<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 14, 2000
REGISTRATION NO. 333-45506
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
BSQUARE CORPORATION
(NAME OF ISSUER IN ITS CHARTER)
<TABLE>
<S> <C> <C>
WASHINGTON 7389 91-1650880
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
3150 139TH AVE S.E., SUITE 500
BELLEVUE, WASHINGTON 98005
(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
3150 139TH AVE S.E., SUITE 500
BELLEVUE, WASHINGTON 98005
(425) 519-5900
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
COPIES OF ALL COMMUNICATIONS TO BE SENT TO:
MICHAEL J. ERICKSON, ESQ.
MARK F. WORTHINGTON, ESQ.
SARAH E. MACKEY, ESQ.
SUMMIT LAW GROUP, PLLC
1505 WESTLAKE AVENUE NORTH, SUITE 300
SEATTLE, WASHINGTON 98109
(206) 281-9881
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
From time to time 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. [X]
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
SUBJECT TO COMPLETION, DATED SEPTEMBER 14, 2000
635,486 SHARES
BSQUARE CORPORATION
COMMON STOCK
This prospectus relates to the public offering, which is not being
underwritten, of 635,486 shares of our common stock which are held by some of
our current shareholders.
The prices at which such shareholders may sell the shares will be
determined by the prevailing market price for the shares or in negotiated
transactions. We will not receive any of the proceeds from the sale of the
shares.
Our common stock is quoted on the Nasdaq National Market under the symbol
"BSQR." On September 5, 2000, the average of the high and low price for the
common stock was $17.56.
INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK AND SHOULD BE
CONSIDERED ONLY BY PERSONS WHO CAN AFFORD THE LOSS OF THEIR ENTIRE INVESTMENT.
SEE THE SECTION ENTITLED "RISK FACTORS" ON PAGE 5 OF THIS PROSPECTUS FOR CERTAIN
RISKS AND UNCERTAINTIES THAT YOU SHOULD CONSIDER.
-------------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is a
criminal offense.
-------------------------
This prospectus does not constitute an offer to sell or a solicitation of
an offer to buy any security other than the securities covered by this
prospectus, nor does it constitute an offer to or solicitation of any person in
any jurisdiction in which such offer or solicitation may not lawfully be made.
The date of this prospectus is September , 2000.
<PAGE> 3
TABLE OF CONTENTS
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PAGE
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Prospectus Summary.................. 1
Risk Factors........................ 5
Forward-Looking Statements.......... 14
Use of Proceeds..................... 14
Dividend Policy..................... 14
Price Range of Common Stock......... 15
Capitalization...................... 15
Dilution............................ 15
Plan of Distribution................ 16
Selling Shareholders................ 18
Selected Consolidated Financial
Data.............................. 20
Management's Discussion and Analysis
of Financial Condition and Results
of Operations..................... 22
</TABLE>
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Liquidity and Capital Resources..... 28
Business............................ 31
Management.......................... 48
Related-Party Transactions.......... 56
Principal Shareholders.............. 57
Description of Capital Stock........ 59
Shares Eligible For Future Sale..... 61
Notice to Canadian Residents........ 62
Legal Matters....................... 63
Experts............................. 63
Where to Find Additional
Documents......................... 63
Index to Financial Information...... F-1
</TABLE>
-------------------------
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.
i
<PAGE> 4
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 products and services that facilitate the
integration of Microsoft Windows operating systems into a variety of devices we
call intelligent computing devices (ICDs), enhance the functionality of those
devices, and accelerate their deployment into the marketplace. Original
equipment manufacturers, semiconductor vendors, software developers, value added
resellers, internet service providers and network service providers rely on our
products and services to help bring customized intelligent computing devices and
intelligent computing device 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. In addition, in late 1999, we began offering Windows NT Embedded
integration services, thus expanding the breadth of our service offerings, and
in January 2000, our acquisition of BlueWater Systems broadened our product line
for developers of ICDs based on additional Windows operating systems including
Windows 98, Windows 2000, Windows NT and Windows NT Embedded. Our acquisition of
Mainbrace Corporation in May 2000 enables us to provide standard manufacturable
designs of popular intelligent computing devices such as Webpads, Web-phones,
Pocket PCs, E-books and portable data tablets, which together with our other
products and services offer customers a broad range of solutions to rapidly
bring products to market.
Intelligent computing devices are an emerging class of products with
sophisticated processing power that are designed for specific computing and
communications applications. Examples of intelligent computing devices include
television "set-top boxes," which sit on top of television sets and provide
users with advanced cable TV 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, Webpads,
E-books and Pocket PCs used both in the workplace and at home. Compared to
traditional computers, intelligent computing devices 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, intelligent computing devices 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
access information and as demand for smaller and more mobile devices grows,
original equipment manufacturers are developing new intelligent computing
devices to better meet the needs of end users. Because of space constraints and
other design and resource limitations inherent in the intelligent computing
device environment, original equipment manufacturers require a computer
operating system that is both scaleable and highly customizable, with lower
system requirements than traditional PC operating systems. There are several
different operating systems that can be used in intelligent computing devices.
Windows CE, a versatile and highly adaptable operating system modeled after
Microsoft Windows, is gaining market acceptance among original equipment
manufacturers as an operating system that meets these requirements. As increased
use of the Internet by consumers and businesses helps fuel the growth of the
intelligent computing device market, we believe that the market for Windows CE
will in turn benefit. In addition, the Windows NT Embedded operating system is
used for "computerizing" larger, more complex devices with a need for real time
functionality. Examples of devices for which Windows NT Embedded is
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<PAGE> 5
designed include Windows-based terminals, office machine equipment such as
printers, and telecommunications equipment such as routers and switching
equipment.
We develop products and provide services that facilitate the development of
Windows CE-based intelligent computing devices. We generate revenue in four
distinct ways. First, we provide software code-writing and related engineering
services to Microsoft and semiconductor vendors to adapt Windows CE software 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 original equipment manufacturers to cost-effectively
integrate Windows CE, NT Embedded and other Windows operating systems into their
intelligent computing devices. These offerings include original equipment
manufacturer adaptation kits, software development products, test programs and
Microsoft Windows CE licensing, along with engineering and quality assurance
services and training. Our service and product offerings are designed to ensure
that Windows works properly with the original equipment manufacturer's computer
boards, which are the internal hardware constituting the core of their
intelligent computing devices. We also offer software engineering services for
the integration of Window NT Embedded into ICDs, and for other Windows-based
operating systems we offer the BlueWater Systems software development products.
Third, we license a wide range of Windows-based software applications to
original equipment manufacturers, value added resellers, Internet service
providers, network service providers and intelligent computing device consumers
to provide additional functions to Windows-based intelligent computing devices,
such as printing and faxing capabilities, voice-over IP, remote device
management and wireless wide area least cost routing. Fourth, we license
standard manufacturing design of intelligent computing devices such as Webpads,
Web-phones, Pocket PCs, E-books and portable data tablets and bundle our
products and integration services for our customers.
We intend to become a primary provider of products and services for
facilitating the rapid and cost-efficient development of intelligent computing
devices. Generally, an operating system provided by vendors in its original form
will not be readily compatible with the increasingly wide variety of
semiconductors and intelligent computing devices 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-based integration services, expanding our
strategic relationships with hardware and software vendors, maintaining and
expanding our relationship with Microsoft, developing additional software
applications, providing a comprehensive solution capability for rapid
development and deployment of intelligent computing devices and expanding our
international presence.
We were incorporated in the State of Washington in July 1994. Our principal
executive offices are located at 3150 139th Avenue S.E., Suite 500, Bellevue,
Washington 98005, 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.
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THE OFFERING
Common stock offered by selling
shareholders................................ 635,486 shares
Common stock to be outstanding after this
offering.................................... 34,298,445 shares
Use of proceeds............................. We will not receive any of the
proceeds from the sale of the
shares.
Nasdaq National Market Symbol............... BSQR
Please see "Capitalization" on page 15 for a more complete discussion
regarding the outstanding shares of common stock, options to purchase common
stock and other related matters.
3
<PAGE> 7
SUMMARY CONSOLIDATED FINANCIAL DATA
The following summary consolidated financial data should be read in
conjunction with our consolidated financial statements and related notes, as
well as the section entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations," found elsewhere in this prospectus.
Additionally, on January 5, 2000 we acquired BlueWater Systems, Inc. in a
transaction accounted for as a pooling of interests. All of our financial data
presented in the consolidated financial statements and results of operations
have been restated to include the historical financial information of BlueWater
Systems, Inc. as if it had always been a part of BSQUARE.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------------------------------------- ------------------
1995 1996 1997 1998 1999 1999 2000
----------- ----------- ------- ------- ------- ------- -------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Revenue............................ $ 1,840 $ 5,026 $15,914 $25,937 $41,406 $19,261 $28,992
Gross profit....................... 1,033 3,546 10,099 14,574 21,897 10,382 15,222
Income (loss) from operations...... 815 2,002 4,815 3,140 1,873 1,450 (1,665)
Net income (loss).................. $ 816 $ 2,005 $ 4,003 $ 2,300 $ 1,695 $ 871 $(1,480)
======= ======= ======= ======= ======= ======= =======
Basic earnings (loss) per share.... $ 0.04 $ 0.09 $ 0.18 $ 0.12 $ 0.08 $ 0.04 $ (0.05)
======= ======= ======= ======= ======= ======= =======
Shares used in computation of basic
earnings (loss) per share........ 21,261 22,367 21,661 18,633 21,430 18,467 32,821
======= ======= ======= ======= ======= ======= =======
Diluted earnings (loss) per
share............................ $ 0.04 $ 0.09 $ 0.18 $ 0.08 $ 0.06 $ 0.03 $ (0.05)
======= ======= ======= ======= ======= ======= =======
Shares used in computation of
diluted earnings (loss) per
share............................ 21,261 22,367 22,042 27,736 30,800 28,945 32,821
======= ======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 2000
-------------
(UNAUDITED)
<S> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments......... $ 79,773
Working capital........................................... 73,048
Total assets.............................................. 113,742
Shareholders' equity...................................... 99,478
</TABLE>
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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-BASED INTELLIGENT COMPUTING DEVICES 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 the majority of our products and services is dependent,
to achieve widespread market acceptance;
- the failure of the intelligent computing device market to develop;
- adverse changes in our relationship with Microsoft, from which a
substantial portion of our revenue is generated and on which 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
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.
THE MAJORITY OF OUR REVENUE, INCLUDING 68% OF OUR TOTAL REVENUE FOR THE SIX
MONTHS ENDED JUNE 30, 2000, IS GENERATED FROM OUR RELATIONSHIP WITH MICROSOFT,
WHICH CAN BE MODIFIED OR TERMINATED BY MICROSOFT AT ANY TIME.
For the year ended December 31, 1999 and for the six months ended June 30,
2000, approximately 85% and 68% 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 July 2001, includes
a number of project-specific work plans. We bill
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<PAGE> 9
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 160 of our 370 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.
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. Microsoft is a publicly traded company that
files financial reports and information with the Securities and Exchange
Commission. These reports are publicly available under Microsoft's Exchange Act
filing number, 000-14278.
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 intelligent
computing device market and the extent of its future acceptance is uncertain.
Because substantially all of our revenue for 1999 and the six months ended June
30, 2000 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;
- the ability of the Windows CE operating system to compete against
existing and emerging operating systems for the intelligent computing
device 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, a joint venture
among several of the largest manufacturers of cellular phones. Windows CE
may be unsuccessful in capturing a significant share of these two
segments of the intelligent computing device market, or in maintaining
its market share in those other segments of the intelligent computing
device 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 original equipment manufacturers 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
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<PAGE> 10
operating systems that are more attractive to intelligent computing
device end users than those available on Windows CE, potential purchasers
could select competing operating systems over Windows CE.
IF THE MARKET FOR INTELLIGENT COMPUTING DEVICES 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 intelligent computing devices 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 intelligent
computing devices, which will depend on many factors, including:
- the development of content and applications for intelligent computing
devices;
- 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 inputting and sharing data, communicating
among users and connecting to the Internet; and
- the evolution of industry standards that facilitate the distribution of
content over the Internet to these devices via wired and wireless
telecommunications systems, satellite or cable.
IF MICROSOFT ADDS FEATURES TO ITS WINDOWS 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, 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 original
equipment manufacturers could be adversely affected and our business would be
harmed. Microsoft has great influence over the development plans and buying
decisions of original equipment manufacturers utilizing Windows CE for
intelligent computing devices. Microsoft refers many of our original equipment
manufacturer customers to us. 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 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
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<PAGE> 11
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 original equipment manufacturer
customer.
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. In addition, competition is intense for the business
of the limited number of original equipment manufacturer customers that are
capable of building and shipping large quantities of intelligent computing
devices. 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;
- established intelligent computing device software and tools;
- small- and medium-size engineering services; and
- software and component distributors.
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.
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-based intelligent computing device software and services is low. In
addition, Microsoft has created a marketing program to encourage systems
integrators to work on Windows. These systems integrators are given the same
access by Microsoft to the Windows technology as we are. New competitors may
have lower overhead than us and may therefore be able to offer advantageous
pricing. We expect that competition will increase as other established and
emerging companies enter the Windows-based intelligent computing device market
and as new products and technologies are introduced.
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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 four patents relating to our engineering work.
These patents, if issued, may not provide sufficiently broad protection or they
may not prove to be enforceable against alleged infringers. There can be no
assurance that any of our pending patents will be granted. Even if granted,
patents may be circumvented or challenged and, if challenged, may be
invalidated. Any patents obtained may provide limited or no competitive
advantage to us. It is also possible that another party could obtain patents
that block our use of some, or all, of our products and services. If that
occurred, we would need to obtain a license from the patent holder or design
around their patent. The patent holder may or may not choose to make a license
available to us at all or on acceptable terms. Similarly, it may not be possible
to design around such a blocking patent.
In general, there can be no assurance that our efforts to protect our
intellectual property rights through patent, copyright, trade secret and
trademark laws will be effective to prevent misappropriation of our technology,
or to prevent the development and design by others of products or technologies
similar to or competitive with those developed by us. We frequently license the
source code of our products and the source code results of our services to
customers. There can be no assurance that customers with access to our source
code will comply with the license terms or that we will discover any violations
of the license terms or, in the event of discovery of violations, that we will
be able to successfully enforce the license terms and/or recover the economic
value lost from such violations. To license many of our software products, we
rely in part on "shrinkwrap" and "clickwrap" licenses that are not signed by the
end user and, therefore, may be unenforceable under the laws of certain
jurisdictions. As with other software products, our products are susceptible to
unauthorized copying and uses that may go undetected, and policing such
unauthorized use is difficult.
A significant portion of our marks include the word "BSQUARE" or the
preface "b." Other companies use forms of "BSQUARE" or the preface "b" in their
marks alone or in combination with other words, and we cannot prevent all such
third-party uses. We license certain trademark rights to third parties. Such
licensees may not abide by compliance and quality control guidelines with
respect to such trademark rights and may take actions that would harm our
business.
The computer software market is characterized by frequent and substantial
intellectual property litigation, which is often complex and expensive, and
involves a significant diversion of resources and uncertainty of outcome.
Litigation may be necessary in the future to enforce our intellectual property
or to defend against a claim of infringement or invalidity. Litigation could
result in substantial costs and the diversion of resources and could harm our
business and operating results.
THIRD PARTIES COULD ASSERT THAT OUR SOFTWARE PRODUCTS AND SERVICES INFRINGE
THEIR INTELLECTUAL PROPERTY RIGHTS, WHICH COULD EXPOSE US TO ADDITIONAL COSTS
AND LITIGATION.
Third parties may claim that our current or future software products and
services infringe their proprietary rights, and these claims, regardless of
their merit, could increase our costs and harm our business. We have not
conducted patent searches to determine whether the technology used in our
products infringes patents held by third parties. In addition, it is difficult
to determine whether our software products and services infringe third-party
intellectual property rights, particularly in a rapidly evolving technological
environment in which there may be numerous patent applications pending,
9
<PAGE> 13
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.
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-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.
WE CANNOT ASSURE YOU THAT OUR REVENUE GROWTH RATE WILL NOT DECLINE OR THAT WE
WILL BE ABLE TO SUSTAIN OR INCREASE OUR PROFITABILITY.
The rate of growth of our revenue over the prior year was 217% from 1996 to
1997, 63% from 1997 to 1998, and 60% from 1998 to 1999. 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 June 2000, we grew from 21 employees to 459
employees, and we expect 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,
10
<PAGE> 14
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
year ended December 31, 1999 and for the six months ended June 30, 2000, 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;
- 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.
RECENT AND FUTURE ACQUISITIONS COULD PROVE DIFFICULT TO INTEGRATE, DISRUPT OUR
BUSINESS, DILUTE SHAREHOLDER VALUE AND ADVERSELY AFFECT OUR OPERATING RESULTS.
We recently acquired BlueWater Systems, Inc. and Mainbrace Corporation, and
we may acquire or make investments in complementary companies, services and
technologies in the future. If we fail to properly evaluate, execute and
integrate acquisitions and investments, including these recent acquisitions, our
business and prospects may be seriously harmed. 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. If we fail to do any of
these, we may suffer losses and impair relationships with our employees,
customers and strategic partners, and our management may be distracted from our
day-to-day operations. We also may be unable to maintain uniform standards,
controls, procedures and policies, and significant demands may be placed on our
management and our operations, information services and financial, legal and
marketing resources. Finally, acquired businesses sometimes result in unexpected
liabilities and contingencies which could be significant. In addition,
acquisitions using debt or equity securities dilute the ownership of existing
shareholders, which could affect the market price of our stock.
11
<PAGE> 15
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 original equipment
manufacturer 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 intelligent
computing devices 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 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.
12
<PAGE> 16
THE VOLATILITY OF THE STOCK MARKETS COULD ADVERSELY AFFECT OUR STOCK PRICE.
Stock markets are subject to significant price and volume fluctuations
which may be unrelated to the operating performance of particular companies, and
the market price of our common stock may therefore frequently change. The market
price of our common stock could also fluctuate substantially due to a variety of
other factors, including quarterly fluctuations in our results of operations,
our ability to meet analysts' expectations, adverse circumstances affecting the
introduction and market acceptance of new products and services offered by us,
announcements of new products and services by competitors, changes in the
information technology environment, changes in earnings estimates by analysts,
changes in accounting principles, sales of our common stock by existing holders
and the loss of key personnel.
A SMALL NUMBER OF OUR EXISTING SHAREHOLDERS CAN EXERT CONTROL OVER US.
Our executive officers, directors and principal shareholders holding more
than 5% of our common stock together control a majority of our outstanding
common stock. As a result, these shareholders, if they act together, could
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 this year's annual meeting of shareholders,
our board of directors was 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.
13
<PAGE> 17
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934 based on current expectations, estimates and projections
about our industry and our management's beliefs and assumptions. When used in
this prospectus and elsewhere, the words "believes," "plans," "estimates,"
"intends," "anticipates," "seeks" and "expects" and similar expressions are
intended to identify forward-looking statements. These forward-looking
statements include, but are not limited to, statements about our plans,
objectives, expectations and intentions and other statements that are not
historical facts. These forward-looking statements are not guarantees of future
performance and are subject to certain risks and uncertainties that are
difficult to predict. Accordingly, actual results may differ materially from
those anticipated or expressed in such statements. Particular attention should
be paid to the cautionary statements contained in this prospectus under "Risk
Factors" involving potential fluctuations in our quarterly operating results,
our reliance on Microsoft, uncertainty about the Windows CE market,
unpredictability of future revenue, the intensely competitive nature of our
industry, our limited operating history, management of growth, the integration
of acquisitions and our reliance on third parties, manufacturers, distributors
and suppliers. Readers are cautioned not to place undue reliance on the
forward-looking statements, which speak only as of the date made. Except as
required by law, we undertake no obligation to update any forward-looking
statement, whether as a result of new information, future events or otherwise.
Readers, however, should carefully review the factors set forth in this and
other reports or documents that we file from time to time with the Securities
and Exchange Commission.
USE OF PROCEEDS
We will not receive any proceeds from the sales of common stock by the
selling shareholders pursuant to this prospectus. We will bear all expenses of
registration incurred in connection with this offering, but the selling
shareholders will bear all selling and other expenses they incur.
DIVIDEND POLICY
We have never paid cash dividends on our common stock other than the
distribution of S corporation earnings prior to October 1997, when we converted
to a C corporation. 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.
14
<PAGE> 18
PRICE RANGE OF COMMON STOCK
Our common stock has been traded on the Nasdaq National Market under the
symbol "BSQR" since October 19, 1999, the date of our initial public offering.
Prior to that time, there was no public market for our common stock. The
following table sets forth, for the periods indicated, the high and low sales
prices for our common stock as reported by the Nasdaq National Market.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
FISCAL YEAR ENDED DECEMBER 31, 1999:
Fourth Quarter (from October 19, 1999).................... $56.50 $15.00
FISCAL YEAR ENDING DECEMBER 31, 2000:
First Quarter............................................. $53.50 $20.81
Second Quarter............................................ $26.00 $12.00
</TABLE>
On September 5, 2000 the last reported sale price for our common stock on
the Nasdaq National Market was $17.50 per share. As of June 30, 2000, there were
approximately 209 holders of record of our common stock.
CAPITALIZATION
The outstanding share information below excludes 4,347,799 shares of common
stock that are reserved for issuance upon exercise of stock options under our
stock option plans outstanding as of June 30, 2000 at a weighted average
exercise price of $7.52 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.
The following table sets forth our capitalization as of June 30, 2000:
<TABLE>
<CAPTION>
JUNE 30, 2000
---------------------------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C>
Shareholders' equity:
Common stock, no par value: 50,000,000 authorized,
33,481,045 shares issued and outstanding............... $102,638
Deferred stock option compensation........................ (550)
Cumulative foreign currency translation adjustment........ (43)
Retained earnings (accumulated deficit)................... (2,567)
--------
Total capitalization................................... $ 99,478
========
</TABLE>
DILUTION
The sales of common stock by the selling shareholders as described in this
prospectus do not dilute the shares of common stock because the shares of common
stock sold under this prospectus are already issued and outstanding.
15
<PAGE> 19
PLAN OF DISTRIBUTION
We are registering 635,486 shares of our common stock on behalf of certain
selling shareholders. All of the shares were issued by us in connection with our
acquisition of BlueWater Systems and Mainbrace Corporation. We will receive no
proceeds from this offering. The selling shareholders named in this prospectus
or pledgees, donees, transferees or other successors-in-interest selling shares
received from a named selling shareholder as a gift, partnership distribution or
other non-sale-related transfer after the date of this prospectus may sell some
or all of the shares from time to time. REGISTRATION OF THE SHARES DOES NOT
MEAN, HOWEVER, THAT THE SHARES NECESSARILY WILL BE OFFERED OR SOLD. The selling
shareholders will act independently of us in making decisions with respect to
the timing, manner and size of each sale. The sales may be made on one or more
exchanges or in the over-the-counter market or otherwise, at prices and at terms
then prevailing or at prices related to the then current market price, or in
negotiated transactions. The selling shareholders may effect such transactions
by selling the shares to or through broker-dealers. The shares may be sold by
one or more of, or a combination of, the following:
- a block trade in which the broker-dealer so engaged will attempt to sell
the shares as agent but may position and resell a portion of the block as
principal to facilitate the transaction,
- purchases by a broker-dealer as principal and resale by such
broker-dealer for its account pursuant to this prospectus,
- an exchange distribution in accordance with the rules of such exchange,
- ordinary brokerage transactions and transactions in which the broker
solicits purchasers, and
- in privately negotiated transactions.
To the extent required, this prospectus may be amended or supplemented from
time to time to describe a specific plan of distribution. In effecting sales,
broker-dealers engaged by the selling shareholders may arrange for other
broker-dealers to participate in the resales.
The selling shareholders may enter into hedging transactions with
broker-dealers in connection with distributions of the shares or otherwise. In
such transactions, broker-dealers may engage in short sales of the shares in the
course of hedging the positions they assume with selling shareholders. The
selling shareholders also may sell shares short and redeliver the shares to
close out such short positions. The selling shareholders may enter into option
or other transactions with broker-dealers which require the delivery to the
broker-dealer of the shares. The broker-dealer may then resell or otherwise
transfer such shares pursuant to this prospectus. The selling shareholders also
may loan or pledge the shares to a broker-dealer. The broker-dealer may sell the
shares so loaned, or upon a default the broker-dealer may sell the pledged
shares pursuant to this prospectus.
Broker-dealers or agents may receive compensation in the form of
commissions, discounts or concessions from selling shareholders. Broker-dealers
or agents may also receive compensation from the purchasers of the shares for
whom they act as agents or to whom they sell as principals, or both.
Compensation as to a particular broker-dealer might be in excess of customary
commissions and will be in amounts to be negotiated in connection with the sale.
Broker-dealers or agents and any other participating broker-dealers or the
selling shareholders may be deemed to be "underwriters" within the meaning of
Section 2(11) of the Securities Act of 1933 in connection with sales of the
shares. Accordingly, any such commission, discount or concession received by
them and any profit on the resale of the shares purchased by them may be deemed
to be underwriting discounts or commissions under the Securities Act. Because
selling shareholders may be deemed to be "underwriters" within the meaning of
Section 2(11) of the Securities Act, the selling shareholders will be subject to
the prospectus delivery requirements of the Securities Act. In addition, any
securities covered by this prospectus which qualify for sale pursuant to Rule
144 promulgated under the Securities Act may be
16
<PAGE> 20
sold under Rule 144 rather than pursuant to this prospectus. To our knowledge,
the selling shareholders have not entered into any agreements, understandings or
arrangements with any underwriters or broker-dealers regarding the sale of their
securities.
The shares will be sold only through registered or licensed brokers or
dealers if required under applicable state securities laws. In addition, in
certain states the shares may not be sold unless they have been registered or
qualified for sale in the applicable state or an exemption from the registration
or qualification requirement is available and is complied with.
Under applicable rules and regulations under the Securities and Exchange
Act of 1934, any person engaged in the distribution of the shares may not
simultaneously engage in market making activities with respect to our common
stock for a period of two business days prior to the commencement of such
distribution. In addition, each selling shareholder will be subject to
applicable provisions of the Exchange Act and the associated rules and
regulations under the Exchange Act, including Regulation M, which provisions may
limit the timing of purchases and sales of shares of our common stock by the
selling shareholders. We will make copies of this prospectus available to the
selling shareholders and we have informed them of the need for delivery of
copies of this prospectus to purchasers at or prior to the time of any sale of
the shares.
We will file a supplement to this prospectus, if required, pursuant to Rule
424(b) under the Securities Act upon being notified by a selling shareholder
that any material arrangement has been entered into with a broker-dealer for the
sale of shares through a block trade, special offering, exchange distribution or
secondary distribution or a purchase by a broker or dealer. Such supplement will
disclose:
- the name of each such selling shareholder and of the participating
broker-dealer(s),
- the number of shares involved,
- the price at which such shares were sold,
- the commissions paid or discounts or concessions allowed to such
broker-dealer(s), where applicable,
- that such broker-dealer(s) did not conduct any investigation to verify
the information set out or incorporated by reference in this prospectus,
and
- other facts material to the transaction.
We will bear all costs, expenses and fees in connection with the
registration of the shares. The selling shareholders will bear all commissions
and discounts, if any, attributable to the sales of the shares. The selling
shareholders may agree to indemnify any broker-dealer or agent that participates
in transactions involving sales of the shares against certain liabilities,
including liabilities arising under the Securities Act.
17
<PAGE> 21
SELLING SHAREHOLDERS
The following table sets forth the number of shares owned by each of the
selling shareholders. None of the selling shareholders has had a material
relationship with us within the past three years other than as a result of the
ownership of the shares reflected below or other of our securities or as a
result of their employment with us or our subsidiaries. We cannot give an
estimate as to the amount of shares that will be held by the selling
shareholders after completion of this offering because the selling shareholders
may offer all or some of the shares and because, to our knowledge, there
currently are no agreements, arrangements or understandings with respect to the
sale of any of the shares. The shares offered by this prospectus may be offered
from time to time by the selling shareholders named below.
<TABLE>
<CAPTION>
NUMBER OF
PERCENT OF SHARES
NUMBER OF SHARES OUTSTANDING REGISTERED FOR
NAME OF SELLING SHAREHOLDER BENEFICIALLY OWNED SHARES SALE HEREBY
--------------------------- ------------------ ----------- --------------
<S> <C> <C> <C>
Joseph R. Breivogel........................... 8,853 * 8,853
William Denecke............................... 788 * 788
Michael Hoskins............................... 4,426 * 4,426
Paul D. Lever................................. 215,145 * 215,145
Kurt Mihalko.................................. 22,375 * 22,375
Abe J. Moses.................................. 4,426 * 4,426
Douglas and Carol Moses....................... 5,378 * 5,378
Dork Alahydoian............................... 652 * 652
John Balletto................................. 1,304 * 1,304
Cadence Design Systems........................ 62,111 * 62,111
Anne Marie Dekker............................. 260 * 260
Vincent Everts................................ 163 * 163
Douglas Fairbairn............................. 4,891 * 4,891
Richard H. Ferrens............................ 163 * 163
William Gsand................................. 370 * 370
Andre Kabel................................... 326 * 326
Blake Gary Krikorian.......................... 27,796 * 27,796
Krikor Krikorian.............................. 489 * 489
Rafi Krikorian................................ 97 * 97
Joseph Longo.................................. 184 * 184
Jonah McLeod.................................. 163 * 163
Andrew and Ria Moroyan........................ 192,728 * 192,728
Hrayr and Vera Moroyan........................ 37,062 * 37,062
Serop Moroyan................................. 370 * 370
Andrew K. Moroyan............................. 3,260 * 3,260
Mike Otworth.................................. 326 * 326
George Rassam................................. 1,664 * 1,664
PierCarlo Ravasio............................. 326 * 326
Jeffrey W. Ridley............................. 2,778 * 2,778
John S. Scott................................. 2,608 * 2,608
Randall Lee Shepard........................... 326 * 326
James E. Smith................................ 2,778 * 2,778
Yassami A. Ting............................... 2,778 * 2,778
Peter Vervest................................. 326 * 326
Thomas C. Wong................................ 27,796 * 27,796
======= === =======
Total....................................... 635,486 1.9% 635,486
</TABLE>
-------------------------
* Represents beneficial ownership of less than one percent.
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<PAGE> 22
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data as of and for the years
ended December 31, 1996, 1997, 1998 and 1999 are derived from our consolidated
financial statements included elsewhere in this prospectus, which have been
audited by Arthur Andersen LLP, independent public accountants. The consolidated
financial data as of and for the period ended December 31, 1995 are derived from
unaudited financial statements. The consolidated financial data as of and for
the six months ended June 30, 1999 and 2000 are derived from unaudited financial
statements included elsewhere in this prospectus. Additionally, on January 5,
2000 we acquired BlueWater Systems, Inc. in a transaction accounted for as a
pooling of interests. All of our financial data presented in the consolidated
financial statements and results of operations have been restated to include the
historical financial information of BlueWater Systems, Inc. as if it had always
been a part of BSQUARE. 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 entitled "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>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------------------------------- ------------------
1995 1996 1997 1998 1999 1999 2000
----------- ------- ------- ------- ------- -------- -------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenue........................................... $ 1,840 $ 5,026 $15,914 $25,937 $41,406 $ 19,261 $28,992
Cost of revenue................................... 807 1,480 5,815 11,363 19,509 8,879 13,770
------- ------- ------- ------- ------- -------- -------
Gross profit...................................... 1,033 3,546 10,099 14,574 21,897 10,382 15,222
Operating expenses:
Research and development...................... 98 771 2,086 4,438 7,506 3,301 4,245
Selling, general and administrative........... 120 773 3,117 6,825 11,935 5,337 7,874
Acquired in-process research and
development................................. -- -- -- -- -- -- 4,100
Amortization of intangible assets............. -- -- -- -- -- -- 350
Amortization of deferred stock option
compensation................................ -- -- 81 171 583 294 318
------- ------- ------- ------- ------- -------- -------
Total operating expenses.................... 218 1,544 5,284 11,434 20,024 8,932 16,887
------- ------- ------- ------- ------- -------- -------
Income (loss) from operations..................... 815 2,002 4,815 3,140 1,873 1,450 (1,665)
Interest income (expense), net.................... 1 3 (8) 326 926 133 1,834
Acquisition-related expense....................... -- -- -- -- -- -- (620)
------- ------- ------- ------- ------- -------- -------
Income (loss) before income taxes................. 816 2,005 4,807 3,466 2,799 1,583 (451)
Provision for income taxes........................ -- -- 804 1,166 1,104 712 1,029
------- ------- ------- ------- ------- -------- -------
Net income (loss)................................. $ 816 $ 2,005 $ 4,003 $ 2,300 $ 1,695 $ 871 $(1,480)
======= ======= ======= ======= ======= ======== =======
Basic earnings (loss) per share................... $ 0.04 $ 0.09 $ 0.18 $ 0.12 $ 0.08 $ 0.04 $ (0.05)
======= ======= ======= ======= ======= ======== =======
Shares used to compute basic earnings (loss) per
share(1)........................................ 21,261 22,367 21,661 18,633 21,430 18,467 32,821
======= ======= ======= ======= ======= ======== =======
Diluted earnings (loss per share)................. $ 0.04 $ 0.09 $ 0.18 $ 0.08 $ 0.06 $ 0.03 $ (0.05)
======= ======= ======= ======= ======= ======== =======
Shares used in computation of diluted earnings
(loss) per share................................ 21,261 22,367 22,042 27,736 30,800 28,945 32,821
======= ======= ======= ======= ======= ======== =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------- JUNE 30,
1995 1996 1997 1998 1999 2000
----------- ------ ------ ------- ------- -----------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments................................... $176 $ 223 $2,528 $ 7,056 $82,972 $ 79,773
Working capital................................. 353 775 3,161 10,527 81,675 73,048
Total assets.................................... 607 1,155 6,921 16,448 96,642 113,742
Long-term obligations, net of current portion... -- -- 1,743 289 -- --
Mandatorily redeemable convertible preferred
stock......................................... -- -- -- 14,417 -- --
Shareholders' equity (deficit).................. 381 1,060 2,663 (965) 89,125 99,478
</TABLE>
-------------------------
(1) See Note 15 to the Consolidated Financial Statements for a reconciliation of
the numerators and denominators used in computing basic and diluted earnings
per share.
19
<PAGE> 23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations should be read in conjunction with our consolidated
financial statements and related notes included elsewhere in this prospectus.
OVERVIEW
We are a leading provider of software solutions that enable the development
and proliferation of a wide variety of intelligent computing devices based on
the Microsoft Windows-based operating systems. We work with semiconductor
vendors and original equipment manufacturers to provide software products and
engineering services for the development of intelligent computing devices.
We enable the rapid and low-cost deployment of intelligent computing
devices by providing a variety of software products and services for the
development, integration and deployment of Windows-powered operating systems
with industry-specific applications. We also develop software applications that
are licensed to end users to provide intelligent computing devices with
additional functionality. Our products and services are marketed and supported
on a worldwide basis through a direct sales force augmented by distributors.
Our revenue totaled $15.9 million in 1997, $25.9 million in 1998, $41.4
million in 1999 and $29.0 million for the six months ended June 30, 2000. We
generated net income of $4.0 million in 1997, $2.3 million in 1998, $1.7 million
in 1999, and a loss of $1.5 million for the six months ended June 30, 2000.
To date, we have derived the majority of our revenue from the provision of
services to Microsoft, semiconductor vendors and original equipment
manufacturers. 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 original equipment
manufacturers related to the bundling of our software on their intelligent
computing devices and, more recently, from the license to them of software
products contained in our intelligent computing device integration tool kits.
On January 5, 2000, we acquired BlueWater Systems, Inc., a privately held
designer of software development tools for the creation of Windows-based
intelligent computing devices. The transaction was accounted for using the
pooling-of-interests method of accounting. All of our financial data presented
in the consolidated financial statements and results of operations have been
restated to include the historical financial information of BlueWater Systems,
Inc. as if it had always been a part of BSQUARE.
On May 24, 2000, we acquired Mainbrace Corporation in a transaction
accounted for as a purchase. Mainbrace Corporation, located in Sunnyvale,
California, is an intellectual property-licensing and enabling software firm
delivering products and services to high-volume market segments including
set-top boxes, web-enabled phones, wireless thin clients and electronic book
readers. The financial data presented in the consolidated financial statements
include the results of operations of Mainbrace Corporation beginning on May 25,
2000.
MICROSOFT MASTER DEVELOPMENT AND LICENSE AGREEMENT
In 1997, 1998, 1999 and for the six months ended June 30, 2000,
approximately 35%, 75%, 85% and 68% of our revenue, respectively, was generated
under our master development and license
20
<PAGE> 24
agreement with Microsoft. The master agreement, the current renewable term of
which concludes in July 2001, 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, and recognize revenue generated under the master agreement
as the services are rendered. The master agreement and each of the individual
work plans may be modified or terminated by Microsoft at any time. While we
anticipate that our relationship with Microsoft will remain strong, we are
unable to predict the magnitude and number of future projects for Microsoft.
HISTORICAL RESULTS OF OPERATIONS
The following table presents certain financial data as a percentage of
total revenue for the periods indicated. 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 ENDED
DECEMBER 31, JUNE 30, 2000
-------------------- --------------
1997 1998 1999 1999 2000
---- ---- ---- ----- -----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenue:
Service........................................... 91% 91% 94% 94% 91%
Product........................................... 9 9 6 6 9
--- --- --- --- ---
Total revenue.................................. 100 100 100 100 100
--- --- --- --- ---
Cost of revenue:
Service........................................... 35 43 46 45 45
Product........................................... 2 1 1 1 2
--- --- --- --- ---
Total cost of revenue.......................... 37 44 47 46 47
--- --- --- --- ---
Gross margin........................................ 63 56 53 54 53
Operating expenses:
Research and development.......................... 13 17 18 17 15
Selling, general and administrative............... 19 26 29 27 28
Acquired in-process research and development...... -- -- -- -- 14
Amortization of intangible assets................. -- -- -- -- 1
Amortization of deferred stock option
compensation................................... 1 1 1 2 1
--- --- --- --- ---
Total operating expenses....................... 33 44 48 46 59
--- --- --- --- ---
Income (loss) from operations....................... 30 12 5 8 (6)
Interest income (expense), net...................... -- 1 2 -- 6
Acquisition-related expense......................... -- -- -- -- (2)
--- --- --- --- ---
Income (loss) before income taxes................... 30 13 7 8 (2)
Provision for income taxes.......................... 5 4 3 3 3
--- --- --- --- ---
Net income (loss)................................... 25% 9% 4% 5% (5)%
=== === === === ===
</TABLE>
COMPARISON OF SIX MONTHS ENDED JUNE 30, 1999 AND 2000
Revenue
Revenue consists of service and product revenue, which includes software
license fees and royalties. Total revenue for the six-month period ended June
30, 2000 increased 51% to $29.0 million, from $19.3 million for the same period
in 1999. The increase in total revenue resulted from an increase in number and
scope of professional service projects as well as an increase in product
revenue. For the six-month periods, Microsoft accounted for 68% and 85% of
revenue for 2000 and 1999, respectively. The decrease in the percentage of
revenue derived from Microsoft was due to the
21
<PAGE> 25
signing of silicon vendors under the Porting Partner Agreement and the growth in
services provided to non-tools customers.
Revenue outside of the U.S. was $3.5 million and $271,000 for the six
months ended June 30, 2000 and 1999, respectively. The increase in international
revenue was due to an increase in both services and products sold to
international OEM customers.
Service revenue. Service revenue was $26.5 million for the six months ended
June 30, 2000 compared to $18.1 million for the same period in 1999, a 46%
increase. The increase was due to a continued increase in the number and size of
consulting service projects.
Product revenue. For the six-month period ended June 30, 2000, product
revenue was $2.5 million compared to $1.2 million for the same period in 1999, a
114% increase. The increase in product revenue was due to increases in sales of
the CE Validator quality assurance test suite, sale of strategic alliance
third-party products and royalty income. As a percentage of total revenue,
product revenue increased to 9% of total revenue for the six months ended June
30, 2000 compared to 6% for the same period in 1999.
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. For the six-month
period ended June 30, 2000, cost of service revenue was $13.1 million compared
to $8.7 million for the same period in 1999, a 50% increase. Cost of service
revenue increased in absolute dollars due to hiring and training of additional
employees to support an increased number of consulting projects. At June 30,
2000 and 1999, we had approximately 284 and 209 employees, respectively, engaged
in engineering consulting. Cost of service revenue as a percentage of related
service revenue was 49% for the six-month period ended June 30, 2000 compared to
48% for the same period in 1999. The increase in cost of service revenue as a
percentage of the related service revenue in 2000 was primarily the result of an
increase in software engineering compensation 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. For the six-month period ended June 30, 2000, cost of product revenue
was $666,000 compared to $139,000 for the same period in 1999, a 379% increase.
As a percentage of related product revenue, cost of product revenue was 27% for
the six months ended June 30, 2000 compared to 12% for the same period in 1999.
The increase in cost of product revenue as a percentage of related product
revenue relates to an increase in sales of third-party products in the first six
months of 2000 over the same period in 1999.
Operating Expenses
Research and development. Research and development expenses consist
primarily of salaries and benefits for software developers, quality assurance
personnel and program managers, plus an allocation of our facilities and
depreciation costs. For the six-month period ended June 30, 2000, research and
development costs were $4.2 million, compared to $3.3 million for the same
period in 1999, a 29% increase. This increase was due to an increase in the
number of software developers and quality assurance personnel hired to expand
our product offerings and to support development and testing activities.
Research and development expenses represented 15% and 17% of our total revenue
for the six months ended June 30, 2000 and 1999, respectively. The decrease in
research and development expenses as a percentage of total revenue in 2000
reflects the more rapid increase of our revenue compared to the growth in
research and development expenses. We anticipate that research and
22
<PAGE> 26
development expenses will continue to increase in absolute dollars in future
periods as we continue to expand our market position.
Selling, general and administrative. For the six-month period ended June
30, 2000, selling, general and administrative expenses were $7.9 million
compared to $5.3 million for the same period in 1999, a 48% increase. This
increase 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, corporate advertising, as well as annual reporting and other
costs associated with having become a public company. For the six-month periods
ended June 30, 2000 and 1999, these expenses represented 28% and 27% of total
revenue, respectively. We anticipate that selling, general and administrative
expenses will continue to increase in absolute dollars in future periods as we
expand our sales and marketing staff both internationally and domestically.
Acquisition of in-process research and development and amortization of
intangible assets. On May 24, 2000, we acquired Mainbrace Corporation, an
intellectual property-licensing and enabling software firm delivering product
solutions including set-top boxes, web-enabled phones, wireless thin clients,
and electronic book readers to high-volume market segments. The acquisition was
accounted for using the purchase method of accounting, and, accordingly, the
results of Mainbrace's operations are included in our consolidated financial
statements since the date of acquisition.
The purchase price was allocated to the fair value of the acquired assets
and assumed liabilities based on their fair market values at the date of the
acquisition. Of the total purchase price, we allocated $4.1 million to acquired
in-process research and development, $16.9 million to goodwill and other
intangible assets and $1.0 million to working capital and tangible assets. The
amount allocated to in-process research and development was determined by an
independent valuation and has been recorded as a charge to expense because its
technological feasibility had not been established and it had no alternative
future use at the date of acquisition. Goodwill and other intangible assets will
be amortized over their estimated future lives of two to seven years. We
anticipate that future amortization of intangible assets will approximate $1.1
million per quarter.
Amortization of deferred stock option compensation. We recorded
amortization of deferred stock option compensation of $318,000 for the six
months ended June 30, 2000 and $294,000 for the same period in 1999. These
charges resulted from stock option grants at prices below the deemed fair market
value of our common stock when we were a private company. Deferred stock option
compensation is amortized over the vesting periods of the options.
Interest Income (Expense), Net
Interest income, net consists primarily of earnings on our cash, cash
equivalents and short-term investment balances offset by interest expense
associated with debt obligations. For the six-month periods ended June 30, 2000
and 1999, interest income, net was $1.8 million and $133,000, respectively. The
increase resulted from higher average cash, cash equivalent and short-term
investment balances.
In January 2000, we acquired BlueWater Systems, Inc. in a transaction
accounted for as a pooling of interests. In connection with the acquisition, we
incurred $620,000 of acquisition-related costs ($515,000 after taxes, or $0.01
per diluted share) which were charged to operations during the six months ended
June 30, 2000.
Income Taxes
Our provision for federal, state and international income taxes was $1.0
million for the six months ended June 30, 2000, compared to $712,000 for the six
months ended June 30, 1999, yielding
23
<PAGE> 27
an effective rate of (229)% during that period in 2000 and 45% during that
period in 1999. The effective rate in 2000 was positively affected by the tax
benefit of interest income earned on tax-exempt and tax-advantaged municipal
securities held in our short-term investment portfolio, and was negatively
affected by the non-deductibility of in-process research and development and
amortization of intangible assets. The effective tax rate in 1999 was negatively
affected by the non-deductibility of the losses generated by international
operations.
COMPARISON OF YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
Revenue
Total revenue increased 63% from $15.9 million in 1997 to $25.9 million in
1998, and an additional 60% to $41.4 million in 1999. Microsoft accounted for
35%, 75% and 85% of total revenue in 1997, 1998 and 1999, respectively. Revenue
outside of North America totaled $4.3 million in 1997, $1.2 million in 1998 and
$1.5 million in 1999. The decrease in international revenue from 1997 to 1998
correlates with the corresponding increase in Microsoft revenue resulting from
the shift from working directly with semiconductor vendors to working with
Microsoft for the benefit of those customers during this period. The increase in
international revenue from 1998 to 1999 is the result of an increase in the
number and size of software integration service and product contracts with OEMs.
Service revenue. Service revenue increased 64% from $14.5 million in 1997
to $23.7 million in 1998, and an additional 64% to $38.8 million in 1999. The
increases in service revenue for all periods were due to the increasing number
and size of service projects. As a percentage of total revenue, service revenue
did not change materially between 1997 and 1998 and increased between 1998 and
1999 due to an increase in the growth of the number and size of software
integration contracts.
Product revenue. Product revenue increased 53% from $1.5 million in 1997 to
$2.2 million in 1998, and an additional 15% to $2.6 million in 1999. The
increases in product revenue from 1997 to 1999 resulted from the expansion of
product offerings from software applications for handheld PCs to intelligent
computing device integration tool kits and CE Validator quality assurance test
suites. As a percentage of total revenue, product revenue did not change
materially between 1997 and 1998 and decreased between 1998 and 1999 due to an
increase in service revenue as a result of the growth of the number and size of
software integration contracts.
Cost of Revenue
Cost of service revenue. Cost of service revenue increased 98% from $5.6
million in 1997 to $11.0 million in 1998, and an additional 72% to $19.0 million
in 1999. These increases resulted from the hiring and training of additional
employees to support our growing customer base. At December 31, 1997, 1998 and
1999, we had 94, 160 and 231 employees, respectively, engaged in engineering
consulting. Cost of service revenue as a percentage of related service revenue
was 39% in 1997, 47% in 1998 and 49% in 1999. The increases in cost of service
revenue as a percentage of related service revenue reflect higher personnel
costs related to the competitive employee recruiting and retention 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 31% from
$249,000 in 1997 to $326,000 in 1998, and an additional 62% to $529,000 in 1999.
Cost of product revenue as a percentage of related product revenue was 17% in
1997, 15% in 1998 and 20% in 1999. The decrease in cost of product revenue as a
percent of related product revenue from 1997 to 1998 relates to a change in mix
from pre-package applications sales in 1997 to royalty revenue earned from the
bundling of software applications in 1998. The increase in cost of product
revenue as a percentage of related product revenue from 1998 to 1999 relates to
a change in mix of product sales from royalties
24
<PAGE> 28
received from original equipment manufacturers for licenses of applications in
1998 to a higher proportion of pre-packaged BSQUARE and third-party applications
in 1999.
Operating Expenses
Research and development. Research and development expenses increased 113%
from $2.1 million in 1997 to $4.4 million in 1998, and an additional 69% to $7.5
million in 1999. These increases relate primarily to the increase in the number
of software developers and quality assurance personnel hired to expand our
product offerings and to support our product development and testing activities.
Research and development expenses represented 13% of our total revenue in 1997,
17% in 1998 and 18% in 1999. 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. We anticipate that research and development expenses will
continue to increase in absolute dollars in future periods.
Selling, general and administrative. Selling, general and administrative
expenses increased 119% from $3.1 million in 1997 to $6.8 million in 1998, and
an additional 75% to $11.9 million in 1999. These increases resulted primarily
from our investment in finance, executive, administration, 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, general and
administrative expenses represented 19% of our total revenue in 1997, 26% in
1998 and 29% in 1999. The increases in selling, general and administrative
expenses as a percentage of total revenue primarily reflect the more rapid
investment in our administrative and sales and marketing infrastructure compared
to the growth of our revenue during these periods. During the fourth quarter of
1998, we opened sales offices in Munich, Germany and Tokyo, Japan. To establish
and operate these offices, we invested $502,000 in 1998 and $1.9 million in
1999, which are included in the expense amounts above. We anticipate that
selling, general and administrative expenses will continue to increase in
absolute dollars in future periods as we expand our sales and marketing staff
both internationally and domestically, as well as incur expenses associated with
being a public company.
Amortization of deferred stock option compensation. We recorded
amortization of deferred stock option compensation of $81,000 in 1997, $171,000
in 1998 and $583,000 in 1999, resulting from stock option grants at prices below
the deemed fair market value of our common stock when we were a private company.
Interest income (expense), net
Interest income (expense), net was $(8,000) in 1997, $326,000 in 1998 and
$926,000 in 1999. These increases resulted from higher average cash, cash
equivalent and short-term investment balances over the prior year.
Income taxes
Our provision for federal, state and international income taxes was
$804,000 for 1997, $1.2 million for 1998 and $1.1 million 1999, yielding an
effective rate of 16.7%, 33.6% and 39.4% in 1997, 1998 and 1999, 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. The
increase in the effective tax rate in 1999 over 1998 was due primarily to the
effect of the non-deductibility of losses from our international operations.
25
<PAGE> 29
LIQUIDITY AND CAPITAL RESOURCES
Since our inception through December 1999, we financed our operations and
capital expenditures primarily through cash flow from operations. As of June 30,
2000, we had $79.8 million of cash, cash equivalents and short-term investments.
This represents a decrease of $3.2 million over December 31, 1999. In October
1999, we completed an initial public offering of 4,000,000 shares of common
stock and raised $54.4 million, net of offering costs. In addition, in September
1999, we sold 1,518,378 shares of our common stock to Vulcan Ventures for
approximately $18.7 million. 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, 2000 was $73.0 million compared to
$81.7 million at December 31, 1999.
Our operating activities resulted in net cash inflows of $4.6 million in
1997, $129,000 in 1998, $10.0 million in 1999 and $11.1 million for the six
months ended June 30, 2000. Cash provided by operating activities resulted
primarily from income from operations (excluding acquired in-process research
and development and amortization of intangible assets during the six months
ended June 30, 2000) and increases in deferred revenue, accounts payable and
accrued liabilities, partially offset by increases in accounts receivable.
Investing activities used cash of $1.5 million in 1997, $3.7 million in
1998, $32.8 million in 1999 and $11.9 million for the six months ended June 30,
2000. Investing activities for 1997 and 1998 were primarily purchases of capital
equipment. Investing activities in 1999 included $25.8 million in purchases of
short-term investments and $7.0 million in purchases of capital equipment.
Investing activities in the six months ended June 30, 2000 included $14.3
million in net cash used in connection with the acquisition of Mainbrace
Corporation, $1.3 million of cash used for the purchase of an investment and
$597,000 of capital equipment purchases.
Financing activities used $775,000 in 1997, 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. Financing activities in 1999
generated $72.9 million due to the net proceeds from the initial public offering
and from the sale of common stock to Vulcan Ventures. Financing activities
generated $1.9 million for the six months ended June 30, 2000 due to proceeds
from the issuance of shares under our employee stock purchase plan, the exercise
of stock options and the exercise of warrants by former BlueWater Systems, Inc.
shareholders.
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 $3.0 million and bears
interest at the bank's prime rate, which was 9.5% at July 12, 2000. The facility
expires in July 2001. 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, 2000, and at that time there were no borrowings outstanding under
this credit facility.
As of June 30, 2000, our principal commitments consisted of obligations
outstanding under operating leases. In October 1999, we began leasing
approximately 126,000 square feet in a single facility located in Bellevue,
Washington pursuant to a lease which expires in 2009. The annual cost of this
lease is approximately $3.0 million, subject to annual adjustments. Although we
have no other material commitments, we anticipate an increase in our capital
expenditures and lease commitments consistent with our anticipated growth in our
operations, infrastructure and personnel.
26
<PAGE> 30
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 professional service capabilities. We believe that 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. 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 may use a portion of our
available cash to acquire additional businesses, products and technologies or to
establish joint ventures that we believe will complement our current or future
business. Pending such uses, we will invest our surplus cash in government
securities and other short-term, investment grade, interest-bearing instruments.
IMPACT OF THE YEAR 2000
Even though we have not experienced any immediate adverse impact from the
transition to the year 2000, it is possible that other dates in the year 2000
may affect computer software and systems. While we believe that all of our
systems are year 2000 compliant, we may discover problems during 2000 that may
require expenditures in order for our computer and software systems to be
upgraded, modified or replaced. In addition, we do not currently have any
information concerning the year 2000 compliance status of our customers or other
parties with whom we do business. It is possible that some of the internal
systems of our customers or other parties with whom we do business have already
been or will be negatively affected by the year 2000 date change. We currently
have no contingency plan to manage any year 2000 issues that may arise.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) 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.
In December 1999, SEC Staff Accounting Bulletin No. 101 (SAB 101), "Revenue
Recognition in Financial Statements," was issued. This pronouncement summarizes
certain of the Securities and Exchange Commission staff's views in applying
generally accepted accounting principles to revenue recognition. We are required
to adopt SAB 101 in the fourth quarter of 2000 with retroactive application to
January 1, 2000. We believe we are in compliance with the requirements of SAB
101.
In March 2000, the Emerging Issues Task Force (EITF) of the FASB reached a
consensus on Issue No. 00-2, "Accounting for Web Site Development Costs," which
provides guidance on when to capitalize versus expense costs incurred to develop
a web site. We believe we are in compliance with the requirements of Issue No.
00-2.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Interest Rate Risk. We do not hold derivative financial instruments or
equity securities in our investment portfolio. Our cash equivalents consist of
high-quality securities, as specified in our investment policy guidelines. The
policy limits the amount of credit exposure to any one issue or
27
<PAGE> 31
issuer to a maximum of 20% of the total portfolio with the exception of treasury
securities, commercial paper and money market funds, which are exempt from size
limitation. The policy limits all short-term investments to mature in two years
or less, with the average maturity being one year or less. These securities are
subject to interest rate risk and will decrease in value if interest rates
increase.
Foreign Currency Risk. Currently, the majority of our sales and expenses
are denominated in U.S. dollars, and, as a result, we have not experienced
significant foreign exchange gains and losses to date. While we have conducted
some transactions in foreign currencies and expect to continue to do so, we do
not anticipate that foreign exchange gains or losses will be significant. We
have not engaged in foreign currency hedging to date, although we may do so in
the future.
Investment Risk. We have an investment in voting capital stock of a
privately-held technology company for business and strategic purposes. This
investment is included in other assets and is accounted for under the cost
method since our ownership is less than 20% and we do not have significant
influence. The securities do not have a quoted market price. Our policy is to
regularly review the operating performance in assessing the carrying value of
the investment.
We review our long-lived assets, including goodwill, for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable.
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BUSINESS
OVERVIEW
We provide a broad range of products and services that facilitate the
integration of Microsoft Windows operating systems into a variety of devices we
call intelligent computing devices (ICDs), enhance the functionality of those
devices, and accelerate their deployment into the marketplace. Original
equipment manufacturers, semiconductor vendors, software developers, value added
resellers, internet service providers and network service providers rely on our
products and services to help bring customized intelligent computing devices and
intelligent computing device 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. In addition, in late 1999, we began offering Windows NT Embedded
integration services, thus expanding the breadth of our service offerings, and
in January 2000, our acquisition of BlueWater Systems broadened our product line
for developers of ICDs based on additional Windows operating systems including
Windows 98, Windows 2000, Windows NT and Windows NT Embedded. Our acquisition of
Mainbrace Corporation in May 2000 enables us to provide standard manufacturable
designs of popular ICDs such as Webpads, Web-phones, Pocket PCs, E-books and
portable data tablets, which together with our other products and services offer
customers a broad range of solutions to rapidly bring products to market.
Intelligent computing devices are an emerging class of products with
sophisticated processing power that are designed for specific computing and
communications applications. Examples of intelligent computing devices include
television "set-top boxes," which sit on top of television sets and provide
users with interactive cable TV 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 used in cars and trucks; and Windows-based
terminals, Webpads, E-books and Pocket PCs used both in the workplace and at
home. Compared to traditional computers, intelligent computing devices 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, intelligent computing devices 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
access information and as demand for smaller and more mobile devices grows,
original equipment manufacturers are developing new intelligent computing
devices to better meet the needs of end users. Because of space constraints and
other design and resource limitations inherent in the intelligent computing
device environment, original equipment manufacturers require a computer
operating system that is both scaleable and highly customizable, with lower
system requirements than traditional PC operating systems. There are several
different operating systems that can be used in intelligent computing devices.
Windows CE, a versatile and highly adaptable operating system modeled after
Microsoft Windows, is gaining market acceptance among original equipment
manufacturers as an operating system that meets these requirements. As increased
use of the Internet by consumers and businesses helps fuel the growth of the
intelligent computing device market, we believe that the market for Windows CE
will in turn benefit. In addition, the Windows NT Embedded operating system is
used for "computerizing" larger, more complex devices with a need for real time
functionality. Examples of devices for which Windows NT Embedded is designed
include Windows-based terminals, office machine equipment such as printers, and
telecommunications equipment such as routers and switching equipment.
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We develop products and provide services that facilitate the development of
Windows-based intelligent computing devices. We generate revenue in four
distinct ways. First, we provide software code-writing and related engineering
services to Microsoft and semiconductor vendors to adapt Windows CE software 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 original equipment manufacturers to cost-effectively
integrate Windows CE, NTE and other Windows operating systems into their
intelligent computing devices. These offerings include original equipment
manufacturer adaptation kits, software development products, test programs and
Microsoft Windows CE licensing, along with engineering and quality assurance
services and training. Our service and product offerings are designed to ensure
that Windows works properly with the original equipment manufacturer's computer
boards, which are the internal hardware constituting the core of their
intelligent computing devices. We also offer software engineering services for
the integration of Window NT Embedded into ICDs, and for other Windows-based
operating systems we offer the BlueWater Systems software development products.
Third, we license a wide range of Windows based software applications to
original equipment manufacturers, value added resellers, Internet service
providers, network service providers and intelligent computing device consumers
to provide additional functions to Windows based intelligent computing devices,
such as printing and faxing capabilities, voice-over IP, remote device
management and wireless wide area least cost routing. Fourth, we license
standard manufacturing design of intelligent computing devices such as Webpads,
Web-phones, Pocket PCs, E-books and portable data tablets and bundle our
products and integration services for our customers.
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.
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.
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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 new class is
emerging. This includes 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, vehicle navigational
devices, Webpads, E-books and Pocket PCs. These intelligent computing devices
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 intelligent computing device market, is expected to grow
from $2.2 billion in 1998 to $18.7 billion in 2003.
Because intelligent computing devices 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 intelligent computing device 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
original equipment manufacturers require operating systems that can be
integrated with a number of different intelligent computing devices and can
support an expanding range of industry-specific content and applications. The
Microsoft Windows family of operating systems, specifically Windows CE and
Windows NT Embedded, 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 intelligent
computing devices 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
and Windows NT Embedded are emerging as operating systems 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 intelligent computing devices
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 these Windows operating
systems, many original equipment manufacturers 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 and Windows
NT Embedded operating systems and related applications across different
semiconductors and intelligent computing devices. These products and services
should encompass the full cycle of the intelligent computing device 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 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.
OUR BUSINESS
We provide a variety of products and services that facilitate the
integration of Microsoft operating systems into a wide range of intelligent
computing devices, speed development and enhance the functionality of those
devices. Original equipment manufacturers, semiconductor vendors
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Windows CE software developers, value added resellers, internet service
providers and network service providers rely on our products and services to
help bring customized intelligent computing devices and intelligent computing
device applications to market in a timely fashion. Key elements of our solutions
include:
A BROAD SET OF END-TO-END SOFTWARE DEVELOPMENT PRODUCTS, SOFTWARE
APPLICATIONS, INTELLIGENT COMPUTING DEVICE MANUFACTURING DESIGNS 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. We also
provide these services 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 original
equipment manufacturers that support a variety of microprocessors and
other intelligent computing device computer hardware. For example, our CE
Xpress Kits provide pre-configured software packages that enable original
equipment manufacturers to integrate Windows CE into their intelligent
computing devices.
- System validation. We provide software products and services to assist
original equipment manufacturers in the validation and verification of
their hardware and software executing Windows CE and Windows NT Embedded,
including services designed to help original equipment manufacturers
develop testing programs to validate the performance and reliability of
their intelligent computing devices.
- Applications software. We provide software packages that facilitate the
third-party development of Windows CE-based intelligent computing device
user interfaces. We also license software applications to both original
equipment manufacturers and intelligent computing device end users that
enhance the functionality of their intelligent computing devices.
- ICD designs. We provide standard designs for intelligent computing
devices such as Webpads, Web-phones, Pocket PCs, E-books and portable
data tablets. We license these designs as well as with our software
product and services to provide rapid development and deployment for a
variety of customers.
PRODUCTS AND SERVICES THAT USE EXISTING MICROSOFT TECHNOLOGIES AND
STANDARDS. Our Windows-based products and services use existing Microsoft
technologies and standards to enable semiconductor vendors and original
equipment manufacturers to deliver highly customizable and cost-efficient
intelligent computing devices to their end users. These technologies enable
original equipment manufacturers to efficiently utilize the existing pool of
programmers familiar with the Windows operating system to develop
differentiating applications for intelligent computing devices based upon the
Windows family of operating systems. Our use of common programming standards
also allows intelligent computing devices designed with our development products
and services to integrate with existing information systems, as well as with
other Microsoft technologies and applications. By enabling original equipment
manufacturers to standardize on a given software platform, our products and
services help original equipment manufacturers more rapidly deploy new hardware
technologies without having to re-implement their software investments across
multiple platforms.
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CAPITALIZING ON OUR DEPTH OF EXPERIENCE IN DEVELOPING WINDOWS-BASED
PRODUCTS AND SERVICES AND OUR VARIETY OF STRATEGIC RELATIONSHIPS TO DELIVER
TANGIBLE BENEFITS TO WINDOWS-BASED INTELLIGENT COMPUTING DEVICE 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 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 original equipment
manufacturers, semiconductor vendors software developers, value added resellers,
internet service providers and network service providers. Such benefits include:
- REDUCED TIME-TO-MARKET. By using our software services, pre-configured
software components and ICD designs, our customers can take advantage of
our experience with the Windows-based platforms to help bring quality
intelligent computing devices 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 intelligent computing
devices, instead of developing these tools internally, our customers can
reduce the implementation and training time required for their engineers
and lower their intelligent computing device 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 intelligent computing device. 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
intelligent computing device users across a variety of markets.
- ENHANCED INTELLIGENT COMPUTING DEVICE FUNCTIONALITY. Our pre-developed
software components help enable original equipment manufacturer customers
to quickly add new and differentiating application features to their
existing intelligent computing device hardware components, which can help
extend product life cycles.
STRATEGY
Currently, the market for providing solutions for the development of ICDs
is very fragmented. Our strategy is to become one of the primary providers of
products and services for facilitating the rapid and cost efficient development
of intelligent computing devices. Key elements of our strategy include:
Continue to enhance our position as a provider of Windows-based integration
services. We intend to enhance our leadership position in the development and
provision of Windows-based integration services to support a wide variety of
intelligent computing devices. Specifically for Windows CE-based solutions,
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
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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. In addition, we believe that
our experience with Windows CE as an embedded operating system and with Windows
NT Embedded provide a foundation of technical and engineering process expertise
to offer our customers.
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,
Windows NT Embedded and other Windows-based operating systems where applicable.
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. We are also Microsoft's exclusive
partner in their Porting Partners Program, for which we will provide software
engineering services to microprocessor vendors seeking compatibility with
Windows CE. 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-based as an operating system on
ICD platforms, and therefore we intend to continue to work with Microsoft to
promote the Windows family of operating systems as the systems of choice for
ICDs.
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 intelligent
computing devices. We intend to use our Windows CE expertise, our alliances with
original equipment manufacturers and our relationship with Microsoft to develop
a leading position in the market for Windows CE-based software applications. We
currently offer a variety of personal productivity software applications for
Windows CE-based intelligent computing devices. We intend to continue to make
use of our Windows CE expertise to develop additional applications to address
the evolving requirements of this market.
Provide a comprehensive solution capability for rapid development and
deployment of intelligent computing devices. Our breadth of products including
software development, quality assurance software tools, applications for
connectivity, device management, transaction development, user application and
ICD designs provides a broad portfolio of capabilities needed by the market. The
development and deployment of intelligent computing devices has expanded beyond
traditional customers such as OEMs and software developers and includes new
types of customers such as value added resellers, Internet service providers and
network service providers. The capabilities of these customers range from
sophisticated engineering teams capable of building full solutions internally to
companies without engineering capability seeking to outsource development of
fully functioning devices. We intend to support this growing base of customers
though a comprehensive solution capability.
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 intelligent computing devices. During
late 1998,
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we established sales offices in Tokyo, Japan and Munich, Germany; during 1999 we
negotiated relationships with distributors throughout fourteen European
countries, Taiwan, Singapore and China.
ACQUISITIONS
BlueWater Systems, Inc.
On January 5, 2000, we acquired all of the issued and outstanding shares of
BlueWater Systems, Inc., a privately held designer of software development tools
for the creation of Windows-based intelligent computing devices. The transaction
was effected through the exchange of 261,391 shares of our common stock and
options to purchase an additional 21,793 shares of our common stock for all of
the issued and outstanding shares and options to purchase shares of BlueWater.
The merger was accounted for as a pooling of interests.
Mainbrace Corporation
On May 24, 2000, we acquired all of the issued and outstanding shares of
Mainbrace Corporation, an intellectual property licensing and enabling software
firm. We paid an aggregate of $10.8 million cash and issued 627,334 shares of
our common stock and options to purchase an additional 172,629 shares of our
common stock in exchange for all of the outstanding shares and options to
purchase shares of Mainbrace. The acquisition was accounted for under the
purchase method of accounting.
SERVICES AND PRODUCTS
We develop, market and support a wide variety of Windows-based software
products, ICD designs and services for the development and integration of a
diverse selection of intelligent computing devices.
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.
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Services
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 - The Visual Tools are
services to Microsoft development of its Visual necessary for the adaptation
Tools series of development of Windows CE to new
tools for Windows CE intelligent computing
devices and for the
development of Windows CE
software applications
Software engineering - We assist Microsoft and - Allows semiconductor vendors
consulting services to semiconductor vendors in the to make their products
Microsoft and development of system-level available for use in Windows
semiconductor vendors software that enables CE-based intelligent
Windows CE to control the computing devices in a
functions on a particular timely and cost- effective
microprocessor manner
</TABLE>
Integration of Windows CE and Windows NT Embedded with intelligent computing
devices
We offer software products and services that are used by our customers to
integrate Windows operating systems with intelligent computing devices. We offer
a comprehensive set of software products and services that enable original
equipment manufacturers to cost-effectively integrate Windows CE or Windows NT
Embedded with intelligent computing devices, thus reducing time-to-market and
decreasing the risk of project failure.
Products. The following table summarizes the key features and benefits of
the products we offer to original equipment manufacturers for the integration of
Windows CE with intelligent computing devices.
<TABLE>
<CAPTION>
BSQUARE PRODUCT DESCRIPTION BENEFIT
--------------- ----------- -------
<S> <C> <C>
CE Xpress Suite - A set of pre-developed and - Designed to save original
tested code for low-level equipment manufacturers time
support of hardware in a developing low-level
Windows CE-based device software support, reducing
time-to-market
- Available for a broad range
of chip sets including those - Pre-tested components
manufactured by AMD, Cyrix, increase reliability of target
Hitachi, Intel and Motorola device
- Sold in source code format
to allow customer
modifications
WinDK - Device Driver development - Allows rapid development of
tools for Windows 98, device drivers that are
Windows 2000 and Windows NT binary compatible across the
4.0 desk top and server versions
of the Microsoft Windows
operating system
</TABLE>
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<TABLE>
<CAPTION>
BSQUARE PRODUCT DESCRIPTION BENEFIT
--------------- ----------- -------
<S> <C> <C>
WinDK CE - Device Driver development - Allows rapid development or
tools for Windows CE device drivers for the
Window CE operating system
- Allows WinDK drivers for
Windows 2000, Windows NT 4.0
and Windows 98, to be ported
easily to Windows CE
Tex for CE - Time Critical Extensions for - Allows extremely fine
Windows CE realtime capabilities on the
Windows CE operating system
WinRT - Allows developers to control - Allows system developers to
hardware directly from Win32 directly control hardware
applications devices from Win32 programs
without the need of writing
a device driver first
- Allows rapid prototyping of
hardware and systems
CEValidator - A quality assurance and - Designed to save original
testing technology for the equipment manufacturers
validation of Windows CE testing costs. Enables
integration with intelligent original equipment
computing devices manufacturers to test
software throughout the
- A client/server-based test design process
program of more than 1,000
individual test cases for
testing compliance and
reliability
- Extendable architecture for
incorporating additional and
custom test programs
CE Transaction Builder - Allows deployment of Biztalk - Rapid Biztalk application
applications on handheld and development for VARs
PocketPC devices deploying business to
business applications
Remote Device - Comprehensive intelligent - Enables ICDs to be managed
Administrator computing device management centrally by net operators,
and upgrade system IT departments, and/or ASPs
- Supports both Windows CE and
Windows NT Embedded devices
</TABLE>
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<TABLE>
<CAPTION>
BSQUARE PRODUCT DESCRIPTION BENEFIT
--------------- ----------- -------
<S> <C> <C>
iWin(TM) Web Appliance - Solution for OEMs building - Rapid development and
Kit Internet devices and/or web deployment of Internet
appliances devices and/or web
appliances for OEMs and ODMs
- Fully customizable user
interface - Allows each OEM/ODM to
customize interface for
- Microsoft Internet Explorer ISPs, ASPs, or net operators
enabled browser
CE XML Developers Kit - A set of tools to develop - Provides the development
XML applications for Windows tools and runtime environment
CE to deploy XML applications
on Windows CE
CE Remote Updater - A Windows CE update utility - Simple upgrade and update
utility for Windows CE
- Standalone operation
- Small ROM foot print
- Integrates with Remote
Device Administrator
CE Interface Composer - A fully customizable desktop - Gives original equipment
building utility manufacturers the ability to
create a device-specific
- Includes a set of
pre-developed components for - Graphical user interface
creating a custom desktop
- Enables original equipment
- Contains customizable manufacturers to rapidly and
security and interface easily create design
features for commercial prototypes and complete the
applications implementation of graphical
user interfaces
</TABLE>
To augment our own Windows-based 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
original equipment manufacturers, in conjunction with our own software products
and services, provides our original equipment manufacturer 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 original
equipment manufacturers developing Windows CE- and Windows NT Embedded-based
intelligent computing devices. 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 software engineering services use our existing products, such as
our CE Xpress Adaptation Kit, CE Interface Composer and CE Validator, to
implement the hardware and software specifications of our customers' intelligent
computing device 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 original equipment manufacturers. We believe
that original equipment manufacturer customers in need of complex adaptations
can save time and resources by outsourcing this work to us. In addition, to
support our original equipment manufacturer customers, we often "bundle" support
services with our software products and other services. These support services
help
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enable our original equipment manufacturer customers to complete intelligent
computing device development and reduce time-to-market.
The following table summarizes the key features and benefits of the
services we offer to our original equipment manufacturer customers:
<TABLE>
<CAPTION>
BSQUARE PRODUCT DESCRIPTION BENEFIT
--------------- ----------- -------
<S> <C> <C>
Systems consulting - We provide Windows CE and - Without our software
services to original Windows NT Embedded engineering consulting
equipment integration services to services, original equipment
manufacturers original equipment manufacturers would need to
developing intelligent manufacturers developing increase their development
computing devices intelligent computing costs and extend their
devices along with custom project schedules to provide
adaptations of Windows CE the training and materials
required to complete the
- We provide software projects in-house
engineering consulting
services to write the - Allows original equipment
software code that enables manufacturers to move
Windows CE and Windows NT quickly past the
Embedded to integrate with traditionally time consuming
intelligent computing device early stage of integrating
hardware Windows-based operating
systems with their existing
hardware and software
Applications - We provide software - Allows original equipment
consulting services to applications development manufacturers to avoid the
original equipment according to customer time and cost of developing
manufacturers specifications in- house expertise in
developing intelligent applications development for
computing devices Windows CE
Quality assurance - We provide complete quality - Allows early discovery of
consulting services to assurance services on every design problems, a more
original equipment project to ensure the rapid development process
manufacturers highest quality and higher quality products
developing intelligent for end users
computing devices
</TABLE>
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 intelligent computing devices. We market our consumer
software applications through standard retail and electronic commerce channels
and also license these products to original equipment
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manufacturers 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 a practical and
provides faxing capabilities comprehensive faxing
for intelligent computing solution for Windows
devices CE-based devices
- bFAX Pro provides send and
receive capability for
handheld PCs
- bFAX Express provides send-
only capability for handheld
and palm-size PCs
bPRINT - Print management software - Users can spool jobs for
for handheld and palm-size PCs batch printing
- Increases the variety of
printers compatible with
Windows CE-based devices
BSQUARE SpreadSheet - A spreadsheet application - Provides independent
for palm-size PCs functionality while
maintaining Pocket Excel
compatibility
bUSEFUL Utilities Pak - Utility suite for handheld - Provides utility
and palm-size PCs that applications which enhance the
contains 12 different performance and
utility applications functionality of Windows
CE-based devices
</TABLE>
TECHNOLOGY
We have developed a set of technologies incorporated in the software
products described under "-- Integration of Windows CE and Windows NT Embedded
with intelligent computing devices -- Products" that are used by original
equipment manufacturers to integrate Windows CE with their computer boards, the
internal hardware constituting the core of their intelligent computing devices.
The technology contained in our CE Xpress Suite, including the Original
Equipment Manufacturer Adaptation Layer, the CE Platform Layer and the Device
Driver Library, provides the interface between Windows CE and the computer board
contained within the intelligent computing device. The basic features and
functions of these technologies are described below.
Original Equipment Manufacturer Adaptation Layer Library
The Original Equipment Manufacturer Adaptation Layer provides a standard
interface between the Windows CE operating system and the core components of an
intelligent computing device's computer board. A new board-specific Original
Equipment Manufacturer Adaptation Layer must be implemented for each computer
board that will be using Windows CE.
We maintain a library of Original Equipment Manufacturer Adaptation Layers
for several of the computer boards used in Windows CE-based intelligent
computing device products. These Original Equipment Manufacturer Adaptation
Layers are distributed to our customers in our CE Xpress Suite and are also used
by our engineers when we are contracted to create custom solutions. In addition,
our Original Equipment Manufacturer Adaptation Layer library serves as a
starting point for the creation of new Original Equipment Manufacturer
Adaptation Layer implementations.
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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 intelligent
computing device's computer board. A separate device driver must be implemented
for each peripheral device connected to a Windows CE-enabled computer board.
We have created a library of device drivers for inclusion in our CE Xpress
Suite 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 Suite and is
used for the implementation of the majority of our device drivers.
CEValidator
Our CEValidator product is a quality assurance and testing tool which we
originally developed for 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 evaluate 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 original equipment manufacturers to add their own test suites to
evaluate specific features of their intelligent computing devices.
- 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 35%, 75%, 85%
and 68% of our total revenue in 1997, 1998, 1999 and the first six months of
2000, respectively. Our other target customers include semiconductor vendors and
original equipment manufacturers seeking to leverage the numerous benefits of
Windows-based operation systems in order to develop high quality, full-feature
products that meet the complex and evolving requirements of numerous
end-markets.
We maintain strategic relationships with Microsoft to promote its
Windows-based operating systems 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 160 of our software
engineers work on a number of
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<PAGE> 45
different Windows CE-based projects for Microsoft and on the development of
Windows CE-related software tools under various work plans. These software tools
are then provided by Microsoft under the Microsoft name to semiconductor vendors
and various original equipment manufacturers utilizing Windows CE. We bill
Microsoft on a time-and-materials basis, although each project has a maximum
dollar cap. A separate work plan is generated for each project, which can then
be modified or terminated by Microsoft at any time.
Porting Partner. We are the exclusive partner of Microsoft for providing
software engineering services to semiconductor manufacturers seeking Windows CE
software support for the year 2000. Microsoft may expand this program to other
companies in the future.
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 original equipment manufacturers that are
building Windows CE-based intelligent computing devices. We actively participate
in the Microsoft systems integrator program, including participating with
Microsoft in "partner pavilions" at trade shows and listing our services and
posting our product announcements on the "embedded Windows CE" portion of
Microsoft's website. In addition, Microsoft has periodically utilized our
services when an original equipment manufacturer 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 intelligent computing devices. 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 intelligent computing devices, 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 original equipment manufacturers integrate Windows CE into their
intelligent computing devices through our direct sales force, as well as through
third-party representatives and distributors. We market our Windows CE-based
software applications either bundled by original equipment manufacturers onto
particular intelligent computing devices or purchased directly by consumers for
their intelligent computing devices through our direct sales force, third-party
representatives, distributors, or other consumer retail channels. We have direct
sales offices in the United States, Germany and Japan. As of June 30, 2000, we
had 42 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
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software products and services and will further promote the development of
software infrastructures for Windows CE-based intelligent computing devices.
RESEARCH AND DEVELOPMENT
As of June 30, 2000, we had 370 engineers engaged in software engineering
services and 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 are
involved in the development of the Windows CE operating system and accompanying
tools for Microsoft. These responsibilities require significant expertise due to
the radically different nature of the microprocessors and other hardware
components used in Windows CE-based intelligent computing devices. This team has
accumulated detailed knowledge of the Windows CE environment over the past six
years, allowing us to continue to develop software products and services that
enable the expanding capability and compatibility of Windows CE-based
intelligent computing devices. 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 provide services
and 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 intelligent computing devices 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;
- established intelligent computing device software and tools
manufacturers;
- small- and medium-size engineering services; and
- software and component distributors.
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.
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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 four 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 June 30, 2000, we had 459 employees, excluding independent
contractors and other temporary employees, including 370 employees in software
engineering services and product development, 42 employees in sales and
marketing and 47 employees in general and administrative services (including
executive officers). Of these employees, 445 are located in the United States,
five are located in Germany and nine 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 126,000 square feet of space in a single location in
Bellevue, Washington, 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
Sunnyvale, California, Munich, Germany and Tokyo, Japan. We believe that our
facilities will be adequate to meet our needs for at least the next 12 months.
LEGAL PROCEEDINGS
We are not currently involved in any material legal proceedings.
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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............................. 37 Chairman of the Board, President and
Chief Executive Officer
Brian V. Turner............................... 40 Senior Vice President, Chief
Financial Officer and Secretary
Albert T. Dosser.............................. 43 Senior Vice President, Director
Jeffrey T. Chambers(1)(2)..................... 45 Director
Scot E. Land(1)(2)............................ 46 Director
William L. Larson............................. 44 Director
David M. Moore................................ 45 Director
David J. Bialer............................... 40 General Manager
Donald L. Whitt............................... 54 General Manager
</TABLE>
-------------------------
(1) Member of the Compensation Committee
(2) Member of the Audit 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.
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.
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<PAGE> 49
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 1995 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.
David M. Moore has been a director of BSQUARE since October 1999. Since
November 1998, Mr. Moore has been a Senior Analyst at Vulcan Northwest Inc., a
venture capital firm, and has served as President of Paralex Corporation, a
consulting company, since October 1997. Prior to that, Mr. Moore worked at
Microsoft Corporation in various capacities, most recently as a Director of
Development.
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, 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 anti 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.
BOARD OF DIRECTORS
We currently have authorized seven directors; however, one board seat is
vacant. Pursuant to our amended and restated articles of incorporation, our
board of directors is divided into three classes, each with staggered three-year
terms. To facilitate the transition to staggered terms, Scot E. Land and William
Larson were elected at the 2000 annual meeting of our shareholders as Class I
directors
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for a one-year term ending in 2001, Albert T. Dosser and Jeffrey T. Chambers
were elected as Class II directors for a two-year term ending in 2002, and
William T. Baxter and David M. Moore were elected as Class III directors for a
three-year term ending in 2003. When the vacant Board seat is filled, such
director will be a Class I director. At each subsequent annual meetings of
shareholders, one class of directors will be elected with the other classes
continuing for the remainder of their respective three-year terms.
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 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, which was
converted to common stock upon consummation of our initial public offering in
October 1999, included:
- TA Associates and its affiliates, who collectively purchased 6,666,667
shares and are beneficial owners of 21% of our outstanding common stock
on an as-converted basis as of June 30, 2000. 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 5% of our outstanding
common stock on an as-converted basis as of June 30, 2000. One of our
directors, Scot E. Land, is a managing director of Encompass Ventures.
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 Encompass Europe, Inc.
(formerly NextGen), an affiliate of Encompass Ventures, in exchange for
consulting services. After the option vested with regard to 41,666 of such
shares, the consulting arrangement was terminated, precluding the vesting of the
remaining portion of the option.
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
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<PAGE> 51
15,000 shares each. Moreover, in October 1999, we granted to Mr. Land an option
to purchase 40,000 shares of our common stock at an exercise price of $12.00 per
share, vesting in four annual installments of 10,000 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. In October 1999, we
granted to David Moore, one of our directors, an option to purchase 35,000
shares of our common stock at an exercise price of $39.56 per share, vesting in
three annual installments of approximately 11,667 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.
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, 1999 by (i) our chief executive officer, (ii) the four other most
highly compensated executive officers who were serving in such capacities at the
end of fiscal 1999 and whose salary and bonus for fiscal 1999 exceeded $100,000
and (iii) one former executive officer whose salary and bonus for fiscal 1999
exceeded $100,000 but who was not serving as an executive officer of BSQUARE at
the end of fiscal 1999.
<TABLE>
<CAPTION>
LONG TERM ALL OTHER
ANNUAL 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........... $250,000 $ -- -- $2,224 $1,060 $ --
President and Chief
Executive Officer
Albert T. Dosser............ 150,000 -- -- 1,915 1,305 --
Senior Vice President
Peter R. Gregory(1)......... 144,231 -- -- -- 1,070 --
Senior Vice President
Brian V. Turner(2).......... 133,730 -- 340,000 1,725 -- 7,493
Senior Vice President of
Operations and Chief
Financial Officer
David J. Bialer............. 131,541 950 30,000 2,707 -- 19,461
General Manager
Donald L. Whitt............. 126,415 1,300 40,000 1,839 -- --
General Manager
</TABLE>
-------------------------
(1) Mr. Gregory left BSQUARE in November 1999.
(2) Mr. Turner was hired by BSQUARE in April 1999.
Option Grants in Fiscal Year 1999
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, 1999. In accordance with the rules of the SEC, also shown
below is the potential realizable value over the term of the option, the
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<PAGE> 52
period from the grant date to the expiration date, 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, 1999, we granted
options to acquire up to an aggregate of 1,345,795 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.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
------------------------------------------------------------- ANNUAL RATES OF
PERCENT OF STOCK PRICE
TOTAL OPTIONS APPRECIATION FOR
NUMBER OF SECURITIES GRANTED TO EXERCISE OPTION TERM
UNDERLYING OPTIONS EMPLOYEES IN PRICE PER EXPIRATION ---------------------
NAME GRANTED FISCAL 1999 SHARE DATE 5% 10%
---- -------------------- ------------- --------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
William T. Baxter.... -- -- $ -- -- $ -- $ --
Albert T. Dosser..... -- -- -- -- -- --
Peter R. Gregory..... -- -- -- -- -- --
Brian V. Turner...... 300,000 22.0% 1.44 4/7/09 705,637 1,123,609
40,000 3.0% 12.00 10/15/09 781,869 1,244,996
David J. Bialer...... 30,000 9.0% 1.00 9/25/08 488,668 778,123
Donald L. Whitt...... 40,000 1.0% 1.00 7/17/08 162,889 259,374
</TABLE>
Aggregate Option Exercises in Fiscal Year 1999 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, 1999 and exercisable and unexercisable options held as of December 31, 1999.
<TABLE>
<CAPTION>
NUMBER OF SHARES NUMBER OF SECURITIES
ACQUIRED ON UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
EXERCISE OPTIONS AT IN-THE-MONEY OPTIONS AT
-------------------- DECEMBER 31, 1999 DECEMBER 31, 1999
VALUE --------------------------- ---------------------------
NAME EXERCISED REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- --------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
William T. Baxter...... -- $-- -- -- $ -- $ --
Albert T. Dosser....... -- -- -- -- -- --
Peter R. Gregory....... -- -- -- -- -- --
Brian V. Turner........ -- -- 300,000 40,000 12,149,400 1,197,520
David J. Bialer........ -- -- 100,000 30,000 4,093,800 958,140
Donald L. Whitt........ -- -- -- 25,000 311,787 2,303,439
</TABLE>
EMPLOYEE BENEFIT PLANS
Stock Option Plans
We have an amended and restated stock option plan pursuant to which options
to purchase common stock are granted to our officers and employees. Our board of
directors adopted and our shareholders approved our amended and restated stock
option plan in May 1997. At our 2000 annual meeting of shareholders, this stock
option plan was further amended to annually increase the number of shares
reserved for issuance during each of our fiscal years beginning on January 1,
2000 by an amount equal to the lesser of (A) four percent (4%) of our
outstanding shares at the end of such fiscal year or (B) an amount determined by
our board of directors. As of June 30, 2000, we had reserved a total of
4,347,799 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
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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.
The stock option plan may be administered by the our board of directors or
a committee of the 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.
We also have a stock option plan pursuant to which options to purchase
common stock have been granted to employees of one of our subsidiaries. As of
June 30, 2000, options to purchase an aggregate of 4,347,799 shares of common
stock were outstanding under our stock option plans at a weighted average
exercise price of $7.52 per share and 605,127 shares had been issued upon
exercise of options.
Employee Stock Purchase Plan
Our board of directors and shareholders adopted an employee stock purchase
plan in August 1999, which was implemented as of October 19, 1999. 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 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 the board.
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 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 commenced on October 19, 1999 and will terminate on May 14, 2001.
Thereafter, a separate offering will commence
50
<PAGE> 54
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 the 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 its 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. 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 the other named executive officers.
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<PAGE> 55
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> 56
RELATED-PARTY TRANSACTIONS
Since the beginning of our last fiscal year, 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.................................. 9/14/99 30,000 10.00
Scot E. Land..................................... 10/15/99 40,000 12.00
David M. Moore................................... 10/29/99 35,000 39.56
Brian V. Turner.................................. 4/7/99 300,000 1.44
10/15/99 40,000 12.00
4/14/00 80,000 15.73
Donald L. Whitt.................................. 7/5/99 40,000 2.50
</TABLE>
In September 1999, we sold 1,518,378 shares of common stock to Vulcan
Ventures Incorporated for an aggregate purchase price of approximately $18.7
million. In addition, pursuant to the stock purchase agreement between us and
Vulcan Ventures, 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 the
board of directors. David M. Moore, one of our directors, is a Senior Analyst at
Vulcan Northwest, Inc., which is affiliated with Vulcan Ventures Incorporated.
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<PAGE> 57
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of our common stock as of June 30, 2000 by:
- each person we know to own beneficially more than five percent of the
outstanding shares of common stock;
- each of our directors;
- each of our executive officers named in the Summary Compensation Table in
"Executive Compensation" in this prospectus; and
- all of our directors and executive officers 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 June 30, 2000 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 33,481,045 shares of
common stock outstanding as of June 30, 2000.
Unless otherwise noted below, the address for each shareholder listed below
is: c/o BSQUARE Corporation, 3150 139th Avenue S.E., Bellevue, Washington 98005.
Unless otherwise noted, each of the shareholders listed below 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>
NUMBER OF SHARES
---------------------------------------
BENEFICIALLY OWNED PERCENT OF SHARES
NAME AND ADDRESS OF BENEFICIAL OWNER DIRECTLY UNDERLYING OPTIONS BENEFICIALLY OWNED
------------------------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C>
Entities affiliated with TA Associates,
Inc.(1)................................ 7,015,800 30,000 21.0%
High Street Tower Suite 2500
Boston, MA 02110
Jeffrey T. Chambers(2)................... 7,015,800 30,000 21.0
Albert T. Dosser......................... 5,744,499 -- 17.2
Peter R. Gregory(3)...................... 5,705,256 -- 17.0
William T. Baxter........................ 4,726,295 -- 14.1
Scot E. Land(4).......................... 1,719,444 71,666 5.3
Entities affiliated with Encompass
Ventures(5)............................ 1,650,000 41,666 5.0
4040 Lake Washington Blvd. N.E.
Suite 205
Kirkland, WA 98033
Vulcan Ventures Incorporated............. 1,518,378 -- 4.5
110 110th Avenue N.E., Suite 550
Bellevue, WA 98004
David M. Moore(6)........................ 1,518,378 -- 4.5
Brian V. Turner.......................... -- 300,000 *
William L. Larson........................ -- 80,000 *
David J. Bialer.......................... -- 100,000 *
Donald L. Whitt.......................... 2,500 25,000 *
All executive officers and directors as a
group (9 persons)(7)................... 20,726,916 606,666 62.6
</TABLE>
54
<PAGE> 58
-------------------------
* Less than 1%
(1) Includes 5,722,076 shares held by TA/Advent VIII L.P., 1,073,990 shares held
by Advent Atlantic and Pacific III, L.P., 114,497 shares held by TA
Investors L.L.C. and 105,237 shares held by TA Executives Fund L.L.C., all
of which are funds managed by TA Associates.
(2) Includes 5,722,076 shares held by TA/Advent VIII L.P., 1,073,990 shares held
by Advent Atlantic and Pacific III, L.P., 114,497 shares held by TA
Investors L.L.C. and 105,237 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.
(3) Mr. Gregory left BSQUARE in November 1999.
(4) Includes 1,372,222 shares held by Encompass Group US Information Technology
Partners 1 LP, and 277,778 shares held by TCI Club, both 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.
(5) Includes 1,372,222 shares held by Encompass Group US Information Technology
Partners 1 LP, and 277,778 shares held by TCI Club, both 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.
(6) Includes 1,518,378 shares held by Vulcan Ventures Incorporated. Mr. Moore is
a Senior Analyst at Vulcan Northwest Inc., which is affiliated with Vulcan
Ventures Incorporated. Mr. Moore disclaims beneficial ownership of such
shares.
(7) See footnotes 2, 4 and 6 above.
55
<PAGE> 59
DESCRIPTION OF CAPITAL STOCK
GENERAL
As of the date of this prospectus, we are authorized to issue up to
150,000,000 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 June 30, 2000, there were 33,481,045 shares of common stock
outstanding that were held of record by 209 shareholders. As of June 30, 2000,
there were outstanding options to purchase a total of 4,347,799 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.
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, our board of directors is divided into
three classes. The directors in each class 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
56
<PAGE> 60
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.
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
Our common stock is listed on The Nasdaq Stock Market's National Market
under the symbol "BSQR."
SHARES ELIGIBLE FOR FUTURE SALE
As of June 30, 2000, we had 33,481,045 shares of common stock outstanding.
Of these shares, the 635,486 shares being offered hereunder and the 4,000,000
shares sold in our initial public 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. In addition, registration statements on Form S-8 under the Securities Act
registering shares of common stock issued or reserved for future issuance under
our stock option plans and our employee stock purchase plan have been filed with
the Securities and Exchange Commission. Shares of common stock covered by the
Form S-8s generally may be resold in the public market without restriction,
except in the case of our affiliates who generally may only resell such shares
in accordance with the provisions of Rule 144 of the Securities Act. The
remaining shares of outstanding common stock are restricted shares and may only
be sold in accordance with the provisions of Rule 144.
57
<PAGE> 61
NOTICE TO CANADIAN RESIDENTS
RESALE RESTRICTIONS
Any distribution of the common stock in Canada is being made only on a
private placement basis exempt from the requirement that we prepare and file a
prospectus with the securities regulatory authorities in each province where
trades of common stock are effected. Accordingly, any resale of the common stock
in Canada must be made in accordance with applicable securities laws which will
vary depending on the relevant jurisdiction, and which may require resales to be
made in accordance with available statutory exemptions or under a discretionary
exemption granted by the applicable Canadian securities regulatory authority.
Purchasers are advised to seek legal advice prior to any resale of the common
stock.
REPRESENTATIONS OF PURCHASERS
Each purchaser of common stock in Canada who receives a purchase
confirmation will be deemed to represent to us and the dealer from whom the
purchase confirmation is received that (1) the purchaser is entitled under
applicable provincial securities laws to purchase common stock without the
benefit of a prospectus qualified under the securities laws, (2) where required
by law, that the purchaser is purchasing as principal and not as agent, and (3)
the purchaser has reviewed the text under "Resale Restrictions."
RIGHTS OF ACTION (ONTARIO PURCHASERS)
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Ontario securities law. As a result, Ontario purchasers must rely on other
remedies that may be available, including common law rights of action for
damages or rescission or rights of action under the civil liability provisions
of the U.S. federal securities laws.
ENFORCEMENT OF LEGAL RIGHTS
All of the issuer's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be possible
for Canadian purchasers to effect service of process within Canada upon the
issuer and these persons. All or a substantial portion of the assets of the
issuer and these persons may be located outside of Canada and, as a result, it
may not be possible to satisfy a judgment against the issuer or these persons in
Canada or to enforce a judgment obtained in Canadian courts against the issuer
or these persons outside of Canada.
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.
58
<PAGE> 62
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for us
by Summit Law Group, PLLC, Seattle, Washington.
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.
Ernst & Young LLP, independent auditors, have audited the Mainbrace
Corporation financial statements at December 31, 1999, and for the year then
ended, as set forth in their report. We have included the Mainbrace Corporation
financial statements in the prospectus and elsewhere in the registration
statement in reliance on Ernst & Young LLP's report, given on their authority as
experts in accounting and auditing.
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. We are required to file annual, quarterly and other
information with the SEC. You may read and copy any document we file with the
SEC 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 and Microsoft, that file electronically with the SEC.
We intend to furnish each holder of our common stock annual reports
containing audited financial statements and a report thereon by independent
certified accountants. We will also furnish to each holder of our common stock
such other reports as may be required by law.
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<PAGE> 63
INDEX TO FINANCIAL INFORMATION
<TABLE>
<S> <C>
BSQUARE CORPORATION
Report of Independent Public Accountants.................... F-2
Consolidated Balance Sheets................................. F-3
Consolidated Statements of Operations 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
MAINBRACE CORPORATION
December 31, 1999:
Report of Independent Auditors......................... F-25
Balance Sheet.......................................... F-26
Statement of Operations................................ F-27
Statement of Shareholders' Equity...................... F-28
Statement of Cash Flows................................ F-29
Notes to Financial Statements.......................... F-30
March 31, 2000:
Balance Sheet.......................................... F-37
Statement of Operations................................ F-38
Statement of Cash Flows................................ F-39
Notes to Unaudited Condensed Financial Statements...... F-40
PRO FORMA FINANCIAL INFORMATION............................. F-41
Condensed Consolidated Balance Sheet as of March 31, 2000... F-42
Condensed Consolidated Statements of Operations for the
three months ended March 31, 2000......................... F-43
Condensed Consolidated Statements of Operations for the year
ended December 31, 1999................................... F-44
Notes to Unaudited Pro Forma Condensed Consolidated
Financial Statements...................................... F-45
</TABLE>
F-1
<PAGE> 64
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, 1999 and 1998, and the related
consolidated statements of income and comprehensive income, shareholders' equity
(deficit) and cash flows for each of the three years in the period ended
December 31, 1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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, 1999 and 1998, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States.
ARTHUR ANDERSEN LLP
Seattle, Washington,
September 7, 2000
F-2
<PAGE> 65
BSQUARE CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ JUNE 30,
1998 1999 2000
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 5,474 $55,604 $ 56,608
Short-term investments................................. 1,582 27,368 23,165
Accounts receivable, net of allowance for doubtful
accounts of $67 in 1998, $142 in 1999 and $422 in
2000................................................ 5,612 4,302 6,270
Income taxes receivable................................ -- 274 831
Prepaid expenses and other current assets.............. 213 609 241
Deferred income tax asset.............................. 237 1,035 197
------- ------- --------
Total current assets................................ 13,118 89,192 87,312
Furniture, equipment and leasehold improvements, net..... 3,151 7,238 5,638
Deposits and other assets................................ 179 212 20,792
------- ------- --------
Total assets........................................ $16,448 $96,642 $113,742
======= ======= ========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of long-term obligations............... $ 169 $ -- $ --
Accounts payable....................................... 688 654 380
Accrued compensation................................... 1,371 2,352 4,262
Accrued expenses....................................... 184 3,381 3,576
Deferred revenue....................................... 179 1,130 6,046
------- ------- --------
Total current liabilities........................... 2,591 7,517 14,264
Long-term obligations, net of current portion............ 289 -- --
Deferred income tax payable, net of current portion...... 116 -- --
------- ------- --------
Total liabilities................................... 2,996 7,517 14,264
------- ------- --------
Commitments and contingencies (Note 7)
Mandatorily redeemable convertible Series A preferred
Stock, no par value: Authorized 10,000,000 shares,
issued and outstanding, 8,333,333 shares in 1998 and no
shares in 1999 and 2000, preference in liquidation of
$15,000,000............................................ 14,417 -- --
Shareholders' equity (deficit):
Blue Water Systems, Inc. Series A Preferred stock, no
par value: authorized 500,000 shares, issued and
outstanding no shares outstanding in 1998, 46,246
shares outstanding in 1999, and no shares
outstanding in 2000................................. -- 250 --
Common stock, no par value: Authorized 50,000,000
shares, issued and outstanding, 18,376,750 shares in
1998, 32,509,978 in 1999 and 33,481,045 in 2000..... 2,126 90,845 102,638
Deferred stock option compensation..................... (401) (868) (550)
Cumulative foreign currency translation adjustment..... 5 (15) (43)
Retained earnings (accumulated deficit)................ (2,695) (1,087) (2,567)
------- ------- --------
Total shareholders' equity (deficit)................ (965) 89,125 99,478
------- ------- --------
Total liabilities and shareholders' equity.......... $16,448 $96,642 $113,742
======= ======= ========
</TABLE>
See notes to Consolidated Financial Statements.
F-3
<PAGE> 66
BSQUARE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
--------------------------- -----------------
1997 1998 1999 1999 2000
------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Service.................................... $14,451 $23,695 $38,823 $18,087 $26,479
Product.................................... 1,463 2,242 2,583 1,174 2,513
------- ------- ------- ------- -------
Total revenue........................... 15,914 25,937 41,406 19,261 28,992
------- ------- ------- ------- -------
Cost of revenue:
Service.................................... 5,566 11,037 18,980 8,740 13,104
Product.................................... 249 326 529 139 666
------- ------- ------- ------- -------
Total cost of revenue................... 5,815 11,363 19,509 8,879 13,770
------- ------- ------- ------- -------
Gross profit............................ 10,099 14,574 21,897 10,382 15,222
------- ------- ------- ------- -------
Operating expenses:
Research and development................... 2,086 4,438 7,506 3,301 4,245
Selling, general and administrative........ 3,117 6,825 11,935 5,337 7,874
Acquired in-process research and
development............................. -- -- -- -- 4,100
Amortization of intangible assets.......... -- -- -- -- 350
Amortization of deferred stock option
compensation............................ 81 171 583 294 318
------- ------- ------- ------- -------
Total operating expenses................ 5,284 11,434 20,024 8,932 16,887
------- ------- ------- ------- -------
Income (loss) from operations........... 4,815 3,140 1,873 1,450 (1,665)
------- ------- ------- ------- -------
Other income (expense), net:
Interest income (expense), net............. (8) 326 926 133 1,834
Acquisition related expense................ -- -- -- -- (620)
------- ------- ------- ------- -------
Total other income (expense)............ (8) 326 926 133 1,214
------- ------- ------- ------- -------
Income (loss) before income taxes............ 4,807 3,466 2,799 1,583 (451)
Provision for income taxes................... 804 1,166 1,104 712 1,029
------- ------- ------- ------- -------
Net income (loss)....................... 4,003 2,300 1,695 871 (1,480)
Foreign currency translation adjustment...... -- 5 (20) (56) (28)
------- ------- ------- ------- -------
Comprehensive net income (loss).............. $ 4,003 $ 2,305 $ 1,675 $ 815 $(1,508)
======= ======= ======= ======= =======
Basic earnings (loss) per share.............. $ 0.18 $ 0.12 $ 0.08 $ 0.04 $ (0.05)
======= ======= ======= ======= =======
Weighted average shares outstanding used to
compute basic earnings (loss) per share.... 21,661 18,633 21,430 18,467 32,821
======= ======= ======= ======= =======
Diluted earnings (loss) per share............ $ 0.18 $ 0.08 $ 0.06 $ 0.03 $ (0.05)
======= ======= ======= ======= =======
Weighted average shares outstanding to
compute diluted earnings (loss) per
share...................................... 22,042 27,736 30,800 28,945 32,821
======= ======= ======= ======= =======
</TABLE>
See notes to Consolidated Financial Statements.
F-4
<PAGE> 67
BSQUARE CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
CUMULATIVE
FOREIGN RETAINED TOTAL
PREFERRED STOCK COMMON STOCK DEFERRED CURRENCY EARNINGS SHAREHOLDERS'
---------------- --------------------- STOCK OPTION TRANSLATION (ACCUMULATED EQUITY
SHARES AMOUNT SHARES AMOUNT COMPENSATION ADJUSTMENT DEFICIT) (DEFICIT)
------- ------ ---------- -------- ------------ ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1996...................... -- $ -- 22,321,145 $ 19 $ -- $ -- $ 1,041 $ 1,060
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.................... -- -- -- -- -- -- 333 333
------- ----- ---------- -------- ------- ---- ------- -------
Balance, December 31,
1997...................... 21,590,145 2,769 (572) -- 466 2,663
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...................... -- -- 18,376,750 2,126 (401) 5 (2,695) (965)
Exercise of stock
options................. -- -- 281,517 77 -- -- -- 77
Issuance of compensatory
stock options........... -- -- -- 1,050 (1,050) -- -- --
Compensation attributable
to stock option
vesting................. -- -- -- -- 583 -- -- 583
Foreign currency
translation
adjustment.............. -- -- -- -- -- (20) -- (20)
Accretion on mandatorily
redeemable convertible
Preferred stock......... -- -- -- -- -- -- (87) (87)
Issuance of BlueWater
Systems Series A
Preferred Stock......... 46,246 250 -- -- -- -- -- 250
Issuance of common stock
(net of offering costs
of $13)................. -- -- 1,518,378 18,689 -- -- -- 18,689
Issuance of common stock
in connection with the
initial public offering
(net of offering costs
of $5,601).............. -- -- 4,000,000 54,399 -- -- -- 54,399
Conversion of mandatorily
redeemable convertible
preferred stock into
shares of common
stock................... -- -- 8,333,333 14,504 -- -- -- 14,504
Net income................ -- -- -- -- -- -- 1,695 1,695
------- ----- ---------- -------- ------- ---- ------- -------
Balance, December 31,
1999...................... 46,246 250 32,509,978 90,845 (868) (15) (1,087) 89,125
Exercise of stock options,
warrants and employee
stock purchase plan..... -- -- 297,487 1,893 -- -- -- 1,893
Compensation attributable
to stock option
vesting................. -- -- -- -- 318 -- -- 318
Foreign currency
translation
adjustment.............. -- -- -- -- -- (28) -- (28)
Conversion of preferred
stock into common
stock................... (46,246) (250) 46,246 250 -- -- -- --
Issuance of common stock
upon acquisition of
Mainbrace Corporation... -- -- 627,334 9,650 -- -- -- 9,650
Net loss.................. -- -- -- -- -- -- (1,480) (1,480)
------- ----- ---------- -------- ------- ---- ------- -------
Balance, June 30, 2000
(unaudited)............... -- $ -- 33,481,045 $102,638 $ (550) $(43) $(2,567) $99,478
======= ===== ========== ======== ======= ==== ======= =======
</TABLE>
See notes to Consolidated Financial Statements.
F-5
<PAGE> 68
BSQUARE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------- ---------------------
1997 1998 1999 1999 2000
------- ------- -------- ----------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)............................. $ 4,003 $ 2,300 $ 1,695 $ 871 $(1,480)
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities:
Depreciation and amortization............ 327 995 2,264 1,094 1,488
In-process research and development...... -- -- -- -- 4,100
Deferred income taxes.................... 262 (397) (925) (581) 839
Stock and stock option compensation...... 106 171 583 294 318
Amortization of deferred financing
costs.................................. -- 14 13 -- --
Changes in operating assets and liabilities,
net of effects of acquisition:
Accounts receivable...................... (2,175) (2,795) 1,309 922 (1,682)
Prepaid expenses and other current
assets................................. (93) (116) (123) (54) 108
Deposits and other assets................ (24) (117) (19) (315) 40
Accounts payable and accrued expenses.... 1,279 1,050 4,387 670 3,053
Income taxes............................. 493 (389) (144) 183 (562)
Deferred revenue......................... 389 (587) 952 482 4,855
------- ------- -------- ------- -------
Net cash provided by operating
activities............................. 4,567 129 9,992 3,566 11,077
------- ------- -------- ------- -------
Cash flows from investing activities:
Purchases of furniture equipment and
leasehold improvements................... (1,487) (2,149) (7,035) (1,070) (597)
Maturity (purchase) of short-term
investments, net......................... -- (1,582) (25,785) 1,582 4,203
Purchase of Mainbrace Corporation, net of
cash acquired............................ -- -- -- -- (14,294)
Purchase of an investment................... -- -- -- -- (1,250)
------- ------- -------- ------- -------
Net cash provided by (used in) investing
activities............................. (1,487) (3,731) (32,820) 512 (11,938)
------- ------- -------- ------- -------
Cash flows from financing activities:
Repayment of shareholder notes payable...... (256) (1,743) -- -- --
Payments on long-term obligations........... -- (26) (453) (82) (6)
Repurchase of common stock.................. (46) (6,000) -- -- --
Deferred financing costs.................... (13) (2) (25) (25) --
Proceeds from exercise of stock options,
warrants and employee stock purchase
plan..................................... -- 5 77 6 1,893
Shareholders' draws......................... (460) -- -- -- --
Net proceeds from issuance of mandatorily
redeemable Series A Preferred Stock...... -- 14,307 -- -- --
Net proceeds from issuance of BlueWater
Systems Series A Preferred Stock......... -- -- 250 250 --
Net proceeds from sale of common stock...... 18,689 -- --
Proceeds from sale of initial public
offering................................. -- -- 54,399 -- --
------- ------- -------- ------- -------
Net cash provided by (used in) financing
activities............................. (775) 6,541 72,937 149 1,887
------- ------- -------- ------- -------
Effect of exchange rate changes on cash....... -- 7 21 (46) (22)
------- ------- -------- ------- -------
Net increase in cash and cash
equivalents............................ 2,305 2,946 50,130 4,181 1,004
Cash and cash equivalents, beginning of
period...................................... 223 2,528 5,474 5,474 55,604
------- ------- -------- ------- -------
Cash and cash equivalents, end of period...... $ 2,528 $ 5,474 $ 55,604 $ 9,655 $56,608
======= ======= ======== ======= =======
</TABLE>
See notes to Consolidated Financial Statements.
F-6
<PAGE> 69
BSQUARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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-based operating systems
into 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.
The Company helps enable the rapid and low-cost deployment of intelligent
computing devices by providing a variety of software products and services for
the development, integration and deployment of Windows-based operating systems
with industry-specific applications. The Company also develops software
applications that are licensed to end users to provide intelligent computing
devices 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 intelligent computing devices to develop fully; adverse changes in
the Company's relationship with Microsoft; failure to secure contracts with
market-leading original equipment manufacturers; 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.
The consolidated financial statements as of June 30, 2000 have been
prepared by the Company pursuant to the rules and regulations of the Securities
and Exchange Commission and include the accounts of the Company. Certain
information and footnote disclosures, normally included in financial statements
prepared in accordance with generally accepted accounting principles, have been
condensed or omitted pursuant to such rules and regulations. In the opinion of
the Company, the unaudited financial statements reflect all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the Company's financial position at June 30, 2000, its operating
results and cash flows for the six-months ended June 30, 2000 and 1999.
On January 5, 2000, the Company acquired BlueWater Systems, Inc. in a
transaction accounted for as a pooling of interests. The consolidated financial
statements and notes thereto have been restated for all periods presented to
include the accounts and operations of BlueWater Systems, Inc. as if it had
always been a part of BSQUARE.
F-7
<PAGE> 70
BSQUARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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.
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 shareholders (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 and 1999, and as of June 30, 2000, all short-term
investments had a contractual maturity of two years or less.
FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF CREDIT RISK
The Company has the following financial instruments: cash and cash
equivalents, short-term investments, accounts receivable, accounts payable,
accrued liabilities, bank lines of credit and standby letters of credit. The
carrying value of cash and cash equivalents, short-term investments, accounts
receivable, accounts payable, and accrued liabilities approximate fair value
based on the liquidity of these financial instruments or based on their short
term nature. The carrying value of bank lines of credit, and standby letters of
credit approximates fair value based on the market interest rates available to
the Company for debt of similar risk and maturities.
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.
F-8
<PAGE> 71
BSQUARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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 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.
INCOME TAXES
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 functional currency of foreign subsidiaries is the local currency.
Accordingly, assets and liabilities are translated into U.S. Dollars 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.
F-9
<PAGE> 72
BSQUARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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.
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.
Deferred revenue consists of deposits received from customers and
unamortized service contract revenue.
F-10
<PAGE> 73
BSQUARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current
year presentation.
2. CASH AND SHORT-TERM INVESTMENTS
The Company's cash, cash equivalent and short-term balances consist of the
following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- JUNE 30,
1998 1999 2000
------ ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Cash and equivalents:
Cash................................................... $ 370 $ 665 $20,536
Money market funds..................................... 5,104 8,056 82
Municipal certificates................................. -- 46,883 35,990
------ ------- -------
$5,474 $55,604 $56,608
====== ======= =======
Short-term investments:
Commercial paper....................................... $1,582 $ 3,064 $ --
Corporate notes and bonds.............................. -- 12,580 2,240
Municipal securities................................... -- 11,724 20,925
------ ------- -------
$1,582 $27,368 $23,165
====== ======= =======
</TABLE>
3. FURNITURE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Major classifications of furniture, equipment and leasehold improvements
consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- JUNE 30,
1998 1999 2000
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Computer equipment and system software...................... $ 2,603 $ 3,707 $ 3,969
Office furniture and equipment.............................. 697 1,282 1,445
Leasehold improvements...................................... 1,040 4,443 3,337
Construction in progress.................................... 119 -- --
------- ------- -------
4,459 9,432 8,751
Less: accumulated depreciation and amortization............. (1,308) (2,194) (3,113)
------- ------- -------
$ 3,151 $ 7,238 $ 5,638
======= ======= =======
</TABLE>
4. INCOME TAXES
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.
F-11
<PAGE> 74
BSQUARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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 1999 1999 2000
---- ------ ------ ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Current:
U.S. Current............................. $542 $1,536 $2,001 $1,206 $ 883
International............................ -- 27 28 87 26
U.S. Deferred............................ 262 (397) (925) (581) 120
---- ------ ------ ------ ------
Total tax provision................... $804 $1,166 $1,104 $ 712 $1,029
==== ====== ====== ====== ======
</TABLE>
The components of net deferred tax assets (liabilities) consisted of the
following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------- JUNE 30,
1998 1999 2000
----- ------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Deferred income tax asset:
Depreciation.............................................. $ 41 $ 88 $ 78
Accrued compensation and benefits......................... 206 472 207
Deferred revenue.......................................... 57 213 234
Cash to accrual basis conversion.......................... (111) (111) (111)
Acquired intangible assets................................ -- -- (736)
Other, net................................................ 44 373 525
----- ------ -----
$ 237 $1,035 $ 197
===== ====== =====
Deferred income taxes payable:
Cash to accrual basis conversion.......................... $(111) $ -- $ --
Other, net................................................ (5) -- --
----- ------ -----
$(116) $ -- $ --
===== ====== =====
</TABLE>
F-12
<PAGE> 75
BSQUARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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 1999 1999 2000
----- ---- ---- ---- ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Taxes at the U.S. statutory rate................. 34.0% 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) (7.2) (8.4) 68.0
International operations....................... -- 4.5 14.3 14.7 (53.2)
Tax exempt interest............................ -- -- (5.5) -- 104.0
Acquisition expenses........................... -- -- -- -- (24.9)
Acquired in-process research and development
expense..................................... -- -- -- -- (318.9)
Amortization of intangible assets.............. -- -- -- -- (18.0)
Other, net..................................... 1.1 1.3 3.8 -- (19.7)
----- ---- ---- ---- ------
16.7% 33.6% 39.4% 40.3% (228.7)%
===== ==== ==== ==== ======
</TABLE>
5. 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 these notes
and related accrued interest on January 30, 1998.
6. BANK LINE OF CREDIT AND NOTES PAYABLE
At December 31, 1999, the Company had available 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 maintain a minimum quick
ratio, tangible net worth and debt service ratio, and limits 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 December 31,
1999 the Company had $464 in standby letters of credit issued and outstanding
under the domestic revolving line of credit.
F-13
<PAGE> 76
BSQUARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
7. 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,
1997, 1998, 1999, and for the six months ended June 30, 1999 and 2000, rental
expense was $420, $980, $3,347, $1,527 (unaudited) and $2,155 (unaudited),
respectively. Minimum rental commitments under non-cancelable operating leases
at June 30, 2000 are as follows:
<TABLE>
<S> <C>
2000 (six months)...................................... $ 1,618
2001................................................... 3,000
2002................................................... 2,948
2003................................................... 3,044
2004................................................... 3,090
Thereafter............................................. 15,571
-------
$29,271
=======
</TABLE>
In January 1999, the Company signed a ten-year lease for a new corporate
headquarters in Bellevue, Washington, which commenced in October 1999. The
Company has the option to extend the lease for four additional periods of five
years each. The Company must provide a $667 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 $333 letter of credit. The letter
of credit may be reduced annually by specified amounts in the lease agreement
upon the Company's achieving certain economic goals.
8. MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK
The Company has authorized 10,000,000 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 the 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
F-14
<PAGE> 77
BSQUARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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.
- 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 holders of Preferred Stock have the same voting rights and voting
powers as common shareholders.
The Preferred shares were converted into shares of the Company's common
stock in conjunction with the Company's initial public offering on October 20,
1999.
9. SHAREHOLDERS' EQUITY
INITIAL PUBLIC OFFERING
On October 20, 1999, the Company issued 4,000,000 shares of its common
stock at an initial public offering price of $15.00 per share. Also sold in this
offering were 600,000 shares held by selling shareholders upon exercise of the
underwriters' overallotment option. The net proceeds to the Company from the
offering, net of offering costs of approximately $5.6 million, were
approximately $54.4 million. Concurrent with the initial public offering, each
outstanding share of the Company's mandatorily redeemable preferred stock was
automatically converted into common stock.
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 Vulcan Ventures for approximately $18.7
million.
COMMON STOCK RESERVED FOR FUTURE ISSUANCE
At December 31, 1999, the Company had reserved the following shares of
common stock for future issuance:
<TABLE>
<S> <C>
BSQUARE Employee Stock Purchase Plan........................ 1,500,000
BSQUARE Stock Option Plan................................... 1,773,980
</TABLE>
10. 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
F-15
<PAGE> 78
BSQUARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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.
The Company has assumed certain options granted to employees of acquired
companies, referred to as acquired options. These options were assumed by the
Company outside of its stock option plans, and are administered as if issued
under their original plans. All of the acquired options have been adjusted to
reflect the price conversion under the terms of the agreements between the
Company and the companies acquired. The acquired options generally become
exercisable over a four-year period and generally expire ten years from the date
of grant. No additional options will be granted under any of the acquired
companies' plans.
A summary of stock option activity follows:
<TABLE>
<CAPTION>
PRICE PER SHARE
--------------------------------
NUMBER OF WEIGHTED
OPTIONS AVAILABLE FOR 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
Authorized......................... -- 2,000,000 -- --
Granted............................ 1,345,795 (1,345,795) $ 7.24 $ 1.44 - $45.06
Exercised.......................... (281,517) -- $ 0.36 $ 0.05 - $ 1.00
Canceled........................... (154,875) 154,875 $ 0.82 $ 0.05 - $10.00
--------- ---------- ------ ---------------
Balance, December 31, 1999........... 3,449,565 1,773,980 $ 3.15 $ 0.05 - $45.06
Authorized......................... -- 73,961 -- --
Assumption of acquired company
options......................... 194,422 (21,793) $ 1.92 $ 0.07 - $ 3.11
Granted............................ 1,146,886 (1,146,886) $19.20 $17.00 - $19.88
Exercised.......................... (203,672) -- $ 1.19 $ 0.05 - $11.64
Canceled........................... (239,402) 239,402 $ 8.78 $ 0.05 - $45.06
--------- ---------- ------ ---------------
Balance, June 30, 2000 (unaudited)... 4,347,799 918,664 $ 7.52 $ 0.05 - $45.06
========= ========== ====== ===============
</TABLE>
F-16
<PAGE> 79
BSQUARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The following table summarizes information concerning currently outstanding
and exercisable options at June 30, 2000 (unaudited):
<TABLE>
<CAPTION>
OUTSTANDING
---------------------------- EXERCISABLE
WEIGHTED AVERAGE --------------------------
REMAINING WEIGHTED
NUMBER OF CONTRACTUAL NUMBER OF AVERAGE
OPTIONS LIFE (YEARS) OPTIONS EXERCISE PRICE
--------- ---------------- --------- --------------
<S> <C> <C> <C> <C>
Range of exercise price:
$ 0.05 - $10.00....................... 2,971,338 8.0 1,498,964 $ 0.91
$12.00 - $20.00....................... 1,142,961 9.7 69,699 15.87
$ 2.25 - $39.99....................... 80,400 9.5 -- --
$40.00 - $49.69....................... 153,100 9.5 -- --
--------- --- --------- ------
4,347,799 8.5 1,568,663 $ 1.58
========= === ========= ======
</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 1999
------ ------ -------
<S> <C> <C> <C>
Net income, as reported..................................... $4,003 $2,300 $ 1,695
Incremental pro forma compensation expense under SFAS 123... (12) (82) (1,351)
------ ------ -------
Pro forma net income........................................ $3,991 $2,218 $ 344
====== ====== =======
Pro forma basic earnings per share.......................... $ 0.18 $ 0.12 $ 0.01
====== ====== =======
</TABLE>
The fair value of options granted in 1997, 1998 and 1999 of $0.03, $0.25
and $4.89, respectively, 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 1999
------- ------- -------
<S> <C> <C> <C>
Dividend yield...................................... 0% 0% 0%
Expected life....................................... 5 years 5 years 5 years
Expected volatility................................. 0% 0% 57%
Risk-free interest rate............................. 6.0% 5.5% 6.6%
</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.
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".) Under the
plan, the Company is authorized to sell up to 1,500,000 shares of common stock
in a series of eighteen month offerings. 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. The price at which
the common
F-17
<PAGE> 80
BSQUARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
stock may be purchased is 85% of the lesser of 1) the fair market value of the
Company's common stock on the first day of the applicable offering period or 2)
the fair market value of the shares on the purchase date. The initial offering
period commenced on the effectiveness of the initial public offering. During the
six months ended June 30, 2000, the Company issued 93,815 (unaudited) shares
under the plan.
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. During the year ended December 31, 1999, and for the six
months ended June 30, 2000, the Company made matching contributions to the
Profit Sharing Plan of $514 and $335 (unaudited) respectively.
DEFERRED STOCK OPTION COMPENSATION
In connection with the grant of certain stock options to employees and
consultants during 1997 and 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, 1999, and for the six months ended June 30, 1999 and
2000, the Company expensed approximately $81, $171, $583, $294 (unaudited) and
$318 (unaudited), 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.
Included in the expensed amounts noted above for the year ended December
31, 1999 is $30 related to options granted to a consultant for services
rendered. As of December 31, 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. During
1999, the agreement was terminated.
F-18
<PAGE> 81
BSQUARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
11. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------ -----------------
1997 1998 1999 1999 2000
---- ------ ------ ------ -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Issuance of notes payable for equipment.... $-- $ 473 $ -- $ -- $ --
Cash paid for interest..................... 13 57 68 42 --
Cash paid for income taxes................. -- 2,170 2,520 1,100 1,050
Common stock issued for acquisition of
BlueWater Systems Inc.................... -- -- -- -- 11,044
Common stock issued for acquisition of
Mainbrace Corporation.................... -- -- -- -- 9,650
</TABLE>
All significant non-cash financing activities are listed elsewhere in the
financial statements or the notes thereto.
12. SIGNIFICANT CUSTOMERS
Sales to customers, which comprised at least 10% of revenue were as
follows:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
-------------------- ------------
1997 1998 1999 1999 2000
---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Microsoft........................................... 35% 75% 85% 85% 68%
Hitachi............................................. 16% 2% -- -- --
NEC................................................. 16% 3% -- -- --
ARM................................................. 10% 1% -- -- --
</TABLE>
As of December 31, 1997, 1998, 1999, and as of June 30, 2000 Microsoft
represented 73%, 84%, 82%, and 49% of total accounts receivable, respectively.
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.
13. 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 Windows-based
F-19
<PAGE> 82
BSQUARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
operating systems. The following table summarizes total revenue and long-lived
assets attributed to significant countries:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------- SIX MONTHS ENDED
1997 1998 1999 JUNE 30, 2000
------- ------- ------- ----------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Total revenue:
United States......................... $11,574 $24,698 $39,876 $25,475
Japan................................. 2,632 480 671 2,548
Other Foreign......................... 1,708 759 859 969
------- ------- ------- -------
Total revenue*..................... $15,914 $25,937 $41,406 $28,992
======= ======= ======= =======
Long-lived assets:
United States......................... $ 1,469 $ 2,886 $ 7,036 $26,072
Japan................................. -- 239 257 252
Germany............................... -- 205 157 106
------- ------- ------- -------
Total long-lived assets............ $ 1,469 $ 3,330 $ 7,450 $26,430
======= ======= ======= =======
</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-20
<PAGE> 83
BSQUARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
14. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Summarized quarterly financial information for 1998, 1999 and 2000 are as
follows:
<TABLE>
<CAPTION>
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
--------- -------- ------------- ------------
<S> <C> <C> <C> <C>
1998 QUARTER ENDED
Revenue.................................... $ 5,847 $ 5,622 $ 6,845 $ 7,623
Gross profit............................... 3,421 2,991 3,858 4,304
Income from operations..................... 1,365 365 1,182 228
Net income................................. $ 924 $ 310 $ 788 $ 278
======= ======= ======= =======
Net income per share, basic................ $ 0.05 $ 0.02 $ 0.04 $ 0.01
======= ======= ======= =======
Weighted average shares outstanding used to
compute basic earnings per share......... 19,451 18,307 $18,374 18,415
======= ======= ======= =======
1999 QUARTER ENDED
Revenue.................................... $ 9,167 $10,094 $10,449 $11,696
Gross profit............................... 4,982 5,400 5,461 6,054
Income (loss) from operations.............. 719 731 460 (37)
Net income................................. $ 429 $ 442 $ 378 $ 446
======= ======= ======= =======
Net income per share, basic................ $ 0.02 $ 0.02 $ 0.02 $ 0.01
======= ======= ======= =======
Weighted average shares outstanding used to
compute basic earnings per share......... 18,458 18,476 18,844 31,655
======= ======= ======= =======
2000 QUARTER ENDED
Revenue.................................... $13,292 $15,700
Gross profit............................... 6,943 8,279
Income (loss) from operations.............. 1,208 (2,873)
Net income (loss).......................... $ 995 $(2,475)
======= =======
Net income (loss) per share, basic......... $ 0.03 $ (0.07)
======= =======
Weighted average shares outstanding used to
compute basic earnings (loss) per
share.................................... 32,566 33,076
======= =======
</TABLE>
F-21
<PAGE> 84
BSQUARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
15. 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,
--------------------------- -----------------
1997 1998 1999 1999 2000
------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net income (loss) (numerator diluted).... $ 4,003 $ 2,300 $ 1,695 $ 871 $(1,480)
Less: Accretion of mandatorily redeemable
convertible preferred stock............ -- (110) (87) (58) --
------- ------- ------- ------- -------
Net income (loss) available to common
shareholders (numerator basic)......... $ 4,003 $ 2,190 $ 1,608 $ 813 $(1,480)
======= ======= ======= ======= =======
Shares (denominator basic):
Weighted average common shares
outstanding......................... 21,661 18,633 21,430 18,467 32,821
======= ======= ======= ======= =======
Basic earnings (loss) per share.......... $ 0.18 $ 0.12 $ 0.08 $ 0.04 $ (0.05)
======= ======= ======= ======= =======
Shares (denominator diluted):
Weighted average common shares
outstanding(1)...................... 21,661 18,633 21,430 18,467 32,821
Mandatorily redeemable convertible
preferred stock..................... -- 7,648 6,689 8,333 --
Common stock equivalents............... 381 1,455 2,681 2,145 --
------- ------- ------- ------- -------
Shares used in computation (denominator
diluted)(2)......................... 22,042 27,736 30,800 28,945 32,821
======= ======= ======= ======= =======
Diluted earnings (loss) per share........ $ 0.18 $ 0.08 $ 0.06 $ 0.03 $ (0.05)
======= ======= ======= ======= =======
</TABLE>
-------------------------
(1) Share amounts presented for 1997 to 1999 give effect to the issuance of
261,391 shares to the former shareholders of BlueWater Systems to effect its
acquisition by BSQUARE. The transaction was accounted for as a pooling of
interests.
(2) As the Company incurred a net loss attributable to common shareholders for
the three- and six-month periods ended June 30, 2000, the effect of common
stock equivalents and mandatorily redeemable convertible securities are
excluded in those periods as their effects are anti-dilutive.
16. ACQUISITIONS
BLUEWATER SYSTEMS, INC.
On January 5, 2000, the Company acquired BlueWater Systems, Inc. in a
transaction accounted for as a pooling of interests. BlueWater Systems, formerly
located in Edmonds, Washington, is dedicated to the design of software
development tool kits and system integration services for the creation of
Windows-based intelligent computing devices. The transaction was effected
through the exchange of 261,391 shares of BSQUARE common stock for all of the
issued and outstanding common shares of BlueWater Systems. The consolidated
financial statements of BSQUARE have been restated for all periods prior to the
merger to include the accounts and operations of BlueWater
F-22
<PAGE> 85
BSQUARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Systems, Inc. In connection with the acquisition, the Company incurred $620
($515 after taxes, or $0.01 per diluted share) of acquisition-related costs
which were charged to operations during the three months ended March 31, 2000.
The following table presents a reconciliation of revenue and net income
previously reported by BSQUARE to those presented in the accompanying condensed
consolidated financial statements:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED
----------------------------- JUNE 30,
1997 1998 1999 2000
------- ------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenue:
BSQUARE Corporation........................ $14,405 $24,612 $39,938 $18,543
BlueWater Systems, Inc..................... 1,509 1,325 1,468 718
------- ------- ------- -------
Combined................................ $15,914 $25,937 $41,406 $19,261
======= ======= ======= =======
Net income (loss):
BSQUARE Corporation........................ $ 3,806 $ 2,300 $ 1,691 $ 866
BlueWater Systems, Inc..................... 197 -- 4 5
------- ------- ------- -------
Combined................................ $ 4,003 $ 2,300 $ 1,695 $ 871
======= ======= ======= =======
</TABLE>
MAINBRACE CORPORATION
On May 24, 2000, the Company acquired Mainbrace Corporation in a
transaction accounted for as a purchase. Mainbrace Corporation, located in
Sunnyvale, California, is a leading IP-licensing and enabling software firm
delivering product solutions to high volume market segments including set-top
boxes, Web-enabled phones, wireless thin clients, and electronic book readers.
Total consideration included the issuance of 627,370 shares of BSQUARE common
stock, and approximately $10,800 in cash. Additionally, the Company assumed
Mainbrace's outstanding vested and unvested employee stock options which were
converted into the right to acquire approximately 173,000 shares of the
Company's common stock. Such assumption of Mainbrace's options by the Company
had a fair market value of approximately $552.
A summary of the purchase price for the acquisition is as follows:
<TABLE>
<S> <C>
Cash................................................... $10,800
Stock and stock options................................ 9,650
Direct acquisition costs............................... 347
Other acquisition costs................................ 2,840
Net deferred tax liability............................. 319
Assumed debt........................................... 900
-------
Total................................................ $24,856
=======
</TABLE>
F-23
<PAGE> 86
BSQUARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The purchase price was allocated as follows:
<TABLE>
<S> <C>
Working capital acquired............................... $ 871
Equipment.............................................. 160
Goodwill............................................... 16,885
Intangible assets...................................... 2,840
In-process research and development.................... 4,100
-------
Total................................................ $24,856
=======
</TABLE>
The excess of consideration paid over the fair value of the net assets
acquired will be recorded as goodwill and other intangible assets and will be
amortized over periods ranging from two to seven years.
In accordance with generally accepted accounting principles, the amount
allocated to in-process research and development, which was determined by an
independent valuation, has been recorded as a charge to expense in the second
quarter of 2000 because its technological feasibility had not been established
and it had no alternative future use at the date of acquisition.
The following table presents unaudited pro forma results of operations as
if the acquisition of Mainbrace had occurred at the beginning of each of the
periods presented. The unaudited pro forma information is not necessarily
indicative of the combined results that would have occurred had the acquisition
taken place at the beginning of the periods presented, nor is it necessarily
indicative of future results.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30,
------------------
1999 2000
------- -------
(IN THOUSANDS)
<S> <C> <C>
Revenue..................................................... $20,454 $30,779
======= =======
Net loss.................................................... $ (914) $(1,840)
======= =======
Net loss per share (basic and diluted)...................... $ (0.05) $ (0.06)
======= =======
</TABLE>
F-24
<PAGE> 87
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Mainbrace Corporation
We have audited the accompanying balance sheet of Mainbrace Corporation as
of December 31, 1999, and the related statements of operations, shareholders'
equity, and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Mainbrace Corporation at
December 31, 1999, and the results of its operations and its cash flows for the
year then ended, in conformity with accounting principles generally accepted in
the United States.
/s/ ERNST & YOUNG, LLP
San Jose, California
May 12, 2000
F-25
<PAGE> 88
MAINBRACE CORPORATION
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
1999
------------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 224,322
Accounts receivable....................................... 340,794
Employee loans............................................ 17,730
-----------
Total current assets................................... 582,846
Property and equipment, net................................. 153,269
-----------
Total assets........................................... $ 736,115
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Note payable -- related party............................. $ 30,000
Accounts payable.......................................... 138,364
Accrued liabilities....................................... 197,199
Deferred revenue.......................................... 60,000
Current portion of capital lease obligation............... 14,596
-----------
Total current liabilities.............................. 440,159
Long-term capital lease obligation.......................... 1,548
Commitments
Shareholders' equity:
Series A convertible preferred stock, no par value;
952,380 shares authorized, issued and outstanding...... 1,203,421
Common stock, 50,000,000 shares authorized, no par value;
13,985,140 shares issued and outstanding............... 2,912,082
Notes receivable from shareholders........................ (10,000)
Deferred compensation..................................... (2,197,200)
Accumulated deficit....................................... (1,613,895)
-----------
Total shareholders' equity............................. 294,408
-----------
Total liabilities and shareholders' equity............. $ 736,115
===========
</TABLE>
See Notes to Financial Statements.
F-26
<PAGE> 89
MAINBRACE CORPORATION
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1999
------------
<S> <C>
Net revenues................................................ $ 3,134,070
Cost of revenues............................................ 1,193,980
-----------
Gross profit................................................ 1,940,090
Operating expenses:
Research and development(1)............................... 1,464,173
Sales and marketing(2).................................... 880,566
General and administrative(3)............................. 497,160
Amortization of deferred stock compensation............... 666,860
-----------
Total operating expenses............................... 3,508,759
-----------
Loss from operations........................................ (1,568,669)
Other income (expense):
Interest income........................................... 8,357
Interest expense.......................................... (4,516)
-----------
Net loss.................................................... $(1,564,828)
===========
Basic and diluted net loss per share........................ $ (0.10)
===========
Shares used to compute basic and diluted net loss per
share..................................................... 15,446,860
===========
</TABLE>
-------------------------
(1) Excluding $343,000 in amortization of deferred stock-based compensation
(2) Excluding $207,000 in amortization of deferred stock-based compensation.
(3) Excluding $116,860 in amortization of deferred stock-based compensation.
See Notes to Financial Statements.
F-27
<PAGE> 90
MAINBRACE CORPORATION
STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
SERIES A CONVERTIBLE
PREFERRED STOCK COMMON STOCK NOTES
-------------------- ----------------------- RECEIVABLE FROM DEFERRED ACCUMULATED
SHARES AMOUNT SHARES AMOUNT SHAREHOLDERS COMPENSATION DEFICIT
------- ---------- ---------- ---------- --------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1998....................... -- $ -- 16,277,000 $ 40,305 $(10,000) $ -- $ (217,817)
Issuance of Series A
preferred stock at $1.00
per share in January
1999, net of issuance
costs of $34,673......... 952,380 917,707 -- -- -- -- --
Issuance of Series A
preferred stock for less
than fair value in
January 1999............. -- 285,714 -- -- -- -- --
Issuance of common stock
upon exercise of stock
options at $0.05 to
$0.10.................... -- -- 230,000 15,500 -- -- --
Repurchase of common
stock.................... -- -- (2,521,860) (7,783) -- -- --
Deferred compensation...... -- -- -- 2,864,060 -- (2,864,060) --
Amortization of deferred
compensation............. -- -- -- -- -- 666,860 --
Contribution of services
from related party....... -- -- -- -- -- -- 168,750
Net loss................... -- -- -- -- -- -- (1,564,828)
------- ---------- ---------- ---------- -------- ----------- -----------
Balance at December 31,
1999....................... 952,380 $1,203,421 13,985,140 $2,912,082 $(10,000) $(2,197,200) $(1,613,895)
======= ========== ========== ========== ======== =========== ===========
<CAPTION>
TOTAL
SHAREHOLDERS'
EQUITY
-------------------
<S> <C>
Balance at December 31,
1998....................... $ (187,512)
Issuance of Series A
preferred stock at $1.00
per share in January
1999, net of issuance
costs of $34,673......... 917,707
Issuance of Series A
preferred stock for less
than fair value in
January 1999............. 285,714
Issuance of common stock
upon exercise of stock
options at $0.05 to
$0.10.................... 15,500
Repurchase of common
stock.................... (7,783)
Deferred compensation...... --
Amortization of deferred
compensation............. 666,860
Contribution of services
from related party....... 168,750
Net loss................... (1,564,828)
-----------
Balance at December 31,
1999....................... $ 294,408
===========
</TABLE>
See Notes to Financial Statements.
F-28
<PAGE> 91
MAINBRACE CORPORATION
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1999
------------
<S> <C>
OPERATING ACTIVITIES
Net loss.................................................... $(1,564,828)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation.............................................. 69,009
Contribution of services from a related party............. 168,750
Amortization of deferred compensation..................... 666,860
Assets acquired under capital lease....................... 42,274
Changes in operating assets and liabilities:
Accounts receivable.................................... (293,197)
Employee loans......................................... 22,252
Accrued liabilities.................................... 65,813
Deferred revenue....................................... 47,500
-----------
Net cash used in operating activities....................... (775,567)
INVESTING ACTIVITY
Capital expenditures........................................ (159,436)
-----------
Cash used in investing activity............................. (159,436)
FINANCING ACTIVITIES
Proceeds from issuance of common stock...................... 15,500
Proceeds from issuance of preferred stock, net.............. 1,203,421
Repurchase of common stock.................................. (7,783)
Payment on notes payable.................................... (350,000)
Proceeds from notes payable................................. 255,000
Payment on capital lease obligation......................... (26,130)
-----------
Net cash provided by financing activities................... 1,090,008
-----------
Net increase in cash and cash equivalents................... 155,005
Cash and cash equivalents at beginning of year.............. 69,317
-----------
Cash and cash equivalents at end of year.................... $ 224,322
===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid............................................... $ 4,516
Taxes paid.................................................. $ 1,302
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING
ACTIVITIES
Deferred compensation related to stock options.............. $ 2,864,060
</TABLE>
See Notes to Financial Statements.
F-29
<PAGE> 92
MAINBRACE CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS
Mainbrace Corporation (the Company) was incorporated in the state of
California on October 6, 1997. The Company provides design services to leading
OEMs, semiconductor vendors, and technology providers in the United States.
The Company's activities to date have consisted principally of raising
capital, arranging for facilities, acquiring equipment and licensing rights,
recruiting managerial and technical personnel, and commencing research and
development efforts.
BASIS OF PRESENTATION
As of December 31, 1999, the Company had working capital of $142,687. For
the year ended December 31, 1999, the Company used cash of approximately
$776,000 in its operating activities. Management has committed that, to the
extent existing resources and anticipated revenues are insufficient to fund the
Company's planned activities, debt or equity financing will be available from
existing investors and others. Based on this commitment, substantial doubt as to
the Company's ability to continue as a going concern for financial reporting
purposes at December 31, 1999 has been alleviated.
REVENUE RECOGNITION
To date, the Company's revenues have been derived from consulting work. The
Company recognizes consulting revenue as earned, provided that contract
milestones have been reached and customer acceptance has occurred.
ESTIMATES AND ASSUMPTIONS
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, liabilities, revenue,
and expenses. Actual results may materially differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of
three months or less at the date of purchase to be cash equivalents. The
carrying value of cash and cash equivalents approximates fair value at December
31, 1999.
SIGNIFICANT CONCENTRATIONS
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of accounts receivable. The
Company's accounts receivable are derived primarily from consulting services to
large OEMs, semiconductor vendors, and technology vendors in the United States.
As of December 31, 1999, three customers represented 15.8%, 35.2%, and 49.0% of
accounts receivable. Three customers accounted for approximately 26.8%, 28.5%,
and 36.8% of revenues in 1999. The Company generally does not require
collateral, performs ongoing credit evaluations of its customers, and to date
has not experienced any material losses.
F-30
<PAGE> 93
MAINBRACE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
PROPERTY AND EQUIPMENT
The Company records property and equipment at cost and calculates
depreciation using the straight-line method over the estimated useful lives of
the assets, generally three years. Leasehold improvements are amortized using
the straight-line method over the shorter of the useful lives or the term of the
lease.
RESEARCH AND DEVELOPMENT
Research and development expenditures are charged to operations as
incurred. Statement of Financial Accounting Standards No. 86, "Accounting for
the Costs of Computer Software to Be Sold, Leased or Otherwise Marketed,"
requires capitalization of certain software development costs subsequent to the
establishment of technological feasibility. Based on the Company's product
development process, technological feasibility is established upon completion of
a working model. To date, the period between achieving technological feasibility
and the general availability of such software has been short and software
development costs qualifying for capitalization have been insignificant.
Accordingly, the Company has charged all such costs to research and development
expense.
STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation using the intrinsic-value
method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and has adopted the disclosure alternative of
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123).
INCOME TAXES
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109). Under
this method, deferred tax assets and liabilities are determined based on the
differences between the financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates that will be in effect
when the differences are expected to reverse.
OTHER COMPREHENSIVE INCOME
The Company has adopted the provisions of the Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS 130). The
Company has no items of other comprehensive income in the period presented and,
therefore, net loss equals total comprehensive loss for the year ended December
31, 1999.
NET LOSS PER SHARE
Basic net loss per share is computed using the weighted-average number of
vested outstanding shares of common stock. Diluted net loss per share is
computed using the weighted-average number of shares of vested common stock
outstanding, and, when dilutive, unvested common stock outstanding, potential
common shares from options to purchase common stock using the treasury stock
method and from convertible securities using the as-if-converted bases. All
potential common
F-31
<PAGE> 94
MAINBRACE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
shares have been excluded from the computation of diluted net loss per share
because the effect would be antidilutive.
The following table presents the calculation of basic and diluted net loss
per share for the year ended December 31, 1999:
<TABLE>
<S> <C>
Net loss.................................................... $(1,564,828)
===========
Basic and diluted:
Weighted average common shares outstanding................ 15,585,000
Less weighted average common shares subject to
repurchase............................................. (138,140)
-----------
Shares used to compute basic and diluted net loss per common
share..................................................... 15,446,860
===========
Basic and diluted net loss per common share................. $ (0.10)
===========
</TABLE>
The number of outstanding options and potential common shares excluded from
the calculations of diluted net loss per share at December 31, 1999 is detailed
in the following table:
<TABLE>
<S> <C>
Preferred stock............................................. 952,380
Outstanding options......................................... 2,100,000
---------
3,052,380
=========
</TABLE>
These instruments were excluded because their effect would be antidilutive.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities" (SFAS 133). SFAS
No. 133 establishes methods for derivative financial instruments and hedging
activities related to those instruments, as well as other hedging activities. At
December 31, 1999, the Company did not hold any derivative instruments and did
not engage in any hedging activities. As a result, the adoption of SFAS 133 is
not expected to have a significant impact on the Company's financial position,
results of operations or cash flows. The Company will be required to implement
SFAS 133, as amended, for the year ending December 31, 2001.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements" (SAB 101). The Company does not
believe its adoption will materially change its financial position, results of
operations, or cash flows.
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44 (FIN 44), "Accounting for Certain Transactions Involving
Stock Compensation -- An Interpretation of APB No. 25." FIN 44 clarifies the
application of APB Opinion No. 25 and, among other issues, clarifies the
following: the definition of an employee for purposes of applying APB Opinion
No. 25; the criteria for determining whether a plan qualifies as a
noncompensatory plan; the accounting consequence of various modifications to the
terms of the previously fixed stock options or awards; and the accounting for an
exchange of stock compensation awards in a business combination. FIN 44 is
effective July 1, 2000, but certain conclusions in FIN 44 cover specific events
that occurred after either December 15, 1998 or January 12, 2000. Mainbrace does
not expect the application of FIN 44 to have a material impact on the Company's
financial position or results of operations.
F-32
<PAGE> 95
MAINBRACE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
2. PROPERTY AND EQUIPMENT
Property and equipment as of December 31, 1999 consist of the following:
<TABLE>
<S> <C>
Computer and office equipment............................... $181,433
Office furniture............................................ 51,772
--------
233,205
Accumulated depreciation and amortization................... (79,936)
--------
Property and equipment, net................................. $153,269
========
</TABLE>
3. COMMITMENTS
The Company leases its primary office space under an operating lease from a
related party. Rent expense for facilities was $147,669 for the year ended
December 31, 1999. Future minimum payments at December 31, 1999 are as follows
for the fiscal years indicated:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
<S> <C> <C>
Year ended December 31:
2000..................................................... $17,500 $157,000
2001..................................................... 2,032 163,000
2002..................................................... -- 170,000
2003..................................................... -- 57,000
------- --------
Total minimum payment required............................. 19,532 $547,000
========
Less amount representing interest.......................... 3,388
-------
Present value of net minimum lease payments................ 16,144
Less current maturities.................................... 14,596
-------
Long-term obligations under capital lease.................. $ 1,548
=======
</TABLE>
4. SHAREHOLDERS' EQUITY
COMMON STOCK
As of December 31, 1999, the Company has reserved 4,770,000 shares of its
common stock for issuance upon exercise of stock options granted and options
available for grant under the Company's Stock Option Plan.
The Company effected a two-for-one stock split of its outstanding common
stock in December 1999. All shares and per share amounts have been adjusted to
reflect the split.
STOCK OPTION PLAN
In 1998, the shareholders adopted the 1998 Stock Option Plan (the Plan) for
issuance of common stock to eligible participants. Under this plan, the Company
may grant either nonstatutory or incentive stock options and the option price
per share cannot be less than 85% of fair value in the case of nonstatutory
options, or 100% of fair value in the case of incentive stock options,
determined on the date that the option is granted. All options expire no later
than 10 years from date of grant.
F-33
<PAGE> 96
MAINBRACE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
Stock options granted under the Plan are immediately exercisable and
unvested shares issued are subject to repurchase by the Company. Options and
unvested shares typically vest 25% per year from the date of grant and 1/16 upon
completion of each consecutive three-month period thereafter. Options may be
granted with different vesting terms from time to time. In the event option
holders cease to be employed by the Company, all unvested options are forfeited
and all vested options may be exercised within a 30-day period after
termination; the Company also has the right to repurchase any unvested (but
issued) shares if the holder is no longer employed by the Company. As of
December 31, 1999, approximately 171,000 shares that had been exercised remained
subject to the Company's right of repurchase.
Pro forma information regarding net loss is required by SFAS 123, and has
been determined as if the Company has accounted for its employee stock options
under the fair-value method of that Statement. The fair value of these options
was estimated at the date of grant using the minimum-value method assuming a
risk-free rate of 6%, an expected life of four years, and no dividends. Changes
in the subjective input assumptions can materially affect the fair value
estimate and, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its stock-based awards to
employees. For the purposes of pro forma disclosures, the estimated fair value
of the options is amortized to expense over the options' vesting period.
The effect of applying the fair-value method of SFAS 123 to the Company's
stock option awards did not result in pro forma net loss that was materially
different from the amounts reported.
The option valuation models were developed for use in estimating the fair
value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including the expected option life. Because the
Company's employee stock options have characteristics significantly different
from those of traded options and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
The effects of applying SFAS 123 on pro forma disclosures are not likely to
be representative of the effects on pro forma disclosures in future years.
Stock activity under the Stock Option Plan was as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-----------------------------------------------------------
SHARES OPTION WEIGHTED
AVAILABLE NUMBER OF PRICE PER AVERAGE
FOR GRANT SHARES SHARE RANGE EXERCISE PRICE
---------- ---------- ------------- --------------
<S> <C> <C> <C> <C>
Balance at December 31, 1998.... 2,963,000 -- $ -- $ --
Authorized.................... 2,037,000 -- $ -- $ --
Grants........................ (4,100,000) 4,100,000 $0.05 -- $0.23 $0.15
Cancellations................. 1,770,000 (1,770,000) $0.01 -- $0.10 $0.02
Exercises..................... -- (230,000) $0.05 -- $0.10 $0.07
---------- ----------
Balance at December 31, 1999.... 2,670,000 2,100,000 $0.01 -- $0.23 $0.08
========== ==========
</TABLE>
The weighted average fair value of options granted during 1999 with an
exercise price equal to the fair value of the Company's common stock on the date
of grant was $0.04 per share.
F-34
<PAGE> 97
MAINBRACE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
ISSUE OF SERIES A PREFERRED STOCK
On January 29, 1999, the Company issued 952,380 shares of Series A
convertible preferred stock at $1.00 per share. The Series A shareholder and the
Company also entered into a consulting agreement in January 1999. The Company
provided consulting services to the Series A shareholder in 1999. The shares
were issued at $1.00 per share while the deemed fair value of the preferred
stock at that date was $1.30 per share. The Company recorded the difference
between the issue price and deemed fair market value as a $285,714 reduction in
revenues for the year ended December 31, 1999.
Each share of Series A convertible preferred stock (preferred stock) is
entitled to voting rights equivalent to the number of shares of common stock
into which each share can be converted and is convertible into common stock at
the quotient obtained by dividing the original issue price of the Series A
preferred conversion price, which shall initially be the original issue price,
and may be charged accordingly. Conversion to common stock occurs automatically
upon a majority vote by holders of preferred stock or upon the closing of an
underwritten public offering, provided certain conditions are met. The Series A
convertible preferred shares are subject to liquidation preferences of $1.00 per
share, plus all declared but unpaid dividends. Series A convertible preferred
shareholders are entitled to noncumulative dividends of $0.10 per share per
annum, if declared by the Board of Directors, and in preference to common stock
dividends.
DEFERRED COMPENSATION
During the year ended December 31, 1999, in connection with the grant of
stock options to employees, the Company recorded deferred stock compensation of
$2,864,060 representing the difference between the exercise price and the deemed
fair value of the Company's common stock. Deferred compensation is included as a
reduction of shareholders' equity and is being amortized using the graded method
over the vesting period, generally four years. During 1999, the Company recorded
amortization of deferred compensation of $666,860.
5. RELATED PARTY TRANSACTIONS
Effective April 1, 1998, the Company entered into an arm's-length
consulting agreement with Metis Associates, Inc. (Metis), a company under common
ownership. Under this agreement, Metis agreed to provide consulting services to
the Company until April 2001. This service was provided without charge up to
December 31, 1998. The remaining term of the agreement included a $25,000
monthly fee. The Company recognized costs under this agreement on a
straight-line basis over the term of the contract. On July 1, 1999, the Company
amended its agreement with Metis, where Metis agreed to waive any outstanding
liability and provide consulting services on an "as needed" basis. The Company
has recognized approximately $169,000 in equity as a contribution of services
for the outstanding liability related to the first nine months of the contract.
The Company had a $125,000 loan outstanding from Metis at December 31,
1998. During 1999, the Company received additional loans of $255,000 from Metis,
due in one year from issuance with interest at 9.00% per annum, compounded
annually. The Company repaid Metis $350,000 of loans during 1999 and has a
balance of $30,000 at December 31, 1999. The Company leases its office space
under a sublease from Metis. The terms of this lease are disclosed in Note 3.
F-35
<PAGE> 98
MAINBRACE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
6. INCOME TAXES
No provision for income taxes has been recorded due to operating losses
with no current benefit.
As of December 31, 1999, the Company had federal and state net operating
loss carryforwards of approximately $600,000. The net operating loss
carryforwards will begin expiring in 2005 through 2019, if not utilized.
Utilization of the net operating losses and credits may be subject to a
substantial annual limitation due to the ownership change provisions of the
Internal Revenue Code of 1986 and similar state provisions. The annual
limitation may result in the expiration of net operating losses and credits
before utilization.
As of December 31, 1999, the Company had deferred tax assets of
approximately $240,000. The deferred tax asset has been fully offset by a
valuation allowance. Deferred tax assets relate primarily to net operating loss
carryforwards. The valuation allowance for deferred tax assets increased by
approximately $154,000 in the year ended December 31, 1999.
7. SUBSEQUENT EVENTS
In May 2000, the Company entered into an Agreement and Plan of Merger with
an unrelated company to be acquired for approximately $10.8 million in cash and
$9.7 million in stock and stock options.
F-36
<PAGE> 99
MAINBRACE CORPORATION
BALANCE SHEET
<TABLE>
<CAPTION>
MARCH 31,
2000
--------------
(UNAUDITED)
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 305,205
Accounts receivable....................................... 1,390,160
Employee loans............................................ 16,760
----------
Total current assets................................... 1,712,125
Property and equipment, net................................. 160,037
----------
Total assets........................................... $1,872,162
==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 67,849
Note payable.............................................. 935,000
Accrued liabilities....................................... 238,702
Deferred revenue.......................................... 60,000
Current portion capital lease obligation.................. 273,250
----------
Total current liabilities.............................. 1,574,801
Long-term capital lease obligation.......................... 1,548
Shareholders' equity:
Series A convertible preferred stock, no par value;
952,380 shares authorized, issued and outstanding at
March 31, 2000......................................... 1,203,421
Common stock, 50,000,000 shares authorized, no par value;
13,985,140 shares issued and outstanding at March 31,
2000................................................... 3,062,782
Notes receivable from shareholders........................ (10,000)
Deferred compensation..................................... (2,048,889)
Accumulated deficit....................................... (1,911,501)
----------
Total shareholders' equity............................. 295,813
----------
Total liabilities and shareholders' equity............. $1,872,162
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-37
<PAGE> 100
MAINBRACE CORPORATION
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1999
------------------
(UNAUDITED)
<S> <C>
Net revenues................................................ $1,353,481
Costs and expenses:
Cost of revenues.......................................... 382,369
Research and development.................................. 577,102
Sales and marketing....................................... 346,483
General and administrative................................ 196,282
Amortization of deferred stock option compensation........ 148,311
----------
Total costs and expenses............................... 1,650,547
----------
Loss from operations........................................ (297,066)
Interest income............................................. 460
Interest expense............................................ (1,000)
----------
Net loss.................................................... $ (297,606)
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-38
<PAGE> 101
MAINBRACE CORPORATION
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
2000
------------------
(UNAUDITED)
<S> <C>
OPERATING ACTIVITIES
Net loss.................................................... $ (297,606)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation.............................................. 17,566
Amortization of deferred compensation..................... 148,311
Changes in operating assets and liabilities:
Accounts receivable.................................... (1,049,368)
Accrued liabilities.................................... 17,048
Deferred revenue....................................... 213,250
-----------
Net cash used in operating activities....................... (950,799)
INVESTING ACTIVITIES
Capital expenditures........................................ (24,018)
-----------
Net cash used in investing activities....................... (24,018)
FINANCING ACTIVITIES
Proceeds from issuance of common stock...................... 150,700
Proceeds from notes payable................................. 905,000
-----------
Net cash provided by financing activities................... 1,055,700
-----------
Increase in cash and cash equivalents....................... 80,883
Cash and cash equivalents at beginning of year.............. 224,322
-----------
Cash and cash equivalents at end of year.................... $ 305,205
===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid............................................... $ 1,000
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-39
<PAGE> 102
MAINBRACE CORPORATION
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The unaudited condensed financial statements have been prepared by
Mainbrace Corporation (the "Company") pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote
disclosures, normally included in financial statements prepared in accordance
with generally accepted accounting principles, have been condensed or omitted
pursuant to such rules and regulations. In the opinion of the Company, the
unaudited financial statements reflect all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation of the Company's
financial position at March 31, 2000, its operating results and cash flows for
the three months ended March 31, 2000. Interim results are not necessarily
indicative of results for a full year.
2. SUBSEQUENT EVENT
On May 24, 2000, the Company was acquired by BSQUARE Corporation for
approximately $10.8 million in cash and $9.1 million in stock.
F-40
<PAGE> 103
PRO FORMA FINANCIAL INFORMATION
BSQUARE's acquisition of Mainbrace Corporation will be accounted for under
the purchase method of accounting. Under the purchase method of accounting, the
purchase price is allocated to the assets acquired and liabilities assumed based
on their estimated fair values. The estimated fair values included herein are
based upon preliminary estimates and may not be indicative of the final
allocation of purchase price consideration. Amounts allocable to in-process
research and development will be recorded as one-time charges that would reduce
the goodwill reflected in the Unaudited Pro Forma Condensed Consolidated Balance
Sheet and the related amortization expense reflected in the Unaudited Pro Forma
Condensed Consolidated Statements of Operations. The acquisition is valued at
approximately $24.9 million based on the closing price of BSQUARE's common stock
on May 24, 2000. The amount of the consideration issued to the former
shareholders and option holders of Mainbrace was determined by arms-length
negotiation between the parties.
The following Unaudited Pro Forma Condensed Consolidated Balance sheet as
of March 31, 2000 gives effect to the acquisition of Mainbrace as if it had
occurred on March 31, 2000 and the Unaudited Pro Forma Condensed Consolidated
Statements of Operations for the year ended December 31, 1999 and the three
months ended March 31, 2000 ("Pro Forma Financial Statements") give effect to
the acquisition of Mainbrace as if it had occurred on January 1, 1999. The Pro
Forma Condensed Consolidated Statements of Operations are based on historical
results of operations of BSQUARE and Mainbrace for the year ended December 31,
1999 and the three months ended March 31, 2000. The Pro Forma Financial
Statements and the accompanying notes ("Pro Forma Financial Information") should
be read in conjunction with and are qualified by the historical financial
statements and notes thereto of BSQUARE and Mainbrace. On January 6, 2000
BSQUARE completed its acquisition of BlueWater Systems Inc. ("BlueWater") in a
transaction accounted for as a pooling of interests. Accordingly, the
accompanying historical financial information of BSQUARE includes the financial
position and results of operations of BlueWater as if BSQUARE and BlueWater had
always been combined.
The Pro Forma Financial Information is intended for information purposes
only and is not necessarily indicative of the combined results that would have
occurred had the acquisition taken place on January 1, 1999, nor is it
necessarily indicative of results that may occur in the future.
F-41
<PAGE> 104
BSQUARE CORPORATION
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
MARCH 31, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
BSQUARE MAINBRACE PRO FORMA
CORPORATION CORPORATION ADJUSTMENTS PRO FORMA
----------- ----------- ----------- ---------
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............... $ 59,358 $ 305 $(13,640)(b) $ 45,673
(350)(c)
Short-term investments.................. 26,869 -- -- 26,869
Accounts receivable, net................ 6,491 1,390 (900)(d) 6,981
Prepaid expenses and other current
assets............................... 579 17 -- 596
-------- ------- -------- --------
Total current assets................. 93,297 1,712 (14,890) 80,119
Furniture, equipment and leasehold
improvements, net....................... 5,693 160 -- 5,853
Intangible assets......................... 19,550(g) 19,550
Deposits and other assets................. 1,422 -- -- 1,422
-------- ------- -------- --------
Total assets......................... $100,412 $ 1,872 $ 4,660 $106,944
======== ======= ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable........................ $ 306 $ 68 $ -- $ 374
Accrued expenses........................ 4,921 1,235 (900)(d) 5,575
319(k)
Deferred revenue........................ 4,269 273 -- 4,542
-------- ------- -------- --------
Total current liabilities............ 9,496 1,576 (581) 10,491
-------- ------- -------- --------
Shareholders' equity:
Mainbrace Corporation. Series A
Preferred stock...................... -- 1,203 (1,203)(i) --
Common stock............................ 91,722 3,063 9,096(a) 101,369
551(e)
(3,063)(f)
Note receivable from shareholder........ (10) -- (10)
Deferred stock option compensation...... (697) (2,048) 2,048(f) (697)
Cumulative foreign currency translation
adjustment........................... (36) -- -- (36)
Accumulated deficit..................... (73) (1,912) 1,912(f) (4,173)
(4,100)(h)
-------- ------- -------- --------
Total shareholders' equity........... 90,916 296 5,241 96,453
-------- ------- -------- --------
Total liabilities and shareholders'
equity............................. $100,412 $ 1,872 $ 4,660 $106,944
======== ======= ======== ========
</TABLE>
See notes to unaudited pro forma condensed consolidated financial statements.
F-42
<PAGE> 105
BSQUARE CORPORATION
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
BSQUARE MAINBRACE PRO FORMA
CORPORATION CORPORATION ADJUSTMENTS PRO FORMA
----------- ----------- ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Revenue:
Service................................. $12,284 $1,353 $ -- $13,637
Product................................. 1,008 -- -- 1,008
------- ------ ------- -------
Total revenue........................ 13,292 1,353 -- 14,645
------- ------ ------- -------
Cost of revenue:
Service................................. 6,197 382 -- 6,579
Product................................. 152 -- -- 152
------- ------ ------- -------
Total cost of revenue................ 6,349 382 -- 6,731
------- ------ ------- -------
Gross profit......................... 6,943 971 -- 7,914
------- ------ ------- -------
Operating expenses:
Research and development................ 2,044 577 -- 2,621
Selling, general and administrative..... 3,520 543 -- 4,063
Amortization of deferred stock option
compensation......................... 171 148 -- 319
Acquired in-process research and
development.......................... -- -- 4,100(h) 4,100
Amortization of acquired intangible
assets............................... -- -- 878(g) 878
------- ------ ------- -------
Total operating expenses............. 5,735 1,268 4,978 11,981
------- ------ ------- -------
Income (loss) from operations........ 1,208 (297) (4,978) (4,067)
Other income (expense) net:
Interest income, net.................... 826 -- -- 826
Acquisition related expenses............ (620) -- -- (620)
------- ------ ------- -------
Income (loss) before income taxes......... 1,414 (297) (4,978) (3,861)
Provision for income taxes................ 419 -- (101)(l) 318
======= ====== ======= =======
Net income (loss).................... $ 995 $ (297) $(4,877) $(4,179)
======= ====== ======= =======
Basic earnings (loss) per share........... $ 0.03 (m) $ (0.12)
======= =======
Weighted average shares outstanding used
to compute basic earnings (loss) per
share................................... 32,566 33,193
======= =======
Diluted earnings (loss) per share......... $ 0.03 (m) $ (0.12)
======= =======
Weighted average shares outstanding to
compute diluted earnings (loss) per
share................................... 35,628 33,193
======= =======
</TABLE>
See notes to unaudited pro forma condensed consolidated financial statements.
F-43
<PAGE> 106
BSQUARE CORPORATION
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
BSQUARE MAINBRACE PRO FORMA
CORPORATION CORPORATION ADJUSTMENTS PRO FORMA
----------- ----------- ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Revenue:
Service.................................. $38,823 $ 3,134 $ -- $41,957
Product.................................. 2,583 -- -- 2,583
------- ------- ------- -------
Total revenue.................... 41,406 3,134 -- 44,540
------- ------- ------- -------
Cost of revenue:
Service.................................. 18,980 1,027 -- 20,007
Product.................................. 529 -- -- 529
------- ------- ------- -------
Total cost of revenue............ 19,509 1,027 -- 20,536
------- ------- ------- -------
Gross profit..................... 21,897 2,107 -- 24,004
------- ------- ------- -------
Operating expenses:
Research and development................. 7,506 1,550 -- 9,056
Selling, general and administrative...... 11,935 1,459 -- 13,394
Amortization of deferred stock option
compensation.......................... 583 667 -- 1,250
Acquired in-process research and
development........................... -- -- 4,100(h) 4,100
Amortization of acquired intangible
assets................................ -- -- 3,512(g) 3,512
------- ------- ------- -------
Total operating expenses......... 20,024 3,676 7,612 31,312
------- ------- ------- -------
Income (loss) from operations.... 1,873 (1,569) (7,612) (7,308)
Other income (expense) net:
Interest income, net..................... 926 4 -- 930
------- ------- ------- -------
Income (loss) before income taxes.......... 2,799 (1,565) (7,612) (6,378)
Provision for income taxes................. 1,104 -- (532)(l) 572
------- ------- ------- -------
Net income (loss)................ $ 1,695 $(1,565) $(7,080) $(6,950)
======= ======= ======= =======
Basic earnings (loss) per share............ $ 0.08 $ (0.32)
======= =======
Weighted average shares outstanding used to
compute basic earnings (loss) per
share.................................... 21,430 22,057
======= =======
Diluted earnings (loss) per share.......... $ 0.06 $ (0.32)
======= =======
Weighted average shares outstanding to
compute diluted earnings (loss) per
share.................................... 30,800 22,057
======= =======
</TABLE>
See notes to unaudited pro forma condensed consolidated financial statements.
F-44
<PAGE> 107
BSQUARE CORPORATION AND SUBSIDIARIES
NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(a) Reflects the issuance of approximately 627,000 shares of BSQUARE common
stock to consummate the acquisition of Mainbrace.
(b) Reflects cash paid to selling shareholders and cash other costs associated
with the acquisition.
(c) Reflects estimated direct acquisition associated with the acquisition.
(d) To eliminate in consolidation, the $900 note between BSQUARE and Mainbrace.
(e) To record the fair value of vested options outstanding.
(f) Represents the elimination of the historical shareholders' equity accounts
of Mainbrace.
(g) To allocate the purchase price, including approximately $350 of transaction
costs incurred in the acquisition to assets and liabilities of Mainbrace.
The excess of the purchase price over the fair value of net assets and other
intangible assets acquired is reflected as goodwill and other intangible
assets and is amortized using the straight-line method over periods ranging
from two to seven years. The estimated fair values of assets acquired and
liabilities assumed are based upon preliminary estimates and may not be
indicative of the final allocation of purchase price consideration. Any
amounts that may be allocable to in process research and development will be
recorded as one time charges that will reduce the goodwill reflected in the
Unaudited Pro Forma Condensed Consolidated Balance Sheet and the related
amortization expense reflected in the Unaudited Pro Forma Condensed
Consolidated Statements of Operations.
A summary of the purchase price for the acquisition is as follows:
<TABLE>
<S> <C>
Cash.............................................. $10,800
Stock and stock options........................... 9,647
Direct acquisition costs.......................... 350
Other acquisition costs........................... 2,840
Net deferred tax liability........................ 319
Assumed debt...................................... 900
-------
Total........................................... $24,856
=======
</TABLE>
The purchase price was allocated as follows:
<TABLE>
<S> <C>
Cash acquired..................................... $ 305
Other working capital acquired.................... 741
Equipment......................................... 160
Goodwill.......................................... 16,650
Intangible assets................................. 2,900
In-process research and development............... 4,100
-------
Total........................................... $24,856
=======
</TABLE>
(a) To reflect the impact of the write-off of in-process research and
development.
(b) Represents the elimination of the Mainbrace historical Series A preferred
stock, which was converted into common stock prior to the close of the
acquisition.
(c) Represents the amortization of goodwill and other intangible assets for the
three-month period ended March 31, 2000 and year ended December 31, 1999
assuming the transaction occurred on January 1, 1999.
F-45
<PAGE> 108
BSQUARE CORPORATION AND SUBSIDIARIES
NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(d) To reflect the estimated net deferred tax liability associated with the
acquisition, as certain assets stepped-up for book purposes that are not
stepped-up for tax purposes.
(d) To record estimated tax benefit for BSQUARE consolidated tax group results
using 34% effective tax rate as a result of the consolidation of Mainbrace
with BSQUARE.
(f) Pro forma basic and diluted net loss per share are computed by dividing the
pro forma net loss attributable to common shareholders by the pro forma
weighted average number of common shares outstanding. A reconciliation of
shares used to compute historical basic and diluted net loss per share to
shares used to compute pro forma basic and diluted net loss per share is as
follows:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED YEAR ENDED
MARCH 31, DECEMBER 31,
2000 1999
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Shares used to compute historical basic net
income per share........................... 32,566 21,430
Shares issued in acquisition................. 627 627
------ ------
Shares used to compute pro forma basic net
income per share........................ 33,193 22,057
====== ======
Shares used to compute historical diluted net
income per share........................... 35,628 30,800
Anti-dilutive effect of common stock
equivalents................................ (3,062) (2,681)
Anti-dilutive effect of mandatorily
redeemable convertible securities.......... -- (6,689)
Shares issued in acquisition................. 627 627
------ ------
Shares used to compute pro forma diluted
net income per share.................... 33,193 22,057
====== ======
</TABLE>
F-46
<PAGE> 109
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.
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee......... $ 2,946
Printing Costs.............................................. 35,000
Legal Fees and Expenses..................................... 35,000
Accounting Fees and Expenses................................ 35,000
Miscellaneous............................................... 2,054
--------
Total..................................................... $110,000
========
</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.
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 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 October 19, 1999, the registrant granted options to
purchase up to 4,331,173 shares of the registrant's common stock under the
registrant's amended and restated stock option plan
II-1
<PAGE> 110
at a weighted average exercise price of $3.88 per share. These grants were
exempt from registration pursuant to Rule 701 under the Securities Act.
From June 1998 to October 19, 1999, 351,141 shares of the registrant's
common stock were issued to 87 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 $3.16 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. This issuance was exempt from
registration pursuant to Section 4(2) of the Securities Act.
On January 5, 2000, the registrant issued 261,391 shares of its common
stock and options to purchase an additional 21,793 shares of common stock to
seven holders in exchange for all of the issued and outstanding shares and
options to purchase shares of BlueWater Systems, Inc. The issuance was exempt
from registration pursuant to Section 4(2) of the Securities Act.
On May 24, 2000, the registrant issued 627,334 shares of its common stock
and options to purchase an additional 172,666 shares of common stock to 43
holders in exchange for all of the issued and outstanding shares and options to
purchase shares of Mainbrace Corporation. The 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>
EXHIBIT
NUMBER DESCRIPTION
--------- -----------
<C> <S>
3.1# Amended and Restated Articles of Incorporation.
3.1(a)+ Articles of Amendment to Amended and Restated Articles of
Incorporation.
3.2# Bylaws and all amendments thereto.
4.1 See Exhibits 3.1, 3.1(a) 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.
10.1(a)++ 1998 Mainbrace 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# Office Lease Agreement between Seattle Office Associates,
LLC and BSQUARE Corporation dated March 24, 1997 (for Suite
100).
10.7# Sunset North Corporate Campus Lease Agreement between WRC
Sunset North and BSQUARE Corporation.
10.8## First Amendment to Office Lease Agreement between WRC Sunset
North LLC and BSQUARE.
10.9*# Master Development & License Agreement between Microsoft
Corporation and BSQUARE Corporation dated effective as of
October 1, 1998.
10.10# Stock Purchase and Shareholders Agreement dated as of
January 30, 1998.
</TABLE>
II-2
<PAGE> 111
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
--------- -----------
<C> <S>
10.11# Stock Purchase Agreement dated August 18, 1999 by and
between BSQUARE Corporation and Vulcan Ventures
Incorporated.
10.12### Agreement and Plan of Merger among BSQUARE, BlueWater
Systems, Inc. and H2O Merger Corporation dated as of January
5, 2000.
10.13#### Agreement and Plan of Merger among BSQUARE, Mainbrace
Corporation and Mainbrace Acquisition Inc. dated as of May
10, 2000.
10.14 Single-Tenant Commercial Space Lease among One South Park
Investors, Paul Enterprises and FKLM as Landlord and BSQUARE
as Tenant.
21.1 Subsidiaries of the registrant.
23.1 Consent of Arthur Andersen LLP, Independent Public
Accountants.
23.2** Consent of Ernst & Young LLP, Independent Public
Accountants.
23.3 Consent of Summit Law Group, PLLC (contained in the opinion
filed as Exhibit 5.1 hereto).
24.1** Power of Attorney (See Page II-5).
</TABLE>
-------------------------
* Subject to confidential treatment.
** Previously filed
+ Incorporated by reference to the registrant's quarterly report on Form
10-Q filed with the Securities and Exchange Commission on August 7,
2000.
++ Incorporated by reference to the registrant's registration statement on
Form S-8 (File No. 333-44306) filed with the Securities and Exchange
Commission on August 23, 2000.
# Incorporated by reference to the registrant's registration statement on
Form S-1 (File No. 333-85351) filed with the Securities and Exchange
Commission on October 19, 2000.
## Incorporated by reference to the registrant's annual report on Form 10-K
filed with the Securities and Exchange Commission on March 2, 2000.
### Incorporated by reference to the registrant's Current Report on Form 8-K
filed with the Securities and Exchange Commission on January 18, 2000.
#### Incorporated by reference to the registrant's Current Report on Form 8-K
filed with the Securities and Exchange Commission on May 23, 2000.
(b) FINANCIAL STATEMENT SCHEDULES.
Schedule II -- Valuation and Qualifying Accounts
ITEM 17. UNDERTAKINGS.
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 provisions described above in Item 14, 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> 112
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933, as amended.
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) of the Securities Act, if,
in the aggregate, the changes in volume and price represent not more
than a 20% change in the maximum aggregate offering price set forth in
the "Calculation of Registration Fee" table in the effective
registration statement.
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement.
(2) For purposes of determining any liability under the Securities
Act, each such post-effective amendment 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.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of this offering.
II-4
<PAGE> 113
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment No. 1 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 14th day of September, 2000.
BSQUARE CORPORATION
By: /s/ BRIAN V. TURNER
--------------------------------------
Brian V. Turner
Sr. Vice President of Operations and
Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the registration statement has been signed by the following persons in
the capacities indicated below on the 14th day of September, 2000.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
* Chairman of the Board, Chief Executive
----------------------------------------------------- Officer and President (Principal Executive
William T. Baxter Officer)
/s/ BRIAN V. TURNER Sr. Vice President of Operations and Chief
----------------------------------------------------- Financial Officer (Principal Financial and
Brian V. Turner Accounting Officer)
* Director
-----------------------------------------------------
Albert T. Dosser
* Director
-----------------------------------------------------
Jeffrey T. Chambers
* Director
-----------------------------------------------------
Scot E. Land
* Director
-----------------------------------------------------
William Larson
* Director
-----------------------------------------------------
David Moore
</TABLE>
* By: /s/ BRIAN V. TURNER
------------------------------------
As Attorney-In-Fact
II-5
<PAGE> 114
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 September
7, 2000. Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The accompanying schedule is the
responsibility of the company's management and is presented for purposes of
complying with the Securities and Exchange Commission 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 relation to the basic financial statements taken as a
whole.
/s/ ARTHUR ANDERSEN LLP
Seattle, Washington
September 7, 2000
<PAGE> 115
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, 1997:
Allowance for doubtful accounts........ $ -- $ 10 $-- $ 10
For the year ended December 31, 1998:
Allowance for doubtful accounts........ $ 10 $ 60 $ 3 $ 67
For the year ended December 31, 1999:
Allowance for doubtful accounts........ $ 67 $ 75 $-- $142
For the six months ended June 30, 2000
(unaudited):
Allowance for doubtful accounts........ $142 $280 $-- $422
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EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
3.1# Amended and Restated Articles of Incorporation
3.1(a)+ Articles of Amendment to Amended and Restated Articles of
Incorporation
3.2# Bylaws and all amendments thereto.
4.1 See Exhibits 3.1, 3.1(a) 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.
10.1(a)++ 1998 Mainbrace 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# Office Lease Agreement between Seattle Office Associates,
LLC and BSQUARE Corporation dated March 24, 1997 (for Suite
100).
10.7++ Sunset North Corporate Campus Lease Agreement between WRC
Sunset North and BSQUARE Corporation.
10.8## First amendment to Office Lease Agreement between WRC Sunset
North LLC and BSQUARE.
10.9*# Master Development & License Agreement between Microsoft
Corporation and BSQUARE Corporation dated effective as of
October 1, 1998.
10.10# Stock Purchase and Shareholders Agreement dated as of
January 30, 1998.
10.11# Stock Purchase Agreement dated August 18, 1999 by and
between BSQUARE Corporation and Vulcan Ventures
Incorporated.
10.12### Agreement and Plan of Merger among BSQUARE, BlueWater
Systems, Inc. and H2O Merger Corporation dated as of January
5, 2000.
10.13#### Agreement and Plan of Merger among BSQUARE, Mainbrace
Corporation and Mainbrace Acquisition Inc. dated as of May
10, 2000.
10.14 Single-Tenant Commercial Space Lease among One South Park
Investors, Paul Enterprises and FKLM as Landlord and BSquare
as Tenant.
21.1 Subsidiaries of the registrant.
23.1 Consent of Arthur Andersen LLP, Independent Public
Accountants.
23.2** Consent of Ernst & Young LLP, Independent Public
Accountants.
23.3 Consent of Summit Law Group, PLLC (contained in the opinion
filed as Exhibit 5.1 hereto).
24.1** Power of Attorney (See Page II-5).
</TABLE>
-------------------------
* Subject to confidential treatment.
** Previously filed
+ Incorporated by reference to the registrant's quarterly report on Form
10-Q filed with the Securities and Exchange Commission on August 7,
2000.
++ Incorporated by reference to the registrant's registration statement on
Form S-8 (File No. 333-44306) filed with the Securities and Exchange
Commission on August 23, 2000.
<PAGE> 117
# Incorporated by reference to the registrant's registration statement on
Form S-1 (File No. 333-85351) filed with the Securities and Exchange
Commission on October 19, 2000.
## Incorporated by reference to the registrant's annual report on Form 10-K
filed with the Securities and Exchange Commission on March 2, 2000.
### Incorporated by reference to the registrant's Current Report on Form 8-K
filed with the Securities and Exchange Commission on January 18, 2000.
#### Incorporated by reference to the registrant's Current Report on Form 8-K
filed with the Securities and Exchange Commission on May 23, 2000.
