UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-KSB
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended SEPTEMBER 30, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission file number 333-59133
V3 SEMICONDUCTOR, INC.
(Exact name of Registrant as specified in its charter)
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Nevada 87-0429263
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
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250 Consumers Road
Suite 901
North York, ON Canada M2J 4V6
(Address of Principal Executive Offices) (Zip Code)
(416) 497 8884
Issuer's Telephone Number, Including Area Code)
Securities Registered under Section 12(b) of the exchange Act:
Name of Each Exchange
Title of Each Class on Which Registered
None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.001 par value per share
(Title of Class)
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark if no disclosure of delinquent filers pursuant to
Item 405 of Regulation S-B is not contained in this form, and no disclosure will
be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. ______
The issuer's revenues for its most recent fiscal year. $4,022,161
The aggregate market value of the voting and non-voting common stock held
by non-affiliates of the registrant computed by reference to the price at which
the common stock was sold as of September 30, 1998 was: $9,254,769.
The number of shares outstanding of the registrant's Common Stock
outstanding as of September 30, 1998 was 5,471,628.
DOCUMENTS INCORPORATED BY REFERENCE:
Reference is made to the Registrant's Prospectus, dated October 21, 1998,
filed pursuant to Rule 424(b) of the Securities Act of 1933.
Reference is made to the Registrant's Form SB-2 Registration Statement
(File No. 333-59133), as filed on July 15, 1998, which is hereby incorporated by
reference.
Reference is made to Amendment Number 1 to the Registrant's Form SB-2
Registration Statement (File No. 333-59133), as filed on September 22, 1998,
which is hereby incorporated by reference.
Reference is made to Amendment Number 2 to the Registrant's Form SB-2
Registration Statement (File No. 333-59133), as filed on October 8, 1998, which
is hereby incorporated by reference.
Reference is made to Amendment Number 3 to the Registrant's Form SB-2
Registration Statement (File No. 333-59133), as filed on October 19, 1998, which
is hereby incorporated by reference.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
History
V3 Semiconductor, Inc. (the "Company") was incorporated under the laws
of the State of Nevada on December 23, 1985 under the name Ariel, Inc. The
Company was dormant and did not engage in any business activities until April
1994 when the Company merged with V3 Corporation and changed its name from
Ariel, Inc. to V3 Incorporated. V3 Corporation, was incorporated under the
Ontario Business Corporations on October 22, 1985. During the period from
October 22, 1985 to April 1994, V3 Corporation engaged in the business of
designing, engineering and marketing semiconductors and integrated circuits. On
April 18, 1994, the Company and V3 Corporation entered into a plan of
reorganization agreement through which the two companies merged into V3
Incorporated and in 1996, V3 Incorporated changed its name to V3 Semiconductor,
Inc.
Overview
The overall mission of the Company is to originate, design and market
high performance peripheral and core silicon products for the Embedded Systems
market. The Company believes that the Embedded Systems market has the potential
for significant growth as Embedded System applications evolve in functionality
from relatively simple industrial controllers to use in highly complex
networking and telecommunications applications.
The Company's products are designed to function in tandem with specific
microprocessors manufactured by third parties such as Intel Corporation
("Intel"), Motorola Corporation ("Motorola"), International Business Machines
("IBM"), Hitachi Semiconductor of America ("Hitachi"), Quantum Effect Design
("QED"), Texas Instruments ("T.I."), Integrated Device Technology ("IDT") and
Advanced Micro Devices ("AMD"). Microprocessors, which include microcontrollers
or central processing units ("CPUs"), are the central controllers of virtually
all computer systems. In addition, they are also used in a relatively invisible
but very large segment of the computer industry as "Embedded Controllers" in a
variety of products and applications. The Company's products work with these
CPUs by directing and controlling the flow of data between the CPUs and the
various peripherals that the CPUs control. Applications include servers,
communication routers, data switches, mass storage controllers, modems,
facsimiles (fax) and imaging equipment, telecommunication switching equipment,
networking controllers, instrumentation, industrial tools and consumer
appliances.
The Company's products are co-peripherals to all major RISC processors
including, but not limited to, Intel's i960 family of processors, IBM's PowerPC
series and AMD's 29K, as well as embedded x86 processors which are used for
lower cost applications. In addition, with a minimum of programming, the
Company's controllers (System, Memory and PCI) can be used with any and all
embedded processors, such as: Motorola (PowerPC TM, 68K TM, Coldfire TM,
PowerQUICC TM families), Hitachi (Super-H TM, SCA-II TM Series), MIPS TM
Processors (QED, MIPS TM, IDT, NEC, Toshiba). The Company's products are
designed to be compatible with existing and new standards and technologies such
as PCI with I2O and are used in such new technologies as ATM, xDSL, Ethernet
(10BaseT), Fast Ethernet (100BaseT), Gigabit Ethernet etc.
The Company has identified target markets for its business, designed
and developed products that satisfy the requirements of key customers in those
markets, and established a number of important strategic alliances with Intel,
IBM, Motorola, Hitachi and QED. The Company is presently listed on Intel's and
Motorola's websites and believes it will be on Hitachi's, T.I.'s and QED's
websites in the near future. The Company's sales and marketing channels are
designed in order to provide total market coverage. The Company has now reached
the stage in the development of its business plan and has the right management
team in place, to aggressively pursue marketing and sales strategies to maximize
market share in its target markets and reinforce its competitive advantages in
the Embedded Systems market.
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Product Lines
The Company produces processor specific semiconductors, integrated
circuits, for the Embedded Systems market. These products are used by system
designers who are utilizing high-speed RISC and 'Super Scalar' microprocessors
within their embedded systems design. These processors demand efficient coupling
to memory and peripheral input/output (I/O) devices in order to attain any
degree of efficiency. The system designer faces three alternative choices in
achieving this coupling: (1) use PLDs or FPGAs (Field Programmable Gate Array)
which must be customized to the application, (2) designing an ASIC to implement
the application, or (3) using a V3 Semiconductor standard product which requires
no design work and whose functionality has been fully tested.
The Company's principal product lines fall into three categories: Burst
(DRAM) Memory Controllers (BMC Family), Small System Controllers (SSC Family)
and PCI Bridge Controllers (PBC, EPC & PSC Families). Today's market demands
also require support for these silicon devices in the form of evaluation and
reference design boards, application notes, documentation and software that will
enable engineers ease of interfacing to other devices in their design.
Burst (DRAM) Memory Controllers
Semiconductor memory is typically available in two major types, Static
Random Access Memory ("SRAM") and Dynamic Random Access Memory ("DRAM"). SRAM
devices are somewhat faster than DRAMs, however, they are considerably more
expensive, particularly in systems where a significant amount of random access
memory is required. DRAM Controllers are integrated circuits that are physically
installed between the microprocessor and an array of DRAM devices and execute
the appropriate control strategy to make DRAM devices behave like SRAM devices.
The Company's Burst Memory Controllers ("BMCs") are DRAM Controllers
interfaces the host processor to the low cost commodity DRAMs manufactured by
merchant semiconductor manufacturers. Systems employing these controllers can
replicate the performance of an SRAM based system at a fraction of the cost, at
lower power levels, at higher speeds and with no design or production overhead
to either the DRAM manufacturer or the system designer. In order to increase
flexibility to system designers and to expand their marketability, most BMCs
have features that are software programmable, enabling these features to be
easily modified for performance or convenience.
The Company has a Canadian patent on a DRAM Controller design which
minimizes the power required and heat generated during the access stage with a
proprietary design feature that may only be functionally replicated by other
technologies at materially higher prices.
Small System Controllers ("SSC")
System Controllers are integrated circuits that expand the functional
use of DRAM controllers by adding control features that would normally be
provided by external devices. The Company's system controllers (SSC family of
integrated circuits) are designed to operate with specific microprocessors such
as Intel's i960 Sx/Jx, and IBM's PPC401 PowerPC processors and are typically
used in high-performance network equipment and RAID (Storage) Controllers. The
Company's SSC product family, allows system designers to replace many lower
integration support components with a single integrated component.
The Company's SSC System Controller family includes a high performance
DRAM controller, DMA controllers, interrupt management, serial ports, I/O
control logic, timers and I/O ports. The SSC can be combined with Intel i960 or
IBM PowerPC processors to build powerful, low-component could add-in cards,
robotics controllers and networking systems.
PCI Bridge Controllers (PBC)
Peripheral Component Interconnect (PCI) is a new system "bus" standard
developed by more than 100 industry leading companies, including Intel, IBM,
AMD, H.P. and Apple to define a single standard method of connecting CPUs to
peripheral devices such as disk controllers, graphics controllers and
communication devices. Most computers today use the PCI bus interface which has
replaced the Industry Standard Architecture (ISA) bus interface.
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The Company was the first company to go to production with devices that
supported the intelligent input/output (I2O) standard. This new standard
provides a software solution (along with PCI, a standard bus interface) which
optimizes CPU and system performance by handling the overhead of I/O interrupts.
The Company has now launched its Second Generation of I2O PCI
Controllers, the EPC (Enhanced PCI Controller). The EPC has additional
functionality such as DMA Chaining, which supports Multi-Processor capabilities.
These features are in demand by mainly networking companies such as: Cisco, Bay
Networks, 3 Comm, Ascend/Cascade Communications, Hewlett Packard, Cabletron,
Nortel, Newbridge and others.
A more recent and more widely applicable family of PCI Controllers is
the PCI Slave Controller ("PSC"). This family is targeted for the cost sensitive
ISA devices, which are now migrating to PCI adapter cards. These are lower cost,
high volume products targeted for a lower-end adapter mass market which in turn
addresses the conversion from older limited and obsolete data buses (ISA) to
wider and more efficient ones (PCI).
Embedded Systems Industry Overview
According to the March 17, 1997 edition of the publication Electronic
Design which cites the report "The World Embedded Controller Market" prepared by
Frost and Sullivan, a market research company (the "Frost and Sullivan Report"),
the total embedded market (4, 8, 16 and especially 32 and 64 bit RISC
Processors) is expected to grow to approximately $34 billion by the year 2002.
The embedded market is driven by the increasing performance demands for speed
and functionality, of the server, mass storage, networking and communications
technologies. Global players, such as Intel, Motorola, IBM, Hitachi and Hewlett
Packard, who also are the Company's technology partners and/or customers, attest
to this unprecedented growth by investing heavily into product development in
RISC processors, new standards such as I2O and new 32 and 64 bit peripherals.
Their heavy investments are driven either by the need to develop, design and
market end-user equipment or semiconductor products in support of the embedded
market.
According to the Frost and Sullivan Report, the high-end 32 and 64 bit
processor segment of the embedded market is expected to exceed $9 billion by the
year 2002. The embedded PCI market, a major subsection of the embedded market
that the Company serves, is expected to grow to $1.7 billion during the same
time period. The Company is targeting a subset of this market, the peripherals
sector, which is expected to grow to over $1 billion by the year 2002. The
Company's goal is to attain significant market share of this surging market by
2001. Emerging standards, such as I2O (Intelligent I/O)--which address and
resolve the serious and costly systems problem of data bottlenecks--create new
opportunities in this market, by providing solutions to data transfer and CPU
overhead problems. In an embedded system, these are crucial design issues that
seriously impact system performance. The increasing need to move data faster and
more efficiently will require solutions supported by the Company's current and
future products.
Initially the Company's products were developed to support RISC
processors in embedded applications. As Embedded Systems requirements have
evolved, driven mainly by networking and office equipment applications, the
Company has moved to designing more advanced products in support of the I/O
(input/output) needs that are driven by such industry leaders as Intel, IBM,
H.P., US Robotics, Compaq, Cisco, Bay Networks etc. New products may include a
RISC processor core or "coring" with a partner as part of a highly integrated
silicon based system, as well as other highly integrated peripherals targeted
for certain segments (telecom and data equipment, imaging, set-top and high-end
server) of the market.
Semiconductor Industry Market Structure
There are three major segments in the semiconductor industry: the
standard integrated circuit ("IC") segment, the application specific integrated
circuit ("ASIC") segment and the "chipset" segment which is a hybrid of the
other two segments. Each of these market segments can be further subdivided into
"merchant" and "captive" markets. The merchant market consists of producers
involved in sales to unrelated third parties, while the captive market involves
sales to affiliated parties. For example, while IBM is reportedly the largest
producer of semiconductors in the world, its production is principally consumed
internally by its "captive" vertically integrated business groups. AMD , T.I.,
Motorola, SGS-Thompson and NSC, on the other hand, are examples of merchant
semiconductor suppliers.
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IC Business Segment
The IC business segment generally sells two types of products:
relatively generic high volume, low margin devices (such as DRAM memory
devices), and proprietary technologies (such as microprocessors, peripheral
controllers, graphics ICs and signal processing ICs). In the "high volume"
product lines, key factors for success are cost controls, manufacturing
efficiency and quality. In the "proprietary" product areas, while cost and
quality issues remain relevant, intellectual property and innovative design take
precedence.
For most large semiconductor producers in the merchant market, volume
output and economies of scale are critical to success. However, costs of
production being relatively uniform (or at least potentially so) for larger
manufacturers, the value of a semiconductor manufacturer's products is
determined by market demand for the features embodied in those products.
Consumers of merchant market ICs select semiconductors for incorporation into
their products based principally on their functionality (roughly determined by
the surface area consumed per product unit) and the degree to which competing
designs can be excluded from the marketplace.
The volume requirements of major merchant market suppliers, their cost
of production constraints, and the effect that this has on product selection for
inclusion in the semiconductors they design and produce has created
opportunities for smaller and innovative semiconductor companies, such as Cyrix,
Atmel, Actel and Xilinx. This is the niche market in which the Company operates.
These kinds of producers are known in the industry as "fabless" semiconductor
manufacturers. These companies, under subcontracting arrangements with larger
semiconductor manufacturers, focus on developing niche designs and products
which can be incorporated into, or added on to, the semiconductors manufactured
by principal merchant market semiconductor suppliers. Because fabless
manufacturers do not have the high fixed costs associated with semiconductor
manufacturing, profitable sales can be made at lower volume targets and their
niche products can be brought to market both independently and through
arrangements with the principal merchant market semiconductor manufacturers.
The Company, for example, has partnered with a traditional
semiconductor maker, National Semiconductor Corporation, to not only "make"
products for incorporation into NSC designs but also to develop, market and sell
ICs jointly with NSC.
ASIC Business Segment
ASICs are essentially customized ICs designed for specific customer
applications. The desire among manufacturers who use embedded control systems to
pursue differentiation in developing their own product designs, and their needs
to increase performance and reduce costs in a number of specific areas, has
fueled the demand for ASICs. While this should be, in theory, a highly
profitable value added undertaking for larger semiconductor manufacturers,
several factors have impeded market growth and profitability in this area. The
major problems of ASICs is that they are expensive to design, do not achieve
full functionality without substantial upgrading and have limited market scope
in the semiconductor merchant market as specific-purpose products. ASICs also
are not easily accommodated within the established architecture of most systems.
As a result, a number of semiconductor manufacturers specializing in ASIC
products have encountered serious financial difficulties and have either
discontinued operations or have been acquired by other firms in recent years.
For this reason, the Company has focused upon the chipset segment of the
semiconductor industry.
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Chipset Business Segment
Traditionally, "chipsets" were not a part of the embedded market. The
Company's entry into the semiconductor business was founded on the premise that
32-Bit RISC processors would change the embedded design marketplace. The 32-Bit
RISC processors are inexpensive and powerful, and allow functions traditionally
implemented in hardware through the use of "chipsets" to be moved into software
without sacrifice in performance or cost. Through the use of 32-Bit processors,
the Company has defined "chipsets" for the embedded marketplace. These "chipset"
devices are part of a new segment of the IC business segment known as
Application Specific Standard Products ("ASSPs").
ASSPs are designed, manufactured, marketed and sold as merchant market
commodity devices or standard products and they are targeted at interfacing key
functions like memory control and other peripheral functions to specific
processors. The Company's interface devices cost less than equivalent ASICs or
discrete solutions that would otherwise be required, and there are no
development costs to the end-user.
The 32-Bit Embedded RISC market has exploded over the past 6 years from
100,000 units shipped in 1989 to 7 million units shipped in 1994. In 1996,
volumes are expected to exceed 15 million units for a total value of over $1
billion and by 2002 to exceed $7 billion. The Company has had an early start in
this marketplace and given its current and planned product mix, anticipates
being one of only a few suppliers of this technology.
Marketing and Sales Strategy & Strategic Partnerships
The Company has identified target markets for its business, designed and
developed products that satisfy the requirements of key customers in those
markets, and established a number of important strategic alliances with Intel,
IBM, Motorola, Hitachi and QED. The Company is presently listed on Intel's and
Motorola's websites and believes it will be on Hitachi's, T.I.'s and QED's
websites in the near future. The Company markets it products through direct
sales to its major, global corporate customers; sales through the Company's
network of manufacturers' representatives which include major original equipment
manufacturers worldwide and sales through distributors. The Company believes
that it has reached the stage in the development of its business to aggressively
pursue marketing and sales strategies to maximize market share in its target
markets and reinforce its competitive advantages in the Embedded Systems market.
The Company markets its products worldwide through a network of
manufacturers' representatives and distributors. The Company utilizes the
technical support, customer service and materials management of its
representatives and distributors. The Company's customers include Adaptec,
Ascend/Cascade, Cabletron, Data General, Hewlett Packard, Hitachi, Hughes
Communications, IBM, Kodak, NEC, Netspeed, Nortel, Samsung, Scitex and Sony.
The Company has developed a number of relationships with strategic partners
who combine the Company's products with their own in recommended system
solutions for customers. These include the i960 division of Intel, the High End
Microprocessor group of Motorola, the Embedded Processor Division of AMD, the
RISC product group of IDT, the Embedded Processor group of IBM, the Embedded
Super-H group of Hitachi and the MIPs Intellectual Property House QED.
To date the Company's marketing strategy has focused on building end-user
and strategic partner confidence in its IC products. Information has been
disseminated to strategic partners and consultations have been held with a view
to presenting the Company's products as part of the strategic partners' overall
design solution to their customer's specific requirements. The Company has been
able to access the resources of its strategic partners to identify target
markets, determine market sizes, develop design proposals and solutions, and
establish pricing policies.
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This third party marketing approach has enabled the Company to develop a
substantial base of customers. These alliances have been particularly important
in developing relationships and product distribution channels to smaller
customers who are more risk averse and less prepared to embrace technology
solutions offered by smaller customers such as the Company. Due to its strategic
relationships with established merchant market manufacturers, the Company has
been able to develop a level of confidence in smaller suppliers that makes it
easier to establish ongoing relationships with them. Smaller customers are
important to the Company's overall market development strategy since they
purchase smaller quantities of its products at higher average selling prices.
They also provide a more diverse and stable revenue base than that which would
apply if the Company held a small number of large accounts.
Manufacturing
The Company does not own or operate silicon fabrication facilities and
therefore is referred to as a "fabless" semiconductor company. The Company has
chosen to be fabless as a result of (i) the significant front end costs of
constructing and owning silicon fabrication facilities (estimated at $500
million to $1 billion) and (ii) the overabundance of low cost fabrication
capacity available in the market. The Company's semiconductor manufacturers
include Samsung and Hyundai, both located in Korea and KLSI, located in Japan.
The Company is also in discussions with IBM, Hitachi, TSMC, SGS-Thomson,
S-MOS/Seiko Epson and UMC regarding fabrication.
To assure its products meet high-quality standards, the Company has
established a Manufacturing/Process Engineering group and a Quality Assurance
department. The continuous audits by these groups assure that the Company's
manufacturing partners and its employees have the discipline to meet the quality
requirements to establish ISO 9001 certification. The ISO 9001 certification is
a quality management and quality assurance certification standard developed by
the International Organization for Standardization ("ISO"). The ISO 9001
certification is the highest standard in the ISO 9000 series. The ISO 9000
series was developed to provide an internationally accepted system of rating
quality and for providing product standardization V3 is the only company among
its competitors that is ISO 9001 compliant, a definite asset in getting approved
with large customers such as NorTel and H.P. etc.
Research and Development/Product Development
The Company has assembled a strong engineering team, comprised of
senior architects and designers from companies such as ATI and LSI Logic. The
Company's engineering group has designed and developed the Company's product
families, including the Burst Mode Controller and the System Controller series,
both of which remain in production today. The Company plans to expand its
product line and enter the 64-Bit PCI Controller market, based on customer
demands and embedded market and RISC processor evolution. The Company maintains
a continuous dialogue with customers and technology partners to ensure that the
Company's products incorporate features that are essential for the rapidly
evolving (embedded) systems design requirements. As a result, the Company's new
products will incorporate inputs from current customers (Hewlett Packard, IBM,
Bay Networks, Cisco, Nortel, Scitex, US Robotics, Kodak, Ascend etc.) and
leverage the expertise gained from joint product development with Intel, IBM,
Motorola, Hitachi, QED, IDT and Hewlett Packard. For example, the Company
utilized such expertise to become the first semiconductor company to introduce
and demonstrate a family of products compatible with the newly emerging I2O
standard.
Beta-Site and Key Customer Support Programs
As part of its product and market development strategy, the Company
supplies unpublished designs that it has developed to a small number of
end-users on a trial basis, and works with those end-users to further refine and
develop new products or modifications to existing products, that will meet the
requirements of a particular market segment.
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The Company retains ownership and control over any proprietary
information disclosed under a Beta-site agreement and retains clear title to any
developments that may result from such joint efforts.
When the design specifications are finalized and product functionality
has been demonstrated, the Company is well positioned to provide the ongoing
supply requirements of those end-users or other end users in the same market
segment. This process of complementary development work with end-users enhances
the Company's design reputation, instills customer confidence and expands
potential markets for the Company's products.
V3 Cubed Corporation ("V Cubed")
V Cubed was incorporated under the laws of the State of Nevada on
September 30, 1994, and is qualified to do business in the State of California.
V Cubed is a wholly owned subsidiary of the Company that was formed for the sole
purpose of providing sales and marketing support for the products of the
Company. V Cubed's principal office is located at 2348 Walsh Avenue, Santa
Clara, California 95051.
In order to maximize the exposure of the Company's products to the
marketplace, it is important that strict attention be paid to product marketing,
customer support and sales support. While the design, manufacturing and
strategic positioning of the Company products are managed from the corporate
head office in Toronto, it was felt that the public face of the Company should
be located in a geographical region (historically and) presently associated with
the business of the Company and one with geographical proximity to the Company's
largest customer base in the world.
The net effect of establishing a presence in the heart of "Silicon
Valley" has been to spread the ability to support customers across several time
zones and to develop an image of the Company consistent with that which
customers expect. V Cubed is chartered with the responsibility of managing
customer contact on both a regional and worldwide basis even though resources
from the Toronto office are sometimes required to assist in this regard. The
Company's Vice President of Sales and Marketing resides at V Cubed and it is the
Company's goal to expand this location's resources significantly to take
advantage of this huge market.
V3 Semiconductor Corp.
V3 Semiconductor Corp. is a corporation organized under the laws
of the Province of Ontario, Canada and is a wholly owned subsidiary of the
Company. The Company's research and development (R&D) activities are conducted
through V3 Semiconductor Corp.
Employees
As of September 30, 1998, the Company currently employs
approximately 34 individuals, including 4 senior executives, 17 engineers, 6
individuals in sales and marketing, 4 individuals in operations and support
staff. The company plans to increase the number of employees to 45-50 persons
over the next year. Most new employees will be hired to expand the engineering
and sales and marketing departments.
ITEM 2. DESCRIPTION OF PROPERTY
The Company leases its headquarters, a 7,500 square foot located in North
York, Ontario. The lease is for a term of 5 years and 6 months, expiring January
31, 2002, with an annual base rent of Cdn.$7,491 for the first year,
Cdn.$9,363.75 the second year, Cdn.$11,236.50 the third year, Cdn.$14,982 the
fourth year, and Cdn.$18,727.50 for the remaining term of the lease.
Additionally, on August 13, 1998, the Company leased an additional 3,346 square
feet of office space for a period of three years and five months, expiring
January 31, 2002. The Company leases this additional space for an annual base
rent of $15,123.92. The headquarters houses the Company's President & CEO, Vice
President of Engineering, General Manager and Financial Officer and Corporate
Secretary and the Director of Manufacturing and Quality.
The Company leases office space located in Santa Clara, California, which
is the principal office of its subsidiary, V3 Cubed. The lease is for a term of
one year, renewable annually, with an annual base rent of $25,200.
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
Mr. Patrick Prentiss, a former employee and original founder of the
Company, filed a claim against V3 Corporation, a wholly owned subsidiary of the
Company, in August 1995. The suit, which has been brought in the Ontario Court
(General Division) (Commercial List), court file number B224/95, seeking damages
of an undetermined number of Class "A" preferred shares of V3 Corporation. In
addition, Mr. Larry Krauss, an individual who was going to act as a finder to
find investors for the Company, filed a claim against the Company in November
1995 alleging breach of contract. The suit has been brought in the Ontario Court
(General Division) court file number 95-CU-94054 and seeks damages of
$6,000,000. The Company believes that it has meritorious defenses to both of
these actions and intends to vigorously contest the actions. As a result, the
Company does not believe that these actions will have a material adverse effect
upon the financial conditions or results of operations of the Company. The
Company is not aware of any other material legal proceedings now pending or
threatened against the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market For Securities
The high and low bid price(price which a market maker is willing to
pay) and ask price (price at which a market maker will sell) quotations for the
Company's common stock, $.001 par value per share (the "Common Stock"), as
reported to the Company's management by the OTC Bulletin Board is listed in the
following chart. These quotations are between dealers, do not include retail
mark-ups, markdowns or other fees and commissions, and may not represent actual
transactions.
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DATE LOW BID HIGH BID LOW ASK HIGH ASK
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Fiscal 1996
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December 31, 1995 $ 4.50 $7.50 $5.50 $8.25
March 31, 1996 $ 3.50 $5.875 $4.25 $6.875
June 30, 1996 $ 1.50 $6.00 $2.00 $8.00
September 30, 1996 $ 1.50 $4.125 $2.25 $8.00
Fiscal 1997
December 31, 1996 $ 0.625 $3.25 $1.75 $4.25
March 31, 1997 $ 1.00 $3.00 $2.50 $4.50
June 30, 1997 $ 1.25 $4.125 $2.25 $5.00
September 30, 1997 $3.50 $4.375 $4.25 $5.25
Fiscal 1998
December 31, 1997 $ 2.375 $4.25 $3.25 $5.00
March 31, 1998 $3.75 $7.00 $4.00 $7.75
June 30, 1998 $ 3.875 $6.125 $4.00 $6.75
September 30, 1998 $3.25 $4.125 $3.625 $4.375
</TABLE>
At September 30, 1998, there were 828 shareholders of the Company's Common
Stock. The Company has not paid dividends on its shares of Common Stock
outstanding during the past two fiscal years. There are no restrictions that
limit the ability of the Company to pay dividends or are likely to do so in the
future.
Recent Sale of Unregistered Securities
On March 16, 1998, the Company, through its placement agent, The Mason
Cabot ("Mason Cabot") Division of W.J. Nolan & Co., undertook the private
placement of Common Stock of the Company at a price of $3.50 per share. The
Common Stock was sold pursuant to an exemption from registration under Section
4(2) and Regulation D, Rule 506, of the Securities Act of 1933 (the "Securities
Act") as not involving a public offering. The offering contemplated a minimum
gross amount of $1,000,000 and a maximum of $5,500,000. On May 6, 1998, the
initial closing was conducted in which the Company sold 687,926 shares for
aggregate gross proceeds of $2,407,741. On June 15, 1998, the second and final
closing was conducted in which the Company sold 684,732 shares for aggregate
gross proceeds of $2,396,562. In the two closings the Company sold a total of
1,372,658 shares of Common Stock for $4,804,303. Mason Cabot received a 7%
selling commission and a 1.5% non-accountable expense allowance for its services
as placement agents. The Company received net proceeds of this sale of
approximately $4,375,000. The Company has not used any of the proceeds from
foregoing offering. Such proceeds are presently invested in short-term notes and
will be used for the purchase of software, hardware and for the hiring of
additional personnel.
<PAGE>
In addition to the foregoing, the Company filed a registration
statement on Form SB-2 with the Securities and Exchange Commission (the
"Commission") pursuant to which the Company registered 518,082 shares of Common
Stock, consisting of shares of Common Stock underlying various options and
warrants. The registration statement was assigned the file number 333-59133 and
was declared effective on October 21, 1998.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The statements contained in this Report that are not historical are
forward-looking statements, including statements regarding the Company's
expectations, intentions, beliefs or strategies regarding the future. Forward-
looking statements include the Company's statements regarding liquidity,
anticipated cash needs and availability and anticipated expense levels. All
forward-looking statements included in this Report are based on information
available to the Company on the date hereof, and the Company assumes no
obligation to update any such forward-looking statement. It is important to note
that the Company's actual results could differ materially from those in such
forward-looking statements. Additionally, the following discussion and analysis
should be read in conjunction with the Financial Statements and notes thereto
appearing elsewhere in this Report. The discussion is based upon such financial
statements which have been prepared in accordance with U.S. Generally Accepted
Accounting Principles and are presented in United States dollars ($).
General
The Company designs and markets high performance peripheral and core
silicon products for the Embedded Systems market. The Company's products are
co-peripherals to microprocessors manufactured by third parties such as Intel
Corporation, Motorola Corporation, International Business Machine, Hitachi
Semiconductor of America, Quantum Effect Design, Texas Instruments, Integrated
Device Technology and Advanced Micro Devices. The principal product lines fall
into three categories: Burst DRAM Memory Controllers (BMC family), System
Controllers ( SSC and USC families) and PCI Bridge Controllers (PBC, EPC and PSC
families). These products are used in applications such as servers,
communication routers, data switches, mass storage controllers, modems,
facsimiles and imaging equipment, telecommunications switching equipment,
networking controllers, instrumentation, industrial tools and consumer
appliances.
The Company does not own or operate any silicon fabrication facilities
and therefore is referred to as a "fabless" semiconductor company. The Company
has chosen to be fabless as a result of: (i) the significant front end costs of
constructing and maintaining a silicon fabrication facility; and (ii) the
overabundance of low cost fabrication capacity available. The Company's
manufacturing subcontractors include Samsung and Hyundai in Korea and KLSI in
Japan.
The Company's products are sold to Original Equipment Manufacturers
(OEM's) to be incorporated into products such as the ones listed above. A
"design win" is recorded when an OEM decides to incorporate one, or more, of the
Company's products into one of their end products. It could take anywhere from 3
to 24 months for a design win to proceed to production volumes as the OEM must
design, test market and build the market for its product. As a result, the
Company is highly dependent on design wins generated in the current fiscal
period to yield revenues in future fiscal periods.
<PAGE>
Results of Operations
Overview
The following table sets forth for the years ended September 30, 1998,
1997 and 1996: (i) certain items in the Company's Consolidated Statement of
Operations expressed as a percentage of revenues; and (ii) the percentage change
in dollar amounts of such items as compared to the indicated prior fiscal year:
<TABLE>
<CAPTION>
Items as a Percentage Period to Period Percentage
Of Net Sales Increase (Decrease)
Years Ended Years Ended
September 30, September 30,
1998 1997 1996 1997-98 1996-1997
<S> <C> <C> <C> <C> <C>
Sales 100.0% 100.0% 100.0% 95.8% 121.2%
Gross Profit 68.8 61.6 53.1 118.8 156.9
Other Income 5.3 13.3 88.4 (22.7) (66.7)
R&D Expenditures 14.5 18.9 59.3 50.5 (29.6)
Selling, General & Administrative 55.2 62.6 144.8 73.1 (4.5)
Net Income 4.4 (6.5) (62.5)
</TABLE>
(1) The R&D expenditures are expressed before applying R&D tax credits of
$306,000 in 1998, $35,032 in 1997 and $39,132 in 1996.
Fiscal Year Ended September 30, 1998 Compared to Fiscal Year Ended
September 30, 1997.
Sales
Sales for 1998 increased $1,870,059 to $3,821,512, a 95.8% increase
over sales of $1,951,453 in 1997. The dramatic sales increase was attributable
to an increase in the number of design wins that are now shipping in production
volumes, the release of an updated SSC device, the introduction of the first
members of the EPC product family and an increase in the number of manufacturers
sales representatives promoting the Company's products. Increases in the number
of production design wins resulted in an increase of 94% and 69% in sales of the
BMC and PBC product families, respectively. The introduction of an updated SSC
device boosted sales of that device by 254%. Increasing the number of
manufacturing sales representatives helped to increase the Company's products'
exposure in the marketplace and resulted in additional design wins.
Gross Profit
Gross profit was $2,630,989 in 1998, an $1,428,619 or 118.8% increase over
gross profit of $1,202,370 in 1997. The increase was predominantly due to
increased sales and reduced product costs. In 1998, gross profit margins, as a
percentage of sales, were 68.8%, compared to 61.6% in 1997. The increase in
gross margin is a reflection of the reduced product costs negotiated with the
manufacturing subcontractors. Such a reduction in costs would have resulted in
even greater profit margins; however, the Company's sales mix has changed to
include an increased volume of transactions at reduced margins. As the number of
volume transactions increase, gross margin is expected to level off and decline
slightly.
<PAGE>
Other Income
Included in other income are royalty income, consulting fees and
interest income totaling $200,649 in 1998,a decrease of $59,063 or 22.7%
compared to $259,712 in 1997.
In 1998, royalty income decreased by $166,336 or 64.6% to $91,136
compared to $257,472 in 1997. This decrease was a direct result of a reduction
in royalty payments from National Semiconductor Corporation ("NSC"). In 1998 the
Company received $36,122 in consulting fees for work performed on the behalf of
non-related companies. The Company did not receive consulting fees in 1997. In
1998 interest income increased by $71,151 or 3,176.4% to $73,391 compared to
$2,240 in 1997. In 1998 the main source of interest income was generated from
investing the funds raised from the private placement in short-term interest
bearing notes.
Research & Development ("R&D") Expenditures
R&D expenditures increased by 50.5% to $553,641 in 1998, from $367,959
in 1997, before applying R&D tax credits of $306,000 in fiscal 1998 and $35,032
in fiscal 1997. The increase in R&D expenditures was due to an increase in R&D
personnel. The number of employees involved in R&D increased by 240% in 1998
compared to 1997 and resulted in an increase of 145% in R&D wages in 1998
compared to 1997. R&D costs were reduced by government funding of $157,958 in
1998, compared to government funding of $124,989 in 1997. The Company expects to
double the number of engineering personnel currently involved in R&D to enable
it to release products into the marketplace on a more expedited basis.
Net Income (Loss) for the year
Net income for 1998 was $167,193, compared to a net loss of $124,596 in
1997. The Company's return to profitability was predominately due to a 95.8%
increase in sales from 1997 to 1998, as well as the 7.2% increase in sales
margin during the same time period. In 1998, selling, general and administrative
expense increased by 73.2% or $892,085 to $2,110,804 in 1998, as compared to
$1,218,719 in 1997, as a result of substantial increases in non-R&D wages,
selling commissions paid to manufacturers sales representatives, promotion and
advertising expenses, and professional fees.
Fiscal Year Ended September 30, 1997 Compared to Fiscal Year Ended
September 30, 1996.
Sales
Sales increased 121% to $1,951,453 in fiscal 1997 from $882,042 for the
1996 fiscal year. The dramatic sales increase was due to the introduction of
revision B2 of the PBC devices as well as the revision D of the BMC devices.
These updated devices accounted for an increase in sales of 261.9% and 82.3% for
the PBC and BMC devices respectively.
Gross Profit
Gross profit increased 156.9% to $1,202,370 in fiscal 1997, from $468,080
in fiscal 1996. The increase in gross profit was a result of increased sales
combined with higher profit margins. The Company was able to increase its gross
profit percentage by (i) reducing the prices the Company pays to its ASIC
manufacturing subcontractors by 20% to 60% through negotiating better pricing
terms, and (ii) streamlining the product delivery structure. Most of the
Company's products are now shipped directly from its manufacturing subcontractor
to the Company's third party inventory logistics partner. The logistics partner,
at the direction of the Company's, is responsible for shipping product to the
customer. As a result, all costs related to inventory storage, product handling,
quality inspections and product delivery are incurred by the logistics partner.
<PAGE>
Other Income
Other income during fiscal 1997 was $259,712, a decrease of $520,286, or
67%, as compared to $779,998 during fiscal 1996. Other income includes royalty
income, consulting fees and interest income totaling.
In 1997, royalty income decreased by $347,598, or 57.4%, to $257,472
compared to $605,070 in 1996.This decrease was a direct result of a reduction in
royalty payment from National Semiconductor Corporation ("NSC"). NSC has the
rights to manufacture and market an earlier version of the Company's Burst
Memory Controller ("BMC") product family. NSC paid the Company a royalty equal
to 50% of the selling price on the first 100,000 units shipped to their
customers; thereafter, the royalty is reduced to 7.5% per unit. In January 1997,
NSC shipped their 100,000th unit and, as a result, the royalty payable on all
additional units sold was reduced to 7.5% per unit. The reduction in "Other
Income" is a direct reflection of the reduction in the royalty percentage. The
Company believes that the decrease in royalty payments from NSC will be offset
by increased sales of its newer BMC products. The Company is currently
contacting customers that have purchased the Company's older BMC products and
converting them to its new line of BMC products. In 1996, the Company generated
$174,450 in consulting fees for work performed for non-related companies. The
Company did not generate consulting fees in 1997. In 1997, interest income
increased $1,762, or 368.6%, to $2,240 compared to $478 in 1996. In both years,
daily interest paid on deposits accounted for all interest income.
Research & Development ("R&D") Expenditures
R&D expenditures decreased by 29.6% to $367,959 in fiscal 1997 from
$522,783 in fiscal 1996, before applying R&D tax credits of $35,032 in fiscal
1997 and $39,132 in fiscal 1996. The Company reduced the costs of its R&D by
reducing the number of modifications made to its products. Products are often
modified after they have been designed and produced due to shifting standards in
the semiconductor industry and because of bugs that may be discovered in early
versions of products. The Company has been able to reduce the number of
modifications or "re-spins" that it has to make to its products. For example, in
1996 the Company re-spun its PCI Bridge Controllers ("PBC") three times and in
1997 the Company did not have to re-spin its PBC device at all. The Company
further reduced its R&D expenses in 1997 by reducing the number of evaluation
boards designed and built in favor of an increased number of application notes.
In the past, the Company would demonstrate how its products worked in
applications by producing actual evaluation boards containing the Company's
products. Customers could then use these boards to evaluate the Company's
products. During 1997, the Company shifted to using application notes to
demonstrate its products rather than producing evaluation boards. The
application notes are essentially paper designs which demonstrate, on paper, how
customers can build systems with the Company's parts, without incurring the
costs of actually building the board level systems.
Loss for the Year
Losses for the fiscal year 1997 were reduced by 77.4% to $124,596, as
compared to the loss of $551,467 for fiscal year 1996. The Company's reduction
in losses was a result of increased sales, increased profit margins, reduced R&D
costs and improvements in operating efficiencies.
Liquidity and Capital Resources
In 1998, the Company generated a positive cash flow from operating
activities of $97,092. The principal source of cash was from net income of
$167,193 and an increase in accounts payable of $244,211. Net income increased
principally because of increases in sales and gross profit. Payable increased
because of the increased volume of business. The principal use of cash was for
an increase in inventory of $73,038 and in increase in accounts receivable of
$522,227. Both inventory and accounts receivable increased as a result in the
increase in the volume of business. Cash used by investing activities was
$170,842 as a result of the purchase of computer equipment and software used to
run the business and develop products. Financing activities provided net cash
flow in the amount of $4,311,371. The principal source of cash was from the
issuance of 1,372,658 shares of Common Stock. The principal use of cash flow
generated from financing is repayment of bank loan payable in the amount of
$55,313. Net cash flow generated after all activities was $4,237,621.
<PAGE>
In 1997, the Company generated a positive cash flow from operating
activities of $374,190. The principal source of cash was from a decrease in
accounts receivable of $158,319, a decrease in inventories of $53,097 and an
increase in accounts payable of $136,281. Accounts receivable decreased because
the Company started shipping more products through distribution and utilizing
discounts to generate faster invoice payments. Inventories were reduced due to
the addition of the inventory and logistics subcontractor. Payable increased
because of an increase in the volume of business. The principal use of cash was
from a net loss of $124,596. The net loss was generated mainly from increases in
R&D expenses. Cash used by investing activities was $62,553 as a result of the
purchase of computer equipment used to develop products. Net cash flow generated
after all activities was $242,224.
On March 16, 1998, the Company, through its placement agent, The Mason
Cabot ("Mason Cabot") Division of W.J. Nolan & Co., undertook the private
placement of Common Stock at a price of $3.50 per share. The offering
contemplated a minimum gross amount of $1,000,000 and a maximum of $5,500,000.
On May 6, 1998, the initial closing was conducted in which the Company sold
687,926 shares for aggregate gross proceeds of $2,407,741. On June 15, 1998, the
second and final closing was conducted in which the Company sold 684,732 shares
for aggregate gross proceeds of $2,396,562. In the two closings the Company sold
a total of 1,372,658 shares of Common Stock for $4,804,303. Mason Cabot received
a 7% selling commission and a 1.5% non-accountable expense allowance for its
services as placement agents. The Company received net proceeds of this sale of
approximately $4,374,000.
In September 1997, the Company entered into a line of credit with the
Canadian Imperial Bank of Commerce ("CIBC") for a maximum of $140,000. No funds
have ever been drawn on this facility. This facility bears interest at the prime
rate, as established by the Royal Bank of Canada, plus two percent.
In April 1998, the Company entered into an agreement with the Export
Development Corporation ("EDC"), a company developed by the Government of
Canada, whereby the Company purchases insurance from EDC, which covers up to 90%
of the Company's receivables. The premium for such insurance, on average, equals
one half of one percent of the Company's receivables in a given month.
Management believes that the net proceeds of the private placement, cash
flow generated from operations and the funds available under the line of credit
will be sufficient to meet the Company's capital, operating and research and
development requirements for the next 12-18 months.
Foreign Exchange
All sales are received in US dollars and all goods purchased for resale are
purchased in US dollars. Although the Company is a US company, expenses incurred
by V3 Semiconductor Corp, a wholly owed subsidiary of the Company located in
Toronto, Canada, are incurred in Canadian dollars. Operational expense incurred
by V3 Semiconductor Corp. accounted for 77% of the Company's total operational
expenses in 1998. Upward variations in the value of the Canadian dollar, as
compared to the value of the US dollar, could adversely effect the Company's
results.
Year 2000
Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field. These date code fields
will need to accept four digits to distinguish 21st century dates from 20th
century dates. Therefore, any such computer systems and software products that
recognize a date code field of "00" as the year 1900 rather than the year 2000
could result in errors or system failures. As a result, many companies' software
and computer systems may need to be upgraded or replaced in order to resolve the
potential impact of this misinterpretation and the resulting errors or system
failures and to make such systems, equipment and software Year 2000 compliant.
In addition, the Company relies upon products and information from critical
suppliers, large customers and other outside parties, in the normal course of
business, whose software programs are also subject to the same problem. Should
miscalculations or other operational errors occur as a result of the Year 2000
issue, the Company or the parties on which it depends may be unable to produce
reliable information or process routine transactions. Furthermore, in the worse
case, the Company or the parties on which it depends may, for an extended period
of time, be incapable of conducting critical business activities, which include
but are not limited to, manufacturing and shipping products, invoicing customers
and paying vendors.
<PAGE>
The Company is continuing to assess the impact that the Year 2000 Problem
may have on its operations and has identified the following three key areas of
its business that may be affected:
Products
The Company has evaluated each of its products and believes that each
is substantially Year 2000 compliant. However, the Company believes that it is
not possible to determine whether all of its customers' products into which the
Company's products are incorporated will be Year 2000 compliant because the
Company has little or no control over the design, production and testing of its
customers' products.
Business Systems
Based on the Company's continuing assessment, the Company has
determined that the core of its business software applications, including those
critical to the Company's normal operation are Year 2000 compliant. However the
Company is currently evaluating business and planning software from JD Edwards,
BAAN and Navision and plans to install one of these systems early in 1999. The
costs associated with bringing on-line one of these business planning
applications, estimated to be between $100,000 and $250,000, have not been
allocated to the Year 2000 issue as they will be purchased by the Company to
satisfy its business needs and not solely to address the Year 2000 issue.
Third-Party Suppliers
The Company relies, directly and indirectly, on external systems
utilized by its suppliers for the management and control of fabrication,
assembly and testing of substantially all of the Company's products. The Company
has contacted all of its major suppliers and other critical business partners in
an effort to identify and mitigate Year 2000 matters originating from third
parties which may adversely affect the Company. Contingency plans, if required,
will be developed for transactions with suppliers that appear to be lagging with
their Year 2000 readiness programs. This may include replacing these suppliers.
The Company is currently reviewing supplier responses and is obtaining
additional information.
The Company will use internal resources to complete the Year 2000
project and does not expect the costs from implementing the project to have a
material effect on the Company's business operations or financial condition.
ITEM 7. FINANCIAL STATEMENTS
All financial information required by this Item is attached hereto
beginning on Page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
<PAGE>
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT
Directors and Executive Officers
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position
<S> <C> <C>
John Zambakkides 48 President, Chief Executive Officer and Director
Carl Mitchell 38 General Manager, Secretary and Treasurer
Michael Alford 38 Vice President of Engineering
Gregg Smith 50 Vice President Sales and Marketing
Bernard N. Slade 74 Director
Jim Wilkinson 50 Director
John A. Fazackerley 63 Director
Robert Skinner 48 Director
</TABLE>
Set forth below is a brief background of the executive officers and
directors of the Company, based on information supplied by them.
John Zambakkides. Mr. John Zambakkides joined the Board of Directors of the
Company in May, 1995 and on April 13, 1996, he was appointed as President and
Chief Executive Officer of the Company. Mr. Zambakkides has an Electronics
Diploma from Niagara College and an Electronics Bachelor of Engineering from
Ryerson Polytechnical Institute. From 1992 to 1996, Mr. Zambakkides worked with
InTELaTECH, Inc. From 1972 to 1992, Mr. Zambakkides served as Regional Manager
for Fairchild Semiconductor during which time he helped to establish Fairchild
in the Canadian market. After National Semiconductor Corp. ("NSC") acquired
Fairchild, Mr. Zambakkides was made General Manager for NSC. Mr. Zambakkides
served on the Board of Directors of the Canadian subsidiaries of both Fairchild
and NSC for a total of 13 years where he contributed his expertise in the areas
of sales, engineering and corporate development. In addition, his expertise was
supplemented by numerous courses in management, finance as well as Total Quality
Management ("TQM"), whereby he was also an accredited instructor for the
Canadian organization.
Carl Mitchell. Mr. Mitchell has served as the Company's General Manager &
Corporate Secretary since June 1994 and is responsible for the General
Administration and Management of the business operations of the Company. Mr.
Mitchell joined V3 Semiconductor Corp. in 1987 and was responsible for writing
and documenting the user interface for the Pc/La Personal Logic Analyzer, as
well as setting up and maintaining the distribution channels for that product
family. In 1989 Mr. Mitchell was appointed Company Controller and was
responsible for the accounting functions as well as the preparation of the
financial statements. Mr. Mitchell is currently responsible for the operations,
administration and financial & corporate reporting of the V3 group of companies.
Mr. Mitchell graduated from the University of Toronto in 1984 with a Specialist
Degree in Computer Science. Prior to joining the Company, Mr. Mitchell was
Software Group Manager at Syntronics Inc.
<PAGE>
Michael Alford. Michael Alford, B.E.Sc. (Electrical) graduated from the
University of Western Ontario in 1983 with a degree in Electrical Engineering.
Since that time Mr. Alford has developed a wide range of experience in all
phases of electronic design, with a particular emphasis on the design of
semiconductors. Mr. Alford was one of the first design engineers employed by V3
and has recently returned as hardware design manager. Prior to his return, he
was the design group leader for multi-media products at ATI. While at ATI
Technologies, he led a team that designed part of an Intel i750 derivative for
acceleration of digital video. He was also a project manager for ATI's first
video re-sizing and reformatting chip. He has experience in ASIC and custom VLSI
chip designs (CMOS technology), and he holds several patents in the area of
multi-media architectures. Mr. Alford graduated from the University of Western
Ontario in 1983 with a degree in Electrical Engineering.
Gregg Smith. Mr. Smith has been the Vice President Sales and Marketing
since he joined the Company in 1997. Prior thereto, from 1986 to 1997, he was
the Western Area Vice President with Future Electronics, Corp. responsible for
the largest territory in the world where he supervised the management of eleven
sales offices, employing more than 250 people. From 1975 to 1986 Mr. Smith
worked for National Semiconductor Corp., first as Canadian Regional Manager,
then starting in 1979 as an Area Sales Manager based in Arizona, then in 1982 as
Area Sales Manager based in Southern California. From 1972 to 1975 he was
General Manager for one of Hamilton Avnet's largest branches in North America.
Mr. Smith is senior sales executive with over 20 years experience in sales and
sales management with national and regional organizations in the manufacturer
and distribution areas of the Semiconductor Industry. Mr. Smith graduated from
the University of New Brunswick with a Bachelor of Science and Business Degree.
Bernard N. Slade. Mr. Slade was elected to the Company's board of directors
in April, 1996. Mr. Slade also serves on the board of directors of YieldUp
International, a firm he founded in 1993. From 1993 to 1984, Mr. Slade acted as
a consultant for Arthur D. Little, Inc. and Gemini Consulting. Prior to becoming
a consultant, Mr. Slade spent 28 years working for IBM, from 1956 to 1984, where
he held a number of senior positions including management of product development
and manufacturing for the components division and Corporate Director of
Manufacturing Technology. From 1948 to 1956 Mr. Slade worked in research and
development for RCA. Mr. Slade is the author of "Compressing Product Development
Cycle" and "Winning the Productivity Race."
James Wilkinson. Mr. Wilkinson was elected to the Company's board of
directors in April, 1996 and is also currently working as a consultant in the
industry. From 1994 to 1997, Mr. Wilkinson served as the Vice-President, Chief
Operating Officer and Secretary to Tee-Comm Electronics, Inc. and has 30 years
of experience in corporate finance. From 1987 to 1994, Mr. Wilkinson served as
Vice President and Treasurer of Northern Telecom Ltd., and from 1984 to 1987 Mr.
Wilkinson was the Assistant Treasurer of Corporate Finance for Northern Telecom
Ltd. Prior thereto, he held senior financial positions with Shell Canada Ltd.
and Canadian National Railway Co.
John A. Fazackerley. Mr. Fazackerley was elected to the board of directors
in September, 1997. Mr. John Fazackerley , founded Digital Processing Systems in
1987 and is currently serving as its Chairman of the Board. From 1975 to 1987,
Mr. Fazackerley was employed by Scientific Atlanta. When he joined Scientific
Atlanta, he served as head of Broadband sales for their newly established
Canadian facility. In 1977 he was promoted to General Manager and in 1987 he
purchased Scientific Atlanta's studio (equipment) products, under its Digital
Video Systems division, and formed Digital Processing Systems. Mr. Fazackerley
has served as a director on the Board of the Canadian Cable Television
Association for seven years and he presently serves as an international
representative on the Management Committee of the International broadcasting
Convention in London, England. He was born in Cheshire, England were he received
his Radio and Television Engineering diploma from Sanford University.
<PAGE>
Robert Skinner. Mr. Skinner was elected to the board of directors in March
1998. From 1992 to 1998 Mr. Skinner has managed his own investments,
specializing in emerging companies in the technology market. From 1980 to 1992,
Mr. Skinner was an executive director of Bain Capital Markets Ltd., Bain
Securities Ltd., and Bain and Co. Ltd., the group holding company. He first
joined Bain and Co. in 1980 working in its Fixed Income Division, and soon
thereafter became a partner in the firm in December 1981. During his career with
Bain and Co. he was also involved in risk management, mortgage securitization,
and commodities markets with emphasis on both coal and industrial metals. Mr.
Skinner's experience in the securities industry commenced in 1977, when he
joined Capel Court Corporation Ltd., a merchant bank, where he engaged in
securities trading and structuring transactions.
Directors serve until the next annual meeting of stockholders or until
their successors are elected and qualified. Officers serve at the discretion of
the Board of Directors. Directors are reimbursed for travel expenses and, during
fiscal 1998, each of Mssrs. Slade, Wilkinson, Fazackerley and Skinner were
granted 10,000 options to purchase Common Stock as compensation for their
services as directors of the Company.
Section 16(a) Beneficial Ownership Reporting Compliance
The Company did not become a reporting company until October 21, 1998. As
such, as of September 30, 1998, the Company had no obligation to file reports
required by Section 16(a) of the Securities Exchange Act of 1934.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth certain summary information with respect to
the compensation paid to the Company's Chief Executive Officer, and the
Company's Vice-President of Sales and Marketing, for services rendered in all
capacities to the Company for the fiscal period ended September 30, 1998. Other
than as listed below, the Company had no executive officers whose total annual
salary and bonus exceeded $100,000 for that fiscal year:
<TABLE>
<CAPTION>
Long Term
Name and Principal Position Other Annual All Other Compensation
Year Salary Compensation Bonus Compensation Awards/Options
<S> <C> <C> <C> <C> <C> <C>
John Zambakkides,
President and Chief
Executive Officer... 1998(1) $141,657 --- $80,000 $19,010(2) ---
Gregg Smith, Vice
President Sales
and Marketing............ 1998 $67,384 $23,265(3) --- $54,950(4) ---
</TABLE>
- ----------------
1. All dollar amounts for Mr. Zambakkides reported in Canadian dollars.
2. Represents car allowance paid to Mr. Zambakkides pursuant to his
employment agreement with the Company.
3. Represents commissions paid to Mr. Smith.
4. Represents $48,950 in consulting fees and $6,000 in car allowance paid
to Mr. Smith.
<PAGE>
The following table shows the value at September 30, 1998 of unexercised
options held by the named executive officers:
<TABLE>
<CAPTION>
Aggregated Option Exercises in Last Fiscal Year
And Fiscal Year-end Option Values
Number of Securities
Shares Underlying Unexercised Value of Unexercised
Acquired Value Options at In-the-Money Options at
On Realized Fiscal Year-end (#) Fiscal Year-end ($)
Name Exercise (#) ($) Exercisable/Unexercisable Exercisable/Unexercisable
John Zambakkides,
President and Chief
<S> <C> <C> <C> <C> <C> <C>
Executive Officer..... 0 0 160,000/0 $50,000*/$0
</TABLE>
* The options held by Mr. Zambakkides are exercisable at $3.75 per share of
Common Stock. Assumes a fair market value of $4.0625 per share.
Employment Arrangements
From October 1, 1998 to December 31, 1998, John Zambakkides, the
Company's President and Chief Executive Officer, was employed pursuant to an
agreement providing for annual compensation of Cdn. $160,000. On January 1,
1998, Mr. Zambakkides entered into a new agreement with the Company whereby Mr.
Zambakkides will be employed as the Company's President and Chief Executive
Officer for a term of five years and, thereafter, the agreement shall be
renewable annually. The agreement provides for a base salary of Cdn. $200,000,
however Mr. Zambakkides has elected to receive a salary of Cdn. $140,000. The
employment agreement provides for a car allowance of Cdn. $1,000 per month. In
addition, Mr. Zambakkides is entitled to receive a bonus and options based upon
achieving certain goals and objectives as determined by the Board of Directors.
Employee Stock Option Plan
In February 1996, the Company adopted, by action of the board of
directors and stockholders, the 1996 Employee Stock Option Plan (the "Plan").
The Plan which was amended in February 1997, provides for the issuance of
incentive stock options to qualified employees. The Plan does not have an
expiration date. Set forth below is a summary of the Plan, but this summary is
qualified in its entirety by reference to the full text of the Plan, a copy of
which is filed as an exhibit to the Company's Registration Statement.
The Plan is authorized to grant options or other equity-based
incentives for 400,000 shares of the Common Stock. If shares subject to an
option under the Plan cease to be subject to such option, or if shares awarded
under the Plan are forfeited, or otherwise terminated without a payment being
made to the participant in the form of stock, such shares will again be
available for future distribution under the Plan.
Awards under the Plan may be made to key employees, including officers
of and consultants to the Company, its subsidiaries and affiliates, including
any director. The Plan imposes no limit on the number of officers and other key
employees to whom awards may be made; however, no person shall be entitled to
receive awards which would entitle such person to acquire more than 10% of the
number of shares of Common Stock available under the Plan.
The Plan is to be administered by a committee of no less than two
disinterested directors to be appointed by the board (the "Committee"). No
member or alternate member of the Committee shall be eligible to receive options
or stock under the Plan (except as to the automatic grant of options to
directors) or under any plan of the Company or any of its affiliates. The
Committee has broad discretion in determining the persons to whom stock options
or other awards are to be granted, the terms and conditions of the award,
including the type of award, the exercise price and term and the restrictions
and forfeiture conditions. If no Committee is appointed, the functions of the
Committee shall be performed by the board of directors.
<PAGE>
The Committee will have the authority to grant the following types of
awards under the Plan: incentive or non-qualified stock options. The Plan is
designed to provide the Committee with broad discretion to grant incentive
stock-based rights.
As of the September 30, 1998, the Board granted stock options to
purchase an aggregate of 548,483 shares of Common Stock at exercise prices
between $1.75 and $6.25. Such exercise prices were determined by the Board to be
the fair market value per share on the date of grant. Under the Plan the options
become exercisable as to 33.33% upon grant and 33.33% on each of the next two
anniversaries of the grant, however, the Committee, at its discretion, can
establish other vesting schedules. All options granted under the Plan expire
five years from the date of grant. The options which have been granted expire
between July 7, 1999 and February 22, 2006.
Employee Stock Purchase Plan
On February 12, 1996, the Board of Directors approved an employee stock
purchase plan. The plan reserves 20,000 shares of Common Stock, out of the
shares of Common Stock reserved under the Stock Option Plan, for eligible
employees and permits employees to purchase Common Stock through payroll
deductions at a purchase price of 90% of the fair market value of the Common
Stock on the purchase date.
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of September 30, 1998, certain
information concerning beneficial ownership of shares of Common Stock with
respect to (i) each person known to the Company to own 5% or more of the
outstanding shares of Common Stock, (ii) each director of the Company, (iii) the
executive officers of the Company, and (iv) all directors and officers of the
Company as a group:
<TABLE>
<CAPTION>
Number of Shares Approximate
Beneficially Percentage of
Owned Common Stock**
Name*
<S> <C> <C> <C>
John Zambakkides(1) 160,000 3%
Carl Mitchell(2) 712,336 13%
Michael Alford(3) 483,248 9%
Alan Simmons(4) 689,434 13%
Bernard N. Slade(5) 85,000 2%
Jim Wilkinson(6) 25,000 0.5%
John A. Fazackerley(7) 15,833 0.3%
Robert Skinner(8) 210,002 4%
Patrick Prentiss 543,654 10%
Bellingham Industries Inc. 599,857 11%
All Officers and Directors
as a Group (4 persons)
1,691,419 31%
- ------------------
</TABLE>
* Except as noted above, the address for the above identified officers and
directors of the Company is c/o V3 Semiconductor, Inc., 250 Consumers Road,
Suite 901, North York, Ontario, Canada M2J 4V6.
** Percentages are based upon the assumption that the shareholder has
exercised all of the currently exercisable options he or she owns which are
currently exercisable or exercisable within 60 days and that no other
shareholder has exercised any options he or she owns.
(1) Includes 160,000 shares of Common Stock issuable upon exercise of the
stock options granted John Zambakkides as part of a special grant, which are
immediately exercisable.
(2) Includes 50,000 shares of Common Stock owned by Mr. Mitchell's wife and
40,000 shares of Common Stock issuable upon exercise of stock options granted
under the Company's Employee Stock Option Plan ("ESOP"). Of such options, 35,000
are immediately exercisable.
<PAGE>
(3) Includes 140,000 shares of Common Stock owned by Mr. Alford's wife and
40,000 shares of Common Stock issuable upon exercise of stock options granted
under the Company's ESOP. Of such options, 35,000 are immediately exercisable.
(4) Includes 159,101 shares of Common Stock owned by Mr. Simmons' wife and
142,650 shares of Common Stock owned by Mr. Simmons' mother-in-law and 15,000
shares of Common Stock issuable upon exercise of stock options granted under the
Company's ESOP.
(5) Includes 25,000 shares of Common Stock issuable upon exercise of stock
options granted under the Company's ESOP plan, all of which are immediately
exercisable. Includes 20,000 shares owned by Mr. Slade's wife and 6,000 shares
owned by Mr. Slade's son.
(6) Includes 25,000 shares of Common Stock issuable upon exercise of stock
options granted under the Company's ESOP plan, all of which are immediately
exercisable.
(7) Includes 15,833 shares of Common Stock issuable upon exercise of stock
options granted under the Company's ESOP plan, all of which are immediately
exercisable.
(8) Includes 200,002 shares of Common Stock owned by Cedar Capital Limited.
Robert Skinner is the sole shareholder of Cedar Capital Limited. Includes 10,000
shares of Common Stock issuable upon exercise of stock options granted under the
Company's ESOP plan, all of which are immediately exercisable.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
A shareholder, Alan Simmons, provided consulting and management services to
the Company for fees in the amount of $67,757 for fiscal year ended September
30, 1997 and $28,246 in fiscal year ended September 30, 1998. These amounts are
included in the Company's Research and Development expense. From October 27,
1997 to May 1, 1997, prior to joining the Company as Vice President of Sales and
Marketing, Scott Smith provided consulting and management services to the
Company for fees in the amount of $48,950 for fiscal year ended September 30,
1998. The consulting and management services provided by Mssrs. Simmons and
Smith were on terms no less favorable than those that could have been obtained
from an unaffiliated party.
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K
The Company has not filed any reports on Form 8-K during the last
quarter of the period covered by this report.
Exhibits
The following Exhibits are filed as part of this Report:
<TABLE>
<CAPTION>
Exhibit
Number Description
<S> <C> <C>
3.1 Certificate of Incorporation, as amended to date (1)
3.2 By-Laws (1)
4.1 Form of Common Stock Certificate (2)
4.2 1996 Stock Option Plan (1)
10.1 Lease of premises located at 250 Consumers Road, North York, Ontario, Canada (2)
Employment Agreement between the Company and John Zambakkides, executed on February 23, 1996 (3)
10.2 Lease of additional space at the Company's headquarters located at
250 Consumers Road, North York, Ontario, Canada, executed on August 13,
1998.
10.3 Letter agreement, dated August 19, 1998, between the Company
and Commerce Communities renewing the lease on the Company's office
space in Santa Clara, California.
23.1 Consent of KPMG LLP, the Company's Independent Auditors, regarding Form SB-2 Registration Statement (4)
23.2 Consent of Sichenzia, Ross & Friedman LLP regarding Form SB-2 Registration Statement (4)
27.1 Financial Data Schedule
</TABLE>
- -------------
(1) Reference is made to the Registrant's Form SB-2 Registration Statement
(File No. 333-59133), as filed on July 15, 1998, which is hereby incorporated by
reference.
(2) Reference is made to Amendment Number 1 to the Registrant's Form SB-2
Registration Statement (File No. 333-59133), as filed on September 22, 1998,
which is hereby incorporated by reference.
(3) Reference is made to Amendment Number 2 to the Registrant's Form SB-2
Registration Statement (File No. 333-59133), as filed on October 8, 1998, which
is hereby incorporated by reference.
(4) Reference is made to Amendment Number 3 to the Registrant's Form SB-2
Registration Statement (File No. 333-59133), as filed on October 19, 1998, which
is hereby incorporated by reference.
<PAGE>
Consolidated Financial Statements of
v3 semiconductor, inc.
Years ended September 30, 1998 and 1997
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
V3 Semiconductor, Inc.:
<S> <C>
Report of Independent Auditors.....................................................................F-3
Balance Sheet......................................................................................F-4
Statement of Operations............................................................................F-5
Statement of Stockholders Equity...................................................................F-6
Statement of Cash Flows............................................................................F-7
Notes to Financial Statements......................................................................F-8 - F-25
</TABLE>
<PAGE>
independent Auditors' Report
To the Shareholders of V3 Semiconductor, Inc.
We have audited the accompanying consolidated balance sheets of V3
Semiconductor, Inc. as at September 30, 1998 and 1997 and the related
consolidated statements of operations, changes in shareholders' equity and cash
flows for each of the years in the three-year period ended September 30, 1998.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with United States generally accepted
auditing standards. Those standards require that we plan and perform an 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 the Company as at
September 30, 1998 and 1997, and the results of its operations and its cash
flows for each of the years in the three-year period ended September 30, 1998,
in accordance with generally accepted accounting principles in the United
States.
/s/ KPMG LLP
KPMG LLP
Chartered Accountants
Toronto, Canada
November 30, 1998
<PAGE>
v3 semiconductor, inc.
Consolidated Balance Sheets
(Stated in United States dollars)
September 30, 1998 and 1997
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
1998 1997
- -------------------------------------------------------------------------------------------------------------------
Assets
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 4,821,556 $ 558,676
Accounts receivable, net of allowance for doubtful
accounts of $15,533; $1,104 at September 30, 1997 754,119 231,892
Inventories (note 2) 168,490 95,452
Prepaid expenses 39,694 31,172
- -------------------------------------------------------------------------------------------------------------------
5,783,859 917,192
Capital assets (note 3) 420,794 372,709
- -------------------------------------------------------------------------------------------------------------------
$ 6,204,653 $ 1,289,901
- -------------------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 576,055 $ 331,844
Accrued liabilities 64,777 27,160
Capital taxes payable 4,940 2,534
Deferred revenue 105,394 6,699
Bank term loan - 55,313
Obligation under capital lease (note 5) - 8,350
- -------------------------------------------------------------------------------------------------------------------
751,166 431,900
Shareholders' equity:
Capital stock:
Preferred shares:
Authorized 10,000,000; no shares issued
and outstanding (note 6) - -
Special shares:
Authorized 3,400,000; 46,368 shares issued and outstanding at
September 30, 1998; 697,310 shares issued and outstanding at
September 30,1997 (note 6) 124 449
Common shares:
Authorized 50,000,000; 5,471,628 shares issued and
outstanding at September 30, 1998; 3,437,928
issued and outstanding at September 30, 1997 (note 6) 5,472 3,438
Additional paid-in capital 6,050,500 1,649,175
- -------------------------------------------------------------------------------------------------------------------
6,056,096 1,653,062
Cumulative translation adjustment 15,728 (9,531)
Deficit (618,337) (785,530)
- -------------------------------------------------------------------------------------------------------------------
5,453,487 858,001
Commitments (note 11)
Contingent liabilities (note 12)
- -------------------------------------------------------------------------------------------------------------------
$ 6,204,653 $ 1,289,901
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
V3 semiconductor, inc.
Consolidated Statements of Operations
(Stated in United States dollars)
Years ended September 30, 1998, 1997 and 1996
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales $ 3,821,512 $ 1,951,453 $ 882,042
Cost of goods sold 1,190,523 749,083 413,962
- -------------------------------------------------------------------------------------------------------------------
2,630,989 1,202,370 468,080
Other income (note 7) 200,649 259,712 779,998
Expenses:
Selling, general and administrative 1,891,758 987,616 1,070,050
Research and development (note 8) 247,641 332,927 483,651
Depreciation and amortization 122,757 143,151 128,497
Rent and utilities 90,183 77,252 56,786
Bank charges and interest 6,106 10,700 21,429
- -------------------------------------------------------------------------------------------------------------------
2,358,445 1,551,646 1,760,413
- -------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes 473,193 (89,564) (512,335)
Income taxes:
Current 306,000 35,032 39,132
Deferred - - -
- -------------------------------------------------------------------------------------------------------------------
306,000 35,032 39,132
- -------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 167,193 $ (124,596) $ (551,467)
- -------------------------------------------------------------------------------------------------------------------
Net income (loss) per share (note 13):
Basic $ 0.04 $ (0.03) $ (0.13)
Diluted 0.03 (0.03) (0.13)
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
V3 semiconductor, inc.
Consolidated Statements of Changes in Shareholders' Equity
(Stated in United States dollars)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Additional Total share
Paid-in capital capital and Retained
special shares additional earnings Cumulative
Special shares Common shares and paid-in (accumulated translation
Shares Par value Shares Par value common shares capital deficit) adjustment
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, October 1, 1995 1,623,194 $ 812 2,712,044 $ 2,712 $ 1,649,538 $ 1,653,062 $(109,467) $ (9,784)
Changes during the year:
Conversion of special shares
to common shares (713,384) (357) 713,384 713 (356) - - -
Cancellation of special shares
(note 6(a)) (200,000) - - - - - - -
Loss for the year - - - - - - (551,467) -
Translation adjustment - - - - - - - (2,949)
- ---------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1996 709,810 455 3,425,428 3,425 1,649,182 1,653,062 (660,934) (12,733)
Changes during the year:
Conversion of special shares
to common shares (12,500) (6) 12,500 13 (7) - - -
Loss for the year - - - - - - (124,596) -
Translation adjustment - - - - - - 3,202 3,202
- ---------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1997 697,310 449 3,437,928 3,438 1,649,175 1,653,062 (785,530) (9,531)
Changes during the year:
Conversion of special shares
to common shares (650,942) (325) 650,942 651 (326) - - -
Issuance of common shares - - 1,382,758 1,383 4,401,651 4,403,034 - -
Net income - - - - - - 167,193 -
Translation adjustment - - - - - - - 25,259
- ---------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1998 46,368 $ 124 5,471,628 $ 5,472 $6,050,500 $ 6,056,096 $ (618,337) $ 15,728
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
V3 semiconductor, inc.
Consolidated Statements of Changes in Shareholders' Equity
(Stated in United States dollars)
(cont.)
<TABLE>
<CAPTION>
Total
shareholders'
equity (deficit)
<S> <C>
Balance, October 1, 1995 $1,533,811
Changes during the year:
Conversion of special shares
to common shares -
Cancellation of special shares
(note 6(a)) -
Loss for the year (551,467)
Translation adjustment (2,949)
-----------
Balance, September 30, 1996 979,395
Changes during the year:
Conversion of special shares
to common shares -
Loss for the year (124,596)
Translation adjustment 3,202
-----------
Balance, September 30, 1997 858,001
Changes during the year:
Conversion of special shares
to common shares -
Issuance of common shares 4,403,034
Net income 167,193
Translation adjustment 25,259
-----------
Balance, September 30, 1998 $5,453,487
-----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
V3 semiconductor, inc.
Consolidated Statements of Cash Flows
(Stated in United States dollars)
Years ended September 30, 1998, 1997 and 1996
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------
Operating activities:
<S> <C> <C> <C>
Net income (loss) $ 167,193 $ (124,596) $ (551,467)
Add items not involving cash:
Depreciation and amortization 122,757 143,151 128,497
Deferred revenue 98,695 6,699 -
Non-cash administrative services 28,000 - -
Changes in working capital balances:
Accounts receivable (522,227) 158,319 (240,345)
Income taxes 2,406 2,167 13,704
Inventories (73,038) 53,097 (17,018)
Prepaid expenses (8,522) (11,446) (5,948)
Accounts payable 244,211 136,281 (71,552)
Accrued liabilities 37,617 10,518 16,642
- -------------------------------------------------------------------------------------------------------------------
Total cash provided by (used by) operating activities 97,092 374,190 (727,487)
Investing activities:
Additions to capital assets (170,842) (62,553) (254,929)
- -------------------------------------------------------------------------------------------------------------------
Total cash used by investing activities (170,842) (62,553) (254,929)
Financing activities:
Repayment of bank term loan (55,313) (61,970) (69,042)
Repayment of loan payable - - (99,733)
Repayment of obligation under capital lease (8,350) (7,443) -
Increase in obligation under capital lease - - 15,793
Net proceeds from issuance of common shares 4,375,034 - -
- -------------------------------------------------------------------------------------------------------------------
Total cash provided by (used by) financing activities 4,311,371 (69,413) (152,982)
- -------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 4,237,621 242,224 (1,135,398)
Effect of currency translation adjustments on cash 25,259 3,202 (2,949)
Cash and cash equivalents, beginning of year 558,676 313,250 1,451,597
- -------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 4,821,556 $ 558,676 $ 313,250
- -------------------------------------------------------------------------------------------------------------------
Cash paid for:
Interest $ 2,869 $ 8,337 $ 18,305
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
V3 semiconductor, inc.
Notes to Consolidated Financial Statements (continued)
(Stated in United States dollars)
Years ended September 30, 1998, 1997 and 1996
1. Significant accounting policies:
(a) Basis of presentation:
V3 Semiconductor, Inc. (the "Company") is incorporated under the laws
of the State of Nevada. The consolidated financial statements of the
Company include the accounts of its wholly-owned subsidiaries, V3
Semiconductor Corp., a Canadian company incorporated under the
Ontario Business Corporations Act and V Cubed Corporation, a
California-based company, registered in the State of Nevada. All
intercompany balances and transactions have been eliminated. The
Company's principal business activities are the design and
development of integrated circuits for the embedded computer market.
(b) Inventories:
Raw materials, which are used in the production of computer boards,
are valued at the lower of cost or replacement value. Finished goods,
which consists of embedded chips are valued at the lower of cost
(cost has been determined on the average cost basis) or net
realizable value.
(c) Capital assets:
The Company records capital assets at cost, net of accumulated
depreciation and amortization. These assets are depreciated over
their estimated useful lives as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Asset Basis Rate
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Furniture and equipment Declining balance 20%
Computer equipment Declining balance 30%
Computer software Declining balance 30%
Patent Straight line 17 years
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
(d) Share issue costs:
Share issue costs are charged against share capital.
(e) Revenue recognition:
Revenues from the sale of chipsets and chips are recognized at the
time of shipment.
F-8
<PAGE>
V3 semiconductor, inc.
Notes to Consolidated Financial Statements (continued)
(Stated in United States dollars)
Years ended September 30, 1998, 1997 and 1996
1. Significant accounting policies (continued):
(f) Research and development costs:
Research and development costs are charged to operations as incurred
less investment tax credits related to these costs.
(g) Foreign currency translation:
The Company's Canadian subsidiary measures and reports its results in
Canadian dollars. The amounts relating to assets and liabilities have
been translated into United States dollars at the current balance
sheet rate and amounts relating to the profit and loss accounts have
been translated using the year's average exchange rate. Differences
arising from currency translation are presented as a component of
shareholders' equity.
(h) Income taxes:
The Company records income taxes using the asset and liability method
as required by the Financial Accounting Standards Board Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes.
Under this method, deferred tax assets and liabilities are determined
based on differences between financial reporting and tax bases of
assets and liabilities and are measured using the enacted tax rates
and laws that are expected to be in effect when the differences are
expected to reverse. Valuation allowances are established when
necessary to reduce deferred tax assets to the amounts that are more
likely than not to be realized. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in the period that
such tax rates changes are enacted.
(i) Use of estimates:
The preparation of consolidated 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 and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements, and
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
<PAGE>
V3 semiconductor, inc.
Notes to Consolidated Financial Statements (continued)
(Stated in United States dollars)
Years ended September 30, 1998, 1997 and 1996
1. Significant accounting policies (continued):
(j) Cash and cash equivalents:
The Company considers all highly liquid investments purchased with a
maturity of 90 days or less to be cash equivalents. Cash and cash
equivalent balances consist of cash balances and term deposits.
2. Inventories:
Inventories are comprised of the following:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
1998 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Raw materials $ 6,423 $ 14,501
Finished goods 162,067 80,951
- -------------------------------------------------------------------------------------------------------------------
$ 168,490 $ 95,452
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
3. Capital assets:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Accumulated Net book
September 30, 1998 Cost amortization value
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Furniture and equipment $ 131,972 $ 54,165 $ 77,807
Computer equipment 311,661 155,045 156,616
Computer software 415,283 244,431 170,852
Patent 8,461 1,510 6,951
Computer equipment under
capital lease 20,183 11,615 8,568
- -------------------------------------------------------------------------------------------------------------------
$ 887,560 $ 466,766 $ 420,794
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
F-10
<PAGE>
V3 semiconductor, inc.
Notes to Consolidated Financial Statements (continued)
(Stated in United States dollars)
Years ended September 30, 1998, 1997 and 1996
3. Capital assets (continued):
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Accumulated Net book
September 30, 1997 Cost amortization value
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Furniture and equipment $ 111,387 $ 41,158 $ 70,229
Computer equipment 231,100 115,204 115,896
Computer software 384,657 219,208 165,449
Patent 9,381 1,312 8,069
Computer equipment under
capital lease 21,962 8,896 13,066
- -------------------------------------------------------------------------------------------------------------------
$ 758,487 $ 385,778 $ 372,709
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
4. Banking facilities:
(a) The bank term loan bears interest at the bank prime rate plus 2%, is
repayable in monthly payments of $5,028 plus interest, is secured by
a specific charge on certain capital assets, a general assignment of
accounts receivable and a general security agreement. The loan
matured on August 31, 1998.
(b) The Company has a $143,980 line of credit, payable on demand, which
bears interest at the Canadian bank prime rate plus 2% of which none
was drawn at September 30, 1998. Advances under the facility are
secured by a general security agreement covering substantially all
the assets of the Company.
F-11
<PAGE>
V3 semiconductor, inc.
Notes to Consolidated Financial Statements (continued)
(Stated in United States dollars)
Years ended September 30, 1998, 1997 and 1996
5. Obligation under capital lease:
The obligation under capital lease represents the total present value of
future minimum lease payments discounted at the implicit interest rate of
12.9% in the lease. The obligation was fully paid during the year.
The following is a schedule of minimum lease payments under capital
lease:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
1998 $ 8,746
- -------------------------------------------------------------------------------------------------------------------
Total minimum lease payments 8,746
Less amount representing interest (396)
- -------------------------------------------------------------------------------------------------------------------
Obligation under capital lease $ 8,350
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
6. Capital stock:
The authorized capital stock of the Company consists of: 50,000,000
common shares with a par value of $.001 each, 10,000,000 preferred
shares, which may be issued in different series and whose rights and
privileges are to be determined at the time of issue, and 3,400,000
special shares with a par value of $0.0005 each. The special shares are
voting, are not entitled to any dividends and can not be transferred
without the consent of the Board of Directors.
The holders of the special shares are able to exchange one special share
together with one preferred share of V3 Semiconductor Corp. for one
common share of the Company.
(a) Pursuant to the terms of an escrow agreement the Company's stock
transfer agent held 400,000 Special shares of the Company and 400,000
preferred shares of V3 Semiconductor Corp., which would be issued if
certain profit performance targets were met by June 30, 1995 and
March 31, 1996, otherwise they are subject to cancellation. In 1996
and 1995, 200,000 shares were cancelled each year, since the targets
had not been met.
F-12
<PAGE>
V3 semiconductor, inc.
Notes to Consolidated Financial Statements (continued)
(Stated in United States dollars)
Years ended September 30, 1998, 1997 and 1996
6. Capital stock (continued):
(b) The Company undertook a private placement offering (the "Offering")
of a minimum of 1,000,000 and a maximum of 5,500,000 of common shares
at $3.50 per common share. In connection with the Offering between
the Company and The Mason Cabot Division of W. J. Nolan & Co., (the
"Placement Agent"), the Placement Agent offered the minimum offering
on a "best efforts, all or none" basis and any additional shares up
to the maximum offering on a "best efforts" basis. The Company agreed
to pay the Placement Agent a fee of 7% of each common share sold,
plus an expense allowance of 1.5% of the aggregate purchase price of
the common shares sold. The Company also granted to the Placement
Agent, warrants to purchase 96,505 common shares. Each warrant has a
3 year exercise period commencing on the date of the Final Closing
(June 22, 1998) at $3.50 per common share. The Company received net
proceeds in the amount of $2,188,000 representing the issuance of
687,926 common shares in May 1998 and $2,186,000 representing the
issuance of 684,732 common shares in June 1998. Share issue costs
relating to the May 1998 and June 1998 private placement offerings
were $219,316 and $210,155, respectively.
During the year, the Company issued 10,000 common shares in the
amount of $28,000 as consideration for legal services.
(c) During fiscal 1996, the board of directors approved an employee share
purchase plan. The plan reserves 20,000 common shares for purchase by
eligible employees and permits employees to purchase common stock
through payroll deductions at a purchase price of 90% of the fair
market value of the common shares on the purchase date. No shares
have yet been issued under this plan.
(d) Stock option plan:
During fiscal 1996, the board of directors approved an employee stock
option plan. Pursuant to the plan, 250,000 common shares are reserved
for issue to eligible employees. During fiscal 1997, the board of
directors approved an amendment to the employee stock option plan to
increase the shares reserved for issue from 250,000 common shares to
400,000. In addition, the board of directors approved the issuance of
10,000 options to each director as compensation.
F-13
<PAGE>
V3 semiconductor, inc.
Notes to Consolidated Financial Statements (continued)
(Stated in United States dollars)
Years ended September 30, 1998, 1997 and 1996
6. Capital stock (continued):
A total of 548,483 share options were granted and approved by the
board of directors during 1996 to 1998 which expire between July 1999
and February 2006. Of this total, 90,833 options were granted to the
members of the board of directors and 160,000 options were granted to
an officer and director of the Company. The options granted to the
officer and director of the Company are in addition to the options
reserved for under employee stock option plan. The options exercise
prices range from $1.75 to $6.25 per share. Subsequent to year end,
the Company granted 30,500 options to employees.
The Company measures compensation cost for stock option awards issued
to employees using the intrinsic value based method of accounting
prescribed by the United States Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees". Had compensation
cost for these plans been determined under the provisions of the
United States Financial Accounting Standards Board Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" which utilizes a fair value based method, the Company's
net income (loss) and earnings (loss) per share would have been
changed to the following pro forma amounts:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------
As Pro As Pro As Pro
reported forma reported forma reported forma
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net income
(loss) $ 167,193 $ (191,992) $ (124,596) $ (319,321) $ (551,467) $ (1,156,910)
Net income (loss) per share:
Basic 0.04 (0.04) (0.03) (0.08) (0.13) (0.27)
Diluted 0.03 (0.04) (0.03) (0.08) (0.13) (0.27)
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
For purposes of the pro forma disclosures, the fair value of each
option grant is estimated on the date of grant using the
Black-Scholes option pricing model with following weighted average
assumptions used for options as at September 30, 1998, 1997 and 1996,
respectively: risk-free interest rates of 5.0%, 5.0% and 5.0%;
expected dividend yields of 0%, 0% and 0%; expected volatility of
90%, 90% and 90%; and expected lives of 5 years, 5 years and 5 years.
F-14
<PAGE>
V3 semiconductor, inc.
Notes to Consolidated Financial Statements (continued)
(Stated in United States dollars)
Years ended September 30, 1998, 1997 and 1996
6. Capital stock (continued):
Certain additional disclosures with respect to stock-based
compensation are as follows:
Stock option information:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
average average average
exercise exercise exercise
Number price Number price Number price
- -------------------------------------------------------------------------------------------------------------------
Balance,
beginning
<S> <C> <C> <C> <C> <C> <C>
of year 384,083 2.87 283,750 $ 2.95 - $ -
Options
granted 164,500 4.59 100,333 2.67 283,750 2.95
Options
exercised 100 - - - - -
- -------------------------------------------------------------------------------------------------------------------
Balance,
end of year 548,483 3.39 384,083 $ 2.87 283,750 $ 2.95
- -------------------------------------------------------------------------------------------------------------------
Exercisable, at
end of year 395,096 322,798 243,750
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
Stock options outstanding and exercisable as at September 30 1998 are
as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Options outstanding Options exercisable
- -------------------------------------------------------------------------------------------------------------------
Weighted
average
remaining
contractual
Exercise price Number life Number
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 1.75 - 2.00 113,750 1.0 - 3.0 years 113,750
2.02 - 2.75 80,900 3.1 - 4.0 years 67,336
3.00 - 3.88 226,500 4.1 - 5.0 years 147,506
4.00 - 6.25 127,333 5.0 - 8.0 years 66,504
- -------------------------------------------------------------------------------------------------------------------
548,483 395,096
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
F-15
<PAGE>
V3 semiconductor, inc.
Notes to Consolidated Financial Statements (continued)
(Stated in United States dollars)
Years ended September 30, 1998, 1997 and 1996
7. Revenue:
Included in revenue are the following amounts:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Royalty income $ 91,136 $ 257,472 $ 605,070
Consulting fees 36,122 - 174,450
Interest 73,391 2,240 478
- -------------------------------------------------------------------------------------------------------------------
$ 200,649 $ 259,712 $ 779,998
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
The Company's Canadian subsidiary entered in a royalty agreement with one
of its suppliers whereby the supplier was granted the right to sell the
Company's product. The royalty agreement provided for a 50% royalty
payment on the first 100,000 units shipped to customers and a 7.5%
royalty payment on any additional units shipped to customers up to a
maximum royalty payment of approximately $1.7 million. As at September
30, 1998, approximately $1.6 million of royalty payments have been
received. Royalty revenues are recognized in accordance with the terms of
the agreement.
8. Research and development:
(a) Government assistance:
Research and development is undertaken by the Canadian subsidiary.
The Company received government assistance covering a portion of the
salaries incurred on qualifying research and development projects.
Government assistance has been accrued and netted against the
research and development expense as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
1998 $ 157,958
1997 124,989
1996 73,430
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
F-16
<PAGE>
V3 semiconductor, inc.
Notes to Consolidated Financial Statements (continued)
(Stated in United States dollars)
Years ended September 30, 1998, 1997 and 1996
8. Research and development (continued):
(b) Investment tax credits ("ITCs"):
The Company's Canadian subsidiary incurs current and capital
expenditures which are eligible as scientific research and
experimental development ("SR&ED") expenditures. The Company earns
ITCs at a rate of 20% on SR&ED expenditures each year. These ITCs are
available for application against the Canadian subsidiary's federal
income taxes payable. Unclaimed ITCs can be carried forward for a
period of 10 years. The Company has unclaimed ITCs which expire as
follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
2007 $ 43,700
2008 171,500
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
ITCs claimed each year have been netted against the research and
development expense as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
1998 $ 306,000
1997 35,000
1996 39,000
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
(c) Research and development expenditures:
The Company's Canadian subsidiary incurs SR&ED expenditures which can
be deducted against taxable income. The Company has undeducted SR&ED
expenditures of approximately $1,858,000 available to be deducted
against future years' taxable income and can be carried forward
indefinitely.
F-17
<PAGE>
V3 semiconductor, inc.
Notes to Consolidated Financial Statements (continued)
(Stated in United States dollars)
Years ended September 30, 1998, 1997 and 1996
9. Income taxes:
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
September 30, 1998, are presented below:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Canada United States Total
- -------------------------------------------------------------------------------------------------------------------
Deferred tax assets:
<S> <C> <C> <C>
Net operating loss carryforwards $ - $ 130,400 $ 130,400
Unclaimed research and
development expenditures 828,700 - 828,700
Unclaimed investment tax credits 215,200 - 215,200
- -------------------------------------------------------------------------------------------------------------------
Total gross deferred tax assets 1,043,900 130,400 1,174,300
Less valuation allowance (681,400) (130,400) (811,800)
- -------------------------------------------------------------------------------------------------------------------
Net deferred tax assets 362,500 - 362,500
Deferred tax liabilities:
Investment tax credits 232,500 - 232,500
Fixed assets 130,000 - 130,000
- -------------------------------------------------------------------------------------------------------------------
Total gross deferred tax liabilities 362,500 - 362,500
- -------------------------------------------------------------------------------------------------------------------
Net deferred tax liability $ - $ - $ -
- -------------------------------------------------------------------------------------------------------------------
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
September 30, 1997, are presented below:
- -------------------------------------------------------------------------------------------------------------------
Canada United States Total
- -------------------------------------------------------------------------------------------------------------------
Deferred tax assets:
Net operating loss carryforwards $ 257,788 $ 100,400 $ 358,188
Unclaimed research and
development expenditures 219,878 - 219,878
Unclaimed investment tax credits 379,000 - 379,000
Fixed assets 48,730 - 48,730
- -------------------------------------------------------------------------------------------------------------------
Total gross deferred tax assets 905,396 100,400 1,005,796
Less valuation allowance (736,362) (100,400) (836,762)
- -------------------------------------------------------------------------------------------------------------------
Net deferred tax assets 169,034 - 169,034
Deferred tax liabilities:
Investment tax credits 169,034 - 169,034
- -------------------------------------------------------------------------------------------------------------------
Total gross deferred tax liabilities 169,034 - 169,034
- -------------------------------------------------------------------------------------------------------------------
Net deferred tax liability $ - $ - $ -
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
F-18
<PAGE>
V3 semiconductor, inc.
Notes to Consolidated Financial Statements (continued)
(Stated in United States dollars)
Years ended September 30, 1998, 1997 and 1996
9. Income taxes (continued):
At September 30, 1998, the Company's United States subsidiary had
operating loss carryforwards for tax purposes which expire as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
2009 $ 40,000
2010 71,000
2011 76,000
2013 87,000
- -------------------------------------------------------------------------------------------------------------------
$ 274,000
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
The effective tax rate on income is different from the statutory income
tax rate as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory tax rate 44.6% 44.6% 44.6%
Effect of ITC claims 68.3 (39.1) (7.6)
Effect of non-deductible expenses 0.5 (10.0) (1.7)
Benefits of prior year losses (54.5) 22.2 -
Other (0.6) (30.9) -
Losses not tax effected 6.4 (25.9) (42.9)
- -------------------------------------------------------------------------------------------------------------------
64.7% (39.1%) (7.6%)
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
10. Related party transactions:
A shareholder provided consulting and management services for fees which
are included in research and development expense as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
1998 $ 28,246
1997 67,757
1996 65,814
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
These transactions are in the normal course of operations and are
measured at the exchange amount, which is the amount of consideration
established and agreed to by the related parties.
F-19
<PAGE>
11. Commitments:
(a) The Company leases office premises under operating leases which
expire in 2002.
The minimum lease payments due under these leases are as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Year ending September 30:
<S> <C> <C>
1999 $ 17,624
2000 20,069
2001 22,108
2002 7,369
- -------------------------------------------------------------------------------------------------------------------
$ 67,170
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
(b) The Company has entered into a five year employment agreement with
the Company's President and Chief Executive Officer, which commenced
February 1996. The employment agreement provides for an annual base
salary of approximately $112,000 (Cdn. $160,000).
12. Contingent liabilities:
(a) A lawsuit was instituted against the Company's subsidiary by a former
employee for entitlement of additional preferred shares of the
Company in 1995. The Company has contested the legal action and
management believes that it has a valid defense in this matter. The
Company can not estimate the reasonably possible loss from this
contingency as neither the number of additional shares nor a dollar
amount was specified on the claim.
(b) During fiscal 1996, a breach of contract lawsuit was instituted
against the Company's subsidiary in the amount of $6,000,000. The
Company filed a Statement of Defense in December 1995 and offered to
settle the lawsuit for $30,000. Management, after consulting legal
counsel, is of the opinion that the Company has a strong defense to
the claim. The Company has estimated that the range of loss is
between $30,000 and $6,000,000 and has accrued $30,000, representing
the settlement offer amount as its best estimate within the range.
F-20
<PAGE>
V3 semiconductor, inc.
Notes to Consolidated Financial Statements (continued)
(Stated in United States dollars)
Years ended September 30, 1998, 1997 and 1996
13. Net income (loss) per share:
Net income (loss) per share has been calculated using the weighted
average number of common and special shares outstanding during the
periods. Special shares have been included in the weighted average number
of shares outstanding as the special shares are exchangeable into common
shares of the Company (note 6).
The weighted average number of common and special shares outstanding
which was used to calculate the net income (loss) per share was:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
1998 $ 4,742,496
1997 4,135,238
1996 4,284,827
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
Application of the provisions of Statement of Financial Accounting
Standards No. 128 results in disclosure of two income per share measures,
basic and assuming dilution, on the face of the consolidated statement of
income.
F-21
<PAGE>
V3 semiconductor, inc.
Notes to Consolidated Financial Statements (continued)
(Stated in United States dollars)
Years ended September 30, 1998, 1997 and 1996
13. Net income (loss) per share (continued):
The reported net income represents the net income available to common and
special shareholders for purposes of computing both measures. The
following reconciles shares outstanding at the beginning of the year to
average shares outstanding used to compute both income per share
measures:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------
Common and special shares outstanding,
<S> <C> <C> <C>
beginning of year 4,135,238 4,135,238 4,335,238
Weighted average shares issued 607,258 - -
Weighted average shares cancelled - - (50,411)
- -------------------------------------------------------------------------------------------------------------------
Average shares outstanding - basic 4,742,496 4,135,238 4,284,827
Effect of dilutive securities:
Dilutive shares contingently
issuable upon the exercise
of stock options and warrants 487,284 325,719 145,486
Shares assumed to have been purchased for treasury with assumed proceeds
from the exercise of stock options and
warrants (384,782) (90,603) (92,227)
- -------------------------------------------------------------------------------------------------------------------
Average shares outstanding
- assuming dilution 4,844,998 4,370,354 4,338,086
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
F-22
<PAGE>
V3 semiconductor, inc.
Notes to Consolidated Financial Statements (continued)
(Stated in United States dollars)
Years ended September 30, 1998, 1997 and 1996
14. Segment information:
The Company's operations involve a single industry segment - the design
and development of integrated circuits for the embedded computer market.
Except for the $4.4 million of net proceeds from the private offering,
substantially, all the operations of the Company are conducted by, and
assets held by the Canadian subsidiary. Financial information, summarized
by geographic area, is as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------
Sales
<S> <C> <C> <C>
Canada $ 3,821,512 $ 1,951,453 $ 882,042
United States 508,940 318,000 447,435
Corporate - United States - - -
Eliminations (508,940) (318,000) (447,435)
- -------------------------------------------------------------------------------------------------------------------
Total sales $ 3,821,512 $ 1,951,453 $ 882,042
- -------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes
Canada $ 565,027 $ (37,158) $ (442,657)
United States (9,703) (15,109) (25,924)
Corporate expenses - United States (87,664) (43,904) (49,373)
Eliminations 5,533 6,607 5,619
- -------------------------------------------------------------------------------------------------------------------
Total income (loss) before income taxes $ 473,193 $ (89,564) $ (512,335)
- -------------------------------------------------------------------------------------------------------------------
Assets
Canada $ 1,721,251 $ 1,059,756 $ 1,026,728
United States 38,342 30,750 47,994
Corporate - United States 4,445,060 199,395 250,320
- -------------------------------------------------------------------------------------------------------------------
Total assets $ 6,204,653 $ 1,289,901 $ 1,325,042
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
The corporate assets consist mainly of cash and cash equivalents. The
United States operations provide marketing services exclusively to the
Canadian subsidiary.
F-23
<PAGE>
V3 semiconductor, inc.
Notes to Consolidated Financial Statements (continued)
(Stated in United States dollars)
Years ended September 30, 1998, 1997 and 1996
14. Segment information (continued):
The Company has several customers whose sales represent a significant
portion of the Company's total sales. Sales to each of the four major
customers for the year ended September 30, 1998 were $1,572,000,
$397,000, $360,000 and $317,000, respectively. Sales to each of the two
major customers for the year ended September 30, 1997 were $644,000 and
$585,000, respectively. Sales to each of the four major customers for the
year ended September 30, 1996 were $272,000, $160,000, $147,000 and
$84,000, respectively. Sales to all customers are conducted in United
States dollars.
Export sales by the Company's Canadian subsidiary were as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
United States $ 1,630,091 $ 526,892 $ 423,380
Middle East 397,382 585,436 97,025
Other 209,029 175,631 8,820
- -------------------------------------------------------------------------------------------------------------------
$ 2,236,502 $ 1,287,959 $ 529,225
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
15. Financial instruments:
The reported values of financial instruments which consist of cash and
cash equivalents, accounts receivable, accounts payable and accrued
liabilities approximate their fair values due to the short-term nature of
these instruments.
16. Concentration of credit risk:
Financial instruments which potentially expose the Company to
concentrations of credit risk consist principally of accounts receivable.
The Company's exposure to credit risk is impacted by the economic
conditions of the embedded systems market which could affect the
customers' ability to satisfy their obligations to the Company. In order
to reduce risks, the Company has credit procedures in place whereby trade
receivables are insured and the insuring company performs analysis to
control the granting of credit to high-risk customers.
F-24
<PAGE>
V3 semiconductor, inc.
Notes to Consolidated Financial Statements (continued)
(Stated in United States dollars)
Years ended September 30, 1998, 1997 and 1996
17. New accounting standards not yet adopted:
SFAS 130, "Reporting Comprehensive Income", establishes standards for
reporting and display of a comprehensive income (which is all changes in
the net equity of a business due to transactions or other events not
involving owners) and its components (revenues, expenses, gains and
losses). While it does not specify a format of presentation, SFAS 130
does require that all items that are required to be recognized as
components of comprehensive income be reported in a financial statement
that is displayed with the same prominence as other financial statements.
SFAS 130, which does not address issues of recognition or measurement of
comprehensive income, is effective for fiscal years beginning after
December 15, 1997.
SFAS 131, "Disclosure about Segments of an Enterprise and Related
Information", establishes new standards for the reporting of information
about the operating segments of a business. It also establishes standards
for related disclosures about products and services, geographic areas and
major customers. Generally, SFAS 131 requires that the definition of
operating segments reflect the manner in which the enterprise's chief
operating decision maker decides how to allocate resources and assess
performance.
SFAS 131 is effective for fiscal years beginning after December 15, 1997.
Management does not believe that the adoption of these new accounting
standards will materially affect its historical results of operations or
shareholders' equity.
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133 (`SFAS 133'), `Accounting for
Derivative Instruments and Hedging Activities'. This statement
establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives), and for hedging
activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and
measure those instruments as fair value. This statement is effective for
all fiscal quarters of fiscal years beginning after June 15, 1999.
Management has not determined the effect of SFAS 133 on its financial
statements.
F-25
AMENDMENT OF LEASE AGREEMENT made this 10th day of August,1998.
BETWEEN: 250 CONSUMERS ROAD LIMITED
A company incorporated under the laws of the Province of
Ontario, and having its head office at:
214 Merton Street, Suite #300
Toronto, Ontario, M4S 1A6
(hereinafter called the "Lessor")
OF THE FIRST PART
-and-
V3 SEMICONDUCTOR CORPORATION Unit #901 250 Consumers Road
North York, Ontario, M2J 4J6
(hereinafter called the "Lessee")
OF THE SECOND PART
WHEREAS by a Lease made the 13th day of August, 1996 (hereinafter called
the "Lease") a copy of which is attached hereto as Schedule "A", the Lessor
leased and demised unto the Lessee the leased premises set out therein
(hereinafter called the "Original Leased Premises") being Suite #901 in the
building located at and municipally known as 250 Consumers Road, in the City of
Toronto, in the Province of Ontario, comprising an area of approximately 7,4191
square feet (adjusted to include the Lessee's proportionate share of common
areas and facilities on the ninth floor of the building) for a lease term of
FIVE (5) YEARS AND SIX (6) MONTHS commencing on the 1st day of August, 1996, and
terminating on the 31st day of January, 2002, at the rentals reserved therein;
AND WHEREAS, the Lessor and the Lessee have agreed to increase the area of
the leased premises, effective as of the 1st day of September, 1998, by adding
thereto the premises known as Suite 905 at 250 Consumers Road (hereinafter
called the "Additional Leased Premises"), comprising an area of approximately
3,346 square feet (adjusted to include the Lessee's proportionate share of
common areas and facilities on the ninth floor of the building) adjacent to the
Original Leased Premises, being the area outlined in red on the plan of the
ninth (9th.) floor of the building attached hereto as Schedule "B" on the terms
and conditions provided herein;
AND WHEREAS, the Lessor and the Lessee have agreed to amend the lease as
provided herein;
NOW THEREFORE THIS INDENTURE WITNESSETH that in consideration of the mutual
covenants and conditions herein contained and other good and valuable
consideration, the receipt and sufficiency of which is hereby a acknowledged,
the Lessor and the Lessee do hereby agree as follows:
1. Effective as of the 1st. day of September, 1998, the area of the leased
premises shall be increased by adding thereto the premises known as Suite 905 at
250 Consumers Road, comprising an area of approximately 3,346 square feet
(adjusted to include the Lessee's proportionate share of common areas and
facilities on the ninth floor of the building) adjacent to the Original Leased
Premises on the terms and conditions provided herein;
<PAGE>
2. During the period of THREE (3) YEARS AND FIVE (5) MONTHS, from September
1, 1998, to January 31, 2002, the Lessee shall pay to the Lessor as annual base
rent for the Additional Leased Premises only the sum of FIFTEEN THOUSAND ONE
HUNDRED AND TWENTY-THREE DOLLARS AND NINETY-TWO CEDNTS ($15,123.92) per annum
payable in equal consecutive monthly installments of ONETHOUSAND TWO HUNDRED AND
SIXTY DOLLARS AND THIRTY-THREE CENTS ($1,260.33) each in advance on the first of
each and every month.
3. In addition to the base rent provided above, the Lessee shall pay to the
Lessor for the Additional Leased Premises hydro charges, realty taxes, including
increases resulting from the transfer of business Taxes to Realty Taxes, and
operating and maintenance costs, all in accordance with the provisions of the
Lease. Additional Rent is currently estimated at $13.26 per square foot per
annum and the Lessee shall pay monthly installments based on this amount.
4. The rent payable as per above are subject to the goods and services tax
(G.S.T.) payable monthly in addition to all rents and any additional charges
that may arise from time to time.
5. A deposit in the amount of TEN THOUSAND SIX HUNDRED AND NINE DOLLARS AND
THIRTY-EIGHT CENTS (10,609.38) is payable for the Additional Leased Premises
only for the month of September, 1998, and to rent and additional rent payable
for the Additional Leased Premises only for the last month of the lease term and
shall be subject to forfeiture as liquidated damages in the event of the default
by the Lessee of any of the terms hereof.
6. The Lessor and the Lessee acknowledge that the area over which the
Lessee shall continue to have a Right of First Refusal pursuant to the last
paragraph on Page 8 of the Lease, being the area outlined in green on Schedule
"B", has an area of 2,675 square feet.
7. The Lessor shall, at its own cost and expense, construct improvements in
the Additional Leased Premises only, in accordance with the plans attached
hereto and in accordance with the lessor's standard grade and quality of
construction and finishings. The work shall include the following:
a) demolish existing partitions in the Additional Leased premises
where indicated in blue on Schedule "C";
b) construct new partitions in the Additional Leased Premises
where in the Additional Leased premises where indicated in orange on
Schedule "D". This would include relocation of the closets and
cupboard where indicated. The size of the closets would be reduced in
order to fit into the available space;
c) repaint the Additional Leased Premises only in a color to be
chosen by the Lessee from the Lessor's building standard samples;
<PAGE>
d) one of the doors from the Additional leased Premises to the
corridor would remain but would be blocked off and not used for
access;
e)the Lessor shall patch the carpet in the Additional Leased
Premises only, resulting from the removal of the demolished partitions
by installing 4-inch wide strips of carpet by the length of the
demolished partition, with carpet to match the existing carpet as
closely as possible. The Lessee acknowledges that the patches may be
noticeable either because the seams are evident or because the color
of the patches is darker or lighter than the surrounding carpet; the
lessor shall steam clean the carpet in the Additional Leased Premises
and make all necessary repairs to the existing carpet:
f) and save as aforesaid, the lessee agrees to accept the
Additional Leased Premises in an "AS IS" condition, and shall be
responsible, at its own expense, for any additional work or
improvements that it requires, including any additional electrical
outlets required in the Additional leased Premises.
8. The Lessor shall, at its own cost and expense, complete the following:
a) replace part of the carpet in the Original Leases Premises as
per the Highlighted area on Schedule "E". The new carpet to be
installed shall be from the Lessor's building standard grade to match
the existing carpet as closely as possible. The Lessee acknowledges
that this work will be done after normal business hours and
b) install a wall with a door to enclose the existing library
area in the Original Leased Premises where indicated in red on
Schedule "E".
9. The Lessor shall use its best efforts to complete all of the above work
by the 1st. day of September, 1998, or as soon thereafter as possible.
10. All of the terms and covenants of the Lease shall apply to the
Additional Leased Premises and , except as amended herein, the Lease shall
remain unchanged and in full force and effect.
11. In all other respects, the terms, covenants and conditions of the Lease
as amended shall remain unchanged and in full force and effect during the
Extended Term except as modified by this Amendment of Lease Agreement.
12. This agreement shall enure to the benefit o an be binding upon the
parties hereto and their respective successors and permitted assignees.
IN WITNESS WHEREOF the parties, hereto have executed these presents.
SIGNED, SEALED & DELIVERED 250 CONSUMERS ROAD LIMITED
--------------------------
In the presence of
___[Signature illegible]_______ Per_____[Signature illegible]
witness
V3 SEMICONDUCTOR CORPORATION
________________________________ Per /s/ Carl Mitchell
witness
<PAGE>
[graphic ommitted]
<PAGE>
[graphic ommitted]
<PAGE>
[graphic ommitted]
<PAGE>
[graphic ommitted]
COMMERCE
COMMUNITIES
August 19, 1998
Carl Mitchell
c/o V3 Corporation
250 Consumers Road, Suite 901
North York, Ontario, Canada M2J 4V6
Re: Lease renewal, 2348-G Walsh Ave., Santa Clara, CA
Dear Carl:
This letter will serve as our written agreement to extend your Lease one (1)
year. The Lease Extension is for that certain Lease dated September 20, 1995 by
and between San Tomas Investors II, Landlord and V 3 Corporation, Tenant,
covering those certain premises known and numbered as stated above, which Lease
was to terminate September 30,1998.
Lessor and Lessee hereby agree:
1. The term of said Lease shall be extended through September 30,1999.
2. The base rent, es provided in paragraph 3, shall be increased to two
thousand one hundred dollars ($2,100.00) per month beginning October 1, 1998 and
continuing to September 30, 1999.
3. The security deposit shall be increased from $1,785.00 to $2,100.00.
4. Tenant acknowledges that there exists a license from the Principal
Mutual Life Insurance Company which permits the Tenant to pay rent to San Tomas
Investors II. Tenant further acknowledges that the Principal Mutual Life
Insurance Company has the right to revoke such license and that upon such
revocation the Tenant will pay rent at such address as the Principal Mutual Life
Insurance Company may direct by written notice to Tenant.
5. The Base Year for Real Property Taxes per paragraph 4 of the lease shall
be changed to 1998-1999 and the Base Year for Operating Expenses per paragraph 5
shall be changed to 1998.
6. All other terms and conditions of said Lease shall remain the same and
in full force and effect.
It the foregoing is acceptable, please sign and return the original and two
(2) copies to me at your earliest convenience. A fully executed copy will be
returned to you.
<PAGE>
Sincerely,
COMMERCE COMMUNITIES CORP. AGREED & ACCEPTED
/s/ Richard V. Treakle
By:[Signature Illegible]
Richard V. Treakle
President Date: 9/1/98
By: /s/ Carl Mitchell
Date: August 25, 1998
Real Estate Development o Management o Brokerage
-----------------------------------------------------------------------------
COMMERCE COMMUNITIES CORP. o 2316 Walsh Avenue o Santa Clara, CA 95051 o
(408) 496-6262 o Fax (408) 748-0341
www.commercecommunities.com
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Exhibit 27.1 Financial Data Schedule
This schedule contains summary financial information extracted from interim
financial statements as at September 30, 1998 and is qualified in its entirety
by reference to such financial statements:
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> sep-30-1998
<PERIOD-END> sep-30-1998
<CASH> 4,821,556
<SECURITIES> 0
<RECEIVABLES> 754,119
<ALLOWANCES> 15,533
<INVENTORY> 168,490
<CURRENT-ASSETS> 5,783,859
<PP&E> 420,794
<DEPRECIATION> 122,757
<TOTAL-ASSETS> 6,204,653
<CURRENT-LIABILITIES> 751,166
<BONDS> 0
0
0
<COMMON> 5,472
<OTHER-SE> 6,050,624
<TOTAL-LIABILITY-AND-EQUITY> 6,204,653
<SALES> 3,821,512
<TOTAL-REVENUES> 4,022,161
<CGS> 1,190,523
<TOTAL-COSTS> 1,190,523
<OTHER-EXPENSES> 2,358,445
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,106
<INCOME-PRETAX> 473,193
<INCOME-TAX> 306,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 167,193
<EPS-PRIMARY> .04
<EPS-DILUTED> .03
</TABLE>
