<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 8, 1999
REGISTRATION NO. 333-85351
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 4
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. [ ]
------------------------
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 OCTOBER 8, 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."
We are selling 4,000,000 shares of our common stock, and the underwriters
have an option to purchase a maximum of 600,000 additional shares from selling
shareholders to cover over-allotments of shares.
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" ON PAGE 6.
<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
CONSUMER INTERNET APPLIANCES*
PALM-SIZE PCs
GAMING SYSTEMS
*Consumer Internet appliances
include kiosk terminals and
vehicle navigational devices
<PAGE> 4
INSIDE GATEFOLD
[Text]
BSQUARE CORPORATION
BSQUARE - WINDOWS CE SOFTWARE PRODUCTS AND SERVICES PROVIDER
BSQUARE provides:
o software engineering services to Microsoft to help develop the Windows CE
operating system and related integration tools
o comprehensive software products and services to original equipment
manufacturers to help integrate Windows CE into their intelligent
computing devices
o productivity software products, such as bFAX(R), to consumers to extend
the use of intelligent computing devices
Intelligent computing devices include:
o Internet-enabled television set-top boxes
o handheld and palm-size personal computers
o gaming systems
o handheld industrial data collectors
o consumer Internet appliances such as kiosk terminals and vehicle
navigational devices
o Windows-based terminals
Off-the-shelf software products:
o help manufacturers achieve a faster time-to-market
o provide consumers with additional functions for their intelligent
computing devices
BSQUARE's 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]
BSQUARE provides software products and services for the development and use of
Windows CE-based intelligent computing devices.
BSQUARE Customers
[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 and consumer applications for bundling on devices
After-market software products to extend the use of intelligent computing
devices
BSQUARE supplies software products and services at all stages of the
intelligent computing device development process
[BSQUARE LOGO]
<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.......................... 6
FORWARD-LOOKING STATEMENTS............ 17
USE OF PROCEEDS....................... 17
DIVIDEND POLICY....................... 17
CAPITALIZATION........................ 18
DILUTION.............................. 19
SELECTED CONSOLIDATED FINANCIAL
DATA................................ 20
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS....................... 21
BUSINESS.............................. 31
</TABLE>
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<CAPTION>
PAGE
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<S> <C>
MANAGEMENT............................ 46
RELATED-PARTY TRANSACTIONS............ 53
PRINCIPAL SHAREHOLDERS................ 54
DESCRIPTION OF CAPITAL STOCK.......... 57
SHARES ELIGIBLE FOR FUTURE SALE....... 60
UNDERWRITING.......................... 62
NOTICE TO CANADIAN RESIDENTS.......... 64
LEGAL MATTERS......................... 65
EXPERTS............................... 65
WHERE TO FIND ADDITIONAL DOCUMENTS.... 65
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.
<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
devices we call 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 in September 1996, 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. These
devices are described as "intelligent" to distinguish them from rudimentary
single-purpose computing devices with only limited functionality. Examples of
ICDs include television "set-top boxes," which sit on top of television sets and
provide users with advanced cable TV access services, sophisticated video gaming
features and Internet access; handheld and palm-size PCs; gaming systems;
handheld industrial data collectors; consumer "Internet appliances" such as
kiosk terminals and navigational devices in cars and trucks; 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.
Increasingly, ICDs are able to connect directly to the Internet, either
through wired or wireless telecommunications systems. As businesses and
consumers increasingly use the Internet to transact business and as demand for
smaller and more mobile devices grows, 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. While there are
several different operating systems that can be used in ICDs, Windows CE, a
versatile and highly adaptable operating system modeled after Microsoft Windows,
is gaining market acceptance among OEMs as an operating system that meets these
requirements. As increased use of the Internet by consumers and businesses helps
fuel the growth of the ICD market, we believe that the market for Windows CE
will in turn benefit.
We develop products and provide services that facilitate the development of
Windows CE-based ICDs. We generate revenue in three distinct ways. First, we
provide code-writing and related 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 OEMs
cost-effectively integrate Windows CE into their ICDs. These offerings include
OEM adaptation kits, software products and test programs, along with engineering
and quality assurance services, all designed to ensure that Windows CE works
properly with the OEM's computer boards, which are the internal hardware
constituting the core of 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.
We intend to become a primary provider of software products and services
for facilitating the integration of operating systems into ICDs. Generally, an
operating system provided by vendors in its original form will not be readily
compatible with the increasingly wide variety of semiconductors and ICDs that
are becoming available and therefore will need to be adapted in order to
function. We refer to this process as "integration." 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
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<PAGE> 8
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.
4
<PAGE> 9
THE OFFERING
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<S> <C>
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
17.
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 18 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>
5
<PAGE> 10
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.
SUBSTANTIALLY ALL OF OUR REVENUE, INCLUDING 87% OF OUR TOTAL REVENUE FOR THE SIX
MONTHS ENDED JUNE 30, 1999, 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, the current renewable
term of 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
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<PAGE> 11
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 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 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, 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
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<PAGE> 12
- 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.
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 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 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.
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
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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.
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;
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<PAGE> 14
- 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 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.
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<PAGE> 15
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.
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.
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<PAGE> 16
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 FIVE-YEAR OPERATING HISTORY MAKES IT DIFFICULT TO EVALUATE OUR FUTURE
PROSPECTS, AND WE CANNOT ASSURE YOU THAT OUR REVENUE GROWTH RATE WILL NOT
DECLINE OR 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. The rate of growth of our revenue over the prior year was
245% from 1996 to 1997 and 71% from 1997 to 1998. The rate of growth of our
revenue over prior periods may continue to decline. 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 late 1998 we opened offices in Munich, Germany and Tokyo, Japan. For the
six months ended June 30, 1999, less than 1% of our total revenue was generated
by our international offices. 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;
- 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;
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<PAGE> 17
- 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.
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
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<PAGE> 18
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.
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
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<PAGE> 19
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
of this offering.............. 63,702 - 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...................... 187,376 - Freely tradable upon
expiration of lock-up
agreements
27,898,378 - 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
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
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<PAGE> 20
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 29.
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<PAGE> 21
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> 22
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>
18
<PAGE> 23
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.
19
<PAGE> 24
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.
20
<PAGE> 25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
We generate revenue in three distinct ways:
- we provide software code-writing and related 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;
- we offer a comprehensive set of software products and services, or
"integration tool kits," that help OEMs integrate Windows CE into their
ICDs; and
- we license a wide range of Windows CE-based software applications both to
OEMs and ICD consumers to provide additional functions to Windows
CE-based ICDs, such as printing and faxing capabilities.
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 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 in connection with our
software applications. These activities produced software applications such as
our CE Xpress Adaptation kits, part of our ICD integration tool kits, for use by
OEMs to integrate Windows CE into their ICDs. These activities also produced
software applications such as bFAX and bPRINT for use by consumers on their
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
21
<PAGE> 26
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. Under our master agreement with Microsoft, we bill
Microsoft on a time-and-materials basis, although each project work plan
has a maximum dollar cap. We recognize the revenue generated under this
master agreement 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 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.
22
<PAGE> 27
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 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.
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
23
<PAGE> 28
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.
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
24
<PAGE> 29
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.
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
25
<PAGE> 30
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.
26
<PAGE> 31
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>
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<PAGE> 32
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> 33
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 believe that we will
be able to meet our anticipated cash needs after that time from cash generated
from operations and do not currently anticipate the need to raise additional
capital, 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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<PAGE> 34
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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<PAGE> 35
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
devices we call 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 in September 1996, 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 television "set-top boxes," which sit on top of
television sets and provide users with advanced cable TV access services,
sophisticated video gaming features and Internet access; handheld and palm-size
PCs; gaming systems; handheld industrial data collectors; consumer "Internet
appliances" such as kiosk terminals and navigational devices in cars and trucks;
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. Increasingly, ICDs are able to connect directly
to the Internet, either through wired or wireless telecommunications systems. As
businesses and consumers increasingly use the Internet to transact business and
as demand for smaller and more mobile devices grows, 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. While there are several different operating systems that can be used in
ICDs, Windows CE, a versatile and highly adaptable operating system modeled
after Microsoft Windows, is gaining market acceptance among OEMs as an operating
system that meets these requirements. As increased use of the Internet by
consumers and businesses helps fuel the growth of the ICD market, we believe
that the market for Windows CE will in turn benefit.
We develop products and provide services that facilitate the development of
Windows CE-based ICDs. We generate revenue in three distinct ways. First, we
provide software code-writing and related 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. These offerings include
OEM adaptation kits, software products and test programs, along with engineering
and quality assurance services, all designed to ensure that Windows CE works
properly with the OEM's computer boards, which are the internal hardware
constituting the core of 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. 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 a November 1998 report by Forrester Research entitled
"Re-sizing On-line Business Trade," U.S.-based Internet commerce between
businesses is expected to grow from $43 billion in 1998 to $1.3 trillion in
2003.
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<PAGE> 36
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;
- 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,
and consumer "Internet appliances" such as kiosk terminals and vehicle
navigational devices, 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 information we received in August 1999 from International
Data Corporation, a provider of information technology data and industry
analysis, 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. Venture Development
Corporation estimates in a December 1998 report entitled "Windows CE and the
Future of Embedded Systems Development" that the number of ICDs utilizing
Windows CE will increase from just under one million units in 1999 to more than
14 million units by 2003.
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 use 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.
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<PAGE> 37
OUR BUSINESS
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 development, testing and
program management services to Microsoft in connection with its ongoing
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
integration of Windows CE with various microprocessors. Software
development tools are software packages that help engineers develop new
software applications. By using our services, Microsoft can draw on our
extensive expertise and experience with Windows CE and can devote its
internal resources to other projects.
- Hardware support. We provide software products and services to OEMs that
support a variety of microprocessors and other ICD computer hardware. 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 USE EXISTING MICROSOFT TECHNOLOGIES AND
STANDARDS. Our Windows CE-based products and services use 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.
CAPITALIZING ON 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 September 1996. In
addition, we have developed strategic relationships with Microsoft, including
under both our master development and license agreement and our distributor
agreement with Microsoft, and through other arrangements. Specifically, we are a
provider of software services to Microsoft under our master agreement, a
Microsoft-sanctioned Windows CE systems integrator as indicated on Microsoft's
website, a licensed distributor of Windows CE under our distribution agreement
and a developer of Windows CE-based software applications. Moreover, we have
worked with several semiconductor vendors to 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 take advantage of our experience
with the Windows CE platform to help bring quality
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<PAGE> 38
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.
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 in September 1996, we believe that we offer
a greater breadth and depth of Windows CE expertise than our current
competitors. We intend to continue to utilize 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 build on 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
code-writing and related 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.
Utilize 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 use our Windows CE expertise, our alliances with OEMs 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 make use of
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<PAGE> 39
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.
Operating system development and accompanying tools
We provide software code-writing and related engineering 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.
The following table summarizes the key features and benefits of the
services we offer to Microsoft and semiconductor vendors:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
BSQUARE SERVICE DESCRIPTION BENEFIT
<S> <C> <C>
- --------------------------------------------------------------------------------------------------------------
Software development - We aid Microsoft in the development of - The Visual Tools are necessary for
services to Microsoft its Visual Tools series of development the adaptation of Windows CE to new
tools for Windows CE ICDs and for the development of
Windows CE software applications
- --------------------------------------------------------------------------------------------------------------
Software engineering - We assist Microsoft and semiconductor - Allows semiconductor vendors to
consulting services to vendors in the development of make their products available for
Microsoft and semiconductor system-level software that enables use in Windows CE-based ICDs in a
vendors Windows CE to control the functions on timely and cost-effective manner
a particular microprocessor
- --------------------------------------------------------------------------------------------------------------
</TABLE>
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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<PAGE> 40
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, from
which we generated 4% of our total revenue for the six months ended June 30,
1999:
<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 navigational devices in cars and trucks, 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.
The following table summarizes the key features and benefits of the
services we offer to our OEM customers:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
BSQUARE SERVICE DESCRIPTION BENEFIT
<S> <C> <C>
- --------------------------------------------------------------------------------------------------------------
Systems consulting services - We provide Windows CE integration - Without our software engineering
to OEMs developing ICDs services to OEMs developing ICDs along consulting services, OEMs would
with custom adaptations of Windows CE need to increase their development
costs and extend their project
- We provide software engineering schedules to provide the training
consulting services to write the software and materials required to complete
code that enables Windows CE to the projects in-house
integrate with ICD hardware
- Allows OEMs to move quickly past
the traditionally time consuming
early stage of integrating Windows
CE with their existing hardware and
software
- --------------------------------------------------------------------------------------------------------------
Applications consulting - We provide software applications - Allows OEMs to avoid the time and
services to OEMs developing development according to customer cost of developing in-house
ICDs specifications expertise in applications
development for Windows CE
- --------------------------------------------------------------------------------------------------------------
Quality assurance - We provide complete quality assurance - Allows early discovery of design
consulting services to OEMs services on every project to ensure the problems, a more rapid development
developing ICDs highest quality process and higher quality products
for end users
- --------------------------------------------------------------------------------------------------------------
</TABLE>
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<PAGE> 42
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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<PAGE> 43
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 provides a standard interface between the Windows
CE operating system and the core components of an ICD's computer board. A new
board-specific OEM Adaptation Layer must be implemented for each computer board
that will be using Windows CE.
We maintain a library of OEM Adaptation Layers for several of the computer
boards used in Windows CE-based ICD products. These OEM Adaptation Layers 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
OEM Adaptation Layer library serves as a starting point for the creation of new
OEM Adaptation Layer 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> 44
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 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 CE Platform Layer 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
Through late 1997, we provided services directly to semiconductor vendors.
In late 1997, Microsoft decided to contract with us to provide services to the
semiconductor vendors with whom we had previously contracted directly. In 1996
and 1997 we provided in excess of $1.0 million of services to each of the
following semiconductor vendors:
ARM
Hitachi Semiconductor (America)
Motorola Computer Group
NEC
Currently, we provide software products and services to these and other
semiconductor vendors under our master agreement with Microsoft.
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<PAGE> 45
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> 46
Selected Customer Projects
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CUSTOMER PROJECT
- ----------------------------------
<S> <C>
Hitachi Semiconductor Hitachi Semiconductor (America) Inc., a wholly owned
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.
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, it turned to us to provide a variety of utility and
personal productivity applications that would enhance the
features of its product. Rather than include these
applications on third-party CDs in its 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 its ElanSC400
microprocessor, but lacked the in-house resources and
knowledge of Windows CE necessary to complete the project
within its required timeframe. AMD called on us to provide
software products to help integrate Windows CE with its 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. These software
tools are then provided by Microsoft under the Microsoft name to semiconductor
vendors and various OEMs utilizing Windows CE.
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
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<PAGE> 47
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 "embedded Windows CE"
portion of Microsoft's website. In addition, Microsoft has periodically utilized
our services when an OEM has required additional software engineering services.
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, which we market under our brand names,
including bFax and bPrint. We also participate in marketing opportunities
offered by Microsoft for third-party developers to promote our software
applications. 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 our services to different semiconductor vendors through our
direct sales force. We market our software tools products and related services
that help OEMs integrate Windows CE into their ICDs through our direct sales
force as well as through third-party representatives and distributors. We market
our Windows CE-based software applications that are both bundled by OEMs onto
particular ICDs and purchased directly by consumers for their ICDs through our
direct sales force, third-party representatives and distributors, and other
consumer retail channels. 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
43
<PAGE> 48
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 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
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<PAGE> 49
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.
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> 50
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> 51
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> 52
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> 53
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> 54
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> 55
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> 56
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> 57
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> 58
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.
If the underwriters' over-allotment option is exercised in full, six of our
shareholders, consisting of TA Associates, Encompass Ventures, Albert T. Dosser,
Peter R. Gregory, William T. Baxter and Joseph Notarangelo, will sell an
aggregate of 600,000 shares of common stock to the underwriters. Information
regarding the beneficial ownership of these shareholders in the event the
underwriters' over-allotment option is exercised in full is set forth below.
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
</TABLE>
54
<PAGE> 59
<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>
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%
(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.
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<PAGE> 60
(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 Notarangelo, our Vice President-Strategic Business Development,
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. Notarangelo
will sell 8,562 shares and own 1.3% of the shares then outstanding.
56
<PAGE> 61
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
57
<PAGE> 62
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.
58
<PAGE> 63
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."
59
<PAGE> 64
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 outstanding on August
31, 1999 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.............. 63,702 - 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...................... 187,376 - Freely tradable upon
expiration of lock-up
agreements
27,898,378 - 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.
60
<PAGE> 65
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.
61
<PAGE> 66
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 broker/dealers may be changed by
the representatives. As used in this section:
- Underwriters are securities broker/dealers that are parties to the
underwriting agreement and will have a contractual commitment to purchase
shares of our common stock from us, and the representatives are the four
firms acting on behalf of the underwriters.
- Broker/dealers are firms registered under applicable securities laws to
sell securities to the public.
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>
62
<PAGE> 67
The aggregate amount of offering expenses payable by us will be
approximately $1,000,000. The principal components of these offering expenses
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.
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 other
parties who have a preexisting relationship with our company, including vendors
and customers, 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.
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<PAGE> 68
- 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.
- 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 broker/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 broker/dealers who
use the Internet to distribute shares to customers who have accounts with these
broker/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. During the last 12 months,
Wit Capital acted as co-manager on 48 initial public offerings and co-lead
manager on one initial public offering. 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
64
<PAGE> 69
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.
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.
65
<PAGE> 70
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> 71
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.
/s/ ARTHUR ANDERSEN LLP
Seattle, Washington,
August 13, 1999 (except for the matter discussed in
Note 13 for which the date is August 18, 1999)
F-2
<PAGE> 72
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> 73
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> 74
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> 75
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> 76
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> 77
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> 78
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> 79
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> 80
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> 81
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> 82
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> 83
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> 84
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> 85
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> 86
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> 87
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> 88
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 press release June 9, 1999
"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, "The Future of Windows CE Utilities"
WinCELair Review Center November 1998
<PAGE> 89
[COMPANY LOGO]
<PAGE> 90
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> 91
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 1997 to September 30, 1999, the registrant granted options to
purchase up to 3,266,354 shares of the registrant's common stock under the
registrant's amended and restated stock option plan at a weighted average
exercise price of $1.91 per share. These grants were exempt from registration
pursuant to Rule 701 under 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 Vulcan Ventures Incorporated, a
qualified institutional buyer, in a private transaction for an aggregate
offering price of approximately $18.7 million. Vulcan Ventures has the right to
require the registrant to redeem the shares at the original issuance price if
this offering is not completed by December 15, 1999. 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).
</TABLE>
II-2
<PAGE> 92
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
------ -----------
<C> <S>
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
++ 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.
II-3
<PAGE> 93
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-4
<PAGE> 94
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment No. 4 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 8th day of October, 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. 4 to the registration statement has been signed by the following persons in
the capacities indicated below on the 8th day of October, 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-5
<PAGE> 95
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
++ Filed herewith
+++ No longer being filed as an exhibit
<PAGE> 1
EXHIBIT 1.1
______________ Shares
BSQUARE Corporation
Common Stock, no par value
UNDERWRITING AGREEMENT
___________, 1999
CREDIT SUISSE FIRST BOSTON CORPORATION
LEHMAN BROTHERS INC.
A.G. EDWARDS & SONS, INC.
WIT CAPITAL CORPORATION
As Representatives of the Several Underwriters,
Eleven Madison Avenue,
New York, N.Y. 10010-3629
Dear Sirs:
1. Introductory. BSQUARE Corporation, a Washington corporation
("Company"), proposes to issue and sell ________________ shares ("Firm
Securities") of its Common Stock, no par value, ("Securities") and also proposes
to issue and sell to the Underwriters, at the option of the Underwriters, an
aggregate of not more than _______________ additional shares ("Optional
Securities") of its Securities as set forth below. The Firm Securities and the
Optional Securities are herein collectively called the "Offered Securities". As
part of the offering contemplated by this Agreement, Credit Suisse First Boston
Corporation (the "Designated Underwriter") has agreed to reserve out of the Firm
Securities purchased by it under this Agreement, up to shares, for sale to the
Company's directors, officers, employees and other parties associated with the
Company (collectively, "Participants"), as set forth in the Prospectus (as
defined herein) under the heading "Underwriters" (the "Directed Share Program").
The Firm Securities to be sold by the Designated Underwriter pursuant to the
Directed Share Program (the "Directed Shares") will be sold by the Designated
Underwriter pursuant to this Agreement at the public offering price. Any
Directed Shares not orally confirmed for purchase by a Participant by the end of
the business day on which this Agreement is executed will be offered to the
public by the Underwriters as set forth in the Prospectus. The Company hereby
agrees with the several Underwriters named in Schedule A hereto ("Underwriters")
as follows:
2. Representations and Warranties of the Company. The Company represents
and warrants to, and agrees with, the several Underwriters that:
(a) A registration statement (No. 333-________) relating to the
Offered Securities, including a form of prospectus, has been filed with
the Securities and Exchange Commission ("Commission") and either (i) has
been declared effective under the Securities Act of 1933 ("Act") and is
not proposed to be amended or (ii) is proposed to be amended by
amendment or post-effective amendment. If such registration statement
("initial registration statement") has been declared
1
<PAGE> 2
effective, either (i) an additional registration statement ("additional
registration statement") relating to the Offered Securities may have
been filed with the Commission pursuant to Rule 462(b) ("Rule 462(b)")
under the Act and, if so filed, has become effective upon filing
pursuant to such Rule and the Offered Securities all have been duly
registered under the Act pursuant to the initial registration statement
and, if applicable, the additional registration statement or (ii) such
an additional registration statement is proposed to be filed with the
Commission pursuant to Rule 462(b) and will become effective upon filing
pursuant to such Rule and upon such filing the Offered Securities will
all have been duly registered under the Act pursuant to the initial
registration statement and such additional registration statement. If
the Company does not propose to amend the initial registration statement
or if an additional registration statement has been filed and the
Company does not propose to amend it, and if any post-effective
amendment to either such registration statement has been filed with the
Commission prior to the execution and delivery of this Agreement, the
most recent amendment (if any) to each such registration statement has
been declared effective by the Commission or has become effective upon
filing pursuant to Rule 462(c) ("Rule 462(c)") under the Act or, in the
case of the additional registration statement, Rule 462(b). For purposes
of this Agreement, "Effective Time" with respect to the initial
registration statement or, if filed prior to the execution and delivery
of this Agreement, the additional registration statement means (i) if
the Company has advised the Representatives that it does not propose to
amend such registration statement, the date and time as of which such
registration statement, or the most recent post-effective amendment
thereto (if any) filed prior to the execution and delivery of this
Agreement, was declared effective by the Commission or has become
effective upon filing pursuant to Rule 462(c), or (ii) if the Company
has advised the Representatives that it proposes to file an amendment or
post-effective amendment to such registration statement, the date and
time as of which such registration statement, as amended by such
amendment or post-effective amendment, as the case may be, is declared
effective by the Commission. If an additional registration statement has
not been filed prior to the execution and delivery of this Agreement but
the Company has advised the Representatives that it proposes to file
one, "Effective Time" with respect to such additional registration
statement means the date and time as of which such registration
statement is filed and becomes effective pursuant to Rule 462(b).
"Effective Date" with respect to the initial registration statement or
the additional registration statement (if any) means the date of the
Effective Time thereof. The initial registration statement, as amended
at its Effective Time, including all information contained in the
additional registration statement (if any) and deemed to be a part of
the initial registration statement as of the Effective Time of the
additional registration statement pursuant to the General Instructions
of the Form on which it is filed and including all information (if any)
deemed to be a part of the initial registration statement as of its
Effective Time pursuant to Rule 430A(b) ("Rule 430A(b)") under the Act,
is hereinafter referred to as the "Initial Registration Statement". The
additional registration statement, as amended at its Effective Time,
including the contents of the initial registration statement
incorporated by reference therein and including all information (if any)
deemed to be a part of the additional registration statement as of its
Effective Time pursuant to Rule 430A(b), is hereinafter referred to as
the "Additional Registration Statement". The Initial Registration
Statement and the Additional Registration Statement are herein referred
to collectively as the "Registration Statements" and individually as a
"Registration Statement". The form of prospectus relating to the Offered
Securities, as first filed with the Commission pursuant to and in
accordance with Rule 424(b) ("Rule 424(b)") under the Act or (if no such
filing is required) as included in a Registration Statement, is
hereinafter referred to as the "Prospectus". No document has been or
will be prepared or distributed in reliance on Rule 434 under the Act.
(b) If the Effective Time of the Initial Registration Statement is
prior to the execution and delivery of this Agreement: (i) on the
Effective Date of the Initial Registration Statement, the Initial
Registration Statement conformed in all respects to the requirements of
the Act and the
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<PAGE> 3
rules and regulations of the Commission ("Rules and Regulations") and
did not include any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary to make the
statements therein not misleading, (ii) on the Effective Date of the
Additional Registration Statement (if any), each Registration Statement
conformed, or will conform, in all respects to the requirements of the
Act and the Rules and Regulations and did not include, or will not
include, any untrue statement of a material fact and did not omit, or
will not omit, to state any material fact required to be stated therein
or necessary to make the statements therein not misleading and (iii) on
the date of this Agreement, the Initial Registration Statement and, if
the Effective Time of the Additional Registration Statement is prior to
the execution and delivery of this Agreement, the Additional
Registration Statement each conforms, and at the time of filing of the
Prospectus pursuant to Rule 424(b) or (if no such filing is required) at
the Effective Date of the Additional Registration Statement in which the
Prospectus is included, each Registration Statement and the Prospectus
will conform, in all respects to the requirements of the Act and the
Rules and Regulations, and neither of such documents includes, or will
include, any untrue statement of a material fact or omits, or will omit,
to state any material fact required to be stated therein or necessary to
make the statements therein not misleading. If the Effective Time of the
Initial Registration Statement is subsequent to the execution and
delivery of this Agreement: on the Effective Date of the Initial
Registration Statement, the Initial Registration Statement and the
Prospectus will conform in all respects to the requirements of the Act
and the Rules and Regulations, neither of such documents will include
any untrue statement of a material fact or will omit to state any
material fact required to be stated therein or necessary to make the
statements therein not misleading, and no Additional Registration
Statement has been or will be filed. The two preceding sentences do not
apply to statements in or omissions from a Registration Statement or the
Prospectus based upon written information furnished to the Company by
any Underwriter through the Representatives specifically for use
therein, it being understood and agreed that the only such information
is that described as such in Section 7(b) hereof.
(c) The Company has been duly incorporated and is an existing
corporation in good standing under the laws of the State of Washington,
with power and authority (corporate and other) to own its properties and
conduct its business as described in the Prospectus; and the Company is
duly qualified to do business as a foreign corporation in good standing
in all other jurisdictions in which its ownership or lease of property
or the conduct of its business requires such qualification.
(d) Each subsidiary of the Company has been duly incorporated and is
an existing corporation in good standing under the laws of the
jurisdiction of its incorporation, with power and authority (corporate
and other) to own its properties and conduct its business as described
in the Prospectus; and each subsidiary of the Company is duly qualified
to do business as a foreign corporation in good standing in all other
jurisdictions in which its ownership or lease of property or the conduct
of its business requires such qualification; all of the issued and
outstanding capital stock of each subsidiary of the Company has been
duly authorized and validly issued and is fully paid and nonassessable;
and the capital stock of each subsidiary owned by the Company, directly
or through subsidiaries, is owned free from liens, encumbrances and
defects.
(e) The Offered Securities and all other outstanding shares of
capital stock of the Company have been duly authorized; all outstanding
shares of capital stock of the Company are, and, when the Offered
Securities have been delivered and paid for in accordance with this
Agreement on each Closing Date (as defined below), such Offered
Securities will have been, validly issued, fully paid and nonassessable
and will conform to the description thereof contained in the Prospectus;
and the stockholders of the Company have no preemptive rights with
respect to the Securities.
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<PAGE> 4
(f) Except as disclosed in the Prospectus, there are no contracts,
agreements or understandings between the Company and any person that
would give rise to a valid claim against the Company or any Underwriter
for a brokerage commission, finder's fee or other like payment in
connection with this offering.
(g) There are no contracts, agreements or understandings between the
Company and any person granting such person the right to require the
Company to file a registration statement under the Act with respect to
any securities of the Company owned or to be owned by such person or to
require the Company to include such securities in the securities
registered pursuant to a Registration Statement or in any securities
being registered pursuant to any other registration statement filed by
the Company under the Act.
(h) The Offered Securities have been approved for listing on The
Nasdaq Stock Market's National Market, subject to notice of issuance.
(i) No consent, approval, authorization, or order of, or filing with,
any governmental agency or body or any court is required for the
consummation of the transactions contemplated by this Agreement in
connection with the issuance and sale of the Offered Securities by the
Company, except such as have been obtained and made under the Act and
such as may be required under state securities laws.
(j) The execution, delivery and performance of this Agreement, and
the issuance and sale of the Offered Securities will not result in a
breach or violation of any of the terms and provisions of, or constitute
a default under, any statute, any rule, regulation or order of any
governmental agency or body or any court, domestic or foreign, having
jurisdiction over the Company or any subsidiary of the Company or any of
their properties, or any agreement or instrument to which the Company or
any such subsidiary is a party or by which the Company or any such
subsidiary is bound or to which any of the properties of the Company or
any such subsidiary is subject, or the charter or by-laws of the Company
or any such subsidiary, and the Company has full power and authority to
authorize, issue and sell the Offered Securities as contemplated by this
Agreement.
(k) This Agreement has been duly authorized, executed and delivered
by the Company.
(l) Except as disclosed in the Prospectus, the Company and its
subsidiaries have good and marketable title to all real properties and
all other properties and assets owned by them, in each case free from
liens, encumbrances and defects that would materially affect the value
thereof or materially interfere with the use made or to be made thereof
by them; and except as disclosed in the Prospectus, the Company and its
subsidiaries hold any leased real or personal property under valid and
enforceable leases with no exceptions that would materially interfere
with the use made or to be made thereof by them.
(m) The Company and its subsidiaries possess adequate certificates,
authorities or permits issued by appropriate governmental agencies or
bodies necessary to conduct the business now operated by them and have
not received any notice of proceedings relating to the revocation or
modification of any such certificate, authority or permit that, if
determined adversely to the Company or any of its subsidiaries, would
individually or in the aggregate have a material adverse effect on the
condition (financial or other), business, properties or results of
operations of the Company and its subsidiaries taken as a whole
("Material Adverse Effect").
(n) No labor dispute with the employees of the Company or any
subsidiary exists or, to the knowledge of the Company, is imminent that
might have a Material Adverse Effect.
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<PAGE> 5
(o) The Company and its subsidiaries own, possess or can acquire on
reasonable terms, adequate trademarks, trade names and other rights to
inventions, know-how, patents, copyrights, confidential information and
other intellectual property (collectively, "intellectual property
rights") necessary to conduct the business now operated by them, or
presently employed by them, and have not received any notice of
infringement of or conflict with asserted rights of others with respect
to any intellectual property rights that, if determined adversely to the
Company or any of its subsidiaries, would individually or in the
aggregate have a Material Adverse Effect.
(p) Except as disclosed in the Prospectus, neither the Company nor
any of its subsidiaries is in violation of any statute, any rule,
regulation, decision or order of any governmental agency or body or any
court, domestic or foreign, relating to the use, disposal or release of
hazardous or toxic substances or relating to the protection or
restoration of the environment or human exposure to hazardous or toxic
substances (collectively, "environmental laws"), owns or operates any
real property contaminated with any substance that is subject to any
environmental laws, is liable for any off-site disposal or contamination
pursuant to any environmental laws, or is subject to any claim relating
to any environmental laws, which violation, contamination, liability or
claim would individually or in the aggregate have a Material Adverse
Effect; and the Company is not aware of any pending investigation which
might lead to such a claim.
(q) Except as disclosed in the Prospectus, there are no pending
actions, suits or proceedings against or affecting the Company, any of
its subsidiaries or any of their respective properties that, if
determined adversely to the Company or any of its subsidiaries, would
individually or in the aggregate have a Material Adverse Effect, or
would materially and adversely affect the ability of the Company to
perform its obligations under this Agreement, or which are otherwise
material in the context of the sale of the Offered Securities; and no
such actions, suits or proceedings are threatened or, to the Company's
knowledge, contemplated.
(r) The financial statements included in each Registration Statement
and the Prospectus present fairly the financial position of the Company
and its consolidated subsidiaries as of the dates shown and their
results of operations and cash flows for the periods shown, and such
financial statements have been prepared in conformity with the generally
accepted accounting principles in the United States applied on a
consistent basis, and the schedules included in each Registration
Statement present fairly the information required to be stated therein.
(s) Except as disclosed in the Prospectus, since the date of the
latest audited financial statements included in the Prospectus there has
been no material adverse change, nor any development or event involving
a prospective material adverse change, in the condition (financial or
other), business, properties or results of operations of the Company and
its subsidiaries taken as a whole, and, except as disclosed in or
contemplated by the Prospectus, there has been no dividend or
distribution of any kind declared, paid or made by the Company on any
class of its capital stock.
(t) The Company is not and, after giving effect to the offering and
sale of the Offered Securities and the application of the proceeds
thereof as described in the Prospectus, will not be an "investment
company" as defined in the Investment Company Act of 1940.
(u) The Company has notified all holders of its securities, including
any outstanding options, warrants or debt securities, that none of such
securities and any Company shares underlying such securities may be sold
or otherwise transferred or disposed of for a period of 180 days after
the
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<PAGE> 6
date of the initial public offering of the Offered Securities and has
imposed a stop-transfer instruction with the Company's transfer agent in
order to enforce the foregoing lock-up provision.
(v) All outstanding Securities, and all securities convertible into
or exercisable or exchangeable for Securities, are subject to valid and
binding agreements (collectively, "Lock-up Agreements") that restrict
the holders thereof from offering, selling, contracting to sell,
pledging or otherwise disposing of, directly or indirectly, any such
Securities or securities convertible into or exchangeable or exercisable
for any Securities, or publicly disclosing the intention to make any
such actions, for a period of 180 days after the date of the Prospectus
without the prior written consent of Credit Suisse First Boston
Corporation ("CSFBC").
(w) Furthermore, the Company represents and warrants to the
Underwriters that (i) the Registration Statement, the Prospectus and any
preliminary prospectus comply, and any further amendments or supplements
thereto will comply, with any applicable laws or regulations of foreign
jurisdictions in which the Prospectus or any preliminary prospectus, as
amended or supplemented, if applicable, are distributed in connection
with the Directed Share Program, and that (ii) no authorization,
approval, consent, license, order, registration or qualification of or
with any government, governmental instrumentality or court, other than
such as have been obtained, is necessary under the securities law and
regulations of foreign jurisdictions in which the Directed Shares are
offered outside the United States.
(x) The Company has not offered, or caused the Underwriters to offer,
any offered Securities to any person pursuant to the Directed Share
Program with the specific intent to unlawfully influence (i) a customer
or supplier of the Company to alter the customer's or supplier's level
or type of business with the Company or (ii) a trade journalist or
publication to write or publish favorable information about the Company
or its products.
3. Purchase, Sale and Delivery of Offered Securities. On the basis of
the representations, warranties and agreements herein contained, but subject to
the terms and conditions herein set forth, the Company agrees to sell to the
Underwriters, and the Underwriters agree, severally and not jointly, to purchase
from the Company, at a purchase price of $________ per share, the respective
numbers of shares of Firm Securities set forth opposite the names of the
Underwriters in Schedule A hereto.
The Company will deliver the Firm Securities to the Representatives for
the accounts of the Underwriters, against payment of the purchase price in
Federal (same day) funds by official bank check or checks or wire transfer to an
account at a bank acceptable to CSFBC drawn to the order of the Company at the
office of Summit Law Group, PLLC, at 10:00 A.M., New York time, on ___________,
or at such other time not later than seven full business days thereafter as
CSFBC and the Company determine, such time being herein referred to as the
"First Closing Date". For purposes of Rule 15c6-1 under the Securities Exchange
Act of 1934, the First Closing Date (if later than the otherwise applicable
settlement date) shall be the settlement date for payment of funds and delivery
of securities for all the Offered Securities sold pursuant to the offering. The
certificates for the Firm Securities so to be delivered will be in definitive
form, in such denominations and registered in such names as CSFBC requests and
will be made available for checking and packaging at the office of Summit Law
Group, PLLC at least 24 hours prior to the First Closing Date.
In addition, upon written notice from CSFBC given to the Company from
time to time not more than 30 days subsequent to the date of the Prospectus, the
Underwriters may purchase all or less than all of the Optional Securities at the
purchase price per Security to be paid for the Firm Securities. The Company
agrees to sell to the Underwriters the number of shares of Optional Securities
specified in such notice and the Underwriters agree, severally and not jointly,
to purchase such Optional Securities. Such Optional
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<PAGE> 7
Securities shall be purchased for the account of each Underwriter in the same
proportion as the number of shares of Firm Securities set forth opposite such
Underwriter's name bears to the total number of shares of Firm Securities
(subject to adjustment by CSFBC to eliminate fractions) and may be purchased by
the Underwriters only for the purpose of covering over-allotments made in
connection with the sale of the Firm Securities. No Optional Securities shall be
sold or delivered unless the Firm Securities previously have been, or
simultaneously are, sold and delivered. The right to purchase the Optional
Securities or any portion thereof may be exercised from time to time and to the
extent not previously exercised may be surrendered and terminated at any time
upon notice by CSFBC to the Company.
Each time for the delivery of and payment for the Optional Securities,
being herein referred to as an "Optional Closing Date", which may be the First
Closing Date (the First Closing Date and each Optional Closing Date, if any,
being sometimes referred to as a "Closing Date"), shall be determined by CSFBC
but shall be not later than five full business days after written notice of
election to purchase Optional Securities is given. The Company will deliver the
Optional Securities being purchased on each Optional Closing Date to the
Representatives for the accounts of the several Underwriters, against payment of
the purchase price therefor in Federal (same day) funds by official bank check
or checks or wire transfer to an account at a bank acceptable to CSFBC drawn to
the order of the Company, at the office of Summit Law Group, PLLC. The
certificates for the Optional Securities being purchased on each Optional
Closing Date will be in definitive form, in such denominations and registered in
such names as CSFBC requests upon reasonable notice prior to such Optional
Closing Date and will be made available for checking and packaging at the office
of Summit Law Group, PLLC at a reasonable time in advance of such Optional
Closing Date.
4. Offering by Underwriters. It is understood that the several
Underwriters propose to offer the Offered Securities for sale to the public as
set forth in the Prospectus.
5. Certain Agreements of the Company. The Company agrees with the
several Underwriters that:
(a) If the Effective Time of the Initial Registration Statement is
prior to the execution and delivery of this Agreement, the Company will
file the Prospectus with the Commission pursuant to and in accordance
with subparagraph (1) (or, if applicable and if consented to by CSFBC,
subparagraph (4)) of Rule 424(b) not later than the earlier of (A) the
second business day following the execution and delivery of this
Agreement or (B) the fifteenth business day after the Effective Date of
the Initial Registration Statement.
The Company will advise CSFBC promptly of any such filing pursuant to
Rule 424(b). If the Effective Time of the Initial Registration Statement
is prior to the execution and delivery of this Agreement and an
additional registration statement is necessary to register a portion of
the Offered Securities under the Act but the Effective Time thereof has
not occurred as of such execution and delivery, the Company will file
the additional registration statement or, if filed, will file a
post-effective amendment thereto with the Commission pursuant to and in
accordance with Rule 462(b) on or prior to 10:00 P.M., New York time, on
the date of this Agreement or, if earlier, on or prior to the time the
Prospectus is printed and distributed to any Underwriter, or will make
such filing at such later date as shall have been consented to by CSFBC.
(b) The Company will advise CSFBC promptly of any proposal to amend
or supplement the initial or any additional registration statement as
filed or the related prospectus or the Initial Registration Statement,
the Additional Registration Statement (if any) or the Prospectus and
will not effect such amendment or supplementation without CSFBC's
consent; and the Company will also advise CSFBC promptly of the
effectiveness of each Registration Statement (if its Effective Time is
subsequent to the execution and delivery of this Agreement) and of any
amendment or supplementation of a Registration Statement or the
Prospectus and of the institution by the
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<PAGE> 8
Commission of any stop order proceedings in respect of a Registration
Statement and will use its best efforts to prevent the issuance of any
such stop order and to obtain as soon as possible its lifting, if
issued.
(c) If, at any time when a prospectus relating to the Offered
Securities is required to be delivered under the Act in connection with
sales by any Underwriter or dealer, any event occurs as a result of
which the Prospectus as then amended or supplemented would include an
untrue statement of a material fact or omit to state any material fact
necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, or if it is
necessary at any time to amend the Prospectus to comply with the Act,
the Company will promptly notify CSFBC of such event and will promptly
prepare and file with the Commission, at its own expense, an amendment
or supplement which will correct such statement or omission or an
amendment which will effect such compliance. Neither CSFBC's consent to,
nor the Underwriters' delivery of, any such amendment or supplement
shall constitute a waiver of any of the conditions set forth in Section
6.
(d) As soon as practicable, but not later than the Availability Date
(as defined below), the Company will make generally available to its
securityholders an earnings statement covering a period of at least 12
months beginning after the Effective Date of the Initial Registration
Statement (or, if later, the Effective Date of the Additional
Registration Statement) which will satisfy the provisions of Section
11(a) of the Act. For the purpose of the preceding sentence,
"Availability Date" means the 45th day after the end of the fourth
fiscal quarter following the fiscal quarter that includes such Effective
Date, except that, if such fourth fiscal quarter is the last quarter of
the Company's fiscal year, "Availability Date" means the 90th day after
the end of such fourth fiscal quarter.
(e) The Company will furnish to the Representatives copies of each
Registration Statement (four of which will be signed and will include
all exhibits), each related preliminary prospectus, and, so long as a
prospectus relating to the Offered Securities is required to be
delivered under the Act in connection with sales by any Underwriter or
dealer, the Prospectus and all amendments and supplements to such
documents, in each case in such quantities as CSFBC requests. The
Prospectus shall be so furnished on or prior to 3:00 P.M., New York
time, on the business day following the later of the execution and
delivery of this Agreement or the Effective Time of the Initial
Registration Statement. All other documents shall be so furnished as
soon as available. The Company will pay the expenses of printing and
distributing to the Underwriters all such documents.
(f) The Company will arrange for the qualification of the Offered
Securities for sale under the laws of such jurisdictions as CSFBC
designates and will continue such qualifications in effect so long as
required for the distribution.
(g) During the period of five years hereafter, the Company will
furnish to the Representatives and, upon request, to each of the other
Underwriters, as soon as practicable after the end of each fiscal year,
a copy of its annual report to stockholders for such year; and the
Company will furnish to the Representatives (i) as soon as available, a
copy of each report and any definitive proxy statement of the Company
filed with the Commission under the Securities Exchange Act of 1934 or
mailed to stockholders, and (ii) from time to time, such other
information concerning the Company as CSFBC may reasonably request.
(h) The Company will pay all expenses incident to the performance of
its obligations under this Agreement, for any filing fees and other
expenses (including fees and disbursements of
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<PAGE> 9
counsel) incurred in connection with qualification of the Offered
Securities for sale under the laws of such jurisdictions as CSFBC
designates and the printing of memoranda relating thereto, for the
filing fee incident to, and the reasonable fees and disbursements of
counsel to the Underwriters in connection with, the review by the
National Association of Securities Dealers, Inc. of the Offered
Securities, for any travel expenses of the Company's officers and
employees and any other expenses of the Company in connection with
attending or hosting meetings with prospective purchasers of the Offered
Securities and for expenses incurred in distributing preliminary
prospectuses and the Prospectus (including any amendments and
supplements thereto) to the Underwriters.
(i) For a period of 180 days after the date of the initial public
offering of the Offered Securities, the Company will not offer, sell,
contract to sell, pledge or otherwise dispose of, directly or
indirectly, or file with the Commission a registration statement under
the Act relating to, any additional shares of its Securities or
securities convertible into or exchangeable or exercisable for any
shares of its Securities, or publicly disclose the intention to make any
such offer, sale, pledge, disposition or filing, without the prior
written consent of CSFBC, except issuances of Securities pursuant to the
conversion or exchange of convertible or exchangeable securities or the
exercise of warrants or options, in each case outstanding on the date
hereof, grants of employee stock options or sales of shares pursuant to
the terms of a stock option or employee stock purchase plan in effect on
the date hereof, and issuances of Securities pursuant to the exercise of
such options.
(j) The Company will (i) enforce the terms of each Lock-up Agreement,
and (ii) to the extent it has not already done so, issue stop-transfer
instructions to the transfer agent for the Securities with respect to
any transaction or contemplated transaction that would constitute a
breach of or default under the applicable Lock-up Agreement. In
addition, except with the prior written consent of CSFBC, the Company
agrees (i) not to amend or terminate, or waive any right under, any
Lock-up Agreement, or take any other action that would directly or
indirectly have the same effect as an amendment or termination, or
waiver of any right under any Lock-up Agreement, that would permit any
holder of Securities, or any securities convertible into, or exercisable
or exchangeable for Securities, to make any short sale of, grant any
option for the purpose of, or otherwise transfer or dispose of, any such
Securities or other securities, prior to the expiration of the 180 days
after the date of the Prospectus and (ii) not to consent to any sale,
short sale, grant of an option for the purchase of, or other disposition
or transfer of shares of Securities or securities convertible into or
exercisable or exchangeable for Securities, subject to a Lock-up
Agreement.
(k) In connection with the Directed Share Program, the Company will
ensure that the Directed Shares will be restricted to the extent
required by the National Association of Securities Dealers, Inc. (the
"NASD") or the NASD rules from sale, transfer, assignment, pledge or
hypothecation for a period of three months following the date of the
effectiveness of the Registration Statement. The Designated Underwriter
will notify the Company as to which Participants will need to be so
restricted. The Company will direct the transfer agent to place stop
transfer restrictions upon such securities for such period of time.
(l) The Company will pay all fees and disbursements of counsel
incurred by the Underwriters in connection with the Directed Shares
Program and stamp duties, similar taxes or duties or other taxes, if
any, incurred by the underwriters in connection with the Directed Share
Program.
Furthermore, the company covenants with the Underwriters that the
company will comply with all applicable securities and other applicable
laws, rules and regulations in each foreign
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<PAGE> 10
jurisdiction in which the Directed Shares are offered in connection with
the Directed Share Program.
6. Conditions of the Obligations of the Underwriters. The obligations of
the several Underwriters to purchase and pay for the Firm Securities on the
First Closing Date and the Optional Securities to be purchased on each Optional
Closing Date will be subject to the accuracy of the representations and
warranties on the part of the Company herein, to the accuracy of the statements
of Company officers made pursuant to the provisions hereof, to the performance
by the Company of its obligations hereunder and to the following additional
conditions precedent:
(a) The Representatives shall have received a letter, dated the date
of delivery thereof (which, if the Effective Time of the Initial
Registration Statement is prior to the execution and delivery of this
Agreement, shall be on or prior to the date of this Agreement or, if the
Effective Time of the Initial Registration Statement is subsequent to
the execution and delivery of this Agreement, shall be prior to the
filing of the amendment or post-effective amendment to the registration
statement to be filed shortly prior to such Effective Time), of Arthur
Andersen LLP confirming that they are independent public accountants
within the meaning of the Act and the applicable published Rules and
Regulations thereunder and stating to the effect that:
(i) in their opinion the financial statements and schedules
examined by them and included in the Registration Statements
comply as to form in all material respects with the applicable
accounting requirements of the Act and the related published
Rules and Regulations;
(ii) they have performed the procedures specified by the American
Institute of Certified Public Accountants for a review of interim
financial information as described in Statement of Auditing
Standards No. 71, Interim Financial Information, on the unaudited
financial statements included in the
Registration Statements;
(iii) on the basis of the review referred to in clause (ii)
above, a reading of the latest available interim financial
statements of the Company, inquiries of officials of the Company
who have responsibility for financial and accounting matters and
other specified procedures, nothing came to their attention that
caused them to believe that:
(A) the unaudited financial statements included in
the Registration Statements do not comply as to form in
all material respects with the applicable accounting
requirements of the Act and the related published Rules
and Regulations or any material modifications should be
made to such unaudited financial statements for them to be
in conformity with generally accepted accounting
principles;
(B) at the date of the latest available balance
sheet read by such accountants, or at a subsequent
specified date not more than three business days prior to
the date of such letter, there was any change in the
capital stock or any increase in short-term indebtedness
or long-term debt of the Company and its consolidated
subsidiaries or, at the date of the latest available
balance sheet read by such accountants, there was any
decrease in consolidated net current assets or net assets
or any increase in stockholders' deficit, as compared with
amounts shown on the latest balance sheet included in the
Prospectus; or
10
<PAGE> 11
(C) for the period from the closing date of the
latest income statement included in the Prospectus to the
closing date of the latest available income statement read
by such accountants there were any decreases, as compared
with the corresponding period of the previous year and
with the period of corresponding length ended the date of
the latest income statement included in the Prospectus, in
consolidated net sales, increases in loss from operations,
consolidated net operating income, or in the total or per
share amounts of consolidated net loss.
except in all cases set forth in clauses (B) and (C) above for
changes, increases or decreases which the Prospectus discloses
have occurred or may occur or which are described in such letter;
and
(iv) they have compared specified dollar amounts (or percentages
derived from such dollar amounts) and other financial information
contained in the Registration Statements (in each case to the
extent that such dollar amounts, percentages and other financial
information are derived from the general accounting records of
the Company and its subsidiaries subject to the internal controls
of the Company's accounting system or are derived directly from
such records by analysis or computation) with the results
obtained from inquiries, a reading of such general accounting
records and other procedures specified in such letter and have
found such dollar amounts, percentages and other financial
information to be in agreement with such results, except as
otherwise specified in such letter.
For purposes of this subsection, (i) if the Effective Time of the
Initial Registration Statement is subsequent to the execution and
delivery of this Agreement, "Registration Statements" shall mean the
initial registration statement as proposed to be amended by the
amendment or post-effective amendment to be filed shortly prior to its
Effective Time, (ii) if the Effective Time of the Initial Registration
Statement is prior to the execution and delivery of this Agreement but
the Effective Time of the Additional Registration is subsequent to such
execution and delivery, "Registration Statements" shall mean the Initial
Registration Statement and the additional registration statement as
proposed to be filed or as proposed to be amended by the post-effective
amendment to be filed shortly prior to its Effective Time, and (iii)
"Prospectus" shall mean the prospectus included in the Registration
Statements.
The Company shall have received from Arthur Andersen LLP (and furnished
to the Representatives) an examination report with respect to
Management's Discussion and Analysis of Financial Condition and Results
of Operations of the Company for the fiscal year ending December 31,
1998 and review report with respect to Management's Discussion and
Analysis of Financial Condition and Results of Operations of the Company
for the six-month period ending June 30, 1999 and the corresponding
period for the prior fiscal year, each in accordance with Statement on
Standards for Attestation Engagement No. 8 issued by the Auditing
Standards Board of the American Institute of Certified Public
Accountants, and such examination report shall be included in the
Registration Statement.
(b) If the Effective Time of the Initial Registration Statement
is not prior to the execution and delivery of this Agreement, such
Effective Time shall have occurred not later than 10:00 P.M., New York
time, on the date of this Agreement or such later date as shall have
been consented to by CSFBC. If the Effective Time of the Additional
Registration Statement (if any) is not prior to the execution and
delivery of this Agreement, such Effective Time shall have occurred not
later than 10:00 P.M., New York time, on the date of this Agreement or,
if earlier, the time the Prospectus is printed and distributed to any
Underwriter, or shall have occurred at such later date
11
<PAGE> 12
as shall have been consented to by CSFBC. If the Effective Time of the
Initial Registration Statement is prior to the execution and delivery of
this Agreement, the Prospectus shall have been filed with the Commission
in accordance with the Rules and Regulations and Section 5(a) of this
Agreement. Prior to such Closing Date, no stop order suspending the
effectiveness of a Registration Statement shall have been issued and no
proceedings for that purpose shall have been instituted or, to the
knowledge of the Company or the Representatives, shall be contemplated
by the Commission.
(c) Subsequent to the execution and delivery of this Agreement,
there shall not have occurred (i) any change, or any development or
event involving a prospective change, in the condition (financial or
other), business, properties or results of operations of the Company and
its subsidiaries taken as one enterprise which, in the judgment of a
majority in interest of the Underwriters including the Representatives,
is material and adverse and makes it impractical or inadvisable to
proceed with completion of the public offering or the sale of and
payment for the Offered Securities; (ii) any downgrading in the rating
of any debt securities of the Company by any "nationally recognized
statistical rating organization" (as defined for purposes of Rule 436(g)
under the Act), or any public announcement that any such organization
has under surveillance or review its rating of any debt securities of
the Company (other than an announcement with positive implications of a
possible upgrading, and no implication of a possible downgrading, of
such rating); (iii) any material suspension or material limitation of
trading in securities generally on the New York Stock Exchange or any
setting of minimum prices for trading on such exchange, or any
suspension of trading of any securities of the Company on any exchange
or in the over-the-counter market; (iv) any banking moratorium declared
by U.S. Federal or New York authorities; or (v) any outbreak or
escalation of major hostilities in which the United States is involved,
any declaration of war by Congress or any other substantial national or
international calamity or emergency if, in the judgment of a majority in
interest of the Underwriters including the Representatives, the effect
of any such outbreak, escalation, declaration, calamity or emergency
makes it impractical or inadvisable to proceed with completion of the
public offering or the sale of and payment for the Offered Securities.
(d) The Representatives shall have received an opinion, dated
such Closing Date, of Summit Law Group, PLLC, counsel for the Company,
to the effect that:
(i) The Company has been duly incorporated and is an
existing corporation in good standing under the laws of the State
of Washington, with corporate power and authority to own its
properties and conduct its business as described in the
Prospectus; and the Company is duly qualified to do business as a
foreign corporation in good standing in all other jurisdictions
in which its ownership or lease of property or the conduct of its
business requires such qualification;
(ii) Each subsidiary of the Company has been duly
incorporated and is an existing corporation in good standing
under the laws of the jurisdiction of its incorporation, with
power and authority (corporate and other) to own its properties
and conduct its business as described in the Prospectus; and each
subsidiary of the Company is duly qualified to do business as a
foreign corporation in good standing in all other jurisdictions
in which its ownership or lease of property or the conduct of its
business requires such qualification; all of the issued and
outstanding capital stock of each subsidiary of the Company has
been duly authorized and validly issued and is fully paid and
nonassessable, and the capital stock of each subsidiary owned by
the Company, directly or through subsidiaries, is owned free from
liens, encumbrances and defects;
12
<PAGE> 13
(iii) The Offered Securities delivered on such Closing
Date and all other outstanding shares of the Common Stock of the
Company have been duly authorized and validly issued, are fully
paid and nonassessable and conform to the description thereof
contained in the Prospectus; and the stockholders of the Company
have no preemptive rights with respect to the Securities;
(iv) There are no contracts, agreements or understandings
known to such counsel between the Company and any person granting
such person the right to require the Company to file a
registration statement under the Act with respect to any
securities of the Company owned or to be owned by such person or
to require the Company to include such securities in the
securities registered pursuant to the Registration Statement or
in any securities being registered pursuant to any other
registration statement filed by the Company under the Act;
(v) The Company is not and, after giving effect to the
offering and sale of the Offered Securities and the application
of the proceeds thereof as described in the Prospectus, will not
be an "investment company" as defined in the Investment Company
Act of 1940.
(vi) No consent, approval, authorization or order of, or
filing with, any governmental agency or body or any court is
required for the consummation of the transactions contemplated by
this Agreement in connection with the issuance or sale of the
Offered Securities by the Company, except such as have been
obtained and made under the Act and such as may be required under
state securities laws;
(vii) The execution, delivery and performance of this
Agreement and the issuance and sale of the Offered Securities
will not result in a breach or violation of any of the terms and
provisions of, or constitute a default under, any statute, any
rule, regulation or order of any governmental agency or body or
any court having jurisdiction over the Company or any subsidiary
of the Company or any of their properties, or any agreement or
instrument to which the Company or any such subsidiary is a party
or by which the Company or any such subsidiary is bound or to
which any of the properties of the Company or any such subsidiary
is subject, or the charter or by-laws of the Company or any such
subsidiary, and the Company has full power and authority to
authorize, issue and sell the Offered Securities as contemplated
by this Agreement;
(viii) The Initial Registration Statement was declared
effective under the Act as of the date and time specified in such
opinion, the Additional Registration Statement (if any) was filed
and became effective under the Act as of the date and time (if
determinable) specified in such opinion, the Prospectus either
was filed with the Commission pursuant to the subparagraph of
Rule 424(b) specified in such opinion on the date specified
therein or was included in the Initial Registration Statement or
the Additional Registration Statement (as the case may be), and,
to the best of the knowledge of such counsel, no stop order
suspending the effectiveness of a Registration Statement or any
part thereof has been issued and no proceedings for that purpose
have been instituted or are pending or contemplated under the
Act, and each Registration Statement and the Prospectus, and each
amendment or supplement thereto, as of their respective effective
or issue dates, complied as to form in all material respects with
the requirements of the Act and the Rules and Regulations; such
counsel have no reason to believe that any part of a Registration
Statement or any amendment thereto, as of its effective date or
as of such Closing Date, contained any untrue statement of a
material fact or omitted to state any material fact required to
be stated therein or necessary to make the statements therein not
misleading or that the Prospectus or any amendment or supplement
thereto, as of its issue date or as of such Closing Date,
contained any untrue statement of a material fact or omitted to
state any
13
<PAGE> 14
material fact necessary in order to make the statements therein,
in the light of the circumstances under which they were made, not
misleading; the descriptions in the Registration Statements and
Prospectus of statutes, legal and governmental proceedings and
contracts and other documents are accurate and fairly present the
information required to be shown; and such counsel do not know of
any legal or governmental proceedings required to be described in
a Registration Statement or the Prospectus which are not
described as required or of any contracts or documents of a
character required to be described in a Registration Statement or
the Prospectus or to be filed as exhibits to a Registration
Statement which are not described and filed as required; it being
understood that such counsel need express no opinion as to the
financial statements or other financial data contained in the
Registration Statements or the Prospectus;
(ix) This Agreement has been duly authorized, executed and
delivered by the Company;
(x) The statements set forth under the heading
"Description of Capital Stock" in the Prospectus, insofar as such
statements purport to summarize certain provisions of the capital
stock of the Company, provide a fair summary of such provisions;
and
(xi) The statements set forth under the headings "Risk
Factors -- A substantial portion of our revenues;" "Risk Factors
-- We have signed an agreement...;" "Business -- Microsoft
Relationship;" and "Business -- Intellectual Property and Other
Proprietary Rights" insofar as such statements constitute a
summary of legal matters, documents or proceedings referred to
therein, provide a fair summary of such legal matters, documents
and proceedings.
(e) The Representatives shall have received from Morrison &
Foerster LLP, counsel for the Underwriters, such opinion or opinions,
dated such Closing Date, with respect to the incorporation of the
Company, the validity of the Offered Securities delivered on such
Closing Date, the Registration Statements, the Prospectus and other
related matters as the Representatives may require, and the Company
shall have furnished to such counsel such documents as they request for
the purpose of enabling them to pass upon such matters.
(f) The Representatives shall have received a certificate, dated
such Closing Date, of the President or any Vice President and a
principal financial or accounting officer of the Company in which such
officers, to the best of their knowledge after reasonable investigation,
shall state that: the representations and warranties of the Company in
this Agreement are true and correct; the Company has complied with all
agreements and satisfied all conditions on its part to be performed or
satisfied hereunder at or prior to such Closing Date; no stop order
suspending the effectiveness of any Registration Statement has been
issued and no proceedings for that purpose have been instituted or are
contemplated by the Commission; the Additional Registration Statement
(if any) satisfying the requirements of subparagraphs (1) and (3) of
Rule 462(b) was filed pursuant to Rule 462(b), including payment of the
applicable filing fee in accordance with Rule 111(a) or (b) under the
Act, prior to the time the Prospectus was printed and distributed to any
Underwriter; and, subsequent to the date of the most recent financial
statements in the Prospectus, there has been no
14
<PAGE> 15
material adverse change, nor any development or event involving a
prospective material adverse change, in the condition (financial or
other), business, properties or results of operations of the Company and
its subsidiaries taken as a whole except as set forth in or contemplated
by the Prospectus or as described in such certificate.
(g) The Representatives shall have received a letter, dated such
Closing Date, of which meets the requirements of subsection (a) of this
Section, except that the specified date referred to in such subsection
will be a date not more than three days prior to such Closing Date for
the purposes of this subsection.
The Company will furnish the Representatives with such conformed copies of such
opinions, certificates, letters and documents as the Representatives reasonably
request. CSFBC may in its sole discretion waive on behalf of the Underwriters
compliance with any conditions to the obligations of the Underwriters hereunder,
whether in respect of an Optional Closing Date or otherwise.
7. Indemnification and Contribution. (a) The Company will indemnify and
hold harmless each Underwriter, its partners, directors and officers and each
person, if any, who controls such Underwriter within the meaning of Section 15
of the Act, against any losses, claims, damages or liabilities, joint or
several, to which such Underwriter may become subject, under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in any Registration Statement,
the Prospectus, or any amendment or supplement thereto, or any related
preliminary prospectus, or arise out of or are based upon the omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, and will reimburse
each Underwriter for any legal or other expenses reasonably incurred by such
Underwriter in connection with investigating or defending any such loss, claim,
damage, liability or action as such expenses are incurred; provided, however,
that the Company will not be liable in any such case to the extent that any such
loss, claim, damage or liability arises out of or is based upon an untrue
statement or alleged untrue statement in or omission or alleged omission from
any of such documents in reliance upon and in conformity with written
information furnished to the Company by any Underwriter through the
Representatives specifically for use therein, it being understood and agreed
that the only such information furnished by any Underwriter consists of the
information described as such in subsection (b) below.
The Company agrees to indemnify and hold harmless the Designated
Underwriter and each person, if any, who controls the Designated Underwriter
within the meaning of either Section 15 of the Securities Act or Section 20 of
the Exchange Act (the "DESIGNATED ENTITIES"), from and against any and all
losses, claims, damages and liabilities (including, without limitation, any
legal or other expenses reasonably incurred in connection with defending or
investigating any such action or claim) (i) caused by any untrue statement or
alleged untrue statement of a material fact contained in any material prepared
by or with the consent of the Company for distribution to Participants in
connection with the Directed Share Program or caused by any omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading; (ii) caused by the
failure of any Participant to pay for and accept delivery of Directed Shares
that the Participant agreed to purchase; or (iii) related to, arising out of, or
in connection with the Directed Share Program, other than losses, claims,
damages or liabilities (or expenses relating thereto) that are finally
judicially determined to have resulted from the bad faith or gross negligence of
the Designated Entities.
(b) Each Underwriter will severally and not jointly indemnify and hold
harmless the Company, its directors and officers and each person, if any, who
controls the Company within the meaning of Section 15 of the Act, against any
losses, claims, damages or liabilities to which the Company may become subject,
under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect
15
<PAGE> 16
thereof) arise out of or are based upon any untrue statement or alleged untrue
statement of any material fact contained in any Registration Statement, the
Prospectus, or any amendment or supplement thereto, or any related preliminary
prospectus, or arise out of or are based upon the omission or the alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, in each case to the
extent, but only to the extent, that such untrue statement or alleged untrue
statement or omission or alleged omission was made in reliance upon and in
conformity with written information furnished to the Company by such Underwriter
through the Representatives specifically for use therein, and will reimburse any
legal or other expenses reasonably incurred by the Company in connection with
investigating or defending any such loss, claim, damage, liability or action as
such expenses are incurred, it being understood and agreed that the only such
information furnished by any Underwriter consists of (i) the following
information in the Prospectus furnished on behalf of each Underwriter: the
concession and reallowance figures appearing in the [fourth] paragraph under the
caption "Underwriting" and the information contained in the [sixth and twelfth]
paragraphs under the caption "Underwriting."
(c) Promptly after receipt by an indemnified party under this Section of
notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against the indemnifying party under
subsection (a) or (b) above, notify the indemnifying party of the commencement
thereof; but the omission so to notify the indemnifying party will not relieve
it from any liability which it may have to any indemnified party otherwise than
under subsection (a) or (b) above. In case any such action is brought against
any indemnified party and it notifies the indemnifying party of the commencement
thereof, the indemnifying party will be entitled to participate therein and, to
the extent that it may wish, jointly with any other indemnifying party similarly
notified, to assume the defense thereof, with counsel satisfactory to such
indemnified party (who shall not, except with the consent of the indemnified
party, be counsel to the indemnifying party), and after notice from the
indemnifying party to such indemnified party of its election so to assume the
defense thereof, the indemnifying party will not be liable to such indemnified
party under this Section for any legal or other expenses subsequently incurred
by such indemnified party in connection with the defense thereof other than
reasonable costs of investigation. No indemnifying party shall, without the
prior written consent of the indemnified party, effect any settlement of any
pending or threatened action in respect of which any indemnified party is or
could have been a party and indemnity could have been sought hereunder by such
indemnified party unless such settlement (i) includes an unconditional release
of such indemnified party from all liability on any claims that are the subject
matter of such action and (ii) does not include a statement as to, or an
admission of, fault, culpability or a failure to act by or on behalf of an
indemnified party.
(d) If the indemnification provided for in this Section is unavailable
or insufficient to hold harmless an indemnified party under subsection (a) or
(b) above, then each indemnifying party shall contribute to the amount paid or
payable by such indemnified party as a result of the losses, claims, damages or
liabilities referred to in subsection (a) or (b) above (i) in such proportion as
is appropriate to reflect the relative benefits received by the Company on the
one hand and the Underwriters on the other from the offering of the Securities
or (ii) if the allocation provided by clause (i) above is not permitted by
applicable law, in such proportion as is appropriate to reflect not only the
relative benefits referred to in clause (i) above but also the relative fault of
the Company on the one hand and the Underwriters on the other in connection with
the statements or omissions which resulted in such losses, claims, damages or
liabilities as well as any other relevant equitable considerations. The relative
benefits received by the Company on the one hand and the Underwriters on the
other shall be deemed to be in the same proportion as the total net proceeds
from the offering (before deducting expenses) received by the Company bear to
the total underwriting discounts and commissions received by the Underwriters.
The relative fault shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Company or the Underwriters and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
untrue statement or omission. The amount paid by an indemnified
16
<PAGE> 17
party as a result of the losses, claims, damages or liabilities referred to in
the first sentence of this subsection (d) shall be deemed to include any legal
or other expenses reasonably incurred by such indemnified party in connection
with investigating or defending any action or claim which is the subject of this
subsection (d). Notwithstanding the provisions of this subsection (d), no
Underwriter shall be required to contribute any amount in excess of the amount
by which the total price at which the Securities underwritten by it and
distributed to the public were offered to the public exceeds the amount of any
damages which such Underwriter has otherwise been required to pay by reason of
such untrue or alleged untrue statement or omission or alleged omission. No
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. The Underwriters' obligations in
this subsection (d) to contribute are several in proportion to their respective
underwriting obligations and not joint.
(e) The obligations of the Company under this Section shall be in
addition to any liability which the Company may otherwise have and shall extend,
upon the same terms and conditions, to each person, if any, who controls any
Underwriter within the meaning of the Act; and the obligations of the
Underwriters under this Section shall be in addition to any liability which the
respective Underwriters may otherwise have and shall extend, upon the same terms
and conditions, to each director of the Company, to each officer of the Company
who has signed a Registration Statement and to each person, if any, who controls
the Company within the meaning of the Act.
8. Default of Underwriters. If any Underwriter or Underwriters default
in their obligations to purchase Offered Securities hereunder on either the
First or any Optional Closing Date and the aggregate number of shares of Offered
Securities that such defaulting Underwriter or Underwriters agreed but failed to
purchase does not exceed 10% of the total number of shares of Offered Securities
that the Underwriters are obligated to purchase on such Closing Date, CSFBC may
make arrangements satisfactory to the Company for the purchase of such Offered
Securities by other persons, including any of the Underwriters, but if no such
arrangements are made by such Closing Date, the non-defaulting Underwriters
shall be obligated severally, in proportion to their respective commitments
hereunder, to purchase the Offered Securities that such defaulting Underwriters
agreed but failed to purchase on such Closing Date. If any Underwriter or
Underwriters so default and the aggregate number of shares of Offered Securities
with respect to which such default or defaults occur exceeds 10% of the total
number of shares of Offered Securities that the Underwriters are obligated to
purchase on such Closing Date and arrangements satisfactory to CSFBC and the
Company for the purchase of such Offered Securities by other persons are not
made within 36 hours after such default, this Agreement will terminate without
liability on the part of any non-defaulting Underwriter or the Company, except
as provided in Section 9 (provided that if such default occurs with respect to
Optional Securities after the First Closing Date, this Agreement will not
terminate as to the Firm Securities or any Optional Securities purchased prior
to such termination). As used in this Agreement, the term "Underwriter" includes
any person substituted for an Underwriter under this Section. Nothing herein
will relieve a defaulting Underwriter from liability for its default.
9. Survival of Certain Representations and Obligations. The respective
indemnities, agreements, representations, warranties and other statements of the
Company or its officers and of the several Underwriters set forth in or made
pursuant to this Agreement will remain in full force and effect, regardless of
any investigation, or statement as to the results thereof, made by or on behalf
of any Underwriter, the Company or any of their respective representatives,
officers or directors or any controlling person, and will survive delivery of
and payment for the Offered Securities. If this Agreement is terminated pursuant
to Section 8 or if for any reason the purchase of the Offered Securities by the
Underwriters is not consummated, the Company shall remain responsible for the
expenses to be paid or reimbursed by it pursuant to Section 5 and the respective
obligations of the Company and the Underwriters pursuant to Section 7 shall
remain in effect, and if any Offered Securities have been purchased hereunder
the representations and warranties in Section 2 and all obligations under
Section 5 shall also remain in effect. If
17
<PAGE> 18
the purchase of the Offered Securities by the Underwriters is not consummated
for any reason other than solely because of the termination of this Agreement
pursuant to Section 8 or the occurrence of any event specified in clause (iii),
(iv) or (v) of Section 6(c), the Company will reimburse the Underwriters for all
out-of-pocket expenses (including fees and disbursements of counsel) reasonably
incurred by them in connection with the offering of the Offered Securities.
10. Notices. All communications hereunder will be in writing and, if
sent to the Underwriters, will be mailed, delivered or telegraphed and confirmed
to the Representatives, c/o Credit Suisse First Boston Corporation, Eleven
Madison Avenue, New York, NY 10010-3629, Attention: Investment Banking
Department--Transactions Advisory Group, or, if sent to the Company, will be
mailed, delivered or telegraphed and confirmed to it at 3633 136th Place S.E.,
Suite 100, Belleuve, Washington 98006, Attention: William T. Baxter; provided,
however, that any notice to an Underwriter pursuant to Section 7 will be mailed,
delivered or telegraphed and confirmed to such Underwriter.
11. Successors. This Agreement will inure to the benefit of and be
binding upon the parties hereto and their respective successors and the officers
and directors and controlling persons referred to in Section 7, and no other
person will have any right or obligation hereunder.
12. Representation of Underwriters. The Representatives will act for the
several Underwriters in connection with this financing, and any action under
this Agreement taken by the Representatives jointly or by CSFBC will be binding
upon all the Underwriters.
13. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, but all such
counterparts shall together constitute one and the same Agreement.
14. Applicable Law. This Agreement shall be governed by, and construed
in accordance with, the laws of the State of New York, without regard to
principles of conflicts of laws.
The Company hereby submits to the non-exclusive jurisdiction of the
Federal and state courts in the Borough of Manhattan in The City of New York in
any suit or proceeding arising out of or relating to this Agreement or the
transactions contemplated hereby.
If the foregoing is in accordance with the Representatives'
understanding of our agreement, kindly sign and return to the Company one of the
counterparts hereof, whereupon it will become a binding agreement between the
Company and the several Underwriters in accordance with its terms.
Very truly yours,
BSQUARE CORPORATION
By______________________________________
Title:__________________________________
The foregoing Underwriting Agreement is hereby
confirmed and accepted as of the date first above
written.
18
<PAGE> 19
CREDIT SUISSE FIRST BOSTON CORPORATION
LEHMAN BROTHERS INC.
A.G. EDWARDS & SONS, INC.
WIT CAPITAL CORPORATION
Acting on behalf of themselves and as the
Representatives of the several
Underwriters
By CREDIT SUISSE FIRST BOSTON CORPORATION
By___________________________________
Title:_______________________________
19
<PAGE> 20
SCHEDULE A
<TABLE>
<CAPTION>
Underwriter Number of
----------- Firm Securities
---------------
<S> <C>
Credit Suisse First Boston Corporation....................
Lehman Brothers Inc.......................................
A.G. Edwards & Sons, Inc..................................
WIT Capital Partners......................................
---------------
Total...............................
===============
</TABLE>
20
<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
October 8, 1999
<PAGE> 2
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> 3
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
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