<PAGE> 1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------------
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
-----------------------------
BSQUARE CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
WASHINGTON 000-27687 91-1650880
----------------------------- --------------------------- ---------------------------
(State or other jurisdiction (Commission File No.) (IRS Employer
of incorporation) Identification No.)
</TABLE>
3150 139TH AVENUE S.E., SUITE 500
BELLEVUE, WASHINGTON 98005
(Address of principal executive offices)
(425) 519-5900
(Registrant's telephone number, including area code)
NONE
(Former name or former address, if changed since last report)
================================================================================
1
<PAGE> 2
BSQUARE CORPORATION
FORM 8-K/A
TABLE OF CONTENTS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAGE
----
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL STATEMENTS AND EXHIBITS.
<S> <C>
(a) Financial statements of businesses acquired 3
(b) Pro Forma Financial Information 19
</TABLE>
2
<PAGE> 3
On May 24, 2000, BSQUARE Corporation, a Washington corporation
("BSQUARE"), completed its acquisition of Mainbrace Corporation, a California
corporation ("Mainbrace"), pursuant to an Agreement and Plan of Merger dated as
of May 10, 2000 (the "Merger Agreement"). This transaction was initially
reported on a Current Report on Form 8-K dated May 23, 2000, and was amended on
June 7, 2000.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
The following financial statements required by Item 7(a) and 7(b) with
respect to the Mainbrace Corporation acquisition are filed as part of this
report:
(a) Financial statements of businesses acquired
3
<PAGE> 4
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 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 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 ended December 31, 1999, in conformity with accounting principles generally
accepted in the United States.
/s/ ERNST & YOUNG LLP
May 12, 2000
4
<PAGE> 5
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:
Accounts payable $ 138,364
Note payable 30,000
Accrued liabilities 197,199
Deferred revenue 60,000
Current portion capital lease obligation 14,596
-----------
Total current liabilities 440,159
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
December 31, 1999 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 accompanying notes.
5
<PAGE> 6
MAINBRACE CORPORATION
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1999
-----------------
<S> <C>
Net revenues $ 3,134,070
Costs and expenses:
Cost of revenues 1,027,265
Research and development 1,550,432
Sales and marketing 930,854
General and administrative 527,328
Amortization of deferred stock option compensation 666,860
-----------
Total costs and expenses 4,702,739
-----------
Loss from operations (1,568,669)
Interest income 8,357
Interest expense (4,516)
-----------
Net loss $(1,564,828)
===========
</TABLE>
See accompanying notes.
6
<PAGE> 7
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 ACTIVITIES
Capital expenditures (159,436)
-----------
Net cash used in investing activities (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
-----------
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 accompanying notes.
7
<PAGE> 8
MAINBRACE CORPORATION
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
SERIES A CONVERTIBLE
PREFERRED STOCK COMMON STOCK
-----------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1998 -- $ -- 16,277,000 $ 40,305
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
Amortization of deferred stock
option compensation -- -- -- --
Contribution of services from
related party -- -- -- --
Net loss -- -- -- --
-----------------------------------------------------------------
Balance at December 31, 1999 952,380 $ 1,203,421 13,985,140 $ 2,912,082
=================================================================
</TABLE>
<TABLE>
<CAPTION>
NOTES
RECEIVABLE TOTAL
FROM DEFERRED ACCUMULATED SHAREHOLDERS'
SHAREHOLDERS COMPENSATION DEFICIT EQUITY
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1998 $ (10,000) $ -- $ (217,817) $ (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 -- (2,864,060) -- --
Amortization of deferred stock
option compensation -- 666,860 -- 666,860
Contribution of services from
related party -- -- 168,750 168,750
Net loss -- -- (1,564,828) (1,564,828)
-------------------------------------------------------------------
Balance at December 31, 1999 $ (10,000) $(2,197,200) $(1,613,895) $ 294,408
===================================================================
</TABLE>
See accompanying notes.
8
<PAGE> 9
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 a working capital of $142,687. For the
year ended December 31, 1999, the Company used 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.
9
<PAGE> 10
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. The
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.
10
<PAGE> 11
2. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1999
-----------------
<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 AND CONTINGENCIES
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 2,670,000 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,
11
<PAGE> 12
determined on the date that the option is granted. All options expire no later
than 10 years from date of grant.
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 option's 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 disclosure in future years.
12
<PAGE> 13
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.
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 stockholder and the Company
also entered into a consulting agreement in January 1999. The Company provided
consulting services to the Series A stockholder 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
approximately $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 approximately
$666,860.
5. RELATED PARTY TRANSACTIONS
Effective April 1, 1998, the Company entered into an arms-length consulting
agreement with Metis Associates, Inc. (Metis), a company under common ownership.
Under this agreement,
13
<PAGE> 14
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.
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
(Agreement) with an unrelated company to be acquired for approximately $10.8
million in cash and $10.2 million in stock.
14
<PAGE> 15
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 1,203,421 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
15
<PAGE> 16
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
16
<PAGE> 17
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
17
<PAGE> 18
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. These financial statements and notes
thereto included elsewhere in this Form 8-K for the year ended December 31,
1999. 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.
18
<PAGE> 19
(b) Pro Forma Financial Information.
BSQUARE's acquisition of Mainbrace 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.
19
<PAGE> 20
BSQUARE CORPORATION
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
MARCH 31, 2000
(in thousands, except share amounts)
<TABLE>
<CAPTION>
BSQUARE MAINBRACE PRO FORMA
CORPORATION CORPORATION ADJUSTMENTS PRO FORMA
----------- ----------- ----------- ---------
<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, 5,693 160 -- 5,853
net
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.
20
<PAGE> 21
BSQUARE CORPORATION
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2000
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
BSQUARE MAINBRACE PRO FORMA
CORPORATION CORPORATION ADJUSTMENTS PRO FORMA
----------- ----------- ----------- ----------
<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 36,255
========== ==========
</TABLE>
See notes to unaudited pro forma condensed consolidated financial statements.
21
<PAGE> 22
BSQUARE CORPORATION
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
BSQUARE MAINBRACE PRO FORMA
CORPORATION CORPORATION ADJUSTMENTS PRO FORMA
----------- ----------- ----------- ----------
<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 927 4 -- 931
---------- ---------- ---------- ----------
Income (loss) before income taxes 2,800 (1,565) (7,612) (6,377)
Provision for income taxes 1,104 -- (532)(l) 572
---------- ---------- ---------- ----------
Net income (loss) $ 1,696 $ (1,565) $ (7,080) $ (6,949)
========== ========== ========== ==========
Basic earnings (loss) per share $ 0.06 (m) $ (0.24)
========== ==========
Weighted average shares outstanding used to
compute basic earnings (loss) per share 28,119 28,746
========== ==========
Diluted earnings (loss) per share $ 0.06 (m) $ (0.22)
========== ==========
Weighted average shares outstanding to
compute diluted earnings
(loss) per share 30,801 31,428
========== ==========
</TABLE>
See notes to unaudited pro forma condensed consolidated financial statements.
22
<PAGE> 23
BSQUARE CORPORATION. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(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>
<CAPTION>
(in thousands)
<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>
<CAPTION>
(in thousands)
<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>
(h) To reflect the impact of the write-off of in-process research and
development.
(i) Represents the elimination of the Mainbrace historical Series A
preferred stock, which was converted into common stock prior to the
close of the acquisition.
23
<PAGE> 24
(j) 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.
(k) 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.
(l) 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.
(m) 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 28,119
Shares issued in acquisition 627 627
-------- --------
Shares used to compute pro forma
basic net income per share 33,193 28,746
======== ========
Shares used to compute historical
diluted net income per share 35,628 30,801
Shares issued in acquisition 627 627
-------- --------
Shares used to compute pro forma
diluted net income per share 36,255 31,428
======== ========
</TABLE>
24
<PAGE> 25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
BSQUARE CORPORATION
Date: July 19, 2000
By: /S/ BRIAN V. TURNER
----------------------------------
Brian V. Turner
Senior Vice President of
Operations and Chief Financial
Officer
25
