure.
- Rapidly customizable graphical user interfaces. A graphical user
interface is the set of visual images through which the user interacts
with the ICD. Our software development solutions help enable our
customers to more rapidly design user- and industry-specific graphical
user interfaces to meet the specific needs of ICD users across a variety
of markets.
- Enhanced ICD functionality. Our pre-developed software components help
enable OEM customers to quickly add new and differentiating application
features to their existing ICD hardware components, which can help extend
product life cycles.
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STRATEGY
Our strategy is to become one of the primary providers of software products
and services for facilitating the integration of operating systems into ICDs.
Key elements of our strategy include:
Continue to enhance our position as a provider of Windows CE integration
services. We intend to enhance our leadership position in the development and
provision of Windows CE integration services to support a wide variety of ICDs.
Because we have been providing Windows CE-based software services since prior to
the commercial release of Windows CE, we believe that we offer a greater breadth
and depth of Windows CE expertise than our current competitors. We intend to
continue to leverage this expertise by maintaining strong, quality-focused
engineering groups, developing market-focused products and services, and
undertaking sales and marketing activities that highlight key design wins,
product awards and other third-party endorsements.
Expand our strategic relationships with hardware and software vendors. We
intend to continue to strengthen and extend our relationships with third-party
hardware and software vendors that are designing products based on Windows CE.
We provide software products and services that enable manufacturers of
microprocessors, computer boards and other components to develop hardware
designs compatible with Windows CE. We have also entered into licensing
arrangements with software developers to provide connectivity technologies for
products that interface with Windows CE. We believe that the use of our products
and services by a broad group of industry leaders is important in increasing
market awareness and generating new business opportunities.
Continue to leverage our relationship with Microsoft. We have developed a
close working relationship with Microsoft and under the terms of our master
agreement are a "preferred Microsoft vendor" for the development of the Windows
CE operating system and accompanying tools. Currently, we provide software
engineering services to Microsoft for a number of different Windows CE projects
and we intend to continue this relationship in the future. We believe that our
success is related to the overall adoption of Windows CE as an operating
platform, and therefore we intend to continue to work with Microsoft to promote
Windows CE, as well as other Microsoft operating systems.
Leverage our extensive Windows CE expertise to develop additional software
applications. We believe that as Windows CE is widely adopted in the
marketplace, there will be an increasing demand for complete, end-user software
applications that enhance the capabilities of Windows CE-based ICDs. We intend
to leverage our Windows CE expertise, our alliances with key strategic
manufacturers and our relationship with Microsoft to develop a leading position
in the market for Windows CE-based software applications. We currently offer a
variety of personal productivity software applications, including calendar,
address book and task-list functions, as well as utility and communications
software for Windows CE-based ICDs. We intend to continue to leverage our
Windows CE expertise to develop additional applications to address the evolving
requirements of this market.
Expand our international presence. We intend to continue to expand
internationally in order to enhance our profile and market reach. We believe
that Windows CE is gaining acceptance in the Asian and European markets. These
markets are attractive to us because of their high concentration of OEM
customers focusing on the development of ICDs. We have recently established
sales offices in Tokyo, Japan and Munich, Germany.
SOFTWARE SERVICES AND PRODUCTS
We develop, market and support a wide variety of Windows CE software
products and services for the development and integration of the Windows CE
operating system across a diverse selection of ICDs.
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Operating system development and accompanying tools
We provide software services to Microsoft and numerous semiconductor
vendors to support and enhance the following:
- the continued development of the Windows CE operating system;
- the utility of the Microsoft Visual Tools series, a set of software
development tools for use with the Windows CE operating system; and
- the integration of Windows CE with multiple microprocessors.
The services we provide these customers include software development,
software testing and program management. We provide these services both as a
comprehensive solution and on a point basis to address specific needs depending
upon individual customer requirements.
Integration of Windows CE with ICDs
We offer software products and services that are used by OEMs to integrate
the Windows CE operating system with ICDs. In order to customize the
functionality of Windows CE and integrate it with a particular ICD, OEMs must
develop or purchase software to be used in conjunction with the Visual Tools
series and Windows CE Platform Builder products provided by Microsoft. We offer
a comprehensive set of software products and services that enable OEMs to
cost-effectively integrate Windows CE with ICDs, with reduced time-to-market and
decreased risk of project failure.
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Products -- The following table summarizes the key features and benefits of
the products we offer to OEMs for the integration of Windows CE with ICDs:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
BSQUARE PRODUCT DESCRIPTION BENEFIT
<S> <C> <C>
- --------------------------------------------------------------------------------------------------------------
CE Xpress Adaptation - A set of pre-developed and tested code - Designed to save OEMs time
Kits for low-level support of hardware in a developing low-level software
Windows CE-based device support, reducing time-to-market
- Available for a broad range of chip - Pre-tested components increase
sets including those manufactured by AMD, reliability of target device
Cyrix, Hitachi, Intel and Motorola
- Sold in source code format to allow
customer modifications
- --------------------------------------------------------------------------------------------------------------
CE Xpress Binary Kits - Includes same functionality as CE - Enables OEMs to rapidly evaluate
Xpress Adaptation Kit without access to Windows CE on a specific reference
source code board with minimal investment
- Enables OEMs to bring reference
board-compatible products to market
with no porting or low-level
customization
- --------------------------------------------------------------------------------------------------------------
CE Xpress Single Board - A development kit that works in - Provides a foundation for OEMs to
Computer Kits conjunction with single board computers begin immediate development of
to quickly install and run Windows CE Windows CE-based ICDs
for the development of ICDs
- Provides all of the infrastructure
normally needed for development of
applications and customizations based
on industry-standard expansion bus (or
"plug-in") architectures
- --------------------------------------------------------------------------------------------------------------
CE Xpress86 Kit - A development kit that allows OEMs to - Eliminates need to wait for
run Windows CE on a standard PC-based hardware development before
platform beginning software development,
enabling faster time-to-market
- Runs Windows CE without DOS
- Reduces the cost of PC-based
Windows CE systems by eliminating
the DOS license requirement
- --------------------------------------------------------------------------------------------------------------
CE Xpress OnDemand - An online subscription service for - Enables CE Xpress Kit customers to
portable device drivers for CE Xpress Kit access the latest drivers and
customers driver updates online
- --------------------------------------------------------------------------------------------------------------
CEValidator - A quality assurance and testing - Designed to save OEMs testing costs
technology for the validation of Windows
CE integration with ICDs - Enables OEMs to test software
throughout the design process
- A client/server-based test program of
more than 1,000 individual test cases for
testing compliance and reliability
- Extensible architecture for
incorporating additional and custom test
programs
- --------------------------------------------------------------------------------------------------------------
CE EmbeddedDesktop - A fully customizable desktop building - Gives OEMs the ability to create a
utility device-specific graphical user
interface
- Includes a set of pre-developed
components for creating a custom desktop - Helps enable OEMs to rapidly and
easily create design prototypes and
- Contains customizable security and complete the implementation of
interface features for commercial graphical user interfaces
applications
- --------------------------------------------------------------------------------------------------------------
</TABLE>
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To augment our own Windows CE software products and services, we
occasionally enter into license and distribution agreements with third-party
software vendors to provide our customers with additional features and
functionality. Our ability to license these third-party software products to
OEMs, in conjunction with our own software products and services, provides our
OEM customers with a single source for Windows CE software products and
services. We are currently a licensed distributor of Windows CE-based software
from Communications Intelligence Corporation, Datalight, Intrinsyc and
Microsoft.
Services -- We also provide integration and support services to OEMs
developing Windows CE-based ICDs. For example, we provide implementation
services for companies developing Internet-enabled television set-top boxes,
gaming systems, handheld industrial devices, consumer Internet appliances such
as kiosk terminals and vehicle navigational devices, and Windows-based
terminals. Our CE Xpress consulting services use our existing products, such as
our CE Xpress Adaptation Kit and CE EmbeddedDesktop, to implement the hardware
and software specifications of our customers' ICD products. We often retain a
license or other proprietary rights in the resulting work product. At times, we
provide new applications or system software development on behalf of OEMs. We
believe that OEM customers in need of complex adaptations can save time and
resources by outsourcing this work to us. In addition, to support our OEM
customers, we often "bundle" support services with our software products and
other services. These support services help enable our OEM customers to complete
ICD development and reduce time-to-market.
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Consumer Software Applications
We provide a wide range of commercially available personal productivity,
utility and communications software to enhance the functionality and usefulness
of Windows CE-based ICDs. We market our consumer software applications through
standard retail and electronic commerce channels and also license these products
to OEMs in formats suitable for bundling with their own products. Our current
consumer software application product offerings include:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
PRODUCT DESCRIPTION BENEFIT
<S> <C> <C>
- ---------------------------------------------------------------------------------------------------------
bFAX - A product family that provides - Provides a practical and
faxing capabilities for ICDs comprehensive faxing solution for
- bFAX Pro provides send and Windows CE-based devices
receive capability for handheld PCs
- bFAX Express provides send-only
capability for handheld and
palm-size PCs
- ---------------------------------------------------------------------------------------------------------
bMOBILE News - Provides access to Internet - Mobile users can download news
newsgroups for handheld and palm- articles for on- or off-line use
size PCs
- ---------------------------------------------------------------------------------------------------------
bPRINT - Print management software for - Users can spool jobs for batch
handheld and palm-size PCs printing
- Increases the variety of printers
compatible with Windows CE-based
devices
- ---------------------------------------------------------------------------------------------------------
bREADY - An electronic book creation and - Users can store and transport
reading system which includes a large volumes of information and
desktop component for publishing literature
books and a client viewer for
handheld or palm-size PCs - Sample applications include sales
catalogs, forms and event
materials, among others
- ---------------------------------------------------------------------------------------------------------
BSQUARE SpreadSheet - A spreadsheet application for - Provides independent
palm-size PCs functionality while maintaining
Pocket Excel compatibility
- ---------------------------------------------------------------------------------------------------------
bTASK - A navigation, status and control - Alleviates the problem of
program for applications on managing multiple open applications
palm-size PCs
- ---------------------------------------------------------------------------------------------------------
bUSEFUL Backup Plus - A full-featured backup and - Avoids critical information loss
restore application for handheld by backing up data
and palm-size PCs
- ---------------------------------------------------------------------------------------------------------
bUSEFUL Utilities Pak - Utility suite for handheld and - Provides utility applications
palm-size PCs that contains 12 which enhance the performance and
different utility applications functionality of Windows CE-based
including bTASK, bUSEFUL Backup devices
Plus and other utility
applications
- ---------------------------------------------------------------------------------------------------------
bPRODUCTIVE Essentials Pak - Six software titles, including - A single installation program
bFAX, bPRINT, bTRACK, bREADY, saves time
bMOBILE News and bTASK
- ---------------------------------------------------------------------------------------------------------
</TABLE>
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TECHNOLOGY
We have developed a set of technologies incorporated in the software
products described under "-- Integration of Windows CE with ICDs -- Products"
that are used by OEMs to integrate Windows CE with their computer boards, the
internal hardware constituting the core of their ICDs. The basic features and
functions of these technologies are described below.
LOGO
The technology contained in our CE Xpress Kits, including the OEM Adaptation
Layer, the CE Platform Layer and the Device Driver Library, provides the
interface between Windows CE and the computer board contained within the ICD.
OEM Adaptation Layer Library
The OEM Adaptation Layer, or OAL, provides a standard interface between the
Windows CE operating system and the core components of an ICD's computer board.
A new board-specific OAL must be implemented for each computer board that will
be using Windows CE.
We maintain a library of OALs for several of the computer boards used in
Windows CE-based ICD products. These OALs are distributed to our customers in
our CE Xpress Kits and are also used by our engineers when we are contracted to
create custom solutions. In addition, our OAL library serves as a starting point
for the creation of new OAL implementations.
Device Driver Library
Device drivers provide the interface by which the Windows CE operating
system controls any peripheral devices, including keyboards, display screens and
computer network interface cards, that may be connected to an ICD's computer
board. A separate device driver must be implemented for each peripheral device
connected to a Windows CE-enabled computer board.
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<PAGE> 42
We have created a library of device drivers for inclusion in our CE Xpress
Kits and for use in the custom software products and services we provide to our
customers. The existing set of drivers also provides starting points for the
creation of new device drivers.
CE Platform Layer
A peripheral device normally requires a different device driver for each
model of computer board to which it is to be connected. A device driver for one
model of computer board will not generally work with a different model of
computer board.
Our CE Platform Layer, or CEPL, technology allows our engineers and
third-party hardware manufacturers to develop a single driver for a peripheral
device that may then be used on many different models of computer boards. This
increases the value and flexibility of each computer board by increasing the
number of readily available peripheral devices that can be used.
Our CEPL technology is included in our CE Xpress Kits and is used for the
implementation of the majority of our device drivers.
CEValidator
Our CEValidator is a quality assurance and testing product which we
originally developed for our in-house use. We believe that it is important to
test devices early in the design process and to continue testing at a high
frequency throughout the development cycle. We have designed our CEValidator to
support such a testing pattern. CEValidator is based on two primary components:
- a broad suite of over 1,000 tests which evaluates the various subsystems
of Windows CE. These tests have been developed by our engineers in the
course of our own software development efforts. In addition, CEValidator
allows OEMs to add their own test suites to evaluate specific features of
their ICDs.
- a test control system. This system manages the execution of the tests
suite and the recording of test results. CEValidator provides
communication features which control testing over network connections, a
graphical user interface for displaying user controls and test results,
and simultaneous testing capabilities for multiple systems.
CUSTOMERS
Microsoft is our largest customer, representing approximately 79% and 87%
of our total revenue in 1998 and for the six months ended June 30, 1999,
respectively. Our other target customers include semiconductor vendors and OEMs
seeking to leverage the numerous benefits of Windows CE in order to develop high
quality, full-feature products that meet the complex and evolving requirements
of numerous end-markets.
Semiconductor Vendors
We have received revenue in excess of $1.0 million directly from the
following semiconductor vendors:
ARM
Hitachi Semiconductor (America)
Motorola Computer Group
NEC
In addition to these vendors, we have provided software products and
services to a variety of other semiconductor vendors under our master agreement
with Microsoft.
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OEM Customers
The following is a representative list of our OEM customers in the first
six months of 1999:
AT&T
Boundless Technologies
Casio
Cedar Systems
Data General
Development Concepts
Ericsson
Hewlett-Packard
IGEL AG
Lexicon
LG Electronics
NEC Electronics
Philips Electronics
Philips Mobile Computing Group
Sainco
Sharp Electronics
Symbol Technologies
Takaoka Electric
Televideo
Telxon
Total Control Products
Touchstar Technologies
Two Technologies
WebTV
Due to customer confidentiality requirements, some customers are not
disclosed. For the first six months of 1999, per-customer revenue for all
customers varied from less than $5,000 to approximately $575,000.
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<PAGE> 44
SELECTED CUSTOMER APPLICATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CUSTOMER APPLICATION
- ----------------------------------
<S> <C>
Hitachi Semiconductor Hitachi Semiconductor (America) Inc., a wholly owned
[image] subsidiary of Hitachi America Ltd, is a semiconductor
vendor.
When Microsoft Windows CE was first introduced, Microsoft
wanted to integrate Windows CE with a Hitachi-manufactured
microprocessor. However, at the time, Hitachi did not
possess tools that would allow Windows CE to operate on its
microprocessor.
Hitachi turned to us to help enable it to integrate the
Windows CE operating system with its microprocessor. We
worked closely with Hitachi to design software programs that
helped enable Hitachi to develop a Windows CE-supported
microprocessor architecture.
- ----------------------------------
Hewlett-Packard Hewlett-Packard develops handheld and palm-size PC devices.
[image]
To enhance the functionality of its handheld devices, HP was
seeking to bundle third-party software applications with its
devices to provide additional features, such as calendar and
address book functions and faxing and printing capabilities.
When HP began developing new Windows CE-based handheld
devices, they turned to us to provide a variety of utility
and personal productivity applications that would enhance
the features of their product. Rather than include these
applications on third-party CDs in their product boxes, HP
now bundles these products into the memory of HP's handheld
devices, HP Jornada 820 and HP Jornada 680, providing users
instant access to our software programs without additional
installations.
- ----------------------------------
Advanced Micro Devices Advanced Micro Devices is a supplier of integrated circuits
for the personal and networked computer and communications
markets. AMD needed to run Windows CE on their ElanSC400
microprocessor, but lacked the in-house resources and
knowledge of Windows CE necessary to complete the project
within their required timeframe. They called on us to
provide software products to help integrate Windows CE with
their ICD microprocessor. We retained rights to the software
we developed for AMD, and we are now reselling this
software, in the form of a CE Xpress Kit, to OEMs interested
in developing ICDs based on the AMD ElanSC400 system.
- ----------------------------------
</TABLE>
MICROSOFT RELATIONSHIP
We maintain strategic relationships with Microsoft to promote its Windows
CE operating system across a broad range of industries and applications. Our
relationship with Microsoft extends to the following:
Development partner. Under the terms of our master agreement, we are a
"preferred Microsoft vendor" for Windows CE. Approximately 200 of our software
engineers work on a number of different Windows CE-based projects for Microsoft
and on the development of Windows CE-related software tools.
Systems integrator. We are a Microsoft-sanctioned systems integrator for
Windows CE, as indicated on the "embedded Windows CE" portion of Microsoft's
website. In this capacity, we provide training, consulting and software
engineering services and products to OEMs that are building Windows CE-based
ICDs. We actively participate in the Microsoft systems integrator program,
including participating with Microsoft in "partner pavilions" at trade shows and
listing our services and posting our product announcements on the
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<PAGE> 45
"embedded Windows CE" portion of Microsoft's website. In addition, Microsoft has
periodically utilized our services when an OEM has required additional software
engineering resources.
Windows CE distributor. We are a licensed distributor of the Windows CE
operating system. We sub-license Windows CE by reselling the right to bundle
this operating system in ICDs. Microsoft actively assists and manages its
distributors to secure additional licensing opportunities for Windows CE. We are
promoted on the "embedded Windows CE" portion of Microsoft's website as a
distributor, and Microsoft shares with us leads generated from Web inquiries and
tradeshows.
Windows CE independent software vendor. Microsoft actively encourages
third-party application development through its Developer Relations Group and
Windows CE logo program, which allows third-party applications to receive
Windows CE compatibility logos. We develop several software applications for a
wide variety of Windows CE-based ICDs and participate in marketing opportunities
offered by Microsoft for third-party developers. In addition, Microsoft has from
time to time demonstrated our applications in connection with demonstrations to
third parties of its Windows CE operating system.
SALES AND MARKETING
We market and sell our software products and services solutions through
representatives, distributors, retail channels and direct OEM sales. This broad
range of channels is based upon the diversity of our products, including
applications, tools and software technology. We have direct sales offices in the
United States, Germany and Japan. As of August 31, 1999, we had 27 employees in
our sales and marketing department. Key elements of our sales and marketing
strategy include direct advertising, event marketing, an active public relations
program, channel marketing programs, customer and strategic alliance partner
co-marketing programs and a comprehensive website.
We are currently developing new sales channels, including value-added
resellers and systems integrators. We believe that these additional channels
will further increase the brand awareness of our software products and services
and will further promote the development of software infrastructures for Windows
CE-based ICDs.
CUSTOMER SUPPORT
We recognize the importance of offering quality service and support to our
resellers and end-user customers. Therefore, we provide a wide range of services
and support to both of these groups, including technical support for our
products, educational services and professional services for implementing and
customizing our products. Both our resellers and end-user customers can utilize
web-based, e-mail and/or telephone support 24 hours a day, seven days a week, to
access answers to questions, obtain assistance in determining the source of
defects or errors and acquire solutions to common problems.
RESEARCH AND DEVELOPMENT
As of August 31, 1999, we had 275 engineers engaged in research and
development. Our research and development teams are responsible for the design,
development and release of our products. Members of our research and development
staff work closely with our sales and marketing department, as well as with our
customers and potential customers, to better understand market needs and
requirements.
A substantial majority of our research and development engineers is
involved in the development of the Windows CE operating system and accompanying
tools for Microsoft. These responsibilities require significant expertise due to
the radically different nature of the microprocessors and other hardware
components used in Windows CE-based ICDs. This team has accumulated detailed
knowledge of the Windows CE environment over the past five years, allowing us to
continue to develop software products and services that enable the expanding
capability and compatibility of Windows CE-based ICDs. To ensure that
compatibility goals are met and that a high level of product quality is
achieved, quality assurance groups within this team subject our products to tens
of thousands of individual tests in multiple test configurations before the
products are released to our customers. Due to the broad variety of hardware
that hosts Windows
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<PAGE> 46
CE, the quality assurance groups have had to develop a special expertise in
managing and extending the test tools used to validate the tool kits for these
diverse operating environments.
The remainder of our research and development engineers develop Windows CE
software for both end-user markets and product/application developers. The
software engineers in this team are responsible for the development of
commercial applications that provide added breadth and functionality for Windows
CE-based ICDs as well as standard products used in the development and testing
of new products utilizing the Windows CE operating system. Our engineers have
significant experience in creating products for Windows CE, which enables us to
bring products to market in a timely manner.
COMPETITION
We face competition from:
- our current and potential customers' internal research and development
departments that may seek to develop their own proprietary products and
solutions;
- large professional engineering services firms, such as Cadence and EDS,
that may enter the market;
- established ICD software and tools manufacturers such as Applied
Microsystems, Spyglass, Phoenix Technologies, Mentor Graphics and
Integrated Systems;
- small- and medium-size engineering services companies such as VenturCom,
Eclipse International, BlueWater Systems and Vadem; and
- software and component distributors such as Avnet/Hamilton Hallmark,
Pioneer and Annasoft Systems.
As we develop new products, particularly products focused on specific
industries, we may begin competing with companies with whom we have not
previously competed.
We compete principally on the basis of the breadth of software products and
services offered, the experience of the providers, the quality of the software
products and services, the time-to-market and price. We believe we compete
favorably in each of these areas.
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
Intellectual property is critical to our success. In general, we attempt to
protect our intellectual property rights through patent, copyright, trademark
and trade secret laws and contractual arrangements. There can, however, be no
assurance that our efforts will be effective to prevent misappropriation of our
technology, or to prevent the development and design by others of products or
technologies similar to or competitive with those developed by us.
We currently have three pending U.S. patent applications. We do not have
any issued patents. BSQUARE, bFAX and BSQUARE View are our registered
trademarks. Additionally, bTRACK, bREADY, bFIND, bPRINT, bMOBILE, bUSEFUL,
bTASK, bPRODUCTIVE, bSTART and CEValidator are our trademarks. We will continue
to pursue registration of these and other marks. This prospectus also contains
trademarks and tradenames of other companies.
EMPLOYEES
As of August 31, 1999, we had 348 employees, excluding independent
contractors and other temporary employees, including 275 employees in research
and development, 27 employees in sales and marketing and 46 employees in general
and administrative services. Of these employees, 338 are located in the United
States, three are located in Germany and seven are located in Japan. In
addition, from time to time, we employ temporary employees and consultants. None
of our employees is represented by a labor union, and we consider our relations
with our employees to be good.
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<PAGE> 47
FACILITIES
We lease approximately 70,000 square feet of space in three buildings in
Bellevue, Washington under multiple leases with various terms, with the longest
term expiring in April 2003. In October 1999, we plan to relocate all of our
U.S. employees to a single new location in Bellevue, Washington with
approximately 126,000 square feet, pursuant to a lease that expires in 2009,
with the option to renew for up to an additional 20 years. We also lease office
space in Munich, Germany and Tokyo, Japan. We believe that our new facilities
will be adequate to meet our needs for at least the next twelve months.
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<PAGE> 48
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information regarding our executive
officers and directors:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
William T. Baxter............... 36 Chairman of the Board, President and Chief Executive
Officer
Brian V. Turner................. 39 Senior Vice President, Chief Financial Officer and
Secretary
Albert T. Dosser................ 42 Senior Vice President, Director
Peter R. Gregory................ 37 Senior Vice President
David J. Bialer................. 39 General Manager
Donald L. Whitt................. 53 General Manager
Jeffrey T. Chambers(1)(2)....... 44 Director
Scot E. Land(1)(2).............. 45 Director
William L. Larson............... 43 Director
</TABLE>
- ---------------
(1) Member of audit committee
(2) Member of compensation committee
William T. Baxter co-founded BSQUARE in July 1994 and has served as our
President, Chief Executive Officer and Chairman of the Board since our
inception. From June 1993 to October 1994, Mr. Baxter served as Principal
Engineer at Digital Equipment Corporation, a manufacturer of business and
networking computer systems. Between February 1990 and May 1993, Mr. Baxter
served as Manager of Compiler Development at Intergraph Corporation, a developer
and manufacturer of interactive computer graphics systems. Mr. Baxter holds a
B.S. and M.S. in computer science from the University of Wyoming.
Brian V. Turner has been our Senior Vice President, Chief Financial Officer
and Secretary since April 1999. From September 1995 to April 1999, Mr. Turner
was the Chief Financial Officer at RadiSys Corporation, a manufacturer and
designer of computers. Between July 1982 and September 1995, Mr. Turner was with
PricewaterhouseCoopers LLP, an accounting firm, most recently as a director in
Corporate Finance. Mr. Turner holds a B.A. in international political science
and a B.B.A. in accounting from the University of Washington.
Albert T. Dosser co-founded BSQUARE in July 1994 and has served as a Senior
Vice President and a director since our inception. From June 1992 to October
1994, Mr. Dosser served as a software engineer at Digital Equipment Corporation.
Between August 1984 and June 1992, Mr. Dosser served as a software engineer at
Telesoft, a software firm developing Ada compilers and related products, and
from July 1982 to August 1984, he served as a sales support analyst and as
assistant to the national product manager for the OEM Systems Division at NCR, a
manufacturer of business and networking computer systems. Mr. Dosser holds a
B.S. in information science, with a minor in mathematics, from East Tennessee
State University.
Peter R. Gregory co-founded BSQUARE in July 1994, has served as a Senior
Vice President since our inception and was a director from inception until
September 1999. From August 1991 to October 1994, Mr. Gregory served as Senior
Software Engineer at Digital Equipment Corporation. Between February 1990 and
August 1991, Mr. Gregory served as Senior Software Engineer at a subsidiary of
Motorola, a computer component and telecommunications equipment manufacturer.
Mr. Gregory holds a B.A. in computer science from Southern Illinois University
at Carbondale.
David J. Bialer has been a General Manager at BSQUARE since September 1998.
From January 1998 to August 1998, Mr. Bialer was the Director of Business
Development at MobileSoft, a division of Philips Electronics North America
Corporation and a Windows CE e-commerce website founded by Mr. Bialer. From
April 1996 to January 1998, Mr. Bialer served as a Senior Product Manager at
Philips Mobile Computing Group, a manufacturer of Windows CE-based devices, and
from December 1995 to February 1996, he served as a Senior Manager, Business
Development at VDOnet, a developer of video conferencing,
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<PAGE> 49
messaging and streaming software. From December 1994 to December 1995, Mr.
Bialer served as a Senior Manager at Oracle Corporation, a database company, and
from January 1993 to December 1994, he served as a Senior Product Marketing
Engineer at Intel Corporation, a manufacturer of semiconductor, computer and
networking products. Mr. Bialer holds a B.S. in computer science from Cornell
University and an M.B.A. from the University of Pennsylvania, Wharton School of
Business.
Donald L. Whitt has been a General Manager at BSQUARE since April 1998, and
from May 1997 to April 1998, Mr. Whitt held various other positions with us.
From October 1993 to May 1997, Mr. Whitt was a program manager at Secure
Computing Corporation, an Internet security company, and from May 1970 to May
1993, he served in management positions at Control Data Corporation, a computer
manufacturer. Mr. Whitt holds a B.S. in mathematics from California State
University at Fresno.
Jeffrey T. Chambers has been a director of BSQUARE since February 1998. Mr.
Chambers was elected to our board of directors in connection with the purchase
of shares of our preferred stock by affiliates of TA Associates, Inc., a venture
capital firm. Mr. Chambers has been employed by TA Associates or its predecessor
since 1980, where he currently serves as a managing director. In addition to
BSQUARE, Mr. Chambers currently serves as a director of several privately held
companies.
Scot E. Land has been a director of BSQUARE since February 1998. Mr. Land
was elected to our board of directors in connection with the purchase of shares
of our preferred stock by affiliates of Encompass Group, a venture capital firm.
Mr. Land is currently a managing director of Encompass Ventures, an affiliate of
Encompass Group, a position he has held since September 1997. Prior to joining
Encompass, Mr. Land was a Senior Technology Analyst and Strategic Planning
Consultant with Microsoft from June 1993 to September 1997, and a technology
research analyst and investment banker for First Marathon Securities, a Canadian
investment bank, from September 1993 to April 1995. From October 1988 to
February 1993, Mr. Land was the President and Chief Executive Officer of
InVision Technologies, a publicly traded company founded by Mr. Land in October,
1988 that designs and manufacturers high-speed computer-aided topography systems
for automatic explosives detection for aviation security. Prior to founding
InVision Technologies, Mr. Land served as a principal in the international
consulting practice of Ernst and Young LLP, a public accounting firm, from April
1984 to October 1988.
William L. Larson has been a director of BSQUARE since September 1998.
Since September 1993 Mr. Larson has been the Chief Executive Officer of Network
Associates, Inc., a software company, where he has also served as President and
a director since October 1993 and as Chairman of the Board since April 1995.
From August 1988 to September 1993, Mr. Larson served as a Vice President of
SunSoft, Inc., a systems software subsidiary of Sun Microsystems, where he was
responsible for worldwide sales and marketing.
BOARD OF DIRECTORS
We currently have authorized seven directors; however, two board seats are
vacant. Currently all directors hold office until the next annual meeting of
shareholders or until their successors are duly elected, and will continue to do
so following the closing of this offering. However, our amended and restated
articles of incorporation provide that as of the first annual meeting of
shareholders after the closing of this offering, our board of directors will be
divided into three classes, each with staggered three-year terms. As a result,
only one class of directors will be elected at each annual meeting of our
shareholders, with the other classes continuing for the remainder of their
respective three-year terms.
In addition, in connection with its purchase of shares of common stock,
following this offering we have agreed to use our best efforts to cause an
individual selected by Vulcan Ventures and reasonably acceptable to us to be
elected to our board of directors.
Committees
Our board of directors currently has an audit committee and a compensation
committee. The audit committee consists of Mr. Chambers and Mr. Land. The audit
committee makes recommendations to our
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<PAGE> 50
board of directors regarding the selection of independent auditors, reviews the
scope of audit and other services by our independent auditors, reviews the
accounting principles and auditing practices and procedures to be used for our
financial statements and reviews the results of our audits. The compensation
committee consists of Mr. Chambers and Mr. Land. The compensation committee
reviews and approves the compensation and benefits for our executive officers,
grants stock options under our stock option plan and makes recommendations to
our board of directors on compensation matters.
Compensation Committee Interlocks and Insider Participation
No interlocking relationship exists between any member of our board of
directors or compensation committee and any member of the board of directors or
compensation committee of any other company, nor has any such interlocking
relationship existed in the past.
In January 1998, we sold 8,333,333 shares of Series A Preferred Stock at a
per share price of $1.80. Purchasers of Series A Preferred Stock included:
- TA Associates and its affiliates, who collectively purchased 6,666,667
shares and are beneficial owners of 25.6% of our outstanding common stock
on an as-converted basis prior to this offering. One of our directors,
Jeffrey T. Chambers, is a managing director of TA Associates; and
- Encompass Ventures and its affiliates, who collectively purchased
1,666,666 shares and are beneficial owners of 6.5% of our outstanding
common stock on an as-converted basis prior to this offering. One of our
directors, Scot E. Land, is a managing director of Encompass Ventures.
Upon closing of this offering, each outstanding share of Series A Preferred
Stock will convert into one share of common stock.
In connection with the sale of the Series A Preferred Stock, the investors
were granted registration rights, and we may therefore become obligated to
effect a registration under the Securities Act of 1933 of shares of common stock
held by these investors upon the conversion of their preferred stock.
In September 1998, we granted an option to purchase 125,000 shares of
common stock at an exercise price of $1.00 per share to NextGen, an affiliate of
Encompass Ventures, in exchange for consulting services.
We have also granted options to purchase common stock to Messrs. Chambers
and Land. Because of contractual obligations involving Mr. Chambers and his
affiliated investment entities, the option grant to Mr. Chambers was issued in
the name of TA Associates, Inc.
Compensation
Our directors are reimbursed for expenses incurred in connection with
attending board and committee meetings but are not otherwise compensated for
their services as board members. In August 1998, we granted to each of TA
Associates, with whom Jeffrey T. Chambers, one of our directors, is affiliated,
and Scot E. Land, one of our directors, an option to purchase 45,000 shares of
our common stock at an exercise price of $1.80 per share, vesting in three
annual installments of 15,000 shares each. In July 1998, we granted to William
Larson, one of our directors, an option to purchase 120,000 shares of our common
stock at an exercise price of $1.80 per share, vesting in three annual
installments of 40,000 shares each. We currently intend to make comparable
option grants to future non-employee directors.
EXECUTIVE OFFICERS
Our executive officers are elected by, and serve at the discretion of, our
board of directors. There are no family relationships among our directors and
officers.
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<PAGE> 51
EXECUTIVE COMPENSATION
The following table sets forth certain information concerning compensation
for services rendered to us in all capacities during the fiscal year ended
December 31, 1998 by our chief executive officer and our four other most highly
compensated executive officers whose salary and bonus for fiscal 1998 exceeded
$100,000.
<TABLE>
<CAPTION>
ANNUAL LONG TERM ALL OTHER
COMPENSATION COMPENSATION COMPENSATION
------------------ ------------ -------------------------------------
SECURITIES HEALTH LIFE AND
UNDERLYING INSURANCE DISABILITY MOVING
NAME AND PRINCIPAL POSITION SALARY BONUS OPTIONS (#S) PREMIUMS PREMIUMS EXPENSES
- --------------------------- -------- ------ ------------ ---------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
William T. Baxter.......... $252,625 $ -- -- $2,133 $1,060 $ --
President and Chief
Executive Officer
Albert T. Dosser........... 150,000 -- -- 1,776 1,305 --
Senior Vice President
Peter R. Gregory........... 150,000 -- -- -- 1,070 --
Senior Vice President
David J. Bialer(1)......... 37,000 1,000 100,000 699 -- 8,676
General Manager
Donald L. Whitt............ 103,265 2,452 10,000 2,192 -- --
General Manager
</TABLE>
- ---------------
(1) Mr. Bialer was hired by us on September 8, 1998. If he had been employed
during the entire fiscal year ended December 31, 1998, his annual salary
would have been $130,000.
Option Grants in Fiscal Year 1998
The following table sets forth certain information with respect to stock
options granted to each of our named executive officers during the fiscal year
ended December 31, 1998. In accordance with the rules of the Securities and
Exchange Commission, also shown below is the potential realizable value over the
term of the option, the period from the grant date to the expiration date,
giving effect to an assumed initial public offering price of $13.00 per share
and based on assumed rates of stock appreciation of 5% and 10%, compounded
annually. These rates are mandated by the SEC and do not represent our estimate
of future stock price. Actual gains, if any, on stock option exercises will
depend on the future performance of our common stock. In the fiscal year ended
December 31, 1998, we granted options to acquire up to an aggregate of 1,108,150
shares of common stock to employees and directors, all under our stock option
plan and all at an exercise price equal to the fair market value of our common
stock on the date of grant as determined in good faith by our board of
directors.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------------------------- POTENTIAL REALIZABLE VALUE
PERCENT OF AT ASSUMED ANNUAL RATES OF
TOTAL OPTIONS STOCK PRICE APPRECIATION FOR
NUMBER OF SECURITIES GRANTED TO EXERCISE OPTION TERM
UNDERLYING OPTIONS EMPLOYEES IN PRICE PER EXPIRATION -----------------------------
NAME GRANTED FISCAL 1998 SHARE DATE 5% 10%
---- -------------------- ------------- --------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
William T. Baxter....... -- -- $ -- -- $ -- $ --
Albert T. Dosser........ -- -- -- -- -- --
Peter R. Gregory........ -- -- -- -- -- --
David J. Bialer......... 100,000 9.0% 1.00 9/25/08 2,017,563 3,271,865
Donald L. Whitt......... 10,000 1.0% 1.00 7/17/08 201,756 327,186
</TABLE>
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<PAGE> 52
Aggregate Option Exercises in Fiscal Year 1998 and Fiscal Year-End Option
Values
With respect to our named executive officers, the following table sets
forth information concerning option exercises in the fiscal year ended December
31, 1998 and exercisable and unexercisable options held as of December 31, 1998.
The "Value Realized" and the "Value of Unexercised In-the-Money Options at
December 31, 1998" are based upon an assumed initial public offering price of
$13.00 per share minus the per share exercise price multiplied by the number of
shares underlying the option.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
NUMBER OF SHARES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
ACQUIRED ON EXERCISE OPTIONS AT IN-THE-MONEY OPTIONS AT
----------------------- DECEMBER 31, 1998 DECEMBER 31, 1998
VALUE --------------------------- ---------------------------
NAME EXERCISED REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- --------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
William T. Baxter............ -- $ -- -- -- $ -- $ --
Albert T. Dosser............. -- -- -- -- -- --
Peter R. Gregory............. -- -- -- -- -- --
David J. Bialer.............. -- -- 100,000 -- 1,200,000 --
Donald L. Whitt.............. 5,000 -- -- 25,000 -- 314,257
</TABLE>
EMPLOYEE BENEFIT PLANS
Amended and Restated Stock Option Plan
Our board of directors adopted and our shareholders approved our amended
and restated stock option plan in May 1997. As of August 31, 1999, we had
reserved a total of 5,625,000 shares of common stock for issuance under the
stock option plan. The stock option plan provides for the granting to our
employees, including officers and directors, of incentive stock options within
the meaning of Section 422 of the Internal Revenue Code of 1986 and for the
granting to employees, consultants and non-employee directors of nonstatutory
stock options. If an optionee would have the right in any calendar year to
exercise for the first time incentive stock options for shares having an
aggregate fair market value (determined for each share as of the date the option
to purchase the shares was granted) in excess of $100,000, any such excess
options shall be treated as nonstatutory stock options. Unless terminated
earlier by our board of directors, the plan will terminate in May 2007. As of
August 31, 1999, options to purchase 3,251,542 shares of common stock were
outstanding under this plan and 303,278 shares had been issued upon exercise of
options.
The stock option plan may be administered by our board of directors or a
committee of our board. Our board of directors determines the terms of each
option granted under the stock option plan, including the number of shares
subject to an option, exercise price, vesting schedule and duration. The
exercise price of all incentive stock options granted under the stock option
plan cannot be less than the fair market value of the common stock on the date
of grant and, in the case of incentive stock options granted to holders of more
than 10% of our voting power, not less than 110% of the fair market value.
Generally, options granted under the stock option plan have a term of ten years,
vest annually over a four-year period and are nontransferable. Payment of the
exercise price of options may be made in cash or other consideration as
determined by our board of directors.
Our board of directors has the authority to amend or terminate the stock
option plan as long as such action does not adversely affect any outstanding
option and provided that shareholder approval for any amendments to the stock
option plan shall be obtained to the extent required by applicable law.
Employee Stock Purchase Plan
Our board of directors and shareholders adopted an employee stock purchase
plan in August 1999. We will implement the employee stock purchase plan
effective as of the date of this prospectus. The employee stock purchase plan
provides a convenient and practical means by which employees may participate in
stock ownership. Our board of directors believes that the opportunity to acquire
a proprietary interest in our success through the acquisition of shares of
common stock pursuant to the employee stock purchase plan is an important aspect
of our ability to attract and retain highly qualified and motivated employees.
The employee
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<PAGE> 53
stock purchase plan is intended to qualify as an "employee stock purchase plan"
within the meaning of Section 423 of the Internal Revenue Code. The employee
stock purchase plan may be administered by our board of directors or by a
committee appointed by our board of directors. The plan administrator has the
power to make and interpret all rules and regulations it deems necessary to
administer the employee stock purchase plan. Our board of directors has broad
authority to amend the employee stock purchase plan, subject in some instances
to shareholder approval. All of our employees who customarily work more than 20
hours per week, including our officers, are eligible to participate in the
employee stock purchase plan. Eligible employees may elect to contribute from 1%
to 10% of the compensation paid to them during each pay period towards stock
purchases under the plan. Other than the first offering, which will have a
duration of approximately 19 months, each participant may enroll in an 18-month
offering in which shares of common stock are purchased on the last day of each
six-month period during the offering. The first offering will commence on the
date of this prospectus and will terminate on May 14, 2001. Thereafter, a
separate offering will commence on November 15 and May 15 of each year. The
purchase price for shares purchased under the employee stock purchase plan will
be equal to 85% of the lower of:
- the fair market value of our common stock on the enrollment date of the
offering; or
- the fair market value on the date of purchase.
Neither payroll deductions credited to an employee's account nor any rights with
regard to the purchase of shares under the employee stock purchase plan may be
assigned, transferred, pledged or otherwise disposed of in any way by a
participant, except that a participant may designate a beneficiary in the event
of his or her death.
Upon termination of employment due to death, retirement or disability, the
payroll deductions credited to an employee's account will be used to purchase
shares on the next purchase date. Any remaining balance will be returned to the
participant or his or her beneficiary. Upon termination of employment for any
other reason, any payroll deductions credited to an employee's account will be
returned to the participant. We have authorized the issuance of up to 1,500,000
shares of common stock under the employee stock purchase plan. In the event of a
merger, consolidation or acquisition by another corporation of all or
substantially all of our assets, each outstanding right to purchase shares under
the employee stock purchase plan shall be assumed or an equivalent stock
purchase right substituted by the successor corporation. If the successor
corporation refuses to assume or substitute for the stock purchase right, the
offering period during which a participant may purchase stock will be shortened
to a specified date before the proposed merger or sale. Similarly, in the event
of our liquidation or dissolution, the offering period during which a
participant may purchase stock will be shortened to a specified date before the
date of the liquidation or dissolution.
401(k) Plan
In March 1997, our board of directors adopted a tax-qualified employee
savings and retirement plan for eligible U.S. employees. Eligible employees may
elect to defer a percentage of their eligible compensation in the 401(k) plan,
subject to the statutorily prescribed annual limit. We make matching
contributions on behalf of all participants in the 401(k) plan in the amount
equal to one-half of the first 6% of an employee's contributions. Matching
contributions are subject to a vesting schedule; all other contributions are at
all times fully vested. We intend the 401(k) plan to qualify under Sections
401(k) and 501 of the Internal Revenue Code so that contributions by employees
or us to the 401(k) plan, and income earned, if any, on plan contributions, are
not taxable to employees until withdrawn from the 401(k) plan, and so that we
will be able to deduct our contributions when made. The trustee of the 401(k)
plan, at the direction of each participant, invests the assets of the 401(k)
plan in any of a number of investment options.
EMPLOYMENT AGREEMENTS AND CHANGE OF CONTROL ARRANGEMENTS
We currently do not have any employment agreements with any of our named
executive officers. Our stock option plan provides that in the event a third
party acquires us through the purchase of all or substantially all of our
assets, a merger or other business combination, if so provided in applicable
stock option agreements, the unexercised portion of outstanding options will
vest and become immediately exercisable.
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<PAGE> 54
Only two of our officers have stock option agreements that contain change of
control provisions. David Bialer has a stock option agreement which provides for
the acceleration of vesting of 50% of any unvested portion of his options in the
event a third party acquires us. In addition, Brian V. Turner has a stock option
agreement pursuant to which his options are all immediately vested but subject
to repurchase by us over a period of four years from the date of grant. Mr.
Turner's option agreement also provides for the release of 50% of any unreleased
portion of his options in the event a third party acquires us. We do not have
change of control arrangements with any of our other named executive officers.
DIRECTOR AND OFFICER INDEMNIFICATION AND LIABILITY
Our amended and restated articles of incorporation limit the liability of
directors and officers to the fullest extent currently permitted by the
Washington Business Corporation Act or as it may be amended in the future.
Consequently, subject to the WBCA, no director will be personally liable to us
or our shareholders for monetary damages resulting from his conduct as our
director, except liability for:
- acts or omissions involving intentional misconduct or knowing violations
of law;
- unlawful distributions; or
- transactions from which the director personally receives a benefit in
money, property or services to which the director is not legally
entitled.
Our amended and restated articles of incorporation also provide that we
shall indemnify any individual made a party to a proceeding because that
individual is or was one of our directors or officers and shall advance or
reimburse reasonable expenses incurred by such individual in advance of the
final disposition of the proceeding to the fullest extent permitted by
applicable law. Any repeal of or modification to our amended and restated
articles of incorporation may not adversely affect any right of any of our
directors who is or was a director at the time of such repeal or modification.
To the extent the provisions of our amended and restated articles of
incorporation provide for indemnification of directors for liabilities arising
under the Securities Act, those provisions are, in the opinion of the SEC,
against public policy as expressed in the Securities Act and are therefore
unenforceable.
Our bylaws provide that we shall indemnify our directors and officers and
may indemnify our employees and agents to the fullest extent permitted by law.
In addition, we have entered into separate indemnification agreements with our
directors and certain executive officers that could require us, among other
things, to indemnify them against liabilities that arise because of their status
or service as directors or executive officers and to advance their expenses
incurred as a result of any proceeding against them as to which they could be
indemnified. Finally, we have purchased and intend to maintain a liability
insurance policy, pursuant to which our directors and officers may be
indemnified against liability they may incur for serving in their capacities as
our directors and officers. We believe that the limitation of liability
provisions in our amended and restated articles of incorporation, the
indemnification provisions in our bylaws, the indemnification agreements and the
liability insurance policy will facilitate our ability to continue to attract
and retain qualified individuals to serve as our directors and officers.
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<PAGE> 55
RELATED-PARTY TRANSACTIONS
In connection with our conversion from a subchapter S corporation to a C
corporation in October 1997, we issued notes payable to William T. Baxter,
Albert T. Dosser and Peter R. Gregory, each in the principal amount of
$654,970.76, which were repaid in full in January 1998.
In January 1998, we sold 8,333,333 shares of Series A Preferred Stock at a
per share price of $1.80. Purchasers of Series A Preferred Stock included TA
Associates and its affiliates, who collectively purchased 6,666,667 shares and
hold more than 5% of our outstanding common stock on an as-converted basis, and
of which one of our directors, Jeffrey T. Chambers, is a partner; and Encompass
Ventures and its affiliates, who collectively purchased 1,666,666 shares and
hold more than 5% of our outstanding common stock on an as-converted basis, and
of which one of our directors, Scot E. Land, is a managing director. Messrs.
Chambers and Land were elected to our board of directors under the terms of the
stock purchase agreement pursuant to which the investors purchased the Series A
Preferred Stock. Upon closing of this offering, each outstanding share of Series
A Preferred Stock will convert into one share of common stock.
In connection with the sale of the Series A Preferred Stock, the investors
were granted registration rights, and we may therefore become obligated to
effect a registration under the Securities Act of shares of common stock held by
these investors upon the conversion of their preferred stock. In addition, in
connection with the Series A Preferred Stock offering, we redeemed 1,111,111
shares of common stock from each of Messrs. Baxter, Dosser and Gregory for
aggregate consideration of $6,000,000.
In September 1998, we entered into an agreement granting an option to
purchase 125,000 shares of common stock at an exercise price of $1.00 per share
to NextGen in exchange for consulting services. A minority interest in NextGen
was subsequently acquired by Encompass Ventures and its name was changed to
Encompass Europe, Inc. Mr. Land became a director of Encompass Europe. The
consulting agreement by its terms terminated August 1, 1999.
We granted options to purchase shares of common stock to the following
officers and directors on the date, for the number of shares and with an
exercise price indicated opposite each person's name:
<TABLE>
<CAPTION>
NUMBER OF SHARES
UNDERLYING EXERCISE
NAME GRANT DATE OPTIONS PRICE
---- ---------- ---------------- --------
<S> <C> <C> <C>
David J. Bialer............................ 9/25/98 100,000 $ 1.00
Jeffrey T. Chambers........................ 8/3/98 45,000 1.80
Scot E. Land............................... 8/3/98 45,000 1.80
William L. Larson.......................... 7/20/98 120,000 1.80
Brian V. Turner............................ 4/7/99 300,000 1.44
Donald L. Whitt............................ 6/11/97 20,000 0.05
7/17/98 10,000 1.00
7/5/99 40,000 2.50
</TABLE>
Because of contractual obligations involving Mr. Chambers and his
affiliated investment entities, the option grant to Mr. Chambers was issued in
the name of TA Associates, Inc.
In September 1999, we sold 1,518,378 shares of our common stock to Vulcan
Ventures for an aggregate purchase price of approximately $18.7 million. In
connection with its purchase of our common stock, Vulcan Ventures will receive
piggy-back registration rights, and we may therefore become obligated to
register under the Securities Act shares of common stock held by Vulcan
Ventures. In addition, pursuant to the stock purchase agreement between us and
Vulcan Ventures, following this offering we have agreed to use our best efforts
to cause an individual selected by Vulcan Ventures and reasonably acceptable to
us to be elected to our board of directors. Vulcan Ventures has the right to
require us to redeem the shares at the original issuance price if this offering
is not completed by December 15, 1999.
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<PAGE> 56
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of our common stock as of August 31, 1999, and as adjusted to reflect
the sale of the common stock offered hereby, by:
- each shareholder known by us to own beneficially more than 5% of our
outstanding common stock;
- each of our directors;
- each of our named executive officers; and
- all current executive officers and directors as a group.
Beneficial ownership is determined in accordance with the rules of the SEC.
For purposes of calculating the number of shares beneficially owned by a
shareholder and the percentage ownership of that shareholder, shares of common
stock subject to options that are currently exercisable or exercisable within 60
days of August 31, 1999 by that shareholder are deemed outstanding. These
options are listed below under the heading "Number of Shares Underlying Options"
and are not treated as outstanding for the purpose of computing the percentage
ownership of any other shareholder. Percentage ownership is based on 28,196,656
shares of common stock outstanding on August 31, 1999, giving effect to the sale
of 1,518,378 shares of common stock to Vulcan Ventures in September 1999, and
32,196,656 shares outstanding upon completion of this offering.
Unless otherwise noted below, the address for each shareholder below is:
c/o BSQUARE Corporation, 3633 136th Place S.E., Suite 100, Bellevue, WA 98006.
Unless otherwise noted, we believe that each of the shareholders has sole
investment and voting power with respect to the common stock indicated, except
to the extent shared by spouses under applicable law.
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
OUTSTANDING
NUMBER OF ---------------------
SHARES
NUMBER OF UNDERLYING BEFORE AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER SHARES OPTIONS OFFERING OFFERING
------------------------------------ ---------- ----------- --------- ---------
<S> <C> <C> <C> <C>
Entities affiliated with TA Associates, Inc.(1)..... 7,192,130 15,000 25.5% 22.4%
High Street Tower
Suite 2500
Boston, MA 02110
Jeffrey T. Chambers(2).............................. 7,192,130 15,000 25.5 22.4
Albert T. Dosser(3)................................. 5,888,889 -- 20.9 18.3
Peter R. Gregory(4)................................. 5,875,089 -- 20.8 18.2
William T. Baxter(5)................................ 5,142,362 -- 18.2 16.0
Scot E. Land(6)..................................... 1,805,555 56,666 6.6 5.8
Entities affiliated with Encompass Ventures(7)...... 1,805,555 41,666 6.5 5.7
4040 Lake Washington Blvd. N.E.
Suite 205
Kirkland, WA 98033
Vulcan Ventures Incorporated(8)..................... 1,518,378 -- 5.4 4.7
110 110th Avenue N.E., Suite 550
Bellevue, WA 98004
Brian V. Turner..................................... -- 300,000 1.1 *
William L. Larson................................... -- 40,000 * *
David J. Bialer..................................... -- 100,000 * *
Donald L. Whitt..................................... 5,000 7,500 * *
All executive officers and directors as a group(9
persons)(9)....................................... 25,909,025 519,166 93.7% 82.1%
</TABLE>
- ---------------
* Less than 1%
52
<PAGE> 57
(1) Includes 5,865,962 shares held by TA/Advent VIII L.P., 1,100,968 shares held
by Advent Atlantic and Pacific III, L.P., 117,318 shares held by TA
Investors L.L.C. and 107,882 shares held by TA Executives Fund L.L.C., all
of which are funds managed by TA Associates. If the underwriters'
over-allotment option is exercised in full, the entities affiliated with TA
Associates will sell 164,210 shares and own 21.9% of the shares then
outstanding.
(2) Includes 5,865,962 shares held by TA/Advent VIII L.P., 1,100,968 shares held
by Advent Atlantic and Pacific III, L.P., 117,318 shares held by TA
Investors L.L.C. and 107,882 shares held by TA Executives Fund L.L.C., all
of which are funds managed by TA Associates. Mr. Chambers is a managing
director of TA Associates. Mr. Chambers directly or indirectly shares voting
and investment power with respect to such shares but disclaims beneficial
ownership. If the underwriters' over-allotment option is exercised in full,
the entities affiliated with TA Associates will sell 164,210 shares and own
21.9% of the shares then outstanding.
(3) If the underwriters' over-allotment option is exercised in full, Mr. Dosser
will sell 134,455 shares and own 17.9% of the shares then outstanding.
(4) If the underwriters' over-allotment option is exercised in full, Mr. Gregory
will sell 134,139 shares and own 17.8% of the shares then outstanding.
(5) If the underwriters' over-allotment option is exercised in full, Mr. Baxter
will sell 117,410 shares and own 15.6% of the shares then outstanding.
(6) Includes 1,372,222 shares held by Encompass Group US Information Technology
Partners 1 LP, 277,778 shares held by TCI Club and 155,555 shares held by
Northwest Financing, L.L.C., all of which are funds managed by Encompass
Ventures. Also includes an option to purchase 41,666 shares held by
Encompass Europe, Inc., in which Encompass Ventures holds a minority
interest. Mr. Land is a managing director of Encompass Ventures and is a
director of Encompass Europe. Mr. Land directly or indirectly shares voting
and investment power with respect to such shares but disclaims beneficial
ownership. If the underwriters' over-allotment option is exercised in full,
the entities affiliated with Encompass Ventures will sell 41,224 shares and
own 5.6% of the shares then outstanding.
(7) Includes 1,372,222 shares held by Encompass Group US Information Technology
Partners 1 LP, 277,778 shares held by TCI Club and 155,555 shares held by
Northwest Financing, L.L.C., all of which are funds managed by Encompass
Ventures. Also includes an option to purchase 41,666 shares held by
Encompass Europe, Inc., in which Encompass Ventures holds a minority
interest. Encompass Ventures disclaims beneficial ownership of Encompass
Europe's shares. If the underwriters' over-allotment option is exercised in
full, the entities affiliated with Encompass Ventures will sell 41,224
shares and own 5.6% of the shares then outstanding.
(8) In September 1999, we sold 1,518,378 shares of our common stock to Vulcan
Ventures Incorporated. Vulcan Ventures has the right to require us to redeem
the shares at the original issuance price if this offering is not completed
by December 15, 1999.
(9) See footnotes 2 and 6 above. If the underwriters' over-allotment is
exercised in full, all executive officers and directors as a group will sell
591,438 shares and own 79.0% of the shares then outstanding.
Joseph Notorangelo beneficially owns 375,000 shares of common stock and
immediately exercisable options to purchase an additional 64,250 shares, which
together represent 1.6% of the shares outstanding prior to this offering and
1.4% after this offering. If the underwriters' over-allotment option is
exercised in full, Mr. Notorangelo will sell 8,562 shares and own 1.3% of the
shares then outstanding.
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<PAGE> 58
DESCRIPTION OF CAPITAL STOCK
GENERAL
Upon completion of this offering, we will be authorized to issue up to
50,000,000 shares of common stock, no par value, and 10,000,000 shares of
preferred stock, no par value. The following summary of certain provisions of
our common stock and preferred stock is not complete and may not contain all the
information you should consider before investing in the common stock. This
description is subject to and qualified in its entirety by provisions of our
amended and restated articles of incorporation and bylaws, which are included as
exhibits to the registration statement of which this prospectus is a part, and
by provisions of applicable Washington law.
COMMON STOCK
As of August 31, 1999, assuming conversion of all outstanding shares of
preferred stock and the issuance of 1,518,378 shares of common stock to Vulcan
Ventures, there were 28,196,656 shares of common stock outstanding that were
held of record by 99 shareholders. After giving effect to the sale of common
stock offered in this offering, there will be 32,196,656 shares of common stock
outstanding, assuming no exercise of outstanding options. As of August 31, 1999,
there were outstanding options to purchase a total of 3,251,542 shares of common
stock.
The holders of common stock are entitled to one vote per share on all
matters to be voted on by the shareholders. Subject to preferences that may be
granted to any outstanding shares of preferred stock, the holders of common
stock are entitled to receive ratably only those dividends our board of
directors declares out of funds legally available for the payment of dividends
as well as any other distributions to the shareholders.
If we are liquidated, dissolved or wound-up, the holders of common stock
are entitled to share pro rata all of our assets remaining after payment of our
liabilities and liquidation preferences of any then-outstanding shares of
preferred stock. Holders of common stock have no preemptive rights or rights to
convert their common stock into any other securities. There are no redemption or
sinking fund provisions applicable to the common stock. All outstanding shares
of common stock are fully paid and non-assessable, and the shares of common
stock to be issued in this offering will be fully paid and non-assessable.
PREFERRED STOCK
Upon the closing of this offering, all outstanding shares of preferred
stock will be converted into 8,333,333 shares of common stock. Thereafter,
pursuant to our amended and restated articles of incorporation, our board of
directors will have the authority, without further action by the shareholders,
to issue up to 10,000,000 shares of preferred stock in one or more series and to
fix the relative designations, powers, preferences and privileges of the
preferred stock, any or all of which may be greater than the rights of the
common stock. Our board of directors, without shareholder approval, can issue
preferred stock with voting, conversion or other rights that could adversely
affect the voting power and other rights of the holders of common stock.
Preferred stock could thus be issued quickly with terms that could delay or
prevent a change in control of us or make removal of our management more
difficult. Additionally, the issuance of preferred stock may decrease the market
price of the common stock and may adversely affect the voting and other rights
of the holders of common stock. We have no present plans to issue any preferred
stock.
REGISTRATION RIGHTS
Series A Convertible Preferred Stock
After this offering, the holders of 8,333,333 shares of common stock will
be entitled to rights with respect to the registration of such shares under the
Securities Act pursuant to a stock purchase and shareholders agreement among
such holders and us dated January 30, 1998. Under the terms of this agreement,
if we propose to register any of our securities under the Securities Act, either
for our own account or for the account of other security holders exercising
registration rights, such holders are entitled to notice of the registration
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<PAGE> 59
and to include their shares of common stock in the registration at our expense.
Additionally, such holders are entitled to demand registration rights pursuant
to which they may require us to file a registration statement under the
Securities Act at our expense with respect to their shares of common stock.
Further, such holders may require us to file additional registration statements
on Form S-3 at our expense. All of these registration rights are subject to the
right of the underwriters of an offering to limit the number of shares included
in such registration. These registration rights terminate when the holder can
transfer his or her registrable shares pursuant to Rule 144. The holders of
these registration rights have entered into lock-up agreements and waived their
registration rights until 180 days following the closing of this offering.
Vulcan Ventures Incorporated
In connection with its purchase of 1,518,378 shares of our common stock,
Vulcan Ventures Incorporated is entitled to rights with respect to the
registration of such shares under the Securities Act. If we propose to register
any of our shares under the Securities Act, either for our own account or for
the account of other security holders exercising registration rights, Vulcan
Ventures is entitled to notice of the registration and to include their shares
of common stock in the registration at our expense. Vulcan Ventures'
registration rights are subject to the right of the underwriters of an offering
to limit the number of shares included in such registration. Vulcan Ventures'
registration rights terminate when Vulcan Ventures can sell its registrable
shares pursuant to Rule 144 without restriction. Vulcan Ventures has entered
into a lock-up agreement until 180 days following the closing of this offering.
ANTITAKEOVER EFFECTS OF CERTAIN PROVISIONS OF OUR AMENDED AND RESTATED ARTICLES
OF INCORPORATION, BYLAWS AND WASHINGTON LAW
Our board of directors, without shareholder approval, has the authority
under our amended and restated articles of incorporation to issue preferred
stock with rights superior to the rights of the holders of common stock. As a
result, preferred stock could be issued quickly and easily, could adversely
affect the rights of holders of common stock and could be issued with terms
calculated to delay or prevent a change in control of us or make removal of our
management more difficult. In addition, as of the first annual meeting of
shareholders following the closing of this offering, our board of directors will
be divided into three classes. The directors in each class will serve for
three-year terms, one class being elected each year by our shareholders, and
directors can only be removed for cause. This system of electing and removing
directors may tend to discourage a third party from making a tender offer or
otherwise attempting to obtain control of our company because it generally makes
it more difficult for shareholders to replace a majority of the directors.
Chapter 19 of the Washington Business Corporation Act generally prohibits a
"target corporation" from engaging in certain significant business transactions
with an "acquiring person," which is defined as a person or group of persons
that beneficially owns 10% or more of the voting securities of the target
corporation, for a period of five years after the acquisition, unless the
transaction or acquisition of shares is approved by a majority of the members of
the target corporation's board of directors prior to the time of acquisition.
Prohibited significant business transactions include, among other things:
- a merger or consolidation with, disposition of assets to, or issuance or
redemption of stock to or from, the acquiring person;
- termination of 5% or more of the employees of the target corporation as a
result of the acquiring person's acquisition of 10% or more of the
shares; or
- allowing the acquiring person to receive any disproportionate benefits as
a shareholder.
After the five-year period, a "significant business transaction" may occur
as long as it complies with certain "fair price" provisions of the statute. A
corporation may not "opt out" of this statute. This provision may have the
effect of delaying, deterring or preventing a change in control of our company.
In addition, our bylaws provide that shareholders may not raise new matters
or nominate directors at a meeting of shareholders unless advance notice
requirements are satisfied, which could have the effect of delaying or deterring
a change in control of us.
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<PAGE> 60
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is ChaseMellon
Shareholder Services, L.L.C. The transfer agent's address is 520 Pike Street,
Suite 1220, Seattle, Washington 98101, and its telephone number is (206)
292-3795.
NATIONAL MARKET LISTING
We have applied to list our common stock on The Nasdaq Stock Market's
National Market under the symbol "BSQR."
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<PAGE> 61
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, we will have 32,196,656 shares of common
stock outstanding, assuming no exercise of options after August 31, 1999 and the
issuance of 1,518,378 shares of common stock to Vulcan Ventures. Of these
shares, the 4,000,000 shares that we expect to sell in this offering will be
freely tradable in the public market without restriction under the Securities
Act, unless such shares are held by our "affiliates," as that term is defined in
Rule 144 under the Securities Act.
The remaining 28,196,656 shares of common stock that will be outstanding
after this offering will be restricted shares because they were sold in private
transactions in reliance on exemptions from registration under the Securities
Act. The following table shows the timing of when shares may be eligible for
resale in the public market after effectiveness of this offering:
<TABLE>
<CAPTION>
DAYS AFTER DATE OF THIS PROSPECTUS SHARES FIRST ELIGIBLE FOR RESALE COMMENT
- ---------------------------------- -------------------------------- -------------------------------
<S> <C> <C>
- - Upon effectiveness............ 4,000,000 - Freely tradable shares sold
in this offering
- - Upon filing of Form S-8
registration statement
immediately after effectiveness
of this offering.............. 76,328 - Outstanding shares registered
on Form S-8 and not locked up
- - 90 days....................... 47,200 - Shares eligible for sale
under Rules 144 and 701 and
not registered on Form S-8 or
locked up
- - 180 days...................... 179,750 - Freely tradable upon
expiration of lock-up
agreements
27,893,378 - Tradable subject to Rule 144
</TABLE>
S-8 Registration Statements
As of August 31, 1999, there were a total of 3,251,542 shares of common
stock subject to outstanding options under our stock option plan, 1,100,574 of
which were vested. Immediately after the completion of the offering, we intend
to file registration statements on Form S-8 under the Securities Act to register
certain of the shares of common stock issued or reserved for future issuance
under our stock option plan and our employee stock purchase plan. After the
effective dates of the registration statements on Form S-8, shares purchased
upon exercise of options granted pursuant to our stock option plan and employee
stock purchase plan generally would be available for resale in the public market
without restriction. Approximately 107,885 shares underlying vested stock
options will be eligible for sale upon filing of the Form S-8 registration
statement immediately after effectiveness of this offering.
Rule 144
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person who has beneficially owned restricted
shares for at least one year would be entitled to sell in any three-month period
up to the greater of:
- 1% of the then-outstanding shares of common stock, or approximately
322,000 shares immediately after this offering; and
- the average weekly trading volume of the common stock during the four
calendar weeks preceding the filing of a Form 144 with respect to such
sale.
Sales under Rule 144 are also subject to certain manner of sale and notice
requirements and to the availability of current public information about us.
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<PAGE> 62
Rule 701
Any of our employees, directors, officers, consultants or advisors who
purchased shares from us in connection with a written stock or option plan
before the effective date of this offering is entitled to rely on the resale
provisions of Rule 701, subject to the lock-up agreements described above. In
general, Rule 701 permits non-affiliates to sell their Rule 701 shares 90 days
after the effectiveness of a registration statement relating to a company's
initial public offering without having to comply with the public information,
holding period, volume limitation or notice provisions of Rule 144 and permits
affiliates to sell their Rule 701 shares without having to comply with the
holding period of Rule 144.
Rule 144(k)
Under Rule 144(k), a person who has not been one of our affiliates during
the preceding 90 days and who has beneficially owned the restricted shares for
at least two years is entitled to sell them without complying with the manner of
sale, public information, volume limitation or notice provisions of Rule 144.
Lock-Up Agreements
Pursuant to certain "lock-up" agreements, we and our executive officers,
directors and certain of our other shareholders have agreed not to offer, sell,
contract to sell, announce an intention to sell, pledge or otherwise dispose of,
directly or indirectly, or file with the SEC a registration statement under the
Securities Act relating to, any shares of common stock or securities convertible
into or exchangeable or exercisable for any common stock without the prior
written consent of Credit Suisse First Boston Corporation for a period of 180
days after the date of this prospectus.
58
<PAGE> 63
UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement dated , 1999, we have agreed to sell to the underwriters
named below, for whom Credit Suisse First Boston Corporation, Lehman Brothers
Inc., A.G. Edwards & Sons, Inc. and Wit Capital Corporation are acting as
representatives, the following respective numbers of shares of common stock:
<TABLE>
<CAPTION>
Number of Shares
Underwriter ----------------
<S> <C>
Credit Suisse First Boston Corporation......................
Lehman Brothers Inc. .......................................
A.G. Edwards & Sons, Inc. ..................................
Wit Capital Corporation.....................................
---------
Total.................................................. 4,000,000
=========
</TABLE>
The underwriting agreement provides that the underwriters are obligated to
purchase all the shares of common stock in the offering if any are purchased,
other than those shares covered by the over-allotment option described below.
The underwriting agreement also provides that if an underwriter defaults, the
purchase commitments of non-defaulting underwriters may be increased or the
offering of common stock may be terminated.
Six of our shareholders have granted to the underwriters a 30-day option to
purchase on a pro rata basis up to 600,000 additional shares at the initial
public offering price less the underwriting discounts and commissions. This
option may be exercised only to cover any over-allotments of common stock.
The underwriters propose to offer the shares of common stock initially at
the public offering price on the cover page of this prospectus and to selling
group members at that price less a concession of $ per share. The
underwriters and selling group members may allow a discount of $ per share
on sales to other broker/dealers. After the initial public offering, the public
offering price and concession and discount to dealers may be changed by the
representatives.
The following table summarizes the compensation and estimated expenses we
will pay. The compensation we will pay to the underwriters will consist solely
of the underwriting discount, which is equal to the public offering price per
share of common stock less the amount the underwriters pay to us per share of
common stock. The underwriters have not received and will not receive from us
any other item of compensation or expense in connection with this offering
considered by the National Association of Securities Dealers, Inc. to be
underwriting compensation under its rules of fair practice. The underwriting fee
will be determined based on our negotiations with the underwriters at the time
the initial public offering price of our common stock is determined. We do not
expect the underwriting discount per share of common stock to exceed 7% of the
initial public offering price per share of common stock.
<TABLE>
<CAPTION>
PER SHARE TOTAL
-------------------------------- --------------------------------
WITHOUT WITH WITHOUT WITH
OVER-ALLOTMENT OVER-ALLOTMENT OVER-ALLOTMENT OVER-ALLOTMENT
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Underwriting discounts and
commissions paid by us............. $ $ $ $
Expenses payable by us............... $ $ $ $
</TABLE>
The principal components of the offering expenses payable by us will
include the fees and expenses of our accountants and attorneys, the fees of our
registrar and transfer agent, the cost of printing this prospectus, The Nasdaq
Stock Market listing fees, and filing fees paid to the Securities and Exchange
Commission and the National Association of Securities Dealers, Inc.
59
<PAGE> 64
The underwriters have informed us that they do not expect discretionary
sales to exceed 5% of the shares of common stock being offered.
We and our executive officers, directors and certain of our other
shareholders have agreed not to offer, sell, contract to sell, announce an
intention to sell, pledge or otherwise dispose of, directly or indirectly, or
file with the SEC a registration statement under the Securities Act relating to,
any shares of common stock or securities convertible into or exchangeable or
exercisable for any common stock without the prior written consent of Credit
Suisse First Boston Corporation for a period of 180 days after the date of this
prospectus.
The underwriters have reserved for sale, at the initial public offering
price, up to 200,000 shares of common stock for employees, directors and certain
other persons associated with us who have expressed an interest in purchasing
common stock in this offering. The number of shares available for sale to the
general public in this offering will be reduced to the extent these persons
purchase the reserved shares. Any reserved shares not so purchased will be
offered by the underwriters to the general public on the same terms as the other
shares.
We have agreed to indemnify the underwriters against liabilities under the
Securities Act, or contribute to payments which the underwriters may be required
to make in that respect.
We have applied to list our common stock on The Nasdaq Stock Market's
National Market under the symbol "BSQR."
Prior to this offering, there has been no public market for our common
stock. The initial public offering price will be determined by negotiation
between us and the underwriters and does may not reflect the market price of the
common stock following the offering. The principal factors that will be
considered in determining the public offering price include:
- the information in this prospectus and otherwise available to the
underwriters;
- market conditions for initial public offerings;
- the history and the prospects for the industry in which we will compete;
- the ability of our management;
- the prospects for our future earnings;
- the present state of our development and our current financial condition;
- the recent market prices of, and the demand for, publicly traded common
stock of generally comparable companies; and
- the general condition of the securities markets at the time of this
offering.
We can offer no assurances that the initial public offering price will
correspond to the price at which the common stock will trade in the public
market subsequent to the offering or that an active trading market for the
common stock will develop and continue after the offering.
The representatives may engage in over-allotment, stabilizing transactions,
syndicate covering transactions and penalty bids in accordance with Regulation M
under the Securities Exchange Act of 1934.
- Over-allotment involves syndicate sales in excess of the offering size,
which creates a syndicate short position.
- Stabilizing transactions permit bids to purchase the underlying security
so long as the stabilizing bids do not exceed a specified maximum.
- Syndicate covering transactions involve purchases of the common stock in
the open market after the distribution has been completed in order to
cover syndicate short positions.
60
<PAGE> 65
- Penalty bids permit the representatives to reclaim a selling concession
from a syndicate member when the common stock originally sold by the
syndicate member is purchased in a syndicate covering transaction to
cover syndicate short positions.
These stabilizing transactions, syndicate covering transactions and penalty bids
may cause the price of the common stock to be higher than it would otherwise be
in the absence of these transactions. These transactions may be effected on The
Nasdaq Stock Market's National Market or otherwise and, if commenced, may be
discontinued at any time.
A prospectus in electronic format is being made available on an Internet
website maintained by Wit Capital. In addition, pursuant to an e-dealer
agreement, all dealers purchasing shares from Wit Capital in the offering
similarly have agreed to make a prospectus in electronic format available on
websites maintained by each of the e-dealers. E-dealers are dealers who
distribute shares to customers who have accounts with these dealers that are
accessible through the Internet.
Wit Capital, a member of the National Association of Securities Dealers,
will participate in the offering as one of the underwriters. The NASD approved
the membership of Wit Capital on September 4, 1997. Since that time, Wit Capital
has acted as an underwriter, co-manager or selected dealer in over 75 public
offerings. Except for its participation as a manager in this offering, Wit
Capital has no relationship with us or any of our founders or our significant
shareholders.
NOTICE TO CANADIAN RESIDENTS
RESALE RESTRICTIONS
The distribution of the common stock in Canada is being made only on a
private placement basis exempt from the requirement that we prepare and file a
prospectus with the securities regulatory authorities in each province where
trades of common stock are effected. Accordingly, any resale of the common stock
in Canada must be made in accordance with applicable securities laws which will
vary depending on the relevant jurisdiction, and which may require resales to be
made in accordance with available statutory exemptions or under a discretionary
exemption granted by the applicable Canadian securities regulatory authority.
Purchasers are advised to seek legal advice prior to any resale of the common
stock.
REPRESENTATIONS OF PURCHASERS
Each purchaser of common stock in Canada who receives a purchase
confirmation will be deemed to represent to us and the dealer from whom the
purchase confirmation is received that (1) the purchaser is entitled under
applicable provincial securities laws to purchase common stock without the
benefit of a prospectus qualified under the securities laws, (2) where required
by law, that the purchaser is purchasing as principal and not as agent, and (3)
the purchaser has reviewed the text under "Resale Restrictions."
RIGHTS OF ACTION (ONTARIO PURCHASERS)
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Ontario securities law. As a result, Ontario purchasers must rely on other
remedies that may be available, including common law rights of action for
damages or rescission or rights of action under the civil liability provisions
of the U.S. federal securities laws.
ENFORCEMENT OF LEGAL RIGHTS
All of the issuer's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be possible
for Canadian purchasers to effect service of process within Canada upon the
issuer and these persons. All or a substantial portion of the assets of the
issuer and these persons may be located outside of Canada and, as a result, it
may not be possible to satisfy a judgment against the issuer or these persons in
Canada or to enforce a judgment obtained in Canadian courts against the issuer
or these persons outside of Canada.
61
<PAGE> 66
NOTICE TO BRITISH COLUMBIA RESIDENTS
A purchaser of common stock to whom the Securities Act (British Columbia)
applies is advised that the purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any
common stock acquired by such purchaser in this offering. This report must be in
the form attached to British Columbia Securities Commission Blanket Order BOR
#95/17, a copy of which may be obtained from us. Only one report must be filed
in respect of common stock acquired on the same date and under the same
prospectus exemption.
TAXATION AND ELIGIBILITY FOR INVESTMENT
Canadian purchasers of common stock should consult with their own legal and
tax advisors with respect to the tax consequences of an investment in our common
stock in their particular circumstances and with respect to the eligibility of
our common stock for investment by the purchaser under relevant Canadian
legislation.
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for
BSQUARE by Summit Law Group, PLLC, Seattle, Washington. Certain legal matters
will be passed upon for the underwriters by Morrison & Foerster LLP, Palo Alto,
California.
As of the date of this prospectus, Summit Law Group beneficially owns
34,722 shares of our common stock.
EXPERTS
Our audited consolidated financial statements and schedule of BSQUARE
Corporation and subsidiaries included in this prospectus and elsewhere in the
registration statement to the extent and for the periods indicated in their
reports have been audited by Arthur Andersen LLP, independent public
accountants, and are included herein as indicated in their reports with respect
thereto, in reliance upon the authority of said firm as experts giving said
reports.
WHERE TO FIND ADDITIONAL DOCUMENTS
We have filed with the SEC a registration statement on Form S-1. This
prospectus, which forms a part of the registration statement, does not contain
all the information included in the registration statement. Certain information
is omitted and you should refer to the registration statement and its exhibits.
With respect to references made in this prospectus to any of our contracts or
other documents, such references are not necessarily complete and you should
refer to the exhibits attached to the registration statement for copies of the
actual contract or document. You may read and copy the registration statement,
including exhibits and schedules filed with it, at the SEC's public reference
facilities in Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549. You may obtain information on the operation of the SEC's public
reference facilities by calling the SEC at 1-800-SEC-0330. The SEC maintains a
website (http://www.sec.gov) that contains reports, proxy and information
statements and other information regarding registrants, such as us, that file
electronically with the SEC.
62
<PAGE> 67
BSQUARE CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Public Accountants.................... F-2
Consolidated Balance Sheets................................. F-3
Consolidated Statements of Income and Comprehensive
Income.................................................... F-4
Consolidated Statements of Shareholders' Equity (Deficit)... F-5
Consolidated Statements of Cash Flows....................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 68
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To BSQUARE Corporation:
We have audited the accompanying consolidated balance sheets of BSQUARE
Corporation and subsidiaries as of December 31, 1997 and 1998, and the related
consolidated statements of income and comprehensive income, shareholders' equity
and cash flows for each of the three years in the period ended December 31,
1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above,
present fairly, in all material respects, the financial position of BSQUARE
Corporation and subsidiaries as of December 31, 1997 and 1998, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1998, in conformity with generally accepted accounting
principles.
Seattle, Washington, /s/ ARTHUR ANDERSEN LLP
August 13, 1999 (except for the matter discussed in Note 13 for which the date
is August 18, 1999)
F-2
<PAGE> 69
BSQUARE CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA
SHAREHOLDERS'
DECEMBER 31, EQUITY
---------------- JUNE 30, (NOTE 1) AT
1997 1998 1999 JUNE 30, 1999
------ ------- ------------ -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................ $2,286 $ 5,324 $ 9,284
Short-term investments................................... -- 1,582 --
Accounts receivable, net of allowance for doubtful
accounts of $10 in 1997, $67 in 1998 and $112 in
1999................................................... 2,700 5,487 4,531
Income taxes receivable.................................. -- 134 --
Prepaid expenses and other current assets................ 89 155 236
Deferred income tax asset................................ -- 237 832
------ ------- -------
Total current assets.............................. 5,075 12,919 14,883
Furniture, equipment and leasehold improvements, net....... 1,320 3,061 3,380
Deposits and other assets.................................. 58 178 486
------ ------- -------
Total assets...................................... $6,453 $16,158 $18,749
====== ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of long-term obligations................. $ -- $ 157 $ 157
Accounts payable......................................... 367 676 507
Accrued compensation..................................... 732 1,331 1,333
Accrued expenses......................................... 147 308 1,509
Income taxes payable..................................... 484 -- 53
Deferred income taxes payable............................ 38 -- --
Deferred revenue......................................... 389 167 649
------ ------- -------
Total current liabilities......................... 2,157 2,639 4,208
Notes payable to shareholders.............................. 1,743 -- --
Long-term obligations, net of current portion.............. -- 289 210
Deferred income tax payable, net of current portion........ 223 111 111
------ ------- -------
Total liabilities................................. 4,123 3,039 4,529
------ ------- -------
Commitments and contingencies (Note 6)
Mandatorily redeemable convertible Series A preferred
stock, no par value: Authorized 10,000,000 shares, issued
and outstanding, no shares in 1997 and 8,333,333 shares
in 1998 and 1999, preference in liquidation of
$15,000,000.............................................. -- 14,417 14,475 --
Shareholders' equity (deficit):
Common stock, no par value: Authorized 50,000,000 shares,
issued and outstanding, 21,375,000 shares in 1997,
18,161,605 shares in 1998, and 18,225,205 in 1999...... 2,766 2,123 3,209 17,684
Deferred stock option compensation....................... (572) (401) (1,157) (1,157)
Stock subscription....................................... -- -- (29) (29)
Cumulative foreign currency translation adjustment....... -- 5 (61) (61)
Retained earnings (accumulated deficit).................. 136 (3,025) (2,217) (2,217)
------ ------- ------- -------
Total shareholders' equity (deficit).............. 2,330 (1,298) (255) $14,220
------ ------- ------- =======
Total liabilities and shareholders' equity........ $6,453 $16,158 $18,749
====== ======= =======
</TABLE>
See notes to Consolidated Financial Statements.
F-3
<PAGE> 70
BSQUARE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
--------------------------- -----------------
1996 1997 1998 1998 1999
------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Service........................................ $ 4,179 $14,021 $23,393 $10,181 $17,848
Product........................................ -- 384 1,219 621 695
------- ------- ------- ------- -------
Total revenue.......................... 4,179 14,405 24,612 10,802 18,543
------- ------- ------- ------- -------
Cost of revenue:
Service........................................ 1,404 5,566 11,135 4,907 8,791
Product........................................ -- 78 166 121 108
------- ------- ------- ------- -------
Total cost of revenue.................. 1,404 5,644 11,301 5,028 8,899
------- ------- ------- ------- -------
Gross profit........................... 2,775 8,761 13,311 5,774 9,644
------- ------- ------- ------- -------
Operating expenses:
Research and development....................... 205 1,391 3,671 1,452 2,960
Selling, general and administrative............ 606 2,806 6,470 2,618 5,236
------- ------- ------- ------- -------
Total operating expenses............... 811 4,197 10,141 4,070 8,196
------- ------- ------- ------- -------
Income from operations................. 1,964 4,564 3,170 1,704 1,448
------- ------- ------- ------- -------
Other income (expense):
Interest income................................ 7 20 359 196 149
Interest expense............................... -- (32) (40) (17) (19)
------- ------- ------- ------- -------
Total other income (expense)........... -- (12) 319 179 130
------- ------- ------- ------- -------
Income before income taxes....................... 1,971 4,552 3,489 1,883 1,578
Provision for income taxes....................... -- 746 1,189 666 712
------- ------- ------- ------- -------
Net income............................. $ 1,971 $ 3,806 $ 2,300 $ 1,217 $ 866
======= ======= ======= ======= =======
Foreign currency translation adjustment.......... -- -- (5) -- 66
------- ------- ------- ------- -------
Comprehensive net income......................... $ 1,971 $ 3,806 $ 2,295 $ 1,217 $ 932
======= ======= ======= ======= =======
Basic earnings per share......................... $ 0.09 $ 0.18 $ 0.12 $ 0.06 $ 0.04
======= ======= ======= ======= =======
Weighted average shares outstanding used to
compute basic earnings per share............... 22,106 21,400 18,372 18,615 18,206
======= ======= ======= ======= =======
Diluted earnings per share....................... $ 0.09 $ 0.17 $ 0.08 $ 0.04 $ 0.03
======= ======= ======= ======= =======
Weighted average shares outstanding to compute
diluted earnings per share..................... 22,106 21,781 27,475 27,050 28,615
======= ======= ======= ======= =======
</TABLE>
See notes to Consolidated Financial Statements.
F-4
<PAGE> 71
BSQUARE CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
CUMULATIVE
FOREIGN RETAINED TOTAL
COMMON STOCK DEFERRED CURRENCY EARNINGS SHAREHOLDERS'
-------------------- STOCK OPTION STOCK TRANSLATION (ACCUMULATED EQUITY
SHARES AMOUNT COMPENSATION SUBSCRIPTION ADJUSTMENT DEFICIT) (DEFICIT)
---------- ------- ------------ ------------ ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995...... 21,000,000 $ 2 $ -- $ -- $ -- $ 259 $ 261
Issuance of common stock...... 1,106,000 14 -- -- -- -- 14
Shareholder draws............. -- -- -- -- -- (1,322) (1,322)
Net income.................... -- -- -- -- -- 1,971 1,971
---------- ------- ------- ---- ---- ------- -------
Balance, December 31, 1996...... 22,106,000 16 -- -- -- 908 924
Issuance of common stock for
services rendered........... 500,000 25 -- -- -- -- 25
Repurchase of common stock.... (1,231,000) (46) -- -- -- -- (46)
Shareholder note payable on S
to C Corporation
conversion.................. -- -- -- -- -- (2,000) (2,000)
Shareholder draws............. -- -- -- -- -- (460) (460)
Net income from January 1,
1997 to October 15, 1997.... 3,670 3,670
Conversion from S corporation
to C corporation............ 2,118 (2,118) --
Issuance of compensatory stock
options..................... -- 653 (653) -- -- -- --
Compensation attributable to
stock option vesting........ -- -- 81 -- -- -- 81
Net income from October 16,
1997 to December 31,
1997........................ -- -- -- -- -- 136 136
---------- ------- ------- ---- ---- ------- -------
Balance, December 31, 1997...... 21,375,000 2,766 (572) -- -- 136 2,330
Repurchase of common stock.... (3,333,333) (649) -- -- -- (5,351) (6,000)
Exercise of stock options..... 119,938 6 -- -- -- -- 6
Compensation attributable to
stock option vesting........ -- -- 171 -- -- -- 171
Foreign currency translation
adjustment.................. -- -- -- -- 5 -- 5
Accretion on mandatorily
redeemable convertible
preferred stock............. -- -- -- -- -- (110) (110)
Net income.................... -- -- -- -- -- 2,300 2,300
---------- ------- ------- ---- ---- ------- -------
Balance, December 31, 1998...... 18,161,605 2,123 (401) -- 5 (3,025) (1,298)
Exercise of stock options..... 63,600 6 -- -- -- -- 6
Note receivable from
shareholder................. -- 30 -- (30) -- -- --
Issuance of compensatory stock
options..................... -- 1,050 (1,050) -- -- -- --
Issuance of common stock upon
payment of subscription
receivable from
shareholder................. -- -- -- 1 -- -- 1
Compensation attributable to
stock option vesting........ -- -- 294 -- -- -- 294
Foreign currency translation
adjustment.................. -- -- -- -- (66) -- (66)
Accretion on mandatorily
redeemable convertible
preferred stock............. -- -- -- -- -- (58) (58)
Net income.................... -- -- -- -- -- 866 866
---------- ------- ------- ---- ---- ------- -------
Balance, June 30, 1999
(unaudited)................... 18,225,205 $ 3,209 $(1,157) $(29) $(61) $(2,217) $ (255)
========== ======= ======= ==== ==== ======= =======
</TABLE>
See notes to Consolidated Financial Statements.
F-5
<PAGE> 72
BSQUARE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------- -----------------
1996 1997 1998 1998 1999
------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income..................................... $ 1,971 $ 3,806 $ 2,300 $ 1,217 $ 866
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization............... 35 328 948 387 1,070
Deferred income taxes....................... -- 262 (387) 7 (595)
Stock and stock option compensation......... -- 106 171 83 294
Amortization of deferred financing costs.... -- -- 14 7 --
Changes in operating assets and liabilities:
Accounts receivable....................... (205) (2,109) (2,786) (1,020) 956
Prepaid expenses and other current
assets................................. (13) (66) (76) (60) (56)
Deposits and other assets................. (27) (24) (117) (4) (315)
Accounts payable and accrued expenses..... 101 1,111 960 125 703
Income taxes.............................. -- 484 (221) (562) 187
Deferred revenue.......................... (222) 389 (618) (354) 482
------- ------- ------- ------- -------
Net cash provided by (used in)
operating activities................. 1,640 4,287 188 (174) 3,592
------- ------- ------- ------- -------
Cash flows from investing activities:
Purchases of furniture equipment and leasehold
improvements................................ (248) (1,413) (2,116) (1,628) (1,070)
Maturity (purchase) of short-term investments,
net......................................... -- -- (1,582) (1,552) 1,582
------- ------- ------- ------- -------
Net cash provided by (used in)
investing activities................. (248) (1,413) (3,698) (3,180) 512
------- ------- ------- ------- -------
Cash flows from financing activities:
Repayment of shareholder notes payable......... -- (256) (1,743) (1,743) --
Payments on long-term obligations.............. -- -- (26) -- (79)
Repurchase of common stock..................... -- (46) (6,000) (6,000) --
Deferred financing costs....................... -- (13) (2) (2) (25)
Proceeds from exercise of stock options........ -- -- 5 1 6
Shareholders' draws............................ (1,322) (460) -- -- --
Net proceeds from issuance of Series A
Preferred Stock............................. -- -- 14,307 14,307 --
Proceeds from sale of common stock............. 14 -- -- -- --
------- ------- ------- ------- -------
Net cash provided by (used in)
financing activities................. (1,308) (775) 6,541 6,563 (98)
------- ------- ------- ------- -------
Effect of exchange rate changes on cash.......... -- -- 7 -- (46)
------- ------- ------- ------- -------
Net increase in cash and cash
equivalents.......................... 84 2,099 3,038 3,209 3,960
Cash and cash equivalents, beginning of period... 103 187 2,286 2,286 5,324
------- ------- ------- ------- -------
Cash and cash equivalents, end of period......... $ 187 $ 2,286 $ 5,324 $ 5,495 $ 9,284
======= ======= ======= ======= =======
</TABLE>
See notes to Consolidated Financial Statements.
F-6
<PAGE> 73
BSQUARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(INFORMATION AS OF JUNE 30, 1998 AND 1999 IS UNAUDITED)
(DOLLARS IN THOUSANDS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
BSQUARE Corporation, a Washington corporation, and its subsidiaries
(collectively the Company) provides a variety of software products and services
that facilitate the integration of the Microsoft Windows CE operating system
with a wide variety of intelligent computing devices. The Company works with
semiconductor vendors and original equipment manufacturers to provide software
products and engineering services for the development of intelligent computing
devices, or ICDs.
The Company helps enable the rapid and low-cost deployment of ICDs by
providing a variety of software products and services for the development,
integration and deployment of the Windows CE operating system with
industry-specific applications. The Company also develops software applications
that are licensed to end users to provide ICDs with additional functionality.
The Company markets and supports its products and provides services on a
worldwide basis through a direct sales force augmented by distributors.
CERTAIN SIGNIFICANT RISKS AND UNCERTAINTIES
The Company operates in the software industry, and accordingly, can be
affected by a variety of factors. For example, management of the Company
believes that any of the following factors could have a significant negative
effect on the Company's future financial position, results of operations and
cash flows: unanticipated fluctuations in quarterly operating results; failure
of the market for Windows CE operating system to develop fully; failure of the
market for ICDs to develop fully; adverse changes in the Company's relationship
with Microsoft; failure to secure contracts with market-leading OEMs; intense
competition; failure to attract and retain key personnel; failure to protect
intellectual property; risks associated with international operations; inability
to manage growth; and litigation or other claims against the Company.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. Significant intercompany accounts and
transactions have been eliminated. Accounts denominated in foreign currencies
have been re-measured into the functional currency, using the U.S. dollar as the
functional currency.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
UNAUDITED INTERIM FINANCIAL DATA
The unaudited interim financial statements as of June 30, 1999 and for the
six months ended June 30, 1998 and 1999 have been prepared on the same basis as
the audited financial statements and, in the opinion of management, include all
adjustments (consisting only of normal recurring adjustments) necessary to
present fairly the financial information set forth therein, in accordance with
generally accepted accounting principles. The Company believes that the results
of operations for the six months ended June 30, 1999 are not necessarily
indicative of the results to be expected for any future period.
F-7
<PAGE> 74
BSQUARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
EARNINGS PER SHARE
In accordance with Statement of Financial Accounting Standards (SFAS) No.
128, "Computation of Earnings Per Share," basic earnings per share is computed
by dividing net income available to common stock (net income less accretion of
mandatorily redeemable convertible preferred stock) by the weighted average
number of shares of common stock outstanding during the period. Dilutive
earnings per share is computed by dividing net income by the weighted average
number of common and dilutive common equivalent shares outstanding during the
period. Common equivalent shares consist of the shares of common stock issuable
upon the conversion of the mandatorily redeemable convertible preferred stock
(using the if-converted method) and shares issuable upon the exercise of stock
options and warrants (using the treasury stock method); common equivalent shares
are excluded from the calculation if their effect is antidilutive. The Company
has not had any issuances or grants for nominal consideration as defined under
Staff Accounting Bulletin 98.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents, include demand deposits, money market accounts
and all highly liquid debt instruments with an original maturity date of three
months or less.
SHORT-TERM INVESTMENTS
The Company's short-term investments consist primarily of investment-grade
marketable securities, which are classified as held to maturity and recorded at
amortized cost. Due to the short-term nature of these investments, changes in
market interest rates would not have a significant impact on the fair value of
these securities that are carried at amortized cost, which approximates fair
value.
At December 31, 1998, all short-term investments had a contractual maturity
of one year or less.
FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to
concentrations of credit risk consist of cash and cash equivalents, short-term
investments and trade accounts receivable, accounts payable and long-term debt.
Fair values of cash and cash equivalents and short-term investments approximate
cost due to the short period of time to maturity. The fair values of financial
instruments that are short-term and/or that have little or no market risk are
considered to have a fair value equal to book value. Assets and liabilities that
are included in this category are receivables, accounts payable and accrued
liabilities.
The Company performs initial and ongoing evaluations of its customers'
financial position, and generally extends credit on open account, requiring
collateral as deemed necessary. The Company maintains allowances for potential
credit losses.
FURNITURE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Furniture, equipment and leasehold improvements are stated at cost less
accumulated depreciation. Depreciation is provided on the straight-line method
over the estimated useful lives, as follows: office furniture and
equipment -- four years; computer equipment -- three years. Leasehold
improvements are amortized over the shorter of the lease term or the estimated
useful life. Maintenance and repairs are expensed as incurred. When properties
are retired or otherwise disposed, gains or losses are reflected in the income
statement. When facts and circumstances indicate that the cost of long-lived
assets may be impaired, an evaluation of recoverability is performed by
comparing the carrying value of the asset to projected future cash flows. Upon
indication that the carrying value of such assets may not be recoverable, the
Company would recognize an impairment loss by a charge against current
operations.
SOFTWARE DEVELOPMENT COSTS
Under the criteria set forth in Statement of Financial Accounting Standards
No. 86, "Accounting for the Costs of Computer Software to Be Sold, Leased, or
Otherwise Marketed," capitalization of software
F-8
<PAGE> 75
BSQUARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
development costs begins upon the establishment of technological feasibility of
the product, which the Company has defined as the completion of beta testing of
a working product. The establishment of technological feasibility and the
ongoing assessment of the recoverability of these costs require considerable
judgment by management with respect to certain external factors, including, but
not limited to, anticipated future gross product revenue estimated economic life
and changes in software and hardware technology. Amounts that could have been
capitalized under this statement after consideration of the above factors were
immaterial and, therefore, no software development costs have been capitalized
by the Company to date.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred and consist
primarily of salaries and materials.
INCOME TAXES
The Company was taxed as an S Corporation until October 15, 1997, when the
shareholders elected to convert to a C Corporation. Accordingly, taxes on income
to the Company were generally the responsibility of the shareholders until the
conversion.
The Company computes income taxes using the asset and liability method,
under which deferred income taxes are provided for the temporary differences
between the financial reporting basis and the tax basis of the Company's assets
and liabilities. Deferred tax assets and liabilities are measured using
currently enacted tax rates that are expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. A valuation allowance is established when necessary to reduce deferred
tax assets to the amounts expected to be realized.
FOREIGN CURRENCY TRANSLATION
The Company commenced operations in Germany and Japan during 1998. The
functional currency of foreign subsidiaries is the local currency. Accordingly,
assets and liabilities are translated at exchange rates in effect at the balance
sheet date and income and expense accounts at the average exchange rates during
the year. Resulting translation adjustments are recorded as a separate component
of shareholders' equity. The net gains and losses resulting from foreign
currency transactions are recorded in the consolidated statements of income in
the period incurred and were not significant for any of the periods presented.
REVENUE RECOGNITION
The Company's revenue recognition policy is in compliance with the
provisions of the American Institute of Certified Public Accountants' Statement
of Position 97-2, "Software Revenue Recognition." Service revenue is derived
from software porting and development contracts. Product revenue consists of
licensing fees from software application products and operating system and
software development tool products. The Company's customers consist of software
companies, original equipment manufacturers, distributors and end users.
The Company's revenue is recognized as follows:
Time and Material Consulting Contracts. The Company recognizes revenue as
services are rendered.
Fixed-Price Consulting Contracts. Service revenue from fixed-price
contracts is recognized on the percentage-of-completion method, measured by the
cost incurred to date to the estimated total cost for the contract. This method
is used as management considers expended costs to be the best available measure
of contract performance. Contract costs include all direct labor, material and
any other costs related to contract performance. Selling, general and
administrative costs are charged to expense as incurred. Provisions for
estimated losses on uncompleted contracts are made in the period in which such
losses are determined. Changes in job performance, job conditions and estimated
profitability may result in revisions in the estimate of total costs. Any
required adjustments due to these changes are recognized in the period in which
such revisions are determined.
F-9
<PAGE> 76
BSQUARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Product Revenue. Product revenue consists principally of fees from the
licensing and sale of software products. Product licensing fees, including
advanced production royalty payments, are generally recognized when a customer
license agreement has been executed, the software has been shipped, remaining
obligations are insignificant and collection of the resulting account receivable
is probable. The Company recognizes license royalty income as it is reported by
the reseller when it ships its product to distributors.
ADVERTISING COSTS
The cost of advertising is expensed as incurred. During the years ending
December 31, 1996, 1997 and 1998 and for the six months ended June 30, 1998 and
1999, the Company incurred advertising expense of $159, $279 and $278, $186, and
$128, respectively.
UNAUDITED PRO FORMA SHAREHOLDERS' EQUITY
If the offering contemplated by this prospectus is consummated, all of the
mandatorily redeemable convertible preferred stock outstanding and subscribed to
as of the closing date will automatically be converted into an aggregate of
8,333,333 shares of common stock. Unaudited pro forma shareholders' equity at
June 30, 1999, as adjusted for the conversion of mandatorily redeemable
convertible preferred stock, is presented in the accompanying consolidated
balance sheet.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1 (SOP 98-1), "Accounting for the Cost of
Computer Software Developed or Obtained for Internal Use." SOP 98-1 is effective
for financial statements for years beginning after December 15, 1998. SOP 98-1
provides guidance over accounting for computer software developed or obtained
for internal use including the requirement to capitalize specified costs and
amortization of such costs. The implementation of SOP 98-1 did not have a
material impact on the Company's financial position or results of operations.
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5 (SOP 98-5), "Reporting on the Costs of
Start-Up Activities." SOP 98-5, which is effective for fiscal years beginning
after December 15, 1998, provides guidance on the financial reporting of
start-up costs and organization costs. It requires costs of start up activities
and organization costs to be expensed as incurred. The implementation of SOP
98-5 did not have a material impact on the Company's financial position or
results of operations.
In June 1998, the Financial Accounting Standards Board issued Statement No.
133 of Financial Accounting Standards, "Accounting for Derivative Instruments
and Hedging Activities." This statement requires that all derivative instruments
be recorded on the balance sheet at their fair value. Changes in the fair value
of derivatives are recorded each period in current earnings or other
comprehensive income, depending on whether a derivative is designated as a part
of a hedge transaction and, if it is the type of hedge transaction. This
statement is effective for all fiscal quarters of all fiscal years beginning
after December 15, 1999. The Company does not use derivative instruments,
therefore the adoption of this statement will not have any effect on the
Company's results of operations or financial position.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current
year presentation.
F-10
<PAGE> 77
BSQUARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. FURNITURE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Major classifications of furniture, equipment and leasehold improvements
consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- JUNE 30,
1997 1998 1999
------ ------- --------
<S> <C> <C> <C>
Computer equipment and system software................. $1,003 $ 2,450 $ 3,158
Office furniture and equipment......................... 404 667 727
Leasehold improvements................................. 293 1,040 1,300
Construction in progress............................... -- 118 114
------ ------- -------
1,700 4,275 5,299
Less: accumulated depreciation and amortization........ (380) (1,214) (1,919)
------ ------- -------
$1,320 $ 3,061 $ 3,380
====== ======= =======
</TABLE>
3. INCOME TAXES
As discussed in Note 1 to the financial statements, the Company was a
Subchapter S Corporation for income tax purposes from inception to October 15,
1997. Effective October 16, 1997, the Company converted to a C Corporation and
was thereafter responsible for U.S. federal income taxes. A net deferred tax
liability of $445, primarily related to the required conversion for income tax
purposes from the cash basis method to the accrual basis method of accounting,
was recorded at the conversion date to reflect the Company's net taxable
temporary differences.
In addition, in accordance with Staff Accounting Bulletin Topic 4.B., the
Company has reclassified accumulated earnings generated prior to the date of
conversion to C corporation status from retained earnings to common stock and
additional paid in capital.
The provision for income taxes consisted of the following:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
-------------- ----------------
1997 1998 1998 1999
---- ------ ----- -------
<S> <C> <C> <C> <C>
Current
U.S. Current..................................... $484 $1,549 $655 $1,220
International.................................... -- 27 4 87
U.S. Deferred...................................... 262 (387) 7 (595)
---- ------ ---- ------
Total tax provision...................... $746 $1,189 $666 $ 712
==== ====== ==== ======
</TABLE>
The components of net deferred tax (assets) liabilities consisted of the
following at December 31:
<TABLE>
<CAPTION>
DECEMBER 31,
------------- JUNE 30,
1997 1998 1999
---- ----- --------
<S> <C> <C> <C>
Deferred income tax (asset) liabilities:
Depreciation............................................. $ -- $ (41) $(163)
Accrued compensation and benefits........................ (64) (206) (265)
Deferred revenue......................................... -- (57) (452)
Allowance for doubtful accounts.......................... (3) (23) (38)
Cash to accrual basis conversion......................... 111 111 111
Other, net............................................... (6) (21) (25)
---- ----- -----
$ 38 $(237) $(832)
==== ===== =====
Deferred income taxes payable:
Cash to accrual basis conversion......................... $223 $ 111 $ 111
---- ----- -----
$223 $ 111 $ 111
==== ===== =====
</TABLE>
F-11
<PAGE> 78
BSQUARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The provision for income taxes differs from the amount of income tax
determined by applying the applicable U.S. statutory federal income tax rate to
pre-tax income, as a result of the following:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
------------- ------------
1997 1998 1998 1999
----- ---- ---- ----
<S> <C> <C> <C> <C>
Taxes at the U.S. statutory rate....................... 34.0% 34.0% 34.0% 34.0%
Increase (decreases) in income taxes resulting from:
Conversion from an S Corporation to C Corporation.... 9.8 -- -- --
Shareholder responsibility for taxes associated with
S Corporation status.............................. (27.4) -- -- --
Research and development tax credit.................. (0.8) (6.2) (0.5) (8.4)
International operations............................. -- 4.5 -- 14.7
Other, net........................................... 0.8 1.8 1.9 4.8
----- ---- ---- ----
16.4% 34.1% 35.4% 45.1%
===== ==== ==== ====
</TABLE>
4. SHAREHOLDER NOTES PAYABLE
The Company was a Subchapter S Corporation for income tax purposes from
inception to October 15, 1997. Effective October 16, 1997, the Company converted
to a C Corporation. In connection with the conversion, the Company issued notes
payable totaling $2.0 million to the shareholders. Interest accrued at the
applicable federal long-term rate under Section 1274 of the Internal Revenue
Code of 1986, as amended. Although the notes were not due until December 2002,
or earlier if certain conditions were met, the Company paid in full the
shareholder notes payable and related accrued interest on January 30, 1998.
5. BANK LINE OF CREDIT AND NOTES PAYABLE
At December 31, 1998, the Company had available a $2.0 million secured
domestic revolving bank line of credit to support working capital, and a $500
domestic term loan to finance the purchase of software and equipment. During
1998, the Company used $473 of the domestic term loan to finance the purchase of
certain equipment. Interest accrues at the bank's prime for the line of credit
and the bank's prime plus 0.25% for the term loan. The facility fee is 0.50% per
annum or $10 for the line of credit and bank's prime plus 0.25% per annum, or $3
for the term loan. Restrictive terms of the line of credit require, among other
restrictions that the Company maintains a minimum quick ratio, tangible net
worth and debt service ratio.
Principal maturities of long-term obligations at December 31, 1998 are as
follows:
<TABLE>
<S> <C>
1999........................................................ $157
2000........................................................ 157
2001........................................................ 132
----
$446
====
</TABLE>
In July 1999, the Company renewed its bank line of credit, which provided
for a $5.0 million secured domestic revolving line of credit, $1.5 million term
loan for the purchase of equipment and a $4.0 term loan for leasehold
improvements. Interest accrues at the bank's prime rate for the revolving line
of credit, the bank's prime rate plus 0.25% for the equipment term loan and the
bank's prime rate plus 0.5% for the leasehold term loan. The facility fee is
$25. Restrictive terms of the lines require, among other requirements, that the
Company maintains a minimum quick ratio, tangible net worth and debt service
ratio, and limit the Company's ability to pay dividends without the lender's
consent. The line of credit is secured by substantially all of the assets of the
Company. As of July 31, the Company had $464 in standby letters of credit issued
and outstanding under the domestic revolving line of credit.
F-12
<PAGE> 79
BSQUARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. COMMITMENTS AND CONTINGENCIES
The Company leases its office space under non-cancelable operating leases
that expire at various dates through 2009. During the years ending December 31,
1996, 1997, 1998 and for the six months ended June 30, 1998 and 1999, rental
expense was $370, $420, $980, $400, and $1.4 million, respectively. Minimum
rental commitments under non-cancelable operating leases at June 30, 1999 are as
follows:
<TABLE>
<S> <C>
1999 (six months)........................................... $ 2,064
2000........................................................ 4,172
2001........................................................ 4,165
2002........................................................ 3,719
2003........................................................ 3,490
Thereafter.................................................. 20,305
-------
$37,915
=======
</TABLE>
As of June 30, 1999, commitments for construction of leasehold improvements in
1999 total $4.0 million.
In January 1999, the Company signed a ten-year lease for a new corporate
headquarters in Bellevue, Washington, which is expected to commence in October
1999. The minimum lease payments associated with this lease are included in the
commitments above. The Company has the option to extend the lease for four
additional periods of five years each. The Company must provide a $500 letter of
credit as security for the lease. If certain working capital requirements are
not met on the commencement date, the Company must provide an additional $250
letter of credit. The letter of credit may be reduced annually by specified
amounts by specified amounts in the lease agreement upon the Company's achieving
certain economic goals.
7. MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK
The Company has authorized 10.0 million shares of convertible preferred
stock. The Board of Directors has the authority to establish and define, in one
or more series, the price, rights, preferences and dividends of authorized but
unissued shares of preferred stock.
On January 30, 1998, the Company issued 8,333,333 shares of Series A
Convertible Preferred Stock (Preferred Stock) at $1.80 per share. Total
proceeds, net of offering costs, approximated $14.3 million. Concurrent with
this transaction, the Company repurchased 3,333,333 shares of the Company's
common stock from its founders for $6.0 million.
The rights and preferences of the preferred stock are as follows:
- In the event of any liquidation, dissolution or winding up of the
Company, the holders of Series A preferred stock would be entitled to
receive the greater of: (i) an amount in cash equal to $1.80 per share
(adjusted for stock splits, stock dividends and the like) or (ii), cash
in an amount equal to the portion of the assets of the Company remaining
for distribution to shareholders which such shareholder would have
received if each share of Series A Preferred Stock held had been
converted into the number of shares of common stock issuable upon the
conversion of a share of Series A Preferred Stock immediately prior to
any liquidation, dissolution or winding up of the Company.
- The Preferred Stock is voluntarily convertible at any time at the option
of the holder into shares of the Company's common stock at a one-for-one
conversion. The Preferred Stock is automatically convertible upon closing
of a Qualified Public Offering, as defined in the agreement.
- Any time following the fifth anniversary of the closing, holders of the
Preferred Stock have the right to cause the Company to redeem up to 50%
of the Preferred Stock at the original purchase price. Any time following
the sixth anniversary of the closing, the holders shall have the right to
cause the Company to redeem up to 100% of the Preferred Stock at the
original purchase price.
F-13
<PAGE> 80
BSQUARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
- The Preferred Stock converts at a one-for-one conversion rate, and is
adjusted in certain circumstances to prevent dilution of the preferred
shareholder's ownership interest.
- The Preferred shareholders have the same voting rights and voting powers
as common shareholders.
COMMON STOCK RESERVED FOR FUTURE ISSUANCES
At June 30, 1999, the Company has reserved the following shares of common
stock for future issuance:
<TABLE>
<S> <C>
Convertible mandatorily redeemable preferred stock.......... 8,333,333
Stock Option Plan........................................... 3,441,462
----------
11,774,795
==========
</TABLE>
8. EMPLOYEE BENEFIT PLANS
STOCK OPTIONS
In May 1997, the Company adopted the Amended and Restated Stock Option Plan
(the Plan). Under the Plan, the Board of Directors may grant nonqualified stock
options at a price determined by the Board, not to be less than 85% of the fair
market value of the common stock. Options have a term of up to 10 years and vest
over a schedule determined by the Board of Directors, generally four years.
Incentive stock options granted under this program may only be granted to
employees of the Company, have a term of up to 10 years, and shall be granted at
a price equal to the fair market value of the Company's stock. A summary of
stock option activity follows:
<TABLE>
<CAPTION>
PRICE PER SHARE
--------------------------------
NUMBER OF OPTIONS AVAILABLE FOR WEIGHTED AVERAGE
OUTSTANDING ISSUANCE EXERCISE PRICE RANGE
----------------- -------------- ---------------- -------------
<S> <C> <C> <C> <C>
Balance, December 31, 1996........... -- -- --
Authorized......................... -- 2,500,000 -- --
Granted............................ 1,750,100 (1,750,100) $0.08 $0.05 - $1.00
Exercised.......................... -- -- -- --
Canceled........................... (69,300) 69,300 $0.05 $0.05 - $0.05
--------- ---------- ----- -------------
Balance, December 31, 1997........... 1,680,800 819,200 $0.08 $0.05 - $1.00
Authorized......................... -- 1,125,000 -- --
Granted............................ 1,108,150 (1,108,150) $1.15 $1.00 - $1.80
Exercised.......................... (119,938) -- $0.05 $0.05 - $0.05
Canceled........................... (128,850) 128,850 $0.34 $0.05 - $1.00
--------- ---------- ----- -------------
Balance, December 31, 1998........... 2,540,162 964,900 $0.54 $0.05 - $1.80
Granted............................ 626,400 (626,400) $1.44 $1.44 - $1.44
Exercised.......................... (63,600) -- $0.53 $0.05 - $1.00
Canceled........................... (106,400) 106,400 $0.42 $0.05 - $1.44
--------- ---------- ----- -------------
Balance, June 30, 1999............... 2,996,562 444,900 $0.73 $0.05 - $1.80
========= ========== ===== =============
</TABLE>
In July 1999, the Company authorized an additional 2.0 million shares for
grants under the plan.
F-14
<PAGE> 81
BSQUARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes information concerning currently outstanding
and exercisable options at June 30, 1999:
<TABLE>
<CAPTION>
OUTSTANDING
------------------------------------------ EXERCISABLE
WEIGHTED AVERAGE -------------------------------------
REMAINING CONTRACTUAL WEIGHTED AVERAGE
NUMBER OF OPTIONS LIFE (YEARS) NUMBER OF OPTIONS EXERCISE PRICE
----------------- --------------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Rate of Exercise
Price:
$0.05.............. 1,303,012 8.0 578,378 $0.05
$0.50.............. 31,650 8.3 8,100 $0.50
$1.00.............. 827,500 8.3 177,571 $1.00
$1.44.............. 624,400 9.7 300,000 $1.44
$1.80.............. 210,000 9.1 -- $1.80
--------- --- --------- -----
2,996,562 8.5 1,064,049 $0.60
========= === ========= =====
</TABLE>
Had compensation expense been recognized on stock options issued based on
the fair value of the options at the date of the grant and recognized over the
vesting period, the Company's net income would have been reduced to the pro
forma amounts presented below.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------
1997 1998
------ ------
<S> <C> <C>
Net income, as reported..................................... $3,806 $2,300
(12) (82)
------ ------
Pro forma net income........................................ $3,794 $2,218
====== ======
Pro forma basic earnings per share.......................... $ 0.18 $ 0.12
====== ======
</TABLE>
The fair value of options granted in 1997 and 1998 of $.03 and $.25 has
been estimated at the date of grant using the Black-Scholes method with the
following weighted-average assumptions:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31
------------------
1997 1998
------- -------
<S> <C> <C>
Dividend yield.............................................. 0% 0%
Expected life............................................... 5 years 5 years
Expected volatility......................................... 0% 0%
Risk-free interest rate..................................... 6.0% 5.5%
</TABLE>
The effects on pro forma disclosures of applying SFAS No. 123 are not
likely to be representative of the effects on pro forma disclosures of future
years.
DEFERRED STOCK OPTION COMPENSATION
In connection with the grant of certain stock options to employees and
consultants during 1997 and the six months ended June 30, 1999, the Company
recorded deferred stock option compensation of $653 and $1.1 million,
respectively, representing the difference between the estimated fair value of
the common stock for accounting purposes and the option exercise price of such
options at the date of grant. Such amount is presented as a reduction of
shareholders' equity and amortized, in accordance with FASB Interpretation No.
28, on an accelerated basis over the vesting period of the applicable options
(generally four years). During the years ended December 31, 1997, 1998 and for
the six months ended June 30, 1998 and 1999, the Company expensed approximately
$106, $171, $83 and $294, respectively. The balance will be expensed over the
period the options vest. Compensation expense is decreased in the period of
forfeiture for any accrued but unvested compensation arising from the early
termination of an option holder's services.
F-15
<PAGE> 82
BSQUARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Included in the expensed amounts noted above for the six months ended June
30, 1999 is $30 related to options granted to a consultant for services
rendered. As of June 30, 1999, the consultant had earned 20,833 options to
acquire common stock at $1 per share. The Company has recorded the fair value of
the options as of the date the options were earned based on a Black-Scholes
model utilizing a 50% volatility factor and an expected life of 2 years.
Subsequent to June 30, 1999, the agreement was terminated.
1999 EMPLOYEE STOCK PURCHASE PLAN
On July 21, 1999, the board of directors approved the adoption of the
Company's 1999 Employee Stock Purchase (the "1999 Purchase Plan"), subject to
shareholder approval. A total of 1.5 million shares of common stock has been
reserved for issuance under the 1999 Purchase Plan. The 1999 Purchase Plan
permits eligible employees to acquire shares of the Company's common stock
through periodic payroll deductions of up to 10% of base cash compensation. No
more than 3,334 shares may be purchased by each employee on any purchase date.
Each offering period will have a maximum duration of 6 months. The price at
which the common stock may be purchased is 85% of the lesser of the fair market
value of the Company's common stock on the first day of the applicable offering
period or on the last day of the respective purchase period. The initial
offering period will commence on the effectiveness of the initial public
offering and will end on May 14, 2001.
PROFIT SHARING AND DEFERRED COMPENSATION PLAN
The Company has a Profit Sharing and Deferred Compensation Plan (Profit
Sharing Plan) under Section 401(k) of the Internal Revenue Code of 1986, as
amended. Substantially all full-time employees are eligible to participate. The
Company, at its discretion, may elect to match the participants' contributions
to the Profit Sharing Plan. Participants will receive their share of the value
of their investments upon retirement or termination, subject to a vesting
schedule. The Company made no matching contributions to the Profit Sharing Plan
during 1998 or 1997. For the six months ended June 30, 1999, the Company made
matching contributions to the profit sharing plan of $228.
9. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------- ----------------
1996 1997 1998 1998 1999
----- ----- ------- ------ ------
<S> <C> <C> <C> <C> <C>
Issuance of notes payable for equipment............ $-- $-- $ 473 $ -- $ --
Cash paid for interest............................. -- 13 57 40 42
Cash paid for income taxes......................... -- -- 2,170 1,220 1,100
</TABLE>
All significant non-cash financing activities are listed elsewhere in the
financial statements or the notes thereto.
10. SIGNIFICANT CUSTOMERS
Sales to customers, which comprised at least 10% of revenue for the years
ended December 31 were as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------ ----------------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Microsoft....................................... 5% 39% 79% 73% 87%
Hitachi......................................... 43% 18% 2% 5% --
NEC............................................. 48% 17% 3% 5% --
ARM............................................. -- 11% 1% 2% --
</TABLE>
As of December 31, 1997, and 1998, and as of June 30, 1999, Microsoft
represented 73%, 84% and 72% of total accounts receivable, respectively.
F-16
<PAGE> 83
BSQUARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In February 1999, the Company signed a two-year agreement with Microsoft
Corporation to continue to provide services to Microsoft which extend the
capabilities of the Windows CE operating system.
11. GEOGRAPHIC AND SEGMENT INFORMATION
The Company follows the requirements of Statement of Financial Accounting
Standards No. 131, Disclosures About Segments of an Enterprise and Related
Information. As defined in SFAS No. 131, the Company operates in two reportable
segments, Service and Products for the Microsoft Windows CE environment. The
following table summarizes total revenue and long-lived assets attributed to
significant countries:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED
-------------------------- JUNE 30,
1996 1997 1998 1999
------ ------- ------- ----------
<S> <C> <C> <C> <C>
Total revenue:
United States............................... $2,357 $10,065 $23,658 $18,272
Japan....................................... 1,802 2,632 195 108
Other Foreign............................... 20 1,708 759 163
------ ------- ------- -------
Total revenue*...................... $4,179 $14,405 $24,612 $18,543
====== ======= ======= =======
Long-lived assets:
United States............................... $ 1,378 $ 2,795 $ 3,460
Japan....................................... -- 239 220
Germany..................................... -- 205 186
------- ------- -------
Total long-lived assets............. $ 1,378 $ 3,239 $ 3,866
======= ======= =======
</TABLE>
- ---------------
* Revenue is attributed to countries based on location of customer invoiced.
BSQUARE has two operating segments, Services and Products. The Services
segment includes design and development of integration tools for the
semiconductor vendors and the original equipment manufacturer market. The
Product segment derives revenue from licensing of software products to original
equipment manufactures and distributing product through resellers. The
accounting policies of the segments are the same as those described in the
summary of significant accounting policies.
The Company does not track assets or operating expenses by operating
segments. Consequently, it is not practicable to show assets or operating
expenses by operating segments.
F-17
<PAGE> 84
BSQUARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. EARNINGS PER SHARE
The following is a reconciliation of the numerators and denominators used
in computing basic and diluted earnings per share:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, ------------------
--------------------------- JUNE 30,
1996 1997 1998 1998 1999
------- ------- ------- -------- -------
<S> <C> <C> <C> <C> <C>
Net income (numerator diluted),.............. $ 1,971 $ 3,806 $ 2,300 $ 1,217 $ 866
Less: Accretion of mandatorily redeemable
convertible preferred stock............. -- -- (110) (50) (58)
------- ------- ------- ------- -------
Net income available to common shareholders
(numerator basic).......................... $ 1,971 $ 3,806 $ 2,190 $ 1,167 $ 808
======= ======= ======= ======= =======
Shares (denominator basic):
Weighted average common shares
outstanding............................. 22,106 21,400 18,372 18,615 18,206
======= ======= ======= ======= =======
Basic earnings per share..................... $ 0.09 $ 0.18 $ 0.12 $ 0.06 $ 0.04
======= ======= ======= ======= =======
Shares (denominator diluted):
Weighted average common shares
outstanding............................. 22,106 21,400 18,372 18,615 18,206
Mandatorily redeemable convertible
preferred
stock................................... -- -- 7,648 6,951 8,333
Common stock equivalents................... -- 381 1,455 1,484 2,076
------- ------- ------- ------- -------
Shares used in computation, (denominator
diluted)................................ 22,106 21,781 27,475 27,050 28,615
======= ======= ======= ======= =======
Diluted earnings per share................... $ 0.09 $ 0.17 $ 0.08 $ 0.04 $ 0.03
======= ======= ======= ======= =======
</TABLE>
13. STOCK PURCHASE AGREEMENT
On August 18, 1999, the Company entered into a stock purchase agreement to
sell 1,518,378 shares of common stock to a new investor for approximately $18.7
million. The investor has the right to require the Company to redeem the shares
at the original issuance price if the Company's initial public offering is not
declared effective by December 15, 1999.
F-18
<PAGE> 85
Back Cover
[BSQUARE LOGO]
[Text]
BSQUARE provides software products and services that facilitate the
integration of Windows CE into intelligent computing devices.
"We came to BSQUARE because we knew they had the products and expertise to
assist us in the development of Capio[TM], our latest Window[R]-based Terminal,
within our tight timeframe. With BSQUARE's CE Xpress[TM] Kit and a custom
Ethernet driver they developed for us, we were able to shorten our development
time and deliver our product to market quickly."
MIKE OLIVA, DIRECTOR OF MARKETING, BOUNDLESS TECHNOLOGIES INC.
"BSQUARE seems to always be keying in on the most meaningful segments of the
Windows CE product market: They always know what we want as consuming people."
JARED MINIMAN, WINCELAIR
<PAGE> 86
[COMPANY LOGO]
<PAGE> 87
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses, other than the
underwriting discounts and commissions, payable by the registrant in connection
with the sale of the securities being registered. All amounts are estimates
except the Securities and Exchange Commission registration fee, the NASD filing
fee and The Nasdaq National Market listing fee.
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee......... $ 17,904
NASD Filing Fee............................................. 6,940
Nasdaq National Market Filing Fee........................... 17,500
Printing Costs.............................................. 200,000
Legal Fees and Expenses..................................... 300,000
Accounting Fees and Expenses................................ 100,000
Directors' and Officers' Insurance Policy Premium........... 300,000
Blue Sky Fees and Expenses.................................. 5,000
Transfer Agent and Registrar Fees........................... 5,000
Miscellaneous............................................... 47,656
----------
Total............................................. $1,000,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Sections 23B.08.500 through 23B.08.600 of the Washington Business
Corporation Act (the "WBCA") authorize a corporation to indemnify its directors,
officers, employees and agents against certain liabilities they may incur in
such capacities, including liabilities under the Securities Act of 1933, as
amended (the "Securities Act"), provided they acted in good faith and in a
manner reasonably believed to be in or not opposed to the best interests of the
corporation. The registrant's Amended and Restated Articles of Incorporation
(Exhibit 3.1 hereto) and Bylaws (Exhibit 3.2 hereto) require the registrant to
indemnify its officers and directors to the fullest extent permitted by
Washington law.
Section 23B.08.320 of the WBCA authorizes a corporation to limit or
eliminate a director's liability to the corporation or its shareholders for
monetary damages for breaches of fiduciary duties, other than for (1) acts or
omissions that involve intentional misconduct or a knowing violation of law, (2)
unlawful distributions to shareholders, or (3) transactions from which a
director derives an improper personal benefit. The registrant's Amended and
Restated Articles of Incorporation (Exhibit 3.1 hereto) contain provisions
implementing, to the fullest extent permitted by Washington law, such
limitations on a director's liability to the registrant and its shareholders.
In addition, the registrant has entered into separate indemnification
agreements with its directors and certain executive officers that could require
the registrant, among other things, to indemnify them against liabilities that
arise because of their status or service as directors or executive officers and
to advance their expenses incurred as a result of any proceeding against them as
to which they could be indemnified.
The Underwriting Agreement (Exhibit 1.1 hereto) provides for
indemnification between the underwriters and the registrant from and against
certain liabilities arising in connection with the offering which is the subject
of this registration statement.
II-1
<PAGE> 88
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
The following is a description of all securities that the registrant has
sold within the past three years without registering the securities under the
Securities Act:
On March 17, 1997, the registrant issued an aggregate of 500,000 shares of
its common stock to two of its employees in exchange for services to be rendered
to the registrant. These issuances were exempt from registration pursuant to
Section 4(2) of the Securities Act.
On January 30, 1998, the registrant sold 8,333,333 shares of the its Series
A redeemable convertible preferred stock at a price of $1.80 per share to 11
accredited investors in a private transaction for an aggregate offering price of
approximately $15.0 million. This issuance was exempt from registration pursuant
to Rule 506 of Regulation D under Section 4(2) of the Securities Act.
From June 1998 to August 1999, 224,726 shares of the registrant's common
stock were issued to 58 individuals upon the exercise of stock options granted
pursuant to the registrant's amended and restated stock option plan at a
weighted average exercise price of $0.29 per share. These issuances were exempt
from registration pursuant to Rule 701 under the Securities Act.
On September 16, 1999, the registrant sold 1,518,378 shares of its common
stock at a price of $12.31 per share to a qualified institutional buyer in a
private transaction for an aggregate offering price of approximately $18.7
million. This issuance was exempt from registration pursuant to Section 4(2) of
the Securities Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits.
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
------ -----------
<C> <S>
1.1+ Form of Underwriting Agreement.
3.1# Articles of Incorporation and all amendments thereto.
3.1(a)# Form of Amended and Restated Articles of Incorporation.
3.2# Bylaws and all amendments thereto.
4.1 See Exhibits 3.1 and 3.2 for provisions defining the rights
of the holders of common stock.
5.1++ Opinion of Summit Law Group, PLLC regarding legality of
shares.
10.1# Amended and Restated Stock Option Plan.
10.2# Employee Stock Purchase Plan.
10.3# 401(k) Plan.
10.4# Form of Indemnification Agreement.
10.5# Loan and Security Agreement and between Imperial Bank and
BSQUARE Corporation dated February 11, 1998.
10.5(a)++ Amended and Restated Loan Agreement between Imperial Bank
and BSQUARE Corporation
10.6# One Bellevue Center Office Lease between EOP Northwest
Properties, LLC and BSQUARE Corporation dated December 14,
1998.
10.7# Mercer Island Partners Associates Building Lease Agreement
between Mercer Island Partners Associates, LLC and BSQUARE
Corporation dated January 30, 1998.
10.8# Office Lease Agreement between Seattle Office Associates,
LLC and BSQUARE Corporation dated November 15, 1996 (for
Suite 205).
10.9# Office Lease Agreement between Seattle Office Associates,
LLC and BSQUARE Corporation dated March 24, 1997 (for Suite
310).
10.10# Office Lease Agreement between Seattle Office Associates,
LLC and BSQUARE Corporation dated March 24, 1997 (for Suite
100).
10.11# Sunset North Corporate Campus Lease Agreement between WRC
Sunset North and BSQUARE Corporation.
</TABLE>
II-2
<PAGE> 89
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
------ -----------
<C> <S>
10.12*#+++ Microsoft Software For Dedicated Systems Distributor
Agreement between Microsoft Corporation and BSQUARE
Corporation dated November 1, 1997, as amended by Amendment
No. 1, Amendment No. 2, Amendment No. 3, Amendment No. 4 and
Amendment No. 5.
10.13*# Master Development & License Agreement between Microsoft
Corporation and BSQUARE Corporation dated effective as of
October 1, 1998.
10.14# Stock Purchase and Shareholders Agreement dated as of
January 30, 1998.
10.15# Stock Purchase Agreement dated August 18, 1999 by and
between BSQUARE Corporation and Vulcan Ventures
Incorporated.
21.1# Subsidiaries of the registrant.
23.1++ Consent of Arthur Andersen LLP, Independent Public
Accountants.
23.2 Consent of Summit Law Group, PLLC (contained in the opinion
filed as Exhibit 5.1 hereto).
24.1# Power of Attorney (See Page II-4).
27.1# Financial Data Schedule.
</TABLE>
- ---------------
* Confidential treatment requested
# Previously filed
+ To be filed by amendment
++ Filed herewith
+++ No longer being filed as an exhibit
(b) Financial Statement Schedules.
All schedules are omitted because they are inapplicable or the requested
information is shown in the consolidated financial statements of the registrant
or related notes thereto.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreement certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding), is asserted by
such director, officer or controlling person in connection with the securities
being registered, the registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the questions whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be a part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
II-3
<PAGE> 90
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment No. 2 to the registration statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Bellevue, State of Washington, on the 17th day of September, 1999.
BSQUARE CORPORATION
By: /s/ BRIAN V. TURNER
------------------------------------
Brian V. Turner
Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to the registration statement has been signed by the following persons in
the capacities indicated below on the 17th day of September, 1999.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
* Chairman of the Board, Chief Executive
- ----------------------------------------------------- Officer and President (Principal Executive
William T. Baxter Officer)
/s/ BRIAN V. TURNER Chief Financial Officer (Principal Financial
- ----------------------------------------------------- and Accounting Officer)
Brian V. Turner
* Director
- -----------------------------------------------------
Albert T. Dosser
* Director
- -----------------------------------------------------
Jeffrey T. Chambers
* Director
- -----------------------------------------------------
Scot E. Land
* Director
- -----------------------------------------------------
William Larson
*By: /s/ BRIAN V. TURNER
------------------------------------------------
As Attorney-In-Fact
</TABLE>
II-4
<PAGE> 91
EXHIBIT INDEX
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
1.1+ Form of Underwriting Agreement.
3.1# Articles of Incorporation and all amendments thereto.
Form of Amended and Restated Articles of Incorporation
3.1(a)#
3.2# Bylaws and all amendments thereto.
4.1 See Exhibits 3.1 and 3.2 for provisions defining the rights
of the holders of common stock.
5.1++ Opinion of Summit Law Group, PLLC regarding legality of
shares.
10.1# Amended and Restated Stock Option Plan.
10.2# Employee Stock Purchase Plan.
10.3# 401(k) Plan.
10.4# Form of Indemnification Agreement.
10.5# Loan and Security Agreement and between Imperial Bank and
BSQUARE Corporation dated February 11, 1998.
10.5(a)++ Amended and Restated Loan Agreement between Imperial Bank
and BSQUARE Corporation
10.6# One Bellevue Center Office Lease between EOP Northwest
Properties, LLC. and BSQUARE Corporation dated December 14,
1998.
10.7# Mercer Island Partners Associates Building Lease Agreement
between Mercer Island Partners Associates, LLC and BSQUARE
Corporation dated January 30, 1998.
10.8# Office Lease Agreement between Seattle Office Associates,
LLC and BSQUARE Corporation dated November 15, 1996 (for
Suite 205).
10.9# Office Lease Agreement between Seattle Office Associates,
LLC and BSQUARE Corporation dated March 24, 1997 (for Suite
310).
10.10# Office Lease Agreement between Seattle Office Associates,
LLC and BSQUARE Corporation dated March 24, 1997 (for Suite
100).
10.11# Sunset North Corporate Campus Lease Agreement between WRC
Sunset North and BSQUARE Corporation
10.12*#+++ Microsoft Software For Dedicated Systems Distributor
Agreement between Microsoft Corporation and BSQUARE
Corporation dated November 1, 1997, as amended by Amendment
No.1, Amendment No.2, Amendment No. 3, Amendment No. 4 and
Amendment No. 5.
10.13*# Master Development & License Agreement between Microsoft
Corporation and BSQUARE Corporation dated effective as of
October 1, 1998.
10.14# Stock Purchase and Shareholders Agreement dated as of
January 30, 1998.
10.15# Stock Purchase Agreement dated August 18, 1999 by and
between BSQUARE Corporation and Vulcan Ventures
Incorporated.
21.1# Subsidiaries of the registrant.
23.1++ Consent of Arthur Andersen LLP, Independent Public
Accountants.
23.2 Consent of Summit Law Group, PLLC (contained in the opinion
filed as Exhibit 5.1 hereto).
24.1# Power of Attorney (See Page II-4).
27.1# Financial Data Schedule.
</TABLE>
- ---------------
* Confidential treatment requested
# Previously filed
+ To be filed by amendment
++ Filed herewith
+++ No longer being filed as an exhibit
<PAGE> 92
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports and to all references to our Firm included in or made part of this
registration statement and prospectus.
/s/ ARTHUR ANDERSEN LLP
Seattle, Washington
September 16, 1999
<PAGE> 93
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
To BSQUARE Corporation
We have audited in accordance with generally accepted auditing standards,
the financial statements of BSQUARE Corporation and subsidiaries included in
this registration statement and have issued our report thereon dated August 13,
1999. Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The accompanying schedule listed in the
index of financial statements is presented for purposes of complying with the
Securities and Exchange Commissions rules and is not part of the basic financial
statements. This schedule has been subjected to the auditing procedures applied
in the audits of the basic financial statements and, in our opinion, fairly
states in all material respects the financial data required to be set forth
therein to the basic financial statements taken as a whole.
/s/ ARTHUR ANDERSEN LLP
Seattle, Washington
August 13, 1999
<PAGE> 94
BSQUARE CORPORATION
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
COLUMN C -- ADDITIONS
COLUMN B ------------------------- COLUMN E
BALANCE AT CHARGED TO COLUMN D BALANCE AT
BEGINNING COSTS AND DEDUCTIONS- END OF
DESCRIPTION OF PERIOD EXPENSES DESCRIBE PERIOD
----------- ----------- ----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
For the year ended December 31, 1996:
Allowance for doubtful accounts..................... $-- $-- $-- $ --
For the year ended December 31, 1997:
Allowance for doubtful accounts..................... $-- $10 $-- $ 10
For the year ended December 31, 1998:
Allowance for doubtful accounts..................... $10 $60 $ 3 $ 67
For the six months ended June 30, 1999:
Allowance for doubtful accounts..................... $67 $45 $-- $112
</TABLE>
<PAGE> 1
Exhibit 5.1
September 17, 1999
BSQUARE Corporation
3633 - 136th Place S.E.
Suite 100
Bellevue, WA 98006
Ladies and Gentlemen:
We have examined the Registration Statement on Form S-1 initially filed
by BSQUARE Corporation, a Washington corporation (the "Company"), with the
Securities and Exchange Commission on August 17, 1999 (Registration No.
333-85351), as amended by and Amendment No. 1 filed on August 19, 1999 and
Amendment No. 2 filed on September 17, 1999 (collectively the "Registration
Statement"), relating to the registration under the Securities Act of 1933, as
amended, of up to 4,000,000 shares of the Company's Common Stock, no par value
per share, being offered by the Company, and 600,000 shares that may be sold by
certain of the Company's shareholders upon exercise of the underwriters'
over-allotment option (collectively, the "Shares"). The Shares are to be sold to
the underwriters named in the Registration Statement for resale to the public.
As counsel to the Company, we have examined the proceedings taken by the
Company in connection with the issuance and sale by the Company of the Shares.
We are of the opinion that the Shares to be offered and sold by the
Company have been duly authorized and, when issued and sold by the Company in
the manner described in the Registration Statement and in accordance with the
resolutions adopted by the Board of Directors of the Company, will be legally
issued, fully paid and non-assessable.
We consent to the use of this opinion as an exhibit to the Registration
Statement and further consent to all references to us in the Registration
Statement, the prospectus constituting a part thereof and any amendments
thereto.
Very truly yours,
SUMMIT LAW GROUP
a professional limited liability company
<PAGE> 1
EXHIBIT 10.5(a)
BSQUARE CORPORATION
AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT
<PAGE> 2
This AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT is entered into as
of July 1, 1999, by and between IMPERIAL BANK ("Bank") and BSQUARE CORPORATION
("Borrower"").
RECITALS
A. Bank and Borrower are parties to that certain Loan and Security
Agreement dated as of February 11, 1998, as amended (the "Original Agreement").
B. Borrower and Bank wish to amend and restate the terms of the Original
Agreement. This Agreement sets forth the terms on which Bank will advance
credit to Borrower, and Borrower will repay the amounts owing to Bank.
AGREEMENT
The parties agree as follows:
1. DEFINITIONS AND CONSTRUCTION
1.1 Definitions. As used in this Agreement, the following terms
shall have the following definitions:
"Accounts" means all presently existing and hereafter arising
accounts, contract rights, and all other forms of obligations owing to Borrower
arising out of the sale or lease of goods (including, without limitation, the
licensing of software and other technology) or the rendering of services by
Borrower, whether or not earned by performance, and any and all credit
insurance, guaranties, and other security therefor, as well as all merchandise
returned to or reclaimed by Borrower and Borrower's Books relating to any of
the foregoing.
"Advance" or "Advances" means a cash advance under the Revolving
Facility.
"Affiliate" means, with respect to any Person, any Person that
owns or controls directly or indirectly such Person, any Person that controls
or is controlled by or is under common control with such Person, and each of
such Person's senior executive officers, directors, and partners.
"Bank Expenses" means all: reasonable costs or expenses
(including reasonable attorneys' fees and expenses) incurred in connection with
the preparation, negotiation, administration, and enforcement of the Loan
Documents; reasonable Collateral audit fees; and Bank's reasonable attorneys'
fees and expenses incurred in amending, enforcing or defending the Loan
Documents (including fees and expenses of appeal), incurred before, during and
after an Insolvency Proceeding, whether or not suit is brought.
"Borrower's Books" means all of Borrower's books and records
including: ledgers; records concerning Borrower's assets or liabilities, the
Collateral, business operations or financial condition; and all computer
programs, or tape files, and the equipment, containing such information.
"Borrowing Base" means an amount equal to eighty percent (80%)
of Eligible Accounts, as determined by Bank with reference to the most recent
Borrowing Base Certificate delivered by Borrower.
"Business Day" means any day that is not a Saturday, Sunday, or
other day on which banks in the State of California or the State of Washington
are authorized or required to close.
"Closing Date" means the date of this Agreement.
"Code" means the California Uniform Commercial Code.
"Collateral" means the property described on Exhibit A attached
hereto.
"Committed Revolving Line" means a credit extension of up to
Five Million Dollars ($5,000,000).
1
<PAGE> 3
"Contingent Obligation" means, as applied to any Person, any
direct or indirect liability, contingent or otherwise, of that Person with
respect to (i) any indebtedness, lease, dividend, letter of credit or other
obligation of another, including, without limitation, any such obligation
directly or indirectly guaranteed, endorsed, co-made or discounted or sold with
recourse by that Person, or in respect of which that Person is otherwise
directly or indirectly liable; (ii) any obligations with respect to undrawn
letters of credit issued for the account of that Person; and (iii) all
obligations arising under any interest rate, currency or commodity swap
agreement, interest rate cap agreement, interest rate collar agreement, or
other agreement or arrangement designated to protect a Person against
fluctuation in interest rates, currency exchange rates or commodity prices;
provided, however, that the term "Contingent Obligation" shall not include
endorsements for collection or other deposit in the ordinary course of
business. The amount of any Contingent Obligation shall be deemed to be an
amount equal to the stated or determined amount of the primary obligation in
respect of which such Contingent Obligation is made or, if not stated or
determinable, the maximum reasonably anticipated liability in respect thereof
as determined by such Person in good faith; provided, however, that such amount
shall not in any event exceed the maximum amount of the obligations under the
guarantee or other support arrangement.
"Copyrights" means any and all copyright rights, copyright
applications, copyright registrations and the like protections in each work or
authorship and derivative work thereof, whether published or unpublished and
whether or not the same also constitutes a trade secret, now or hereafter
existing, created, acquired or held.
"Credit Extension" means each Advance, Letter of Credit,
Equipment Advance, Leasehold Advance or any other extension of credit by Bank
for the benefit of Borrower hereunder.
"Current Liabilities" means, as of any applicable date, all
amounts that should, in accordance with GAAP, be included as current
liabilities on the consolidated balance sheet of Borrower and its Subsidiaries,
as at such date, plus, to the extent not already included therein, all
outstanding Advances made under this Agreement, including all Indebtedness that
is payable upon demand or within one year from the date of determination
thereof unless such Indebtedness is renewable or extendible at the option of
Borrower or any Subsidiary to a date more than one year from the date of
determination.
"Daily Balance" means the amount of the Obligations owed at the
end of a given day.
"Debt Service Coverage" means, as of any date of determination,
a ratio of (a) the sum of (i) earnings after tax annualized for the preceding
three (3) months plus interest and non-cash (i.e., depreciation and
amortization) expenses, annualized for the preceding (3) months to (b) the sum
of (i) current portion of long term debt and capitalized leases plus (ii)
interest expense, annualized for the preceding three months.
"Eligible Accounts" means those Accounts that arise in the
ordinary course of Borrower's business that comply with all of Borrower's
representations and warranties to Bank set forth in Section 5.4; provided, that
standards of eligibility may be fixed and revised from time to time by Bank in
Bank's reasonable judgment and upon notification thereof to Borrower in
accordance with the provisions hereof. Unless otherwise agreed to by Bank,
Eligible Accounts shall not include the following:
(a) Accounts that the account debtor has failed to pay within
ninety (90) days of invoice date;
(b) Accounts with respect to an account debtor, twenty-five
percent (25%) of whose Accounts the account debtor has failed to pay within
ninety (90) days of invoice date;
(c) Accounts with respect to which the account debtor is an
officer, employee, or agent of Borrower;
(d) Accounts with respect to which goods are placed on
consignment, guaranteed sale, sale or return, sale on approval, bill and hold,
or other terms by reason of which the payment by the account debtor may be
conditional;
(e) Accounts with respect to which the account debtor is an
Affiliate of Borrower,
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(f) Accounts with respect to which the account debtor does not have
its principal place of business in the United States, except for Eligible
Foreign Accounts;
(g) Accounts with respect to which the account debtor is the United
States or any department, agency, or instrumentality of the United States;
(h) Accounts with respect to which Borrower is liable to the account
debtor for goods sold or services rendered by the account debtor to Borrower,
but only to the extent of any amounts owing to the account debtor;
(i) Accounts with respect to an account debtor, including
Subsidiaries and Affiliates, whose total obligations to Borrower exceed
twenty-five percent (25%) of all Accounts, to the extent such obligations exceed
the aforementioned percentage; except that the concentration limit for Accounts
on which Microsoft Corporation is the account debtor shall be fifty percent
(50%); and except as approved in writing by Bank;
(j) Accounts with respect to which the account debtor disputes
liability or makes any claim with respect thereto as to which Bank believes, in
its sole discretion, that there may be a basis for dispute (but only to the
extent of the amount subject to such dispute or claim), or is subject to any
Insolvency Proceeding, or becomes insolvent, or goes out of business; and
(k) Accounts the collection of which Bank reasonably determines to be
doubtful.
"Eligible Foreign Accounts" means Accounts with respect to which the
account debtor does not have its principal place of business in the United
States and (1) that have sales in excess of Five Hundred Million Dollars
($500,000,000) per year; or (2) that Bank approves on a case-by-case basis.
"Equipment" means all present and future machinery, equipment, tenant
improvements, furniture, fixtures, vehicles, tools, parts and attachments in
which Borrower has any interest.
"Equipment Advance" has the meaning set forth in Section 2.1.5.
"ERISA" means the Employment Retirement Income Security Act of 1974,
as amended, and the regulations thereunder.
"Facility A Equipment Line" means a credit extension of up to Five
Hundred Thousand Dollars ($500,000).
"Facility A Equipment Maturity Date" means October 30, 2001.
"Facility B Equipment Line" means a credit extension of up to One
Million Dollars ($1,000,000).
"Facility B Equipment Maturity Date" means June 30, 2003.
"GAAP" means generally accepted accounting principles as in effect
from time to time.
"Indebtedness" means (a) all indebtedness for borrowed money or the
deferred purchase price of property or services, including without limitation
reimbursement and other obligations with respect to surety bonds and letters of
credit, (b) all obligations evidenced by notes, bonds, debentures or similar
instruments, (c) all capital lease obligations and (d) all Contingent
Obligations.
"Insolvency Proceeding" means any proceeding commenced by or against
any person or entity under any provision of the United States Bankruptcy Code,
as amended, or under any other bankruptcy or insolvency law, including
assignments for the benefit of creditors, formal or informal moratoria,
compositions, extension generally with its creditors, or proceedings seeking
reorganization, arrangement, or other relief.
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"Intellectual Property Collateral" means:
(a) Copyrights, Trademarks and Patents;
(b) Any and all trade secrets, and any and all intellectual property
rights in computer software and computer software products now or hereafter
existing, created, acquired or held;
(c) Any and all design rights which may be available to Borrower now or
hereafter existing, created, acquired or held;
(d) Any and all claims for damages by way of past, present and future
infringement of any of the rights included above, with the right, but not the
obligation, to sue for and collect such damages for said use or infringement of
the intellectual property rights identified above;
(e) All licenses or other rights to use any of the Copyrights, Patents or
Trademarks, and all license fees and royalties arising from such use to the
extent permitted by such license or rights;
(f) All amendments, renewals and extensions of any of the Copyrights,
Trademarks or Patents; and
All proceeds and products of the foregoing, including without
limitation all payments under insurance or any indemnity or warranty payable in
respect of any of the foregoing. Notwithstanding any of the foregoing,
"Intellectual Property Collateral" shall not include any property which is owned
by a client of Borrower pursuant to a consulting contract between Borrower and
such client.
"Inventory" means all present and future inventory in which Borrower
has any interest, including merchandise, raw materials, parts, supplies,
packing and shipping materials, work in process and finished products intended
for sale or lease or to be furnished under a contract of service, of every kind
and description now or at any time hereafter owned by or in the custody or
possession, actual or constructive, of Borrower, including such inventory as is
temporarily out of its custody or possession or in transit and including any
returns upon any accounts or other proceeds, including insurance proceeds,
resulting from the sale or disposition of any of the foregoing and any
documents of title representing any of the above, and Borrower's Books relating
to any of the foregoing.
"Investment" means any benefit ownership of (including stock,
partnership interest or other securities) any Person, or any loan, advance or
capital contribution to any Person.
"IRC" means the Internal Revenue Code of 1986, as amended, and the
regulations thereunder.
"Leasehold Advance" or "Leasehold Advances" means a cash advance
under the Leasehold Facility.
"Leasehold Committed Line" means a credit extension of up to Four
Million Dollars ($4,000,000).
"Leasehold Facility" means the facility under which Borrower may
request Bank to issue cash advances, as specified in Section 2.1.3 hereof.
"Leasehold Improvements" means leasehold improvements, equipment
specifically designed or manufactured for Borrower, office furnishings, limited
use property and other similar property.
"Leasehold Maturity Date" means June 30, 2005.
"Lien" means any mortgage lien, deed of trust, charge, pledge,
security interest or other encumbrance.
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"Loan Documents" means, collectively, this Agreement, any note or
notes executed by Borrower, and any other agreement entered into between
Borrower and Bank in connection with this Agreement, all as amended or extended
from time to time.
"Material Adverse Effect" means a material adverse effect on (i) the
business operations or condition (financial or otherwise) of Borrower and its
subsidiaries taken as a whole or (ii) the ability of Borrower to repay the
Obligations or otherwise perform its obligations under the Loan Documents.
"Negotiable Collateral" means all of Borrower's present and future
letters of credit of which it is a beneficiary, notes, drafts, instruments,
securities, documents of title, and chattel paper, and Borrower's Books relating
to any of the foregoing.
"Obligations" means all debt, principal, interest, Bank Expenses and
other amounts owed to Bank by Borrower pursuant to this Agreement or any other
agreement, whether absolute or contingent, due or to become due, now existing or
hereafter arising, including any interest that accrues after the commencement of
an Insolvency Proceeding and including any debt, liability, or obligation owing
from borrower to others that Bank may have obtained by assignment or otherwise.
"Patents" means all patents, patent applications and like protections
including without limitation improvements, divisions, continuations, renewals,
reissues, extensions and continuations-in-part of the same.
"Periodic Payments" means all installments or similar recurring
payments that borrower may now or hereafter become obligated to pay to Bank
pursuant to the terms and provisions of any instrument, or agreement now or
hereafter in existence between borrower and Bank.
"Permitted Indebtedness" means:
(a) Indebtedness of Borrower in favor of Bank arising under this
Agreement or any other Loan Document;
(b) Indebtedness existing on the Closing Date and disclosed in the
Schedule;
(c) Indebtedness secured by a lien described in clause (c) of the
defined term "Permitted Liens," provided such Indebtedness does not exceed the
lesser of the cost or fair market value of the equipment financed with such
Indebtedness;
(d) Subordinated Debt;
(e) Indebtedness to trade creditors incurred in the ordinary course
of business; and
(f) Other Indebtedness in an outstanding principal amount not to
exceed $200,000.
"Permitted Investment" means:
(a) Investments existing on the Closing Date disclosed in the
Schedule; and
(b) (i) marketable direct obligations issued or unconditionally
guaranteed by the United States of America or any agency or any State thereof
maturing within one (1) year from the date of acquisition thereof, (ii)
commercial paper maturing no more than one (1) year from the date of creation
thereof and currently having the highest rating obtainable from either Standard
& Poor's Corporation or Moody's Investors Service, Inc., and (iii) certificates
of deposit maturing no more than one (1) year from the date of investment
therein issued by Bank.
<PAGE> 7
"Permitted Liens" means the following:
(a) Any Liens existing on the Closing Date and disclosed in the Schedule
or arising under this Agreement or the other Loan Documents;
(b) Liens for taxes, fees, assessments or other governmental charges or
levies, either not delinquent or being contested in good faith by appropriate
proceedings, provided the same have no priority over any of Bank's security
interests;
(c) Liens (i) upon or in any equipment (other than equipment financed
hereunder) acquired or held by Borrower or any of its Subsidiaries to secure the
purchase price of such equipment or indebtedness incurred solely for the purpose
of financing the acquisition of such equipment, or (ii) existing on such
equipment at the time of its acquisition, provided that the Lien is confined
solely to the property so acquired and improvements thereon, and the proceeds of
such equipment;
(d) Liens incurred in connection with the extension, renewal or
refinancing of the indebtedness secured by Liens of the type described in
clauses (a) through (c) above, provided that any extension, renewal or
replacement Lien shall be limited to the property encumbered by the existing
Lien and the principal amount of the indebtedness being extended, renewed or
refinanced does not increase.
"Person" means any individual, sole proprietorship, partnership, limited
liability company, joint venture, trust, unincorporated organization,
association, corporation, institution, public benefit corporation, firm, joint
stock company, estate, entity or governmental agency.
"Prime Rate" means the variable rate of interest, per annum, most recently
announced by Bank, as its "prime rate," whether or not such announced rate is
the lowest rate available from Bank.
"Quick Assets" means, at any date, as of which the amount thereof shall be
determined, the unrestricted cash and cash-equivalents, accounts receivable and
investments, with maturities not to exceed 90 days, of Borrower determined in
accordance with GAAP.
"Responsible Officer" means each of the Chief Executive Officer, the Chief
Financial Officer and the Controller of Borrower.
"Revolving Maturity Date" means June 30, 2000.
"Revolving Facility" means the facility under which Borrower may request
Bank to issue Advances, as specified in Section 2.1.1 hereof.
"Schedule" means the schedule of exceptions attached hereto, if any.
"Subordinated Debt" means any debt incurred by Borrower that is
subordinated to the debt owing by Borrower to Bank on terms acceptable to Bank
(and identified as being such by Borrower and Bank).
"Subsidiary" means any corporation or partnership in which (i) any general
partnership interest or (ii) more than 50% of the stock of which by the terms
thereof ordinary voting power to elect the Board of Directors, managers or
trustees of the entity shall, at the time as of which any determination is being
made, be owned by Borrower, either directly or through an Affiliate.
"Tangible Net Worth" means at any date as of which the amount thereof shall
be determined, the sum of the capital stock and additional paid-in capital plus
retained earnings (or minus accumulated deficit) of Borrower and its
Subsidiaries minus intangible assets, plus Subordinated Debt, on a consolidated
basis determined in accordance with GAAP.
"Total Liabilities" means at any date as of which the amount thereof shall
be determined, all obligations that should, in accordance with GAAP be
classified as liabilities on the consolidated balance sheet of Borrower,
including in any event all Indebtedness.
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"Trademarks" means any trademark and servicemark rights, whether
registered or not, applications to register and registrations of the same and
like protections, and the entire goodwill of the business of Borrower connected
with and symbolized by such trademarks.
1.2 Accounting Terms. All accounting terms not specifically defined
herein shall be construed in accordance with GAAP and all calculations made
hereunder shall be made in accordance with GAAP. When used herein, the terms
"financial statements" shall include the notes and schedules thereto.
2. LOAN AND TERMS OF PAYMENT
2.1 Credit Extensions.
Borrower promises to pay to the order of Bank, in lawful money of
the United States of America, the aggregate unpaid principal amount of all
Credit Extensions made by Bank to Borrower hereunder. Borrower shall also pay
interest on the unpaid principal amount of such Credit Extensions at rates in
accordance with the terms hereof.
2.1.1 Revolving Advances
(a) Subject to and upon the terms and conditions of this
Agreement, Bank agrees to make Advances to Borrower in an aggregate outstanding
amount not to exceed (i) the lesser of the Committed Revolving Line or the
Borrowing Base, minus (ii) the aggregate face amount of all outstanding Letters
of Credit (including drawn but unreimbursed Letters of Credit). Subject to the
terms and conditions of this Agreement, amounts borrowed pursuant to this
Section 2.1.1 may be repaid and reborrowed at any time prior to the Revolving
Maturity Date, at which time all Advances under this Section 2.1.1 shall be
immediately due and payable. Notwithstanding the foregoing, the aggregate
Advances outstanding under this Section 2.1.1 shall not exceed Two Hundred Fifty
Thousand Dollars ($250,000) unless Bank has performed an audit of the
Collateral, the results of which are satisfactory to Bank.
(b) Whenever Borrower desires an Advance, Borrower will notify
Bank by facsimile transmission or telephone no later than 3:00 p.m. Pacific
time, on the Business Day that the Advance is to be made. Each such notification
shall be promptly confirmed by a Payment/Advance Form in substantially the form
of Exhibit B hereto. Bank is authorized to make Advances under this Agreement,
based upon instructions received from a Responsible Officer or a designee of a
Responsible Officer, or without instructions if in Bank's discretion such
Advances are necessary to meet Obligations which have become due and remain
unpaid. Bank shall be entitled to rely on any telephonic notice given by a
person who Bank reasonably believes to be a Responsible Officer or a designee
thereof, and Borrower shall indemnify and hold Bank harmless for any damages or
loss suffered by Bank as a result of such reliance. Bank will credit the amount
of Advances made under this Section 2.1.1 to Borrower's deposit account.
2.1.2 Letters of Credit.
(a) Subject to the terms and conditions of this Agreement, Bank
agrees to issue or cause to be issued Letters of Credit for the account of
Borrower in an aggregate outstanding face amount not to exceed (i) the lesser of
the Committed Revolving Line or the Borrowing Base, minus (ii) the then
outstanding principal balance of the Advances, provided that the aggregate face
amount of outstanding Letters of Credit (including drawn but unreimbursed
Letters of Credit and any Letter of Credit Reserve) shall not in any case exceed
One Million Dollars ($1,000,000). Each Letter of Credit shall have an expiry
date no later than the Revolving Maturity Date. All Letters of Credit shall be,
in form and substance, acceptable to Bank in its sole discretion and shall be
subject to the terms and conditions of Bank's form of standard Application and
Letter of Credit Agreement.
(b) The obligation of Borrower to immediately reimburse Bank
for drawings made under Letters of Credit shall be absolute, unconditional and
irrevocable, and shall be performed strictly in accordance with the terms of
this Agreement and such Letters of Credit, under all circumstances whatsoever.
Borrower shall indemnify, defend, protect and hold Bank harmless from any loss,
cost, expense or liability, including, without limitation, reasonable attorneys'
fees, arising out of or in connection with any Letters of Credit.
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<PAGE> 9
(c) Borrower may request that Bank issue a Letter of Credit
payable in a currency other than United States Dollars. If a demand for payment
is made under any such Letter of Credit, Bank shall treat such demand as an
Advance to Borrower of the equivalent of the amount thereof (plus cable charges)
in United States currency at the then prevailing rate of exchange in San
Francisco, California, for sales of that other currency for cable transfer to
the country of which it is the currency.
(d) Upon the issuance of any Letter of Credit payable in a
currency other than United States Dollars, Bank shall create a reserve under
the Committed Revolving Line for Letters of Credit against fluctuations in
currency exchange rates, in an amount equal to ten percent (10%) of the face
amount of such Letter of Credit. The amount of such reserve may be amended by
Bank from time to time to account for fluctuations in the exchange rate. The
availability of funds under the Committed Revolving Line shall be reduced by
the amount of such reserve for so long as such Letter of Credit remains
outstanding.
2.1.3 Leasehold Advances.
(a) Subject to and upon the terms and conditions of this
Agreement, Bank agrees, at any time from the date hereof through June 30, 2000,
to make advances (each a "Leasehold Advance" and, collectively, the "Leasehold
Advances") to Borrower in an aggregate outstanding principal amount not to
exceed the Leasehold Committed Line. Each Leasehold Advance (i) shall be used
to finance Leasehold Improvements, and (ii) shall not exceed one hundred
percent (100%) of the cost of such Leasehold Improvements, excluding taxes,
shipping, warranty charges, freight discounts and installation expense.
(b) Interest shall accrue from the date of each Leasehold
Advance at the rate specified in Section 2.3(a), and shall be payable monthly on
the last day of each month through June 30, 2000. Any Leasehold Advances that
are outstanding on June 30, 2000 shall be payable in sixty (60) equal monthly
installments of principal, plus all accrued interest, beginning on July 31,
2000, and continuing on the last day of each month thereafter through the
Leasehold Maturity Date, at which time all amounts due under this Section 2.1.3
and any other amounts due under this Agreement shall be immediately due and
payable. Leasehold Advances, once repaid, may not be reborrowed. Borrower may
prepay any Leasehold Advances without penalty or premium.
(b) When Borrower desires to obtain a Leasehold Advance,
Borrower shall notify Bank (which notice shall be irrevocable) by facsimile
transmission to be received no later than 3:00 p.m. Pacific time one (1)
Business Day before the day on which the Leasehold Advance is to be made. Such
notice shall be substantially in the form of Exhibit B. The notice shall be
signed by a Responsible Officer or its designee and include a copy of the
invoice for any Leasehold Improvements to be financed.
2.1.4 Facility A Equipment Advances.
(a) Subject to and upon the terms and conditions of this
Agreement, at any time from the date of the Original Agreement through October
30, 1998, Bank agrees to make advances (each a "Facility A Equipment Advance"
and, collectively, the "Facility A Equipment Advances") to Borrower in an
aggregate outstanding amount not to exceed the Facility A Equipment Line. The
Facility A Equipment Advances shall be used only to purchase Equipment and
software approved from time to time by Bank purchased on or after ninety (90)
days prior to the date hereof, and shall not exceed eighty percent (80%) of the
invoice amount of such equipment, excluding taxes, shipping, warranty charges,
freight discounts and installation expense. Not more than twenty-five percent
(25%) of the aggregate outstanding Facility A Equipment Advances shall be used
to finance the acquisition or licensing of software.
(b) Interest shall accrue from the date of each Facility A
Equipment Advance at the rate specified in Section 2.3(a), and shall be payable
monthly for each month through October 1998. Any Facility A Equipment Advances
that are outstanding on October 30, 1998 shall be payable in thirty-six (36)
equal monthly installments of principal, plus all accrued interest, beginning
on November 30, 1998, and continuing on the last day of each month thereafter
through the Facility A Equipment Maturity Date, at which time all amounts due
under this Section 2.1.4 shall be immediately due and payable. Facility A
Equipment Advances, once repaid, may not be reborrowed.
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<PAGE> 10
(c) When Borrower desires to obtain a Facility A Equipment
Advance, Borrower shall notify Bank (which notice shall be irrevocable) by
facsimile transmission to be received no later than 3:00 p.m. Pacific time one
(1) Business Day before the day on which the Facility A Equipment Advance is to
be made. Such notice shall be substantially in the form of Exhibit B. The notice
shall be signed by a Responsible Officer or its designee and include a copy of
the invoice for any Equipment to be financed.
2.1.5 Facility B Equipment Advances.
(a) Subject to and upon the terms and conditions of this
Agreement, at any time from the date hereof through June 30, 2000, Bank agrees
to make advances (each a "Facility B Equipment Advance", collectively, the
"Facility B Equipment Advances", and, collectively with the Facility A Equipment
Advances, the "Equipment Advances") to Borrower in an aggregate outstanding
amount not to exceed the Facility B Equipment Line. The Facility B Equipment
Advances shall be used only to purchase Equipment, software, and furniture
approved from time to time by Bank purchased on or after ninety (90) days prior
to the date hereof, and shall not exceed one hundred percent (100%) of the
invoice amount of such equipment, excluding taxes, shipping, warranty charges,
freight discounts and installation expense.
(b) Interest shall accrue from the date of each Facility B
Equipment Advance at the rate specified in Section 2.3(a), and shall be payable
monthly through June 30, 2000. Any Facility B Equipment Advances that are
outstanding on June 30, 2000 shall be payable in thirty-six (36) equal monthly
installments of principal, plus all accrued interest, beginning on July 31,
2000, and continuing on the last day of each month thereafter through the
Facility B Equipment Maturity Date, at which time all amounts due under this
Section 2.1.5 shall be immediately due and payable. Facility B Equipment
Advances, once repaid, may not be reborrowed.
(c) When Borrower desires to obtain a Facility B Equipment
Advance, Borrower shall notify Bank (which notice shall be irrevocable) by
facsimile transmission to be received no later than 3:00 p.m. Pacific time one
(1) Business Day before the day on which the Facility B Equipment Advance is to
be made. Such notice shall be substantially in the form of Exhibit B. The notice
shall be signed by a Responsible Officer or its designee and include a copy of
the invoice for any Equipment to be financed.
2.2 Overadvances. If, at any time or for any reason, the amount of
Obligations owed by Borrower to Bank pursuant to Sections 2.1.1 and 2.1.2 of
this Agreement is greater than the lesser of (i) the Committed Revolving Line or
(ii) the Borrowing Base, Borrower shall immediately pay to Bank, in cash, the
amount of such excess.
2.3 Interest Rates, Payments, and Calculations.
(a) Interest Rates.
(i) Advances. Except as set forth in Section 2.3(b), the
Advances shall bear interest, on the average daily balance thereof, at a rate
equal to the Prime Rate.
(ii) Equipment Advances. Except as set forth in Section
2.3(b), the Equipment Advances shall bear interest, on the average daily balance
thereof, at a rate equal to the Prime Rate plus one-quarter percent (0.25%).
(iii) Leasehold Advances. Except as set forth in Section
2.3(b), the Leasehold Advances shall bear interest, on the average daily balance
thereof, at a rate equal to the Prime Rate plus one-half percent (0.50%).
(b) Late Fee; Default Rate. If any payment is not made within
ten (10) days after the date such payment is due, Borrower shall pay Bank a late
fee equal to the lesser of (i) five percent (5%) of the amount of such unpaid
amount or (ii) the maximum amount permitted to be charged under applicable law.
All Obligations shall bear interest, from and after the occurrence and during
the continuance of an Event of Default, at a rate equal to five (5) percentage
points above the interest rate applicable immediately prior to the occurrence of
the Event of Default.
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(c) Payments. Interest hereunder shall be due and payable on the last
day of each month during the term hereof. Bank shall, at its option, charge such
interest, all Bank Expenses, and all Periodic Payments against any of Borrower's
deposit accounts or against the Committed Revolving Line, in which case those
amounts shall thereafter accrue interest at the rate then applicable hereunder.
Any interest not paid when due shall be compounded by becoming a part of the
Obligations, and such interest shall thereafter accrue interest at the rate then
applicable hereunder.
(d) Computation. In the event the Prime Rate is change from time to
time hereafter, the applicable rate of interest hereunder shall be increased or
decreased effective as of 12:01 a.m. on the day the Prime Rate is changed, by an
amount equal to such change in the Prime Rate. All interest chargeable under the
Loan Documents shall be computed on the basis of a three hundred sixty (360) day
year for the actual number of days elapsed.
2.4 Crediting Payments. Prior to the occurrence of an Event of Default,
Bank shall credit a wire transfer of funds, check or other item of payment to
such deposit account or Obligation as Borrower specifies. After the occurrence
of an Event of Default, the receipt by Bank of any wire transfer of funds,
check, or other item on account unless such payment is of immediately available
federal funds or unless and until such check or other item of payment is honored
when presented for payment. Notwithstanding anything to the contrary contained
herein, any wire transfer or payment received by Bank after 12:00 noon Pacific
time shall be deemed to have been received by Bank as of the opening of business
on the immediately following Business Day. Whenever any payment to Bank under
the Loan Documents would otherwise be due (except by reason of acceleration) on
a date that is not a Business Day, such payment shall instead be due on the next
Business Day, and additional fees or interest, as the case may be, shall accrue
and be payable for the period of such extension.
2.5 Fees. Borrower shall pay to Bank the following:
(a) Facility Fee. On the Closing Date, a Facility Fee equal to
Twenty-Five Thousand Dollars ($25,000), which shall be fully earned and
nonrefundable;
(b) Financial Examination and Appraisal Fees. Bank's customary fees
and out-of-pocket expenses for Bank's audits of Borrower's Accounts, and for
each appraisal of Collateral and financial analysis and examination of Borrower
performed from time to time by Bank or its agents;
(c) Bank Expenses. Upon the date hereof, all Bank Expenses incurred
through the Closing Date, including reasonable attorneys' fees and expenses,
and, after the date hereof, all Bank Expenses, including reasonable attorneys'
fees and expenses, as and when they become due.
2.6 Additional Costs. In case any change in any law, regulation, treaty
or official directive or the interpretation or application thereof by any court
or any governmental authority charged with the administration thereof or the
compliance with any guideline or request of any central bank or other
governmental authority (whether or not having the force of law), in each case
after the date of this Agreement):
(a) subjects Bank to any tax with respect to payments of
principal or interest or any other amounts payable hereunder by Borrower or
otherwise with respect to the transactions contemplated hereby (except for taxes
on the overall net income of Bank imposed by the United States of America or any
political subdivision thereof);
(b) imposes, modifies or deems applicable any deposit insurance,
reserve, special deposit or similar requirement against assets held by, or
deposits in or for the account of, or loans by, Bank; or
(c) imposes upon Bank any other condition with respect to its
performance under this Agreement,
and the result of any of the foregoing is to increase the cost to Bank, reduce
the income receivable by Bank or impose any expense upon Bank with respect to
any Obligations, Bank shall notify Borrower thereof. Borrower agrees to pay to
Bank the amount of such increase in cost, reduction in income or additional
expense as and when such cost, reduction or
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expense is incurred or determined, upon presentation by Bank of a statement of
the amount and setting forth Bank's calculation thereof, all in reasonable
detail, which statement shall be deemed true and correct absent manifest error.
2.7 Term. This Agreement shall become effective on the Closing Date
and, subject to Section 12.7, shall continue in full force and effect for a
term ending on the Leasehold Maturity Date. Notwithstanding the foregoing, Bank
shall have the right to terminate its obligation to make Credit Extensions
under this Agreement immediately and without notice upon the occurrence and
during the continuance of an Event of Default. Notwithstanding termination,
Bank's Lien on the Collateral shall remain in effect for so long as any
Obligations are outstanding.
3. CONDITIONS OF LOANS
3.1 Conditions Precedent to Initial Credit Extension. The obligation
of Bank to make the initial Credit Extension is subject to the condition
precedent that Bank shall have received, in form and substance satisfactory to
Bank, the following:
(a) this Agreement;
(b) a certificate of the Secretary of Borrower with respect to
incumbency and resolutions authorizing the execution and delivery of this
Agreement;
(c) agreement to provide insurance;
(d) payment of the fees and Bank Expenses then due specified in
Section 2.5 hereof; and
(e) such other documents, and completion of such other matters,
as Bank may reasonably deem necessary or appropriate.
3.2 Conditions Precedent to all Credit Extensions. The obligation of
Bank to make each Credit Extension, including the initial Credit Extension, is
further subject to the following conditions:
(a) timely receipt by Bank of the Payment/Advance Form as
provided in Section 2.1;
(b) the representations and warranties contained in Section 5
shall be true and correct in all material respects on and as of the date of
such Payment/Advance Form and on the effective date of each Credit Extension as
though made at and as of each such date, and no Event of Default shall have
occurred and be continuing, or would result from such Credit Extension. Without
limiting the generality of the foregoing, Bank shall not be obligated to make
any Credit Extension if, at and as of the date immediately following such
Credit Extension, Borrower would not be in compliance with any of the covenants
or restrictions set forth in Sections 6.8, 6.9, 6.10, or 6.11. The making of
each Credit Extension shall be deemed to be a representation and warranty by
Borrower on the date of such Credit Extension as to the accuracy of the facts
referred to in this Section 3.2(b).
4. CREATION OF SECURITY INTEREST
4.1 Grant of Security Interest. Borrower grants and pledges to Bank
a continuing security interest in all presently existing and hereafter acquired
or arising Collateral in order to secure prompt repayment of any and all
Obligations and in order to secure prompt performance by Borrower of each of
its covenants and duties under the Loan Documents. Except as set forth in the
Schedule, such security interest constitutes a valid, first priority security
interest in the presently existing Collateral, and will constitute a valid,
first priority security interest in Collateral acquired after the date hereof.
4.2 Delivery of Additional Documentation Required. Borrower shall
from time to time execute and deliver to Bank, at the request of Bank, all
Negotiable Collateral, all financing statements and other documents that Bank
may reasonably request, in form satisfactory to Bank, to perfect and continue
perfected Bank's
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security interests in the Collateral and in order to fully consummate all of
the transactions contemplated under the Loan Documents.
4.3 Right to Inspect. Bank (through any of its officers, employees,
or agents) shall have the right, upon reasonable prior notice, from time to time
during Borrower's usual business hours, to inspect Borrower's Books and to make
copies thereof and to check, test, and appraise the Collateral in order to
verify Borrower's financial condition or the amount, condition of, or any other
matter relating to, the Collateral.
5. REPRESENTATIONS AND WARRANTIES
Borrower represents and warrants as follows:
5.1 Due Organization and Qualification. Borrower and each Subsidiary
is a corporation duly existing and in good standing under the laws of its state
of incorporation and qualified and licensed to do business in, and is in good
standing in, any state in which the conduct of its business or its ownership of
property requires that it be so qualified.
5.2 Due Authorization: No Conflict. The execution, delivery, and
performance of the Loan Documents are within Borrower's powers, have been duly
authorized, and are not in conflict with nor constitute a breach of any
provision contained in Borrower's Articles of Incorporation or Bylaws, nor will
they constitute an event of default under any material agreement to which
Borrower is a party or by which Borrower is bound. Borrower is not in default
under any agreement to which it is a party or by which it is bound, which
default could have a Material Adverse Effect.
5.3 No Prior Encumbrances. Borrower has good and indefeasible title
to the Collateral, free and clear of Liens, except for Permitted Liens.
5.4 Bona Fide Eligible Accounts. The Eligible Accounts are bona fide
existing obligations. The services or property giving rise to such Eligible
Accounts have been rendered or delivered to the account debtor or to the account
debtor's agent for immediate shipment to and unconditional acceptance by the
account debtor. Borrower has not received notice of actual or imminent
Insolvency Proceeding of any account debtor that is included in any Borrowing
Base Certificate as an Eligible Account.
5.5 Merchantable Inventory. All Inventory is in all material respects
of good and marketable quality, free form all material defects.
5.6 Intellectual Property Collateral. Borrower is the sole owner of
the Intellectual Property Collateral, except for exclusive and non-exclusive
licenses granted by Borrower to its customers in the ordinary course of business
or where Borrower is a joint owner. Each of the issued Patents is valid and
enforceable, and no part of the Intellectual Property Collateral has been judged
invalid or unenforceable, in whole or in part, and no claim has been made that
any part of the Intellectual Property Collateral violates the rights of any
third party.
5.7 Name: Location of Chief Executive Office. Except as disclosed in
the Schedule, Borrower has not done business under any name other than that
specified on the signature page hereof. The chief executive office of Borrower
is located at the address indicated in Section 10 hereof.
5.8 Litigation. Except as set forth in the Schedule, there are no
actions or proceedings pending by or against Borrower or any Subsidiary before
any court or administrative agency in which an adverse decision could have a
Material Adverse Effect or a material adverse effect on Borrower's interest or
Bank's security interest in the Collateral. Borrower does not have knowledge of
any such pending or threatened actions or proceedings.
5.9 No Material Adverse Change in Financial Statements. All
consolidated financial statements related to Borrower and any Subsidiary that
have been delivered by Borrower to Bank fairly present in all material respects
Borrower's consolidated financial condition as of the date thereof and
Borrower's consolidated results of operations for the period then ended. There
has not been a material adverse change in the consolidated financial condition
of Borrower since the date of the most recent of such financial statements
submitted to Bank.
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5.10 Solvency. Borrower is solvent and able to pay its debts
(including trade debts) as they mature.
5.11 Regulatory Compliance. Borrower and each Subsidiary has met the
minimum funding requirements of ERISA with respect to any employee benefit
plans subject to ERISA. No event has occurred resulting from Borrower's failure
to comply with ERISA that is reasonably likely to result in Borrower's
incurring any liability that could have a Material Adverse Effect. Borrower is
not an "investment company" or a company "controlled" by an "investment
company" within the meaning of the Investment Company Act of 1940. Borrower is
not engaged principally, or as one of the important activities, in the business
of extending credit for the purpose of purchasing or carrying margin stock
(within the meaning of Regulations G, T and U of the Board of Governors of the
Federal Reserve System). Borrower has complied with all the provisions of the
Federal Fair Labor Standards Act. Borrower has not violated any statutes, laws,
ordinances or rules applicable to it, violation of which could have a Material
Adverse Effect.
5.12 Environmental Condition. None of Borrower's or any Subsidiary's
properties or assets has ever been used by Borrower or any Subsidiary or, to
the best of Borrower's knowledge, by previous owners or operators, in the
disposal of, or to produce, store, handle, treat, release, or transport, any
hazardous waste or hazardous substance other than in accordance with applicable
law; to the best of Borrower's knowledge, none of Borrower's properties or
assets has ever been designated or identified in any manner pursuant to any
environmental protection statute as a hazardous waste or hazardous substance
disposal site, or a candidate for closure pursuant to any environmental
protection statute; no lien arising under any environmental protection statute
has attached to any revenues or to any real or personal property owned by
Borrower or any Subsidiary; and neither Borrower nor any Subsidiary has
received a summons, citation, notice, or directive from the Environmental
Protection Agency or any other federal, state or other governmental agency
concerning any action or omission by Borrower or any Subsidiary resulting in
the releasing, or otherwise disposing of hazardous waste or hazardous
substances into the environment.
5.13 Taxes. Borrower and each Subsidiary has filed or caused to be
filed all tax returns required to be filed, and has paid, or has made adequate
provision for the payment of, all taxes reflected therein.
5.14 Subsidiaries. Borrower does not own any stock, partnership
interest or other equity securities of any Person, except for Permitted
Investments.
5.15 Government Consents. Borrower and each Subsidiary has obtained
all consents, approvals and authorizations of, made all declarations or filings
with, and given all notices to, all governmental authorities that are necessary
for the continued operation of Borrower's business as currently conducted.
5.16 Full Disclosure. No representation, warranty or other statement
made by Borrower in any certificate or written statement furnished to Bank
contains any untrue statement of a material fact or omits to state a material
fact necessary in order to make the statements contained in such certificates
or statements not misleading.
5.17 Year 2000. Borrower and its Subsidiaries have reviewed the
areas within their operations and business which could be adversely affected
by, and have developed or are developing a program to address on a timely
basis, the Year 2000 Problem and have made related appropriate inquiry of
material suppliers and vendors, and based on such review and program, the Year
2000 Problem will not have a Material Adverse Effect upon its financial
condition, operations or business as now conducted. "Year 2000 Problem" means
the possibility that any computer applications or equipment used by Borrower
may be unable to recognize and properly perform date sensitive functions
involving certain dates prior to and any dates on or after December 31, 1999.
6. AFFIRMATIVE COVENANTS
Borrower covenants and agrees that, until payment in full of all
outstanding Obligations, and for so long as Bank may have any commitment to
make a Credit Extension hereunder, Borrower shall do all of the following:
6.1 Good Standing. Borrower shall maintain its and each of its
Subsidiaries' corporate existence and good standing in its jurisdiction of
incorporation and maintain qualification in each jurisdiction in which the
failure to so qualify could have a Material Adverse Effect. Borrower shall
maintain, and shall cause each
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of its Subsidiaries to maintain, to the extent consistent with prudent
management of Borrower's business, in force all licenses, approvals and
agreements, the loss of which could have a Material Adverse Effect.
6.2 Government Compliance. Borrower shall meet, and shall cause each
Subsidiary to meet, the minimum funding requirements of ERISA with respect to
any employee benefit plans subject to ERISA. Borrower shall comply, and shall
cause each Subsidiary to comply, with all statutes, laws, ordinances and
government rules and regulations to which it is subject, noncompliance with
which could have a Material Adverse Effect or a material adverse effect on the
Collateral or the priority of Bank's Lien on the Collateral.
6.3 Financial Statements, Reports, Certificates. Borrower shall
deliver to Bank: (a) as soon as available, but in any event within twenty-five
(25) days after the end of each month, a company prepared consolidated balance
sheet and income statement covering Borrower's consolidated operations during
such period, in a form acceptable to Bank and certified by a Responsible
Officer; (b) as soon as available, but in any event within ninety (90) days
after the end of Borrower's fiscal year, audited consolidated financial
statements of Borrower prepared in accordance with GAAP, consistently applied,
together with an unqualified opinion on such financial statements of an
independent certified public accounting firm reasonably acceptable to Bank; (c)
within five (5) days of filing, copies of all statements, reports and notices
sent or made available generally by Borrower to its security holders or to any
holders of Subordinated Debt and all reports on Form 10-K, 10-Q and 8-K filed
with the Securities and Exchange Commission; (d) promptly upon receipt of
notice thereof, a report of any legal actions pending or threatened against
Borrower or any Subsidiary that could result in damages or costs to Borrower or
any Subsidiary of Fifty Thousand Dollars ($50,000) or more; (e) such budgets,
sales projections, operating plans or other financial information as Bank may
reasonably request from time to time; and (f) within twenty-five (25) days of
the last day of each fiscal quarter, a report signed by Borrower, in form
reasonably acceptable to Bank, listing any applications or registrations that
Borrower has made or filed in respect of any Patents, Copyrights or Trademarks
and the status of any outstanding applications or registrations, as well as any
material change in Borrower's intellectual property, including but not limited
to any subsequent ownership right of Borrower in or to any Trademark, Patent or
Copyright not specified in Exhibits A, B, and C of the Intellectual Property
Security Agreement delivered to Bank by each Borrower in connection with this
Agreement.
Within fifteen (15) days after the last day of each month, Borrower shall
deliver to Bank a Borrowing Base Certificate signed by a Responsible Officer in
substantially the form of Exhibit C hereto, together with aged listings of
accounts receivable and accounts payable.
Borrower shall deliver to Bank with the monthly financial statements a
Compliance Certificate signed by a Responsible Officer in substantially the
form of Exhibit D hereto.
Bank shall have a right from time to time hereafter to audit Borrower's
Accounts and appraise Collateral at Borrower's expense, provided that such
audits will be conducted no more often than every twelve (12) months unless an
Event of Default has occurred and is continuing.
6.4 Inventory; Returns. Borrower shall keep all Inventory in good
and marketable condition, free from all material defects. Returns and
allowances, if any, as between Borrower and its account debtors shall be on the
same basis and in accordance with the usual customary practices of Borrower, as
they exist at the time of the execution and delivery of this Agreement.
Borrower shall promptly notify Bank of all returns and recoveries and of all
disputes and claims, where the return, recovery, dispute or claim involves more
than Fifty Thousand Dollars ($50,000).
6.5 Taxes. Borrower shall make, and shall cause each Subsidiary to
make, due and timely payment or deposit of all material federal, state, and
local taxes, assessments, or contributions required of it by law, and will
execute and deliver to Bank, on demand, appropriate certificates attesting to
the payment or deposit thereof; and Borrower will make, and will cause each
Subsidiary to make, timely payment or deposit of all material tax payments and
withholding taxes required of it by applicable laws, including, but not limited
to, those laws concerning F.I.C.A., F.U.T.A., state disability, and local,
state, and federal income taxes, and will, upon request, furnish Bank with
proof satisfactory to Bank indicating that Borrower or a Subsidiary has made
such payments or deposits; provided that Borrower or a Subsidiary need not make
any payment if the amount or validity of such
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payment is contested in good faith by appropriate proceedings and is reserved
against (to the extent required by GAAP) by Borrower.
6.6 Insurance.
(a) Borrower, at its expense, shall keep the Collateral insured
against loss or damage by fire, theft, explosion, sprinklers, and all other
hazards and risks, and in such amounts, as ordinarily insured against by other
owners in similar businesses conducted in the locations where Borrower's
business is conducted on the date hereof. Borrower shall also maintain
insurance relating to Borrower's ownership and use of the Collateral in amounts
and of a type that are customary to businesses similar to Borrower's.
(b) All such policies of insurance shall be in such form, with
such companies, and in such amounts as reasonably satisfactory to Bank. All
such policies of property insurance shall contain a lender's loss payable
endorsement, in a form satisfactory to Bank, showing Bank as an additional loss
payee thereof and all liability insurance policies shall show the Bank as an
additional insured, and shall specify that the insurer must give at least
twenty (20) days notice to Bank before canceling its policy for any reason.
Upon Bank's request, Borrower shall deliver to Bank certified copies of such
policies of insurance and evidence of the payments of all premiums therefor.
All proceeds payable under any such policy shall, at the option of Bank, be
payable to Bank to be applied on account of the Obligations.
6.7 Principal Depository. Borrower shall maintain its principal
depository, investment, and operating accounts with Bank.
6.8 Adjusted Quick Ratio. Borrower shall maintain, as of the last
day of each calendar month, a ratio of Quick Assets to Current Liabilities,
less deferred revenue, of at least 1.50 to 1.00.
6.9 Tangible Net Worth. Borrower shall maintain, as of the last day
of each calendar month, a Tangible Net Worth plus Subordinated Debt of not less
than Twelve Million Five Hundred Thousand Dollars ($12,500,000).
6.10 Liquidity; Debt Service Coverage. Borrower shall maintain, as of
the last calendar day of each month, a balance of unrestricted cash plus eighty
percent (80%) of Eligible Accounts minus the outstanding Advances that is two
(2) times the outstanding balance of (i) the Equipment Advances plus (ii) the
Leasehold Advances. In the alternative, Borrower may maintain a Debt Service
Coverage of at least 2.00 to 1.00 as of the last calendar day of each month.
6.11 Adjusted Total Liabilities-Tangible Net Worth. Borrower shall
maintain, as of the last day of each calendar month, a ratio of Total
Liabilities less deferred revenue to Tangible Net Worth of not more than 1.00
to 1.00.
6.12 Registration of Intellectual Property Rights.
(a) Borrower shall register or cause to be registered on an
expedited basis (to the extent not already registered) with the United States
Patent and Trademark Office or the United States Copyright Office, as
applicable: (i) those intellectual property rights listed on Exhibits A, B and
C to the Intellectual Property Security Agreement delivered to Bank by Borrower
in connection with this Agreement, within thirty (30) days of the date of this
Agreement, (ii) all registerable intellectual property rights in Intellectual
Property Collateral which constitute or give rise to more than five percent
(5%) of Borrower's revenue in any given month which Borrower has developed as
of the date of this Agreement but heretofore failed to register, within thirty
(30) days of the date of this Agreement, and (iii) those additional
intellectual property rights in Intellectual Property Collateral which
constitute or give rise to more than five percent (5%) of Borrower's revenue in
any given month which are developed or acquired by Borrower from time to time
in connection with any Borrower's product, within thirty days of the sale or
licensing of such product to any third party and within thirty days of
Borrower's use of such product (including without limitation major revisions or
additions to the intellectual property rights listed on such Exhibits A, B and
C). Borrower shall give Bank notice of all such applications or registrations.
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(b) Borrower shall execute and deliver such additional instruments
and documents from time to time as Bank shall reasonably request to perfect
Bank's security interest in the Intellectual Property Collateral.
(c) Borrower shall (i) protect, defend and maintain the validity and
enforceability of the Trademarks, Patents and Copyrights, (ii) use its best
efforts to detect infringements of the Trademarks, Patents and Copyrights and
promptly advise Bank in writing of material infringements detected and (iii) not
allow any material Trademarks, Patents or Copyrights to be abandoned, forfeited
or dedicated to the public without the written consent of Bank, which shall not
be unreasonably withheld.
(d) Bank may audit Borrower's Intellectual Property Collateral to
confirm compliance with this Section 6.12, provided such audit may not occur
more often than once per year, unless an Event of Default has occurred and is
continuing. Bank shall have the right, but not the obligation, to take, at
Borrower's sole expense, any actions that Borrower is required under this
Section 6.12 to take but which Borrower fails to take, after fifteen (15) days'
notice to Borrower. Borrower shall reimburse and indemnify Bank for all
reasonable costs and reasonable expenses incurred in the reasonable exercise of
its rights under this Section 6.12.
6.13 Year 2000 Compliance. Borrower shall perform all acts reasonably
necessary to ensure that Borrower and any business in which Borrower holds a
substantial interest become Year 2000 Compliant in a timely manner. Such acts
shall include, without limitation, performing a comprehensive review and
assessment of all Borrower's systems and adopting a detailed plan, with
itemized budget, for the remediation, monitoring and testing of such systems.
Borrower shall also take reasonably necessary steps to ensure that it will not
be materially adversely affected as a result of any customer, supplier or
vendor's failure to become Year 2000 compliant. As used in this paragraph,
"Year 2000 Compliant" shall mean, in regard to any entity, that all software,
hardware, firmware, equipment, goods or systems utilized by or material to the
business operations or financial condition of such entity, will properly perform
date sensitive functions before, during and after the year 2000. Borrower shall
immediately upon request, provide to Bank such certifications or other
evidence of Borrower's compliance with the terms of this paragraph as Bank may
from time to time require.
6.14 Further Assurances. At any time and from time to time Borrower shall
execute and deliver such further instruments and take such further action as
may reasonably be requested by Bank to effect the purposes of this Agreement.
7. NEGATIVE COVENANTS
Borrower covenants and agrees that, so long as any credit hereunder shall
be available and until payment in full of the outstanding Obligations or for so
long as Bank may have any commitment to make any Credit Extensions, Borrower
will not do any of the following:
7.1 Dispositions. Convey, sell, lease, transfer or otherwise dispose
of (collectively, a "Transfer"), or permit any of its Subsidiaries to Transfer,
all or any part of its business or property, other than: (i) Transfers of
Inventory in the ordinary course of business; (ii) Transfers of non-exclusive
licenses and similar arrangements for the use of the property of Borrower or its
Subsidiaries; or (iii) Transfers of surplus, worn-out or obsolete Equipment.
7.2 Change in Business. Engage in any business, or permit any of its
Subsidiaries to engage in any business, other than the businesses currently
engaged in by Borrower and any business substantially similar or related thereto
(or incidental thereto), or suffer a material change of no more than fifty
percent (50%) in Borrower's ownership. Borrower will not, without thirty (30)
days prior written notification to Bank, relocate its chief executive office.
7.3 Mergers or Acquisitions. Merger or consolidate, or permit any of
its Subsidiaries to merge or consolidate, with or into any other business
organization, or acquire, or permit any of its Subsidiaries to acquire, all or
substantially all of the capital stock or property of another Person.
7.4 Indebtedness. Create, incur, assume or be or remain liable with
respect to any Indebtedness, or permit any Subsidiary so to do, other than
Permitted Indebtedness.
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7.5 Encumbrances. Create, incur, assume or suffer to exist any Lien
with respect to any of its property, or assign or otherwise convey any right to
receive income, including the sale of any Accounts, or permit any of its
Subsidiaries so to do, except for Permitted Liens.
7.6 Distributions. Pay any dividends or make any other distribution
or payment on account of or in redemption, retirement or purchase of any
capital stock, except that Borrower may pay dividends to its shareholders in
such amounts as are necessary to cover personal tax liabilities of such
shareholders.
7.7 Investments. Directly or indirectly acquire or own, or make any
Investment in or to any Person, or permit any of its Subsidiaries so to do,
other than Permitted Investments.
7.8 Transactions with Affiliates. Directly or indirectly enter into
or permit to exist any material transaction with any Affiliate of Borrower
except for transactions that are in the ordinary course of Borrower's business,
upon fair and reasonable terms that are no less favorable to Borrower than
would be obtained in an arm's length transaction with a nonaffiliated Person.
7.9 Subordinated Debt. Make any payment in respect of any
Subordinated Debt, or permit any of its Subsidiaries to make any such payment,
except in compliance with the terms of such Subordinated Debt, or amend any
provision contained in any documentation relating to the Subordinated Debt
without Bank's prior written consent.
7.10 Inventory. Store the Inventory with a bailee, warehouseman, or
similar party unless Bank has received a pledge of the warehouse receipt
covering such Inventory. Except for Inventory sold in the ordinary course of
business and except for such other locations as Bank may approve in writing,
Borrower shall keep the Inventory only at the location set forth in Section 10
hereof and such other locations of which Borrower gives Bank prior written
notice and as to which Borrower signs and files a financing statement where
needed to perfect Bank's security interest.
7.11 Compliance. Become an "investment company" controlled by an
"investment company," within the meaning of the Investment Company Act of
1940, or become principally engaged in, or undertake as one of its important
activities, the business of extending credit for the purpose of purchasing or
carrying margin stock, or use the proceeds of any Credit Extension for such
purpose. Fail to meet the minimum funding requirements of ERISA, permit a
Reportable Event or Prohibited Transaction, as defined in ERISA, to occur, fail
to comply with the Federal Fair Labor Standards Act or violate any law or
regulation, which violation could have a Material Adverse Effect or a material
adverse effect on the Collateral or the priority of Bank's Lien on the
Collateral, or permit any of its Subsidiaries to do any of the foregoing.
7.12 Intellectual Property Agreements. Borrower shall not permit the
inclusion in any material contract to which it becomes a party of any
provisions that could or might in any way prevent the creation of a security
interest in Borrower's rights and interests in any property included within the
definition of the Intellectual Property Collateral acquired under such
contracts, except to the extent that such provisions are necessary in
Borrower's exercise of its reasonable business judgment.
8. EVENTS OF DEFAULT
Any one or more of the following events shall constitute an Event
of Default by Borrower under this Agreement:
8.1 Payment Default. If Borrower fails to pay, when due, any of the
Obligations;
8.2 Covenant Default. If Borrower fails to perform any obligation
under Article 6 or violates any of the covenants contained in Article 7 of this
Agreement, or fails or neglects to perform, keep, or observe any other material
term, provision, condition, covenant, or agreement contained in this Agreement,
in any of the Loan Documents, or in any other present or future agreement
between Borrower and Bank and as to any default under such other term,
provision, condition, covenant or agreement that can be cured, has failed to
cure such default within ten (10) days after Borrower receives notice thereof
or any officer of Borrower becomes aware thereof; provided, however, that if
the default cannot by its nature be cured within the ten (10) day period or
cannot after diligent
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attempts by Borrower be cured within such ten (10) day period, and such
default is likely to be cured within a reasonable time, then Borrower shall
have an additional reasonable period (which shall not in any case exceed thirty
(30) days) to attempt to cure such default, and within such reasonable time
period the failure to have cured such default shall not be deemed an Event of
Default (provided that no Credit Extensions will be required to be made during
such cure period);
8.3 Material Adverse Change. If there occurs a material adverse
change in Borrower's business or financial condition, or if there is a material
impairment of the prospect of repayment of any portion of the Obligations or a
material impairment of the value or priority of Bank's security interests in the
Collateral;
8.4 Attachment. If any material portion of Borrower's assets is
attached, seized, subjected to a writ or distress warrant, or is levied upon, or
comes into the possession of any trustee, receiver or person acting in a similar
capacity and such attachment, seizure, writ or distress warrant or levy has not
been removed, discharged or rescinded within ten (10) days, or if Borrower is
enjoined, restrained, or in any way prevented by court order from continuing to
conduct all or any material part of its business affairs, or if a judgment or
other claim becomes a lien or encumbrance upon any material portion of
Borrower's assets, or if a notice of lien, levy, or assessment is filed of
record with respect to any of Borrower's assets by the United States Government,
or any department, agency, or instrumentality thereof, or by any state, county,
municipal, or governmental agency, and the same is not paid within ten (10) days
after Borrower receives notice thereof, provided that none of the foregoing
shall constitute an Event of Default where such action or event is stayed or an
adequate bond has been posted pending a good faith contest by Borrower (provided
that no Credit Extensions will be required to be made during such cure period);
8.5 Insolvency. If Borrower becomes insolvent, or if an Insolvency
Proceeding is commenced by Borrower, or if an Insolvency Proceeding is commenced
against Borrower and is not dismissed or stayed within ten (10) days (provided
that no Credit Extensions will be made prior to the dismissal of such Insolvency
Proceeding);
8.6 Other Agreements. If there is an uncured default in any
agreement to which Borrower is a party with a third party or parties resulting
in a right by such third party or parties, whether or not exercised, to
accelerate the maturity of any Indebtedness in an amount in excess of One
Hundred Thousand Dollars ($100,000) or that could have a Material Adverse
Effect;
8.7 Subordinated Debt. If Borrower makes any payment on account of
Subordinated Debt, except to the extent such payment is allowed under any
subordination agreement entered into with Bank;
8.8 Judgments. If a judgment or judgments for the payment of money
in an amount, individually or in the aggregate, of at least One Hundred Thousand
Dollars ($100,000) shall be rendered against Borrower and shall remain
unsatisfied and unstayed for a period of ten (10) days (provided that no Credit
Extensions will be made prior to the satisfaction or stay of such judgment); or
8.9 Misrepresentations. If any material misrepresentation or
material misstatement exists now or hereafter in any warranty or representation
set forth herein or in any certificate delivered to Bank by any Responsible
Officer pursuant to this Agreement or to induce Bank to enter into this
Agreement or any other Loan Document.
8.10 Guaranty. Any guaranty of all or a portion of the Obligations
ceases for any reason to be in full force and effect, or any guarantor fails to
perform any obligation under any guaranty of all or a portion of the
Obligations, or any guarantor revokes or purports to revoke any guaranty of the
Obligations, or any material misrepresentation or material misstatement exists
now or hereafter in any warranty or representation set forth in any guaranty of
all or a portion of the Obligations or in any certificate delivered to Bank in
connection with such guaranty.
9. BANK'S RIGHTS AND REMEDIES
9.1 Rights and Remedies. Upon the occurrence and during the
continuance of an Event of Default, Bank may, at its election, without notice of
its election and without demand, do any one or more of the following, all of
which are authorized by Borrower:
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<PAGE> 20
(a) Declare all Obligations, whether evidenced by this
Agreement, by any of the other Loan Documents, or otherwise, immediately due
and payable (provided that upon the occurrence of an Event of Default described
in Section 8.5 all Obligations shall become immediately due and payable without
any action by Bank);
(b) Cease advancing money or extending credit to or for the
benefit of Borrower under this Agreement or under any other agreement between
Borrower and Bank;
(c) Demand that Borrower (i) deposit cash with Bank in an
amount equal to the amount of any Letters of Credit remaining undrawn, as
collateral security for the repayment of any future drawings under such Letters
of Credit, and Borrower shall forthwith deposit and pay such amounts, and (ii)
pay in advance all Letters of Credit fees scheduled to be paid or payable over
the remaining term of the Letters of Credit;
(d) Settle or adjust disputes and claims directly with account
debtors for amounts, upon terms and in whatever order that Bank reasonably
considers advisable;
(e) Without notice to or demand upon Borrower, make such
payments and do such acts as Bank considers necessary or reasonable to protect
its security interest in the Collateral. Borrower agrees to assemble the
Collateral if Bank so requires, and to make the Collateral available to Bank as
Bank may designate. Borrower authorizes Bank to enter the premises where the
Collateral is located, to take and maintain possession of the Collateral, or
any part of it, and to pay, purchase, contest, or compromise any encumbrance,
charge, or lien which in Bank's determination appears to be prior or superior
to its security interest and to pay all expenses incurred in connection
therewith. With respect to any of Borrower's owned premises, Borrower hereby
grants Bank a license to enter into possession of such premises and to occupy
the same, without charge, in order to exercise any of Bank's rights or remedies
provided herein, at law, in equity, or otherwise;
(f) Without notice to Borrower set off and apply to the
Obligations any and all (i) balances and deposits of Borrower held by Bank, or
(ii) indebtedness at any time owing to or for the credit or the account of
Borrower held by Bank;
(g) Ship, reclaim, recover, store, finish, maintain, repair,
prepare for sale, advertise for sale, and sell (in the manner provided for
herein) the Collateral. Bank is hereby granted a license or other right, solely
pursuant to the provisions of this Section 9.1, to use, without charge,
Borrower's labels, patents, copyrights, rights of use of any name, trade
secrets, trade names, trademarks, service marks, and advertising matter, or any
property of a similar nature, as it pertains to the Collateral, in completing
production of, advertising for sale, and selling any Collateral and, in
connection with Bank's exercise of its rights under this Section 9.1,
Borrower's rights under all licenses and all franchise agreements shall inure
to Bank's benefit;
(h) Sell the Collateral at either a public or private sale, or
both, by way of one or more contracts of transactions, for cash or on terms, in
such manner and at such places (including Borrower's premises) as is
commercially reasonable, and apply any proceeds to the Obligations in whatever
manner or order Bank deems appropriate;
(i) Bank may credit bid and purchase at any public sale; and
(j) Any deficiency that exists after disposition of the
Collateral as provided above will be paid immediately by Borrower.
9.2 Power of Attorney. Effective only upon the occurrence and during
the continuance of an Event of Default, Borrower hereby irrevocably appoints
Bank (and any of Bank's designated officers, or employees) as Borrower's true
and lawful attorney to: (a) send requests for verification of Accounts or
notify account debtors of Bank's security interest in the Accounts; (b) endorse
Borrower's name on any checks or other forms of payment or security that may
come into Bank's possession; (c) sign Borrower's name on any invoice or bill of
lading relating to any Account, drafts against account debtors, schedules and
assignments of Accounts, verifications of Accounts, and notices to account
debtors; (d) dispose of any Collateral in connection with the exercise of
Bank's remedies under Article 8 of the California Uniform Commercial Code; (e)
make, settle, and adjust all claims under and decisions with respect to
Borrower's policies of insurance; (f) settle and adjust disputes and claims
respecting the accounts
19
<PAGE> 21
directly with account debtors, for amounts and upon terms which Bank determines
to be reasonable; (g) to modify, in its sole discretion, any intellectual
property security agreement entered into between Borrower and Bank without
first obtaining Borrower's approval of or signature to such modification by
amending Exhibits A, B, and C, thereof, as appropriate, to include reference to
any right, title or interest in any Copyrights, Patents or Trademarks acquired
by Borrower after the execution hereof or to delete any reference to any right,
title or interest in any Copyrights, Patents or Trademarks in which Borrower no
longer has or claims to have any right, title or interest; and (h) to file, in
its sole discretion, one or more financing or continuation statements and
amendments thereto, relative to any of the Collateral without the signature of
Borrower where permitted by law; provided Bank may exercise such power of
attorney to sign the name of Borrower on any of the documents described in
Section 4.2 regardless of whether an Event of Default has occurred. The
appointment of Bank as Borrower's attorney in fact, and each and every one of
Bank's rights and powers, being coupled with an interest, is irrevocable until
all of the Obligations have been fully repaid and performed and Bank's
obligation to provide advances hereunder is terminated.
9.3 Accounts Collection. At any time from the date of this
Agreement, Bank may notify any Person owing funds to Borrower of Bank's
security interest in such funds and verify the amount of such Account. Borrower
shall collect all amounts owing to Borrower for Bank, receive in trust all
payments as Bank's trustee, and immediately deliver such payments to Bank in
their original form as received from the account debtor, with proper
endorsements for deposit.
9.4 Bank Expenses. If Borrower fails to pay any amounts or furnish
any required proof of payment due to third persons or entities within ten (10)
days of when such payment is due, to the extent required under the terms of
this Agreement, then Bank may do any or all of the following: (a) make payment
of the same or any part thereof; (b) set up such reserves under the Revolving
Facility as Bank deems necessary to protect Bank from the exposure created by
such failure; or (c) obtain and maintain insurance policies of the type
discussed in Section 6.6 of this Agreement, and take any action with respect to
such policies as Bank deems prudent. Any amounts so paid or deposited by Bank
shall constitute Bank Expenses, shall be immediately due and payable, and shall
bear interest at the then applicable rate hereinabove provided, and shall be
secured by the Collateral. Any payments made by Bank shall not constitute an
agreement by Bank to make similar payments in the future or a waiver by Bank of
any Event of Default under this Agreement.
9.5 Bank's Liability for Collateral. So long as Bank complies with
reasonable banking practices, Bank shall not in any way or manner be liable or
responsible for: (a) the safekeeping of the Collateral; (b) any loss or damage
thereto occurring or arising in any manner or fashion from any cause; (c) any
diminution in the value thereof; or (d) any act or default of any carrier,
warehouseman, bailee, forwarding agency, or other person whomsoever. All risk
of loss, damage or destruction of the Collateral shall be borne by Borrower.
9.6 Remedies Cumulative. Bank's rights and remedies under this
Agreement, the Loan Documents, and all other agreements shall be cumulative.
Bank shall have all other rights and remedies not inconsistent herewith as
provided under the Code, by law, or in equity. No exercise by Bank of one right
or remedy shall be deemed an election, and no waiver by Bank or any Event of
Default on Borrower's part shall be deemed a continuing waiver. No delay by
Bank shall constitute a waiver, election, or acquiescence by it. No waiver by
Bank shall be effective unless made in a written document signed on behalf of
Bank and then shall be effective only in the specific instance and for the
specific purpose for which it was given.
9.7 Demand; Protest. Borrower waives demand, protest, notice of
protest, notice of default or dishonor, notice of payment and nonpayment,
notice of any default, nonpayment at maturity, release, compromise, settlement,
extension, or renewal of accounts, documents, instruments, chattel paper, and
guarantees at any time held by Bank on which Borrower may in any way be liable.
10. NOTICES
Unless otherwise provided in this Agreement, all notices or demands
by any party relating to this Agreement or any other agreement entered into in
connection herewith shall be in writing and (except for financial statements
and other informational documents which may be sent by first-class mail,
postage prepaid) shall be personally delivered or sent by a recognized
overnight delivery service, certified mail, postage prepaid, return receipt
requested, or by telefacsimile to Borrower or to Bank, as the case may be, at
its addresses set forth below:
20
<PAGE> 22
If to Borrower: bsquare corporation
3633 136th Place SE, Suite 100
Bellevue, WA 98006
Attn: Ms. Leila Kirske
FAX: (425) 519-5999
If to Bank: Imperial Bank
226 Airport Parkway
San Jose, CA 95110-1024
Attn: Corporate Banking Center
FAX: (408) 451-8523
with a copy to: Imperial Bank
777 108th Avenue NE, Suite 1670
Bellevue, WA 98004
Attn: Mr. Jim Ellison
FAX: (425) 454-6224
The parties hereto may change the address at which they are to receive
notices hereunder, by notice in writing in the foregoing manner given to the
other.
11. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER
This Agreement shall be governed by, and construed in accordance
with, the internal laws of the State of California, without regard to
principles of conflicts of law. Each of Borrower and Bank hereby submits to the
exclusive jurisdiction of the state and Federal courts located in the County of
Santa Clara, State of California. BORROWER AND BANK EACH HEREBY WAIVE THEIR
RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR
ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY OF THE TRANSACTIONS
CONTEMPLATED THEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY
CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS. EACH PARTY RECOGNIZES AND
AGREES THAT THE FOREGOING WAIVER CONSTITUTES A MATERIAL INDUCEMENT FOR IT TO
ENTER INTO THIS AGREEMENT. EACH PARTY REPRESENTS AND WARRANTS THAT IT HAS
REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL AND THAT IT KNOWINGLY AND
VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL
COUNSEL.
12. GENERAL PROVISIONS
12.1 Successors and Assigns. This Agreement shall bind and inure to
the benefit of the respective successors and permitted assigns of each of the
parties; provided, however, that neither this Agreement nor any rights
hereunder may be assigned by Borrower without Bank's prior written consent,
which consent may be granted or withheld in Bank's sole discretion. Bank shall
have the right without the consent of or notice to Borrower to sell, transfer,
negotiate, or grant participation in all or any part of, or any interest in,
Bank's obligations, rights and benefits hereunder.
12.1 Indemnification. Borrower shall defend, indemnify and hold
harmless Bank and its officers, employees, and agents against: (a) all
obligations, demands, claims, and liabilities claimed or asserted by any other
party in connection with the transactions contemplated by this Agreement; and
(b) all losses or Bank Expenses in any way suffered, incurred, or paid by Bank
as a result of or in any way arising out of, following, or consequential to
transactions between Bank and Borrower whether under this Agreement, or
otherwise (including without limitation reasonable attorneys fees and
expenses), except for losses caused by Bank's gross negligence or willful
misconduct.
12.3 Time of Essence. Time is of the essence for the performance of
all obligations set forth in this Agreement.
21
<PAGE> 23
12.4 Severability of Provisions. Each provision of this Agreement
shall be severable from every other provision of this Agreement for the purpose
of determining the legal enforceability of any specific provision.
12.5 Amendments in Writing, Integration. This Agreement cannot be
amended or terminated orally. All prior agreements, understandings,
representations, warranties, and negotiations between the parties hereto with
respect to the subject matter of this Agreement, if any, are merged into this
Agreement and the Loan Documents.
12.6 Counterparts. This Agreement may be executed in any number of
counterparts and by different parties on separate counterparts, each of which,
when executed and delivered, shall be deemed to be an original, and all of
which, when taken together, shall constitute but one and the same Agreement.
12.7 Survival. All covenants, representations and warranties made in
this Agreement shall continue in full force and effect so long as any
Obligations remain outstanding. The obligations of Borrower to indemnify Bank
with respect to the expenses, damages, losses, costs and liabilities described
in Section 12.2 shall survive until all applicable statute of limitations
periods with respect to actions that may be brought against Bank have run.
12.8 Confidentiality. In handling any confidential information Bank
shall exercise the same degree of care that it exercises with respect to its own
proprietary information of the same types to maintain the confidentiality of any
non-public information thereby received or received pursuant to this Agreement
except that disclosure of such information may be made (i) to the subsidiaries
or affiliates of Bank in connection with their present or prospective business
relations with Borrower, (ii) to prospective transferees or purchasers of any
interest in the Loans, provided that they have entered into a comparable
confidentiality agreement in favor of Borrower and have delivered a copy to
Borrower, (iii) as required by law, regulations, rule or order, subpoena,
judicial order or similar order, (iv) as may be required in connection with the
examination, audit or similar investigation of Bank and (v) as Bank may
determine in connection with the enforcement of any remedies hereunder.
Confidential information hereunder shall not include information that either:
(a) is in the public domain or in the knowledge or possession of Bank; or (b) is
disclosed to Bank by a third party, provided Bank does not have actual knowledge
that such third party is prohibited from disclosing such information.
12.9 Effect of Amendment and Restatement. This Agreement is intended
to and does completely amend and restate, without novation, the Original
Agreement. All security interests granted under the Original Agreement are
hereby confirmed and ratified and shall continue to secure all Obligations under
this Agreement.
13. JUDICIAL REFERENCE
(a) Other than (i) nonjudicial foreclosure and all matters in
connection therewith regarding security interests in real or personal property;
or (ii) the appointment of a receiver, or the exercise of other provisional
remedies (any and all of which may be initiated pursuant to applicable law),
each controversy, dispute or claim between the parties arising out of or
relating to this document, which controversy, dispute or claim is not settled in
writing within thirty (30) days after the "Claim Date" (defined as the date on
which a party subject to this Agreement gives written notice to all other
parties that a controversy, dispute or claim exists), will be settled by a
reference proceeding in California in accordance with the provisions of Section
638 et seq. of the California Code of Civil Procedure, or their successor
section ("CCP"), which shall constitute the exclusive remedy for the settlement
of any controversy, dispute or claim concerning this Agreement, including
whether such controversy, dispute or claim is subject to the reference
proceeding and except as set forth above, the parties waive their rights to
initiate any legal proceedings against each other in any court or jurisdiction
other than the Superior Court in the County where the Real Property, if any, is
located or Los Angeles County if none (the "Court"). The referee shall be a
retired Judge of the Court selected by mutual agreement of the parties, and if
they cannot so agree within forty-five (45) days after the Claim Date, the
referee shall be promptly selected by the Presiding Judge of the Court (or his
representative). The referee shall be appointed to sit as a temporary judge,
with all of the powers for a temporary judge, as authorized by law, and upon
selection should take and subscribe to the oath of office as provided for in
Rule 244 of the California Rules of the Court (or any subsequently enacted
Rule). Each party shall have one
22
<PAGE> 24
peremptory challenge pursuant to CCP Section 170.6. The referee shall (a) be
requested to set the matter for hearing within sixty (60) days after the date
of selection of the referee and (b) try any and all issues of law or fact and
report a statement of decision upon them, if possible, within ninety (90) days
of the Claim Date. Any decision rendered by the referee will be final, binding
and conclusive and judgment shall be entered pursuant to CCP Section 644 in any
court in the State of California having jurisdiction. Any party may apply for a
reference proceeding at any time after thirty (30) days following notice to any
other party of the nature of the controversy, dispute or claim, by filing a
petition for a hearing and/or trial. All discovery permitted by this Agreement
shall be completed no later than fifteen (15) days before the first hearing
date established by the referee. The referee may extend such period in the event
of a party's refusal to provide requested discovery or unavailability of a
witness due to absence or illness. No party shall be entitled to "priority" in
conducting discovery. Depositions may be taken by either party upon seven (7)
days written notice, and request for production or inspection of documents which
cannot be resolved by the parties shall be submitted to the referee as provided
herein, the Superior Court is empowered to issue temporary and/or provisions
remedies, as appropriate.
(b) Except as expressly set forth in this Agreement, the referee shall
determine the manner in which the reference proceeding is conducted including
the time and place of all hearings, the order of presentation of evidence, and
all other questions that arise with respect to the course of the reference
proceeding. All proceedings and hearings conducted before the referee, except
for trial, shall be conducted without a court reporter except that when any
party so requests, a court reporter will be used at any hearing conducted
before the referee. The party making such a request shall have the obligation
to arrange for and pay for the court reporter. The costs of the court reporter
at the trial shall be borne equally by the parties.
(c) The referee shall be required to determine all issues in accordance
with existing case law and the statutory laws of the State of California. The
rules of evidence applicable to proceedings at law in the State of California
will be applicable to the reference proceeding. The referee shall be empowered
to enter equitable as well as legal relief, to provide all temporary and/or
provisional remedies and to enter equitable orders that will be binding upon the
parties. The referee shall issue a single judgment at the close of the reference
proceeding which shall dispose of all of the claims of the parties that are the
subject of the reference. The parties hereto expressly reserve the right to
contest or appeal from the final judgment or any appealable order or appealable
judgment entered by the referee. The parties hereto expressly reserve the right
to findings of fact, conclusions of laws, a written statement of decision, and
the right to move for a new trial or a different judgment, which new trial, if
granted, is also to be a reference proceeding under this provision.
(d) In the event that the enabling legislation which provides for
appointment of a referee is repealed (and no successor statute is enacted), any
dispute between the parties that would otherwise be determined by the reference
procedure herein described will be resolved and determined by arbitration. The
arbitration will be conducted by a retired judge of the Court, in accordance
with the California Arbitration Act, Section 1280 through Section 1294.2 of the
CCP as amended from time to time. The limitations with respect to discovery as
set forth hereinabove shall apply to any such arbitration proceeding.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first above written.
BSQUARE CORPORATION
By: /s/ BRIAN V. TURNER
--------------------------------
Title: Chief Financial Officer
-----------------------------
IMPERIAL BANK
By: /s/ [ILLEGIBLE]
--------------------------------
Title: SVP
-----------------------------
23
<PAGE> 25
EXHIBIT A
The Collateral shall consist of all right, title and interest of Borrower
in and to the following:
(a) All goods and equipment now owned or hereafter acquired, including,
without limitation, all machinery, fixtures, vehicles (including motor vehicles
and trailers), and any interest in any of the foregoing, and all attachments,
accessories, accessions, replacements, substitutions, additions, and
improvements to any of the foregoing, wherever located;
(b) All inventory, now owned or hereafter acquired, including, without
limitation, all merchandise, raw materials, parts, supplies, packing and
shipping materials, work in process and finished products including such
inventory as is temporarily out of Borrower's custody or possession or in
transit and including any returns upon any accounts or other proceeds, including
insurance proceeds, resulting from the sale or disposition of any of the
foregoing and any documents of title representing any of the above, and
Borrower's Books relating to any of the foregoing;
(c) All contract rights and general intangibles now owned or hereafter
acquired, including, without limitation, goodwill, trademarks, servicemarks,
trade styles, trade names, patents, patent applications, leases, license
agreements, franchise agreements, blueprints, drawings, purchase orders,
customer lists, route lists, infringements, claims, computer programs, computer
discs, computer tapes, literature, reports, catalogs, design rights, income tax
refunds, payments of insurance and rights to payment of any kind;
(d) All now existing and hereafter arising accounts, contract rights,
royalties, license rights and all other forms of obligations owing to Borrower
arising out of the sale or lease of goods, the licensing of technology or the
rendering of services by Borrower, whether or not earned by performance, and
any and all credit insurance, guaranties, and other security therefor, as well
as all merchandise returned to or reclaimed by Borrower and Borrower's Books
relating to any of the foregoing.
(e) All documents, cash, deposit accounts, securities, financial assets,
investment property, securities accounts, securities entitlements, letters of
credit, certificates of deposit, instruments and chattel paper now owned or
hereafter acquired and Borrower's Books relating to any of the foregoing.
24
<PAGE> 26
EXHIBIT B
LOAN PAYMENT/ADVANCE TELEPHONE REQUEST FORM
DEADLINE FOR SAME DAY PROCESSING IS 3:00 P.M., P.S.T.
TO: EMERGING GROWTH INDUSTRIES DATE:
----------------
FAX#: (650) 843-6969 TIME:
----------------
FROM:
----------------------------------------------------------------------
CLIENT NAME (BORROWER)
REQUESTED BY:
--------------------------------------------------------------
AUTHORIZED SIGNER'S NAME
AUTHORIZED SIGNATURE:
------------------------------------------------------
PHONE NUMBER:
-------------------------------------------------------------
FROM ACCOUNT # TO ACCOUNT #
-------------------- -------------------------
<TABLE>
<CAPTION>
REQUESTED TRANSACTION TYPE REQUEST DOLLAR AMOUNT
- -------------------------- ---------------------
<S> <C>
PRINCIPAL INCREASE (ADVANCE) $
--------------------------
PRINCIPAL PAYMENT (ONLY) $
--------------------------
INTEREST PAYMENT (ONLY) $
--------------------------
PRINCIPAL AND INTEREST (PAYMENT) $
--------------------------
</TABLE>
OTHER INSTRUCTIONS:
--------------------------------------------------------
- ---------------------------------------------------------------------------
All representations and warranties of Borrower stated in the Amended and
Restated Loan Agreement are true, correct and complete in all material respects
as of the date of the telephone request for and Advance confirmed by this
Borrowing Certificate; provided, however, that those representations and
warranties expressly referring to another date shall be true, correct and
complete in all material respects as of such date.
BANK USE ONLY
TELEPHONE REQUEST:
- -----------------
The following person is authorized to request the loan payment transfer/loan
advance on the advance designated account and is known to me.
- --------------------------------- ------------------------------------
Authorized Requester Phone #
- --------------------------------- ------------------------------------
Authorized Requester Phone #
------------------------------
Authorized Signature (Bank)
25
<PAGE> 27
EXHIBIT C
BORROWING BASE CERTIFICATE
Borrower: BSQUARE CORPORATION Lender: Imperial Bank
Commitment Amount: $5,000,000
<TABLE>
<S> <C> <C>
ACCOUNTS RECEIVABLE
1. Accounts Receivable Book Value as of $
--------- ----------
2. Additions (please explain on reverse) $
----------
3. TOTAL ACCOUNTS RECEIVABLE $
----------
ACCOUNTS RECEIVABLE DEDUCTIONS (without duplication) $
----------
4. Amounts over 90 days due $
----------
5. Balance of 25% over 90 day accounts $
----------
6. Concentration Limits $
----------
7. Foreign Accounts $
----------
8. Governmental Accounts $
----------
9. Contra Accounts $
----------
10. Promotion or Demo Accounts $
----------
11. Intercompany/Employee Accounts $
----------
12. Other (please explain on reverse) $
----------
13. TOTAL ACCOUNTS RECEIVABLE DEDUCTIONS $
----------
14. Eligible Accounts (#3 minus #13) $
----------
15. LOAN VALUE OF ACCOUNTS (80% OF #14) $
----------
BALANCES
16. Maximum Loan Amount $5,000,000
17. Total Funds Available [Lesser of #16 or #15] $
----------
18. Present balance owing on Line of Credit $
----------
19. Outstanding under Sublimits (Letter of Credit) $
----------
20. RESERVE POSITION (#17 minus #18 and #19) $
----------
</TABLE>
The undersigned represents and warrants that the foregoing is true, complete and
correct, and that the information reflected in this Borrowing Base Certificate
complies with the representations and warranties set forth in the Amended and
Restated Loan and Security Agreement between the undersigned and Imperial Bank.
COMMENTS: BANK USE ONLY
Rcv'd by:
-----------------------
BSQUARE CORPORATION Auth. Signer
Date:
---------------------------
By:
------------------------
Authorized Signer Verified:
-----------------------
Auth. Signer
Date:
---------------------------
--------------------------------
26
<PAGE> 28
EXHIBIT D
COMPLIANCE CERTIFICATE
TO: IMPERIAL BANK
FROM: BSQUARE CORPORATION
The undersigned authorized officer of bsquare corporation hereby certifies
that in accordance with the terms and conditions of the Amended and Restated
Loan and Security Agreement between Borrower and Bank (the "Agreement"),
(i) Borrower is in complete compliance for the period ending __________ with
all required covenants except as noted below and (ii) all representations and
warranties of Borrower stated in the Agreement are true and correct in all
material respects as of the date hereof. Attached herewith are the required
documents supporting the above certification. The Officer further certifies that
these are prepared in accordance with Generally Accepted Accounting Principles
(GAAP) and are consistently applied from one period to the next except as
explained in an accompanying letter or footnotes.
PLEASE INDICATE COMPLIANCE STATUS BY CIRCLING YES/NO UNDER "COMPLIES" COLUMN.
<TABLE>
<CAPTION>
REPORTING COVENANT REQUIRED COMPLIES
- ------------------ -------- --------
<S> <C> <C> <C>
Monthly financial statements Monthly within 25 days Yes No
Annual (CPA Audited) FYE within 90 days Yes No
A/R & A/P Agings, Borrowing Base Cert. Monthly within 15 days Yes No
A/R Audit Initial and Annual Yes No
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL COVENANT REQUIRED ACTUAL COMPLIES
- ------------------ -------- ------ --------
<S> <C> <C> <C> <C>
Maintain on a Monthly Basis: 2.0:1.0 ____:1.0 Yes No
Minimum Liquidity* 2.0:1.0 ____:1.0 Yes No
Minimum Debt Service Coverage* 1.5:1.0 ____:1.0 Yes No
Minimum Adjusted Quick Ratio $12,500,000 $_______ Yes No
Minimum Tangible Net Worth
Maximum Adjusted Total Liabilities to
Tangible Net Worth 1.0:1.0 ____:1.0 Yes No
</TABLE>
*Borrower shall maintain either a Minimum Liquidity or a Minimum Debt Service
Coverage.
COMMENTS REGARDING EXCEPTIONS: SEE ATTACHED. BANK USE ONLY
Sincerely, Received by:
-------------------
AUTHORIZED SIGNER
Date:
- -------------------------------------------- --------------------------
SIGNATURE
Verified:
- -------------------------------------------- ----------------------
TITLE AUTHORIZED SIGNER
Date:
- -------------------------------------------- --------------------------
DATE
Compliance Status: Yes No
27
<PAGE> 29
AGREEMENT TO PROVIDE INSURANCE
TO: IMPERIAL BANK Date: July 1, 1999
9920 S. La Cienega, Ste. 628
Inglewood, CA 90301 Borrower: BSQUARE CORPORATION
In consideration of a loan in the amount of $10,000,000, secured by all
tangible personal property including inventory and equipment.
I/We agree to obtain adequate insurance coverage to remain in force during
the term of the loan.
I/We also agree to advise the below named agent to add Imperial Bank as
lender's loss payable on the new or existing insurance policy, and to furnish
Bank at above address with a copy of said policy/endorsements and any subsequent
renewal policies.
I/We understand that the policy must contain:
1. Fire and extended coverage in an amount sufficient to cover:
(a) The amount of the loan, OR
(b) All existing encumbrances, whichever is greater,
But not in excess of the replacement value of the improvements on the real
property.
2. Lender's "Loss Payable" Endorsement Form 438 BFU in favor of Imperial
Bank, or any other form acceptable to Bank.
INSURANCE INFORMATION
Insurance Co./Agent Telephone No.:
Agent's Address:
Signature of Obligor: /s/ [ILLEGIBLE]
-----------------------------
Signature of Obligor:
-----------------------------
FOR BANK USE ONLY
INSURANCE VERIFICATION: Date:
-----------------------
Person Spoken to:
-----------------------------------
Policy Number:
--------------------------------------
Effective Form: To:
--------- ------------------------
Verified By:
----------------------------------------
<PAGE> 30
IMPERIAL BANK
CALIFORNIA'S BUSINESS BANKS AUTOMATIC DEBIT AUTHORIZATION
MEMBER FDIC (EQUIPMENT LOAN)
To: IMPERIAL BANK
Re: LOAN #
-----------------------------------------
You are hereby authorized and instructed to charge account No. 36001283 in the
name of BSQUARE CORPORATION for principal and interest payments due on the
above referenced loan as set forth below and credit the loan referenced above.
[X] 6 Debit each interest payment as it becomes due according to the
terms of the note and any renewals or amendments thereof.
[X] 7 Debit each principal payment as it becomes due according to
the terms of the note and any renewals or amendments thereof.
This authorization is to remain in full force and effect until revoked in
writing.
Borrower Signature Date
/s/ [ILLEGIBLE] 7/1/99
- --------------------- -------------------------
<PAGE> 31
IMPERIAL BANK
CALIFORNIA'S BUSINESS BANKS AUTOMATIC DEBIT AUTHORIZATION
MEMBER FDIC (REVOLVER)
To: IMPERIAL BANK
Re: LOAN #
-----------------------------------------
You are hereby authorized and instructed to charge account No. 36001283 in the
name of BSQUARE CORPORATION for principal and interest payments due on the
above referenced loan as set forth below and credit the loan referenced above.
[X] 4 Debit each interest payment as it becomes due according to the
terms of the note and any renewals or amendments thereof.
[ ] 5 Debit each principal payment as it becomes due according to
the terms of the note and any renewals or amendments thereof.
This authorization is to remain in full force and effect until revoked in
writing.
Borrower Signature Date
/s/ [ILLEGIBLE] 7/1/99
- ------------------------------ -------------------
<PAGE> 32
IMPERIAL BANK
CALIFORNIA'S BUSINESS BANKS AUTOMATIC DEBIT AUTHORIZATION
MEMBER FDIC (LEASEHOLD FACILITY)
To: IMPERIAL BANK
Re: LOAN #
-----------------------------------------
You are hereby authorized and instructed to charge account No. 36001283 in the
name of BSQUARE CORPORATION for principal and interest payments due on the
above referenced loan as set forth below and credit the loan referenced above.
[X] 8 Debit each interest payment as it becomes due according to the
terms of the note and any renewals or amendments thereof.
[X] 9 Debit each principal payment as it becomes due according to
the terms of the note and any renewals or amendments thereof.
This authorization is to remain in full force and effect until revoked in
writing.
Borrower Signature Date
/s/ [ILLEGIBLE] 7/1/99
- ----------------------- -----------------------
<PAGE> 33
IMPERIAL BANK
MEMBER FDIC
ITEMIZATION OF AMOUNT FINANCED
DISBURSEMENT INSTRUCTIONS
(REVOLVER)
<TABLE>
<S> <C>
Name(s): BSQUARE CORPORATION Date: July 1, 1999
$ paid to you directly by Cashiers Check No.
$ 5,000,000.00 credited to deposit account No. 36001283 when Advances are requested or by
wire transfer or cashiers check
$ amounts paid to Bank for
Amounts paid to others on your behalf:
$ to Imperial Bank for Loan Fee
$ to Imperial Bank for Document Fee
$ to Imperial Bank for accounts receivable audit
(estimate)
$ to Bank counsel fees and expenses
$ to
$ to
$ 5,000,000.00 TOTAL (AMOUNT FINANCED)
</TABLE>
Upon consummation of this transaction, this document will also serve as the
authorization for Imperial Bank to disburse the loan proceeds as stated above.
/s/ [ILLEGIBLE]
- -------------------------------- --------------------------------
Signature Signature
<PAGE> 34
IMPERIAL BANK
MEMBER FDIC
ITEMIZATION OF AMOUNT FINANCED
DISBURSEMENT INSTRUCTIONS
(LEASEHOLD FACILITY)
<TABLE>
<S> <C>
Name(s): BSQUARE CORPORATION Date: July 1, 1999
$ paid to you directly by Cashiers Check No.
$ 4,000,000.00 credited to deposit account No. 36001283 when Advances are requested or by
wire transfer or cashiers check
$ amounts paid to Bank for
Amounts paid to others on your behalf:
$ to Imperial Bank for Loan Fee
$ to Imperial Bank for Document Fee
$ to Bank counsel fees and expenses
$ to
$ to
$ 4,000,000.00 TOTAL (AMOUNT FINANCED)
</TABLE>
Upon consummation of this transaction, this document will also serve as the
authorization for Imperial Bank to disburse the loan proceeds as stated above.
/s/ [ILLEGIBLE]
- -------------------------------- --------------------------------
Signature Signature
<PAGE> 35
IMPERIAL BANK
MEMBER FDIC
ITEMIZATION OF AMOUNT FINANCED
DISBURSEMENT INSTRUCTIONS
(EQUIPMENT LOAN)
<TABLE>
<S> <C>
Name(s): BSQUARE CORPORATION Date: July 1, 1999
$ paid to you directly by Cashiers Check No.
$ 1,000,000.00 credited to deposit account No. 36001283 when Advances are requested or by
-------- wire transfer or cashiers check
$ amounts paid to Bank for
Amounts paid to others on your behalf:
$ to Imperial Bank for Loan Fee
$ to Imperial Bank for Document Fee
$ to Bank counsel fees and expenses
$ to
$ to
$ 1,000,000.00 TOTAL (AMOUNT FINANCED)
</TABLE>
Upon consummation of this transaction, this document will also serve as the
authorization for Imperial Bank to disburse the loan proceeds as stated above.
/s/ [ILLEGIBLE]
- -------------------------------- --------------------------------
Signature Signature
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports and to all references to our Firm included in or made part of this
registration statement and prospectus.
/s/ ARTHUR ANDERSEN LLP
Seattle, Washington
September 16, 1999
