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, 1999
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)
<TABLE>
<CAPTION>
<S> <C>
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)
<PAGE>
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. $7,043,353.
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, 1999 was: $66,770,094.
The number of shares outstanding of the registrant's Common Stock
outstanding as of September 30, 1999 was 5,743,664.
DOCUMENTS INCORPORATED BY REFERENCE:
Reference is made in Part III of this Report to the Registrant's
Prospectus, dated October 21, 1998, filed pursuant to Rule 424(b) of the
Securities Act of 1933.
Reference is made in Part III of this Report 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 in Part III of this Report 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 in Part III of this Report 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 in Part III of this Report 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.
Reference is made in Part III of this Report to the Registrant's Annual
Report on Form 10-KSB for the fiscal year ended September 30, 1998, as filed on
December 23, 1998, which is hereby incorporated by reference.
Transitional Small Business Disclosure Format: Yes ______; No X
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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, Hitachi SH Series, MIPS (QED) Processors, 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, 68K,
Coldfire, PowerQUICC families), MIPS(TM)Processors (MIPS, IDT, NEC, Toshiba).
The Company's products are designed to be compatible with existing and new
standards and technologies such as PCI with I2O.
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 Hitachi's,
Intel's, Motorola's, QED's and T.I.'s websites. 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 four categories: Burst
(DRAM) Memory Controllers (BMC, PDC, and SDC Families), Small System Controllers
(SSC Family), PCI Bridge Controllers (PBC, EPC, USC, HPC, PSC), and PCI to PCI
Bridges (PPB Family). 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/PCI DRAM/SynchronousDRAM) Memory Controllers (BMC, PDC, and SDC)
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.
The high-performance PCI target interface with integrated SDRAM Controller
("PDC's") and the Synchronous DRAM Controller ("SDC's") are the newest products
from V3's newly formed Memory Controller Product Group. These devices complement
the existing BMC family of memory controllers, by providing an upgrade path to
today's most popular Synchronous DRAM. These devices enable system designers to
shorten their design cycle by offering them an off the shelf product, that in
turn will provide the advantage of faster time-to-market. The PDC interfaces to
the industrial standard PCI bus and the CompactPCI bus. At the same time, they
provide access to SDRAM and other peripheral components such as FLASH and SRAM.
The PDC is a Hot Swap Ready device (Hot Swap Ready - ability to insert and
extract a system board without shutting down the system) and is available in
industrial temperature range. The SDC is also available in industrial
temperature range. This device is the successor to the BMC, which interfaces the
host processor to SDRAM to provide higher performance, lower system cost and a
faster design cycle.
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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 add-in cards, robotics
controllers and networking systems.
PCI Bridge Controllers (PBC,EPC,USC,HPC and PSC)
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 that has
replaced the Industry Standard Architecture (ISA) bus interface.
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: 3 Comm, Cabletron, Cisco, Hewlett
Packard, Lucent Technologies, Nortel Networks, Newbridge and others.
The Company's USC (Universal System Controller) family is a
high-performance, highly integrated PCI bridge solution for MIPS and SH
processors. The USC product family consists of an SDRAM controller with support
for Enhanced SDRAM, FIFO storage, DMA Chaining, 3.3v operation - all necessary
features that are in demand in the industry today. This controller family was
designed to address the two largest embedded processor market segments, MIPS and
SH. The Company expects substantial revenues to be generated from the USC in the
year 2000 and beyond. Market acceptance has already been overwhelming.
The Company's latest and most advanced controller the High-Performance PCI
Controller ("HPC") extends the existing line of PCI Bridge Controllers into the
arena of 64-bit datapaths. The Company's HPC PCI Bridge family is designed to
serve as the system control logic for high-end embedded applications whose
computational and bandwidth performance levels are unattainable with existing
32-bit solutions. The HPC can provide simultaneous connectivity to multiple PCI
buses, high performance MIPS(TM) processors, and commodity Synchronous DRAMs
(SDRAMs) without the use of any external components. In addition, the HPC family
includes a high-performance DMA controller, interrupt management, serial ports,
I/O control logic, timers, and I/O ports, all of which allow system designers to
build very powerful, low-component systems tailored to their embedded
applications.
<PAGE>
PCI to PCI Bridges (PPB)
The Company's PPB family (PCI-to-PCI Bridge) is the newest product designed to
address the issues of bandwidth restrictive applications. The PPB is a highly
integrated, high-performance peripheral device that performs PCI-to-PCI bridging
functions. It provides electrical isolation of devices on each PCI bus while
maintaining concurrent operation on both buses. This 64-bit Hot Swap Ready
device is pin-to-pin compatible with Intel's popular 21154 PCI-to-PCI bridge
family (provides second source and supply continuity for Intel's 21154
PCI-to-PCI bridges). The features of this product best address advanced
networking and telecommunications products, mass storage controllers (RAID),
high performance servers, and Intelligent I/O subsystems.
Embedded Systems Industry Overview
The Worldwide Semiconductor Total Available Market is shown below:
Semiconductor Market Growth (US$)
Year Revenues Growth
-----------------------------------------
1996 $130B
1997 $137B 5%
1998 $122B -11%
1999 $133B 9%
2000 $154B 16%
2001 $182B 18%
Source: SIA 1998-2000 Forecast
According to a report prepared by Frost and Sullivan, a market research
company (the "Frost and Sullivan Report"), the total embedded market which is a
segment of the Total Available 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 IBM, Intel, Hewlett
Packard, Hitachi, and Motorola, who are also the Company's technology partners
and/or customers, attest to this unprecedented growth by investing heavily into
product development in RISC processors, new standards, 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.
Moreover, the high-end 32 and 64 bit processor segment of the embedded
market is expected to exceed $7 billion by the year 2002. The 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, 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 Cisco, Compaq,
Hewlett Packard, IBM, Intel, Lucent Technologies and Nortel Networks. 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 boxes and high-end servers) of the market.
<PAGE>
The newly created Memory Products group, which augments the 32 Bit and
Advanced (64 Bit & PCI to PCI) product groups, is an added strength that
fortifies our position in the market place, while it differentiates us from our
competitors who lack this essential embedded market expertise.
The product development roadmap is now on a "high velocity" curve for
fiscal year 2000. These will include our new generation high-performance core
silicon products, supported by board level systems (for reference and evaluation
purposes) and software, as well as Intellectual Property (IP). Reusable IP - a
transportable "virtual component" design or intellectual property, that is in
software form rather than hardware, and can be integrated or re-synthesized into
other (silicon) products, is now one of the fastest growing segments in the
semiconductor business today. The natural target of IP is the rapidly emerging
System-on-Chip (SoC) market - a revolution that has gained momentum and will
eventually create an entire new range of consumer and business products that
require an enormous amount of integration for numerous functions on a single
chip.
In manufacturing and through our foundry partners, we have established
scales and efficiencies that allow us to compete and maintain our margins. As we
migrate to newer methodologies and smaller geometries - that afford us increased
functionality and product complexity, that yields higher performance and lower
cost per gate products - we are well positioned for the competitive onslaught
and rapidly increasing market demands.
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,
Motorola, NSC, SGS-Thompson, and TI on the other hand, are examples of merchant
semiconductor suppliers.
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 innovative semiconductor companies, such as Actel, Atmel, and
Xilinx. This once niche market now encompasses a wide variety of rapidly
emerging segments of the embedded market. These kinds of producers are known in
the industry as "fabless" semiconductor manufacturers. These design-centric
companies, under subcontracting arrangements with larger semiconductor
manufacturers, focus on developing IP (Intellectual Property) and 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.
<PAGE>
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.
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 Processor market is expected to ship 320 million units
for a total value of $3.4 billion and the 64-Bit Embedded Processor market is
expected to ship 200 million units for a total of $2.9 billion by the end of
2000. 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 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.
<PAGE>
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 ATI,
Cabletron, Cisco, Data General, Hewlett Packard, Hitachi, IBM, Kodak, Lucent,
NEC, Nortel, Samsung, 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 RISC product group of IDT, the Embedded
Processor group of IBM, the Embedded Super-H group of Hitachi, MIPs Intellectual
Property House of QED, and the Embedded Processor Division of AMD.
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.
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 suppliers 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, ST Microelectronics,
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 for an ISO 9001 Registered company. The ISO 9001 certification is a
quality management and quality assurance certification standard developed by the
International Organization for Standardization ("ISO"). The ISO 9001
Registration 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 Registered, a definite asset in getting approved
vendor status with large customers such as Cisco, NorTel and Hewlett Packard
etc.
<PAGE>
Research and Development/Product Development
The Company has assembled a strong engineering team, comprised of senior
architects and designers from companies such as ATI, Genesis, LSI Logic, Nortel
and Scientific Atlanta. 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 and
64-Bit PCI to PCI Bridge 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 (Cisco, Hewlett Packard, IBM, Kodak,
Lucent Technologies, and Nortel Networks), and leverage the expertise gained
from joint product development with Hitachi, IBM, IDT, Intel, Motorola, and QED.
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. Similarly, the newer MIPS and
SH products, were developed after close collaboration with QED and Hitachi
respectively.
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.
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.
<PAGE>
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, 1999, the Company currently employs approximately 50
individuals. The company plans to increase the number of employees to 66 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.
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.
<PAGE>
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.
<TABLE>
<CAPTION>
DATE LOW BID HIGH BID LOW ASK HIGH ASK
Fiscal 1997
<S> <C> <C> <C> <C> <C> <C>
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
Fiscal 1999
December 31, 1998 $2.563 $4.813 $3.125 $5.125
March 31, 1999 $3.813 $4.031 $3.875 $4.313
June 30, 1999 $3.625 $9.688 $3.875 $9.875
September 30, 1999 $6.500 $12.750 $6.750 $13.000
</TABLE>
At September 30, 1999, there were approximately 274 holders of record 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
During the fiscal year ended September 30, 1999, the Company issued to
Sichenzia, Ross & Friedman LLP 1,000 shares of its common stock in consideration
for $5,700 in fees for legal services rendered.
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The statements contained in this Report that are not historical are
forward-looking statements, including statements regarding the Company's
expectations, intentions, beliefs or strategies regarding the future. Forward-
looking statements include the Company's statements regarding liquidity,
anticipated cash needs and availability and anticipated expense levels. All
forward-looking statements included in this Report are based on information
available to the Company on the date hereof, and the Company assumes no
obligation to update any such forward-looking statement. It is important to note
that the Company's actual results could differ materially from those in such
forward-looking statements. Additionally, the following discussion and analysis
should be read in conjunction with the Financial Statements and notes thereto
appearing elsewhere in this Report. The discussion is based upon such financial
statements which have been prepared in accordance with U.S. Generally Accepted
Accounting Principles and are presented in United States dollars ($).
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.
Results of Operations
Overview
The following table sets forth for the years ended September 30, 1999, 1998
and 1997: (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:
<PAGE>
<TABLE>
<CAPTION>
Items as a Percentage Period to Period Percentage
Of Net Sales Increase (Decrease)
Years Ended Years Ended
September 30, September 30,
1999 1998 1997 1998-99 1997-98
<S> <C> <C> <C> <C> <C>
Sales 100.0% 100.0% 100.0% 78.6% 95.8%
Gross Profit 70.4 68.8 61.6 82.7 118.8
Other Income 3.2 5.3 13.3 8.7 (22.7)
R&D Expenditures 25.7 14.5 18.9 216.9 50.5
Selling, General & Administrative 39.4 49.5 50.6 42.2 91.5
Net Income 3.4 4.4 (6.5)
</TABLE>
(1) The R&D expenditures are expressed before applying R&D tax credits of
$173,591 in 1999, $306,000 in 1998 and $35,032 in 1997.
Fiscal Year Ended September 30, 1999 Compared to Fiscal Year Ended
September 30, 1998.
Sales
Sales for 1999 increased $3,003,790 to $6,825,302, a 78.6% increase over
sales of $3,821,512 in 1998. The dramatic sales increase was attributable to an
increase in the number of design wins that are now shipping in production
volumes, the introduction of the USC device and various evaluation boards, and
the continuos increase in the number of manufacturers sales representatives
promoting the Company's products. Increase in the number of production design
wins resulted in an increase of 87.1%, 57.4%, 84.4% and 57.4% in sales of the
BMC, PBC,EPC and SSC respectively. The newly released USC family accounted for
3% of product sales in 1999 and that percentage is expected to increase
dramatically over the next two years. The introduction of various evaluation
boards boosted sales for that product family by 361.3%.
Gross Profit
Gross profit was $4,807,796 in 1999, an $2,176,807 or 82.7% increase over
gross profit of $2,630,989 in 1998. The increase was predominantly due to
increased sales and reduced product costs. In 1999, gross profit margin, as a
percentage of sales, was 70.4%, compared to 68.8% in 1998. The increase in gross
margin is a reflection of the reduced product costs negotiated with the
manufacturing subcontractors. As the number of volume transaction increase, the
gross margin is expected to decline slightly.
Other Income
Included in other income are royalty income, consulting fees and interest
income totaling $218,051 in 1999,an increase of $17,402 or 8.7% compared to
$200,649 in 1998.
In 1999, royalty income decreased by $34,282 or 37.6% to $56,854 compared
to $91,136 in 1998. This decrease was a direct result of reduction in royalty
payments from National Semiconductor Corporation ("NSC"). In 1999 the Company
received $nil in consulting fees for work performed on the behalf of non-related
companies. In 1998 the Company received $36,122 in consulting fees for work
performed on the behalf of non-related companies. In 1999 interest income
increased by $87,806 or 119.60% to $161,197 compared to $73,391, in 1998. In
1999 the main source of interest income was generated from investing the funds
raised from the private placement in short-term interest bearing notes.
<PAGE>
Research & Development ("R&D") Expenditures
R&D expenditures increased by 216.9% to $1,754,587 in 1999, from $553,641
in 1998, before applying R&D tax credits of $173,591 in fiscal 1999 and $306,000
in fiscal 1998. 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 63.16% in 1999
compared to 1998 and resulted in an increase of 105% in R&D wages in 1999
compared to 1998. R&D costs were reduced by government funding of $16,615 in
1999, compared to government funding of $157,958 in 1998. The Company will
continue to increase the number of R&D personnel to enable it to address
emerging trends in technology as well as expedite the release of new products to
market.
Net Income (Loss) for the year
Net income for 1999 was $230,480, compared to $167,193 in 1998. This was
the result of a 78.6% increase in sales from 1998 to 1999, as well as the 1.6%
increase in gross margin during the same time period. In 1999, selling, general
and administrative expense increased by 42.2% or $798,847 to $2,690,605, as
compared to $1,891,758 in 1998, as a result of substantial increases in non-R&D
wages, selling commissions paid to manufacturers sales representatives,
promotion and advertising expenses.
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.
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.
<PAGE>
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.
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.
Liquidity and Capital Resources
In 1999, the Company generated a negative cash flow from operating
activities of $392,181. The principal source of cash was from net income of
$230,480 and an increase in inventories of $114,617. Net income increased
principally because of increases in sales and gross profit. Inventories
decreased as the Company outsourced its logistic functions to a third party
experts for most of our product lines. The principal use of cash was for an
increase in accounts receivable and prepaid expenses of $693,336 and $124,214
respectively. Both accounts receivable and prepaid expense increased as result
in the increase in the volume of business. Cash used by investing activities was
$572,342 as a result of the purchase of major computer equipment and software
for research and development. Financing activities provided net cash flow in the
amount of $619,519. This amount is represented from the proceeds in the
exercising of stock options by the optionee. Net cash outflow after all
activities was $345,004.
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.
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.
<PAGE>
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. The Company
is currently negotiating with the bank to increase this line of credit.
Management believes that its present cash holdings, 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 79% of the Company's total operational
expenses in 1999. 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.
Investigation of Significant Distributor
Future Electronics Inc. ("Future Electronics"), one of the Company's
significant distributors has advised the Company that the U.S. Federal bureau of
Investigation has commenced an investigation relating to certain industry
practices known as "ship from stock and debit." Ship from stock and debit is a
practice where distributors purchase parts from suppliers at inflated prices
and, subsequently, receives credits or rebates when a sale is made to a customer
at a price that is below the list price for such parts.
Future Electronics has advised the Company that it does not believe that it
has committed any wrongdoing and that such investigation will not effect
business transactions with the Company. While the Company does not presently
believe that the F.B.I.'s investigation of Future Electronics will materially
effect its business, there can be no assurance of the outcome of the
investigation or its effect on the Company. In the event Future Electronics
ceases operations, the Company's business could be materially adversely
affected.
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.
The Company has assessed 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:
<PAGE>
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 assessment, it has determined that the core of its
business software applications, including those critical to the Company's normal
operation are Year 2000 compliant. The Company is currently in the process of
implementing an ERP system from JD Edwards to address its inventory, sales order
management and financial reporting requirements. Management expects the
completion of the implementation process in early March in the year 2000.
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, have
been developed for transactions with suppliers that appear to be lagging with
their Year 2000 readiness programs.
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 49 President, Chief Executive Officer and Director
Carl Mitchell 39 General Manager, Secretary and Treasurer
Michael Alford 39 Vice President of Engineering
Bernard N. Slade 75 Director
Jim Wilkinson 51 Director
John A. Fazackerley 64 Director
Robert Skinner 49 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.
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,
Scientific Atlanta employed Mr. Fazackerley. 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.
Robert Skinner. Mr. Skinner was elected to the board of directors in March
1998. From 1992 to 1999, 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 1999, each of Mssrs. Slade, Wilkinson, Fazackerley and Skinner were
granted options to purchase 10,000 shares of Common Stock as compensation for
their services as directors of the Company.
<PAGE>
Section 16(a) Beneficial Ownership Reporting Compliance
Based solely upon a review of Forms 3, 4 and 5, and amendments thereto,
furnished to the Company during fiscal year 1999, the Company is not aware of
any director, officer or beneficial owner of more than ten percent of the
Company's Common Stock that, during fiscal year 1999, failed to file on a timely
basis 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, 1999. Other
than as listed below, the Company had no executive officers whose total annual
salary and bonus exceeded $100,000 for that fiscal year:
<TABLE>
<CAPTION>
Long Term
Name and Other Annual All Other Compensation
Principal Position Year Salary ($) Compensation Bonus Compensation Awards/Securities
Underlying Options(#)
John Zambakkides,
President and Chief
Executive Officer...
<S> <C> <C> <C> <C> <C>
1999 $134,008 --- $41,223 $11,473 (1) 400,000
1998 $97,743 --- $55,200 $13,117 (2) ---
1997 $72560 --- --- $5,966 (2) ---
</TABLE>
- ----------------
(1) Represents $7,986 in car allowance and $3,487 in insurance benefits
paid to Mr. Zambakkides pursuant to his employment agreement with the Company.
(2) Represents car allowance commissions paid to Mr. Zambakkides pursuant
to his employment agreement with the Company.
The following table shows the option grants to the named executive officers
during fiscal year ended September 30, 1999:
Option Grants in Last Fiscal Year
(Individual Grants)
<TABLE>
<CAPTION>
Percent of Total
Number of Common Options Granted
Stock Underlying to Employees in Exercise Price
Name Options Granted Fiscal Year ($/Share) Expiration Date
John Zambakkides, President
<S> <C> <C> <C> <C>
and Chief Executive Officer..... 400,000 66.24% $3.40 Feb. 28, 2009
</TABLE>
<PAGE>
The following table shows the value at September 30, 1999 of unexercised
options held by the named executive officers:
<TABLE>
<CAPTION>
Aggregated Option Exercises in Last Fiscal Year
And Fiscal Year-end Option Values
Number of Securities
Underlying Unexercised Value of Unexercised
Shares Options at In-the-Money Options at
Acquired Value Fiscal Year-end (#) Fiscal Year-end ($)
On Realized Exercisable/Unexercisable Exercisable/Unexercisable
Name Exercise (#) ($)
John Zambakkides, President
and Chief Executive Officer.....
<S> <C> <C> <C> <C>
54,700 453,899 225,300 / 280,000(1)(2) $1,731,766 / $2,182,320(1)(2)
</TABLE>
- ----------------
(1) Represents presently exercisable options to purchase 85,300 shares of
common stock at $3.75 per share and 140,000 shares of common stock at $3.40, and
unexercisable options to purchase 20,000 shares of common stock at $3.75 per
share and 260,000 shares of common stock at $3.40 per share.
(2) Assumes a fair market value of $11.22 per share of common stock which
is the closing price for the Company's common stock on September 30, 1999.
Employment Arrangements
From January 1, 1999 to December 31, 1999, John Zambakkides, the Company's
President and Chief Executive Officer, was employed pursuant to an agreement
providing for annual compensation of Cdn. $200,000. 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
effective January 1, 1999. 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
The Company has adopted two stock option plans, the 1996 Employee Stock
Option Plan and the 1999 Employee Stock Option Plan. The plans were adopted by
the Company for the purpose of attracting and retaining the best available
personnel for positions with the Company, and to provide additional incentive to
such employees and others to exert their maximum efforts toward the success of
the Company. The Company believes that these aims will be effectuated through
the granting of certain stock options.
1996 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 " 1996 Plan"). The
1996 Plan which was amended in February 1997, provides for the issuance of
incentive stock options to qualified employees. The 1996 Plan does not have an
expiration date. Set forth below is a summary of the 1996 Plan, but this summary
is qualified in its entirety by reference to the full text of the 1996 Plan, a
copy of which is filed as an exhibit to the Company's Registration Statement.
The 1996 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 1996 Plan cease to be subject to such option, or if shares
awarded under the 1996 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 1996 Plan.
<PAGE>
Awards under the 1996 Plan may be made to key employees, including officers
of and consultants to the Company, its subsidiaries and affiliates, including
any director. The 1996 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 1996 Plan.
The 1996 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 1996 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 board of directors
shall perform the functions of the Committee.
The Committee will have the authority to grant the following types of
awards under the 1996 Plan: incentive or non-qualified stock options. The 1996
Plan is designed to provide the Committee with broad discretion to grant
incentive stock-based rights.
1999 Employee Stock Option Plan
In March 1999, the Company adopted, by action of the board of directors and
stockholders, the 1999 Employee Stock Option Plan (the " 1999 Plan"). The 1999
Plan provides for the issuance of incentive stock options ("ISOs") to qualified
employees and options which are not intended to qualify as incentive stock
options ("Non-ISOs"). The 1999 Plan expires 10 years from the date of adoption.
Set forth below is a summary of the 1999 Plan, but this summary is qualified in
its entirety by reference to the full text of the 1999 Plan.
The 1999 Plan is authorized to grant options or other equity-based
incentives for 700,000 shares of the Common Stock. If shares subject to an
option under the 1999 Plan cease to be subject to such option, or if shares
awarded under the 1999 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 1999 Plan.
Awards under the 1999 Plan may be made to key employees, including officers
of and consultants to the Company, its subsidiaries and affiliates, including
any director, provided, however, that the issuance of options under the 1999
plan is subject to certain restrictions which include:
o An ISO may be granted to an individual who owns more that ten (10%)
percent of the total combined voting power or value of all classes of stock of
the Company or a subsidiary corporation only if, at the time such ISO is
granted, the purchase price of the Common Stock subject to the ISO is an amount
which equals or exceeds one hundred ten percent (110%) of the fair market value
of such Common Stock, and such ISO by its terms is not exercisable more than
five (5) years after it is granted
o A director or an officer of the Company who is not also an employee of
the Company and consultants to the Company shall be eligible to receive Non-ISOs
but shall not be eligible to receive ISOs
o To the extent that the grant of an option results in the aggregate fair
market value (determined at the time of grant) of the Common Shares (or other
capital stock of the Company or any subsidiary) with respect to which ISOs are
exercisable for the first time by an optionee during any calendar year (under
all plans of the Company and subsidiary corporation) to exceed $100,000, such
options shall be treated as a Non-ISOs
<PAGE>
o The purchase price of the Common Shares subject to each Non-ISO shall not
be less than 85% of the fair market value of such Common Shares at the time such
Option is granted
The 1999 Plan imposes no limit on the number of officers and other key
employees to whom awards may be made.
The 1999 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 1996 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 board of directors
shall perform the functions of the Committee.
The Committee will have the authority to grant the following types of
awards under the 1996 Plan: incentive or non-qualified stock options. The 1996
Plan is designed to provide the Committee with broad discretion to grant
incentive stock-based rights.
As of September 30, 1999, the Board granted stock options to purchase an
aggregate of 1,032,483 shares of Common Stock at exercise prices between $1.75
and $9.16. Of such options, 224,768 were exercised, 55,166 were cancelled and
912,449 remain outstanding. The option exercise prices were determined by the
Board to be the fair market value per share on 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. As of September 30, 1999 no options were issued or
outstanding from his plan.
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of September 30, 1999, 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) 505,300 8.1%
Carl Mitchell(2) 652,339 10.2%
Michael Alford(3) 477,248 7.5%
Bernard N. Slade(4) 156,500 2.7%
Jim Wilkinson(5) 20,000 0.4%
John A. Fazackerley(6) 25,833 0.5%
Robert Skinner(7) 228,711 3.8%
Bellingham Industries Inc. 599,857 9.5%
All Officers and Directors as
a Group (7 persons) 2,065,931 33.4%
</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 505,300 shares of Common Stock issuable upon exercise of the
stock options granted John Zambakkides, of which 225,300 are immediately
exercisable.
(2) Includes 50,000 shares of Common Stock owned by Mr. Mitchell's wife and
30,000 shares of Common Stock issuable upon exercise of stock options granted
under the Company's ESOP.
(3) Includes 110,000 shares of Common Stock owned by Mr. Alford's wife and
64,000 shares of Common Stock issuable upon exercise of stock options granted
under the Company's ESOP. Of such options, 40,000 are immediately exercisable.
(4) Includes 20,000 shares of Common Stock issuable upon exercise of stock
options granted under the Company's ESOP plan, all of which are immediately
exercisable. Includes 15,000 shares owned by Mr. Slade's wife includes and 6,000
shares owned by Mr. Slade's son.
(5) Includes 20,000 shares of Common Stock issuable upon exercise of stock
options granted under the Company's ESOP plan, all of which are immediately
exercisable.
<PAGE>
(6) Includes 25,833 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 200,002 shares of Common Stock owned by Cedar Capital Limited.
Robert Skinner is the sole shareholder of Cedar Capital Limited. Includes 20,000
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
None.
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>
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 (5)
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(5)
23.1 Consent of KPMG LLP, the Company's Independent Auditors
23.2 Consent of KPMG LLP, the Company's Independent Auditors, regarding Form SB-2 Registration Statement (4)
23.3 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.
<PAGE>
(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.
(5) Reference is made to the Registrant's Annual Report on Form 10-KSB for
the fiscal year ended September 30, 1998, as filed on December 23, 1998, which
is hereby incorporated by reference.
<PAGE>
Consolidated Financial Statements
(Stated in United States dollars)
V3 SEMICONDUCTOR, INC.
Years ended September 30, 1999 and 1998
<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>
F-2
<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, 1999 and 1998 and the related
consolidated statements of operations, changes in shareholders' equity and
comprehensive income (loss) and cash flows for each of the years in the
three-year period ended September 30, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with 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, 1999 and 1998, and the results of its operations and its
cash flows for each of the years in the three-year period ended September 30,
1999, in accordance with generally accepted accounting principles in the United
States.
/s/ KPMG LLP
Chartered Accountants
Toronto, Canada
November 30, 1999
F-3
<PAGE>
V3 SEMICONDUCTOR, INC.
Consolidated Balance Sheets
(Stated in United States dollars)
September 30, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
Assets
Current assets:
<S> <C> <C>
Cash and cash equivalents ............................................ $ 4,474,174 $ 4,821,556
Accounts receivable, net of allowance for doubtful
accounts of $16,352; $15,533 at September 30, 1998 ................. 1,447,455 754,119
Inventories (note 2) ................................................. 53,873 168,490
Prepaid expenses ..................................................... 163,908 39,694
--------- ---------
6,139,410 5,783,859
Capital assets (note 3) ................................................... 1,099,606 420,794
--------- ---------
$ 7,239,016 $ 6,204,653
========= =========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable ..................................................... $ 801,685 $ 576,055
Accrued liabilities .................................................. 145,532 64,777
Capital taxes payable ................................................ 12,806 4,940
Deferred revenue ..................................................... -- 105,394
--------- ---------
960,023 751,166
Shareholders' equity:
Capital stock:
Preferred shares:
Authorized 10,000,000; no shares issued
and outstanding (note 5) .................................. -- --
Special shares:
Authorized 3,400,000; Nil shares issued and outstanding at
September 30, 1999; 46,368 shares issued and outstanding at
September 30,1998 (note 5) ................................ -- 124
Common shares:
Authorized 50,000,000; 5,743,664 shares issued and
outstanding at September 30, 1999; 5,471,628
issued and outstanding at September 30, 1998 (note 5) ..... 5,743 5,472
Additional paid-in capital ....................................... 6,675,572 6,050,500
--------- ---------
6,681,315 6,056,096
Cumulative translation adjustment .................................... (14,465) 15,728
Deficit .............................................................. (387,857) (618,337)
--------- ---------
6,278,993 5,453,487
Commitments (note 10)
Contingent liabilities (note 11)
--------- ---------
$ 7,239,016 $ 6,204,653
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
On behalf of the Board:
____________________________ Director ____________________________ Director
F-4
<PAGE>
V3 SEMICONDUCTOR, INC.
Consolidated Statements of Operations
(Stated in United States dollars)
Years ended September 30, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Sales $ 6,825,302 $ 3,821,512 $ 1,951,453
Cost of goods sold 2,017,506 1,190,523 749,083
--------- --------- ---------
4,807,796 2,630,989 1,202,370
Other income (note 6) 218,051 200,649 259,712
Expenses:
Selling, general and administrative 2,690,605 1,891,758 987,616
Research and development (note 7) 1,580,996 247,641 332,927
Depreciation and amortization 110,245 122,757 143,151
Rent and utilities 127,628 90,183 77,252
Bank charges and interest 8,142 6,106 10,700
--------- --------- ---------
4,517,616 2,358,445 1,551,646
--------- --------- ---------
Income (loss) before income taxes 508,231 473,193 (89,564)
Income taxes:
Current 277,751 306,000 35,032
Deferred - - -
--------- --------- ---------
277,751 306,000 35,032
--------- --------- ---------
Net income (loss) $ 230,480 $ 167,193 $ (124,596)
========= ========= =========
Net income (loss) per share (note 12):
Basic $ 0.04 $ 0.04 $ (0.03)
Diluted 0.04 0.03 (0.03)
--------- --------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
V3 SEMICONDUCTOR, INC.
Consolidated Statements of Changes in Shareholders' Equity and Comprehensive Income (Loss)
(Stated in United States dollars)
Additional
Paid-in
capital Total share Retained Accumulated
special capital and earnings other
shares additional (accumu- comprehensive
Special shares Common shares and common paid-in lated income
Shares Par value Shares Par value shares capital deficit) (loss)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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
Net loss and other
comprehensive income - - - - - - - -
-------- --- --------- ----- --------- --------- ---------- ------
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
Net income and other
comprehensive income - - - - - - - -
-------- --- --------- ----- --------- --------- ---------- ------
Balance, September 30, 1998 46,368 124 5,471,628 5,472 6,050,500 6,056,096 (618,337) 15,728
Changes during the year:
Conversion of special shares
to common shares (46,368) (124) 46,368 46 78 - - -
Issuance of common shares - - 225,668 225 624,994 625,219 - -
Net income - - - - - - 230,480 -
Translation adjustment - - - - - - - (30,193)
Net income and other
comprehensive loss - - - - - - - -
-------- --- --------- ----- --------- --------- ---------- ------
Balance, September 30, 1999 - $ - 5,743,664 $5,743 $6,675,572 $ 6,681,315 $(387,857) $ (14,465)
======== === ========= ===== ========= ========== =========== ======
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
Total Comprehensive
shareholders' income
equity (deficit) (loss)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
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 -
Net loss and other
comprehensive income - (121,394)
----------- ----------
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
Net income and other
comprehensive income - 192,452
----------- ----------
Balance, September 30, 1998 5,453,487
Changes during the year:
Conversion of special shares
to common shares -
Issuance of common shares 625,219
Net income 230,480
Translation adjustment (30,193)
Net income and other
comprehensive loss - 200,287
----------- ----------
Balance, September 30, 1999 $ 6,278,993
=========== ==========
</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, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
Operating activities:
<S> <C> <C> <C>
Net income (loss) $ 230,480 $ 167,193 $ (124,596)
Add items not involving cash:
Depreciation and amortization 234,745 122,757 143,151
Deferred revenue (105,394) 98,695 6,699
Non-cash administrative services 5,700 28,000 -
Changes in working capital balances:
Accounts receivable (693,336) (522,227) 158,319
Capital taxes payable 7,866 2,406 2,167
Inventories 114,617 (73,038) 53,097
Prepaid expenses (124,214) (8,522) (11,446)
Accounts payable (143,400) 244,211 136,281
Accrued liabilities 80,755 37,617 10,518
--------- --------- ---------
Total cash provided by (used by)
operating activities (392,181) 97,092 374,190
Investing activities:
Additions to capital assets (572,342) (170,842) (62,553)
--------- --------- ---------
Total cash used by investing activities (572,342) (170,842) (62,553)
Financing activities:
Repayment of bank term loan - (55,313) (61,970)
Repayment of obligation under capital lease - (8,350) (7,443)
Net proceeds from issuance of common shares 619,519 4,375,034 -
--------- --------- ---------
Total cash provided by (used by)
financing activities 619,519 4,311,371 (69,413)
--------- --------- ---------
Increase (decrease) in cash and
cash equivalents (345,004) 4,237,621 242,224
Effect of currency translation adjustments on cash (2,378) 25,259 3,202
Cash and cash equivalents, beginning of year 4,821,556 558,676 313,250
--------- --------- ---------
Cash and cash equivalents, end of year $ 4,474,174 $ 4,821,556 $558,676
========= ========= =========
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ 4,078 $ 2,869 $ 8,337
Cash received for:
Interest 155,376 66,074 2,240
Non-cash financing and investing activities:
Acquisition of capital assets included
in accounts payable 369,030 - -
Issue of common shares for legal services 5,700 28,000 -
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
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) Sales recognition:
Sales are recognized when the products are shipped to the
customer, and are net of an allowance for returns. Sales to a major
distributor are subject to an agreement allowing for the right of
return. The Company provides a reserve for estimated future returns.
(c) Inventories:
Raw materials, which are used in the production of computer
boards, are valued at the lower of cost and replacement value.
Finished goods, which consist of embedded chips are valued at the
lower of cost (cost has been determined on the average cost basis) and
net realizable value.
(d) Capital assets:
The Company records capital assets at cost, net of accumulated
depreciation and amortization, and investment tax credits. These
assets are depreciated and amortized 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
Leasehold improvements Straight line 5 years
</TABLE>
F-8
<PAGE>
1. Significant accounting policies (continued):
(e) Share issue costs:
Share issue costs are charged against share capital.
(f) Revenue recognition:
Revenues from the sale of chipsets and chips are recognized at
the time of shipment.
(g) Research and development costs:
Research and development costs are charged to operations as
incurred less investment tax credits related to these costs.
(h) 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
exchange rate in effect at the balance sheet date 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.
(i) 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.
<PAGE>
1. Significant accounting policies (continued):
(j) 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.
(k) 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.
(l) Other comprehensive income:
During the year, the Company adopted FAS 130 "Reporting
Comprehensive Income," which establishes the standards for reporting
and displaying comprehensive income and its components in a financial
statement that is displayed with the same prominence as other
financial statements. The changes in the components of other
comprehensive income (loss) which consist of the currency translation
adjustment is as follows:
<TABLE>
<CAPTION>
Accumulated
other
comprehensive
income (loss)
<S> <C> <C> <C>
September 30, 1996 $ (12,733)
1997 change 3,202
--------
September 30, 1997 (9,531)
1998 change 25,259
--------
September 30, 1998 15,728
1999 change (30,193)
--------
September 30, 1999 $ (14,465)
</TABLE>
The currency translation adjustment is not adjusted for income taxes as
they relate to a long-term investment in a non-U.S. subsidiary.
<PAGE>
2. Inventories:
<TABLE>
<CAPTION>
Inventories are comprised of the following:
1999 1998
<S> <C> <C>
Raw materials $ 32,424 $ 6,423
Finished goods 21,449 162,067
------ -------
$ 53,873 $ 168,490
</TABLE>
3. Capital assets:
<TABLE>
<CAPTION>
Accumulated
depreciation
and Net book
September 30, 1999 Cost amortization value
<S> <C> <C> <C>
Furniture and equipment $ 201,648 $ 83,262 $ 118,386
Computer equipment 1,015,740 330,717 685,023
Computer software 615,888 339,085 276,803
Patent 11,171 2,233 8,938
Leasehold improvements 5,247 1,049 4,198
Computer equipment under
capital lease 21,060 14,802 6,258
--------- ------- ---------
$ 1,870,754 $ 771,148 $ 1,099,606
Accumulated
depreciation
and Net book
September 30, 1998 Cost amortization value
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>
<PAGE>
4. Banking facilities:
The Company has a $140,000 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, 1999. Advances under the facility are
secured by a general security agreement covering substantially all the
assets of the Company.
5. 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) The Company undertook a private placement offering (the "Offering")
of common shares at $3.50 per common share. The offering contemplated
a minimum of $1,000,000 and a maximum of $5,500,000. 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.
(b) During the year, the Company issued 1,000 common shares in the amount
of $5,700 as consideration for legal services.
<PAGE>
5. Capital stock (continued):
(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.
During 1999, the board of directors approved the 1999 employee
stock option plan. Pursuant to this plan, 700,000 common shares are
reserved for issue to eligible employees.
Under the 1996 stock option plan, a total of 568,983 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 under the employee
stock option plan. The exercise prices of these options range from
$1.75 to $6.25 per share.
Under the 1999 stock option plan, a total of 623,400 share
options were granted and approved by the board of directors during the
year which expire between February and September 2009. The exercise
prices of these options range from $3.40 to $9.16 per share.
<PAGE>
5. Capital stock (continued):
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>
1999 1998 1997
As Pro As Pro As Pro
reported forma reported forma reported forma
<S> <C> <C> <C> <C> <C> <C>
Net income
(loss) $ 230,480 $ (280,002) $ (167,193) $ (191,992) $ (124,596) $ (319,321)
Net income
(loss) per share:
Basic 0.04 (0.05) 0.04 (0.04) (0.03) (0.08)
Diluted 0.04 (0.05) 0.03 (0.04) (0.03) (0.08)
</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, 1999, 1998 and 1997, 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 3 years, 5 years and 5 years.
<PAGE>
5. Capital stock (continued):
Certain additional disclosures with respect to stock-based
compensation are as follows:
Stock option information:
<TABLE>
<CAPTION>
1999 1998 1997
Weighted Weighted Weighted
average average average
exercise exercise exercise
Number price Number price Number price
<S> <C> <C> <C> <C> <C> <C>
Balance,
beginning
of year 548,483 $ 3.39 384,083 $ 2.87 283,750 $ 2.95
Options
granted 643,900 3.96 164,500 4.59 100,333 2.67
Options
exercised (224,768) 2.76 (100) - - -
Options
cancelled (55,166) 3.35 - - - -
--------- ---- ------- ----- -------- -----
Balance,
end of year 912,449 $ 3.95 548,483 $ 3.39 384,083 $ 2.87
========= ==== ======= ===== ======== =====
Exercisable, at
end of year 227,813 395,096 322,798
========= ==== ======= ===== ======== =====
</TABLE>
Stock options outstanding and exercisable as at September 30 1999
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 38,000 1.0 - 3.0 years 85,682
2.02 - 2.75 16,000 3.1 - 4.0 years 76,831
3.00 - 3.88 537,283 4.1 - 5.0 years -
4.00 - 6.25 276,866 5.0 - 8.0 years 65,300
6.78 - 9.16 44,300
------- -------
912,449 227,813
</TABLE>
<PAGE>
6. Revenue:
Included in revenue are the following amounts:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Royalty income $ 56,854 $ 91,136 $ 257,472
Consulting fees - 36,122 -
Interest 161,197 73,391 2,240
------- ------- -------
$ 218,051 $ 200,649 $ 259,712
</TABLE>
The Company's Canadian subsidiary entered into 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, 1999, approximately $1.6 million of
royalty payments have been received. Royalty revenues are recognized
in accordance with the terms of the agreement.
7. 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:
1999 $ 16,615
1998 157,958
1997 124,989
<PAGE>
7. 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 in the amount of
$590,500 which expire on September 2009.
ITCs claimed each year have been netted against the research and
development expense as follows:
1999 $173,591
1998 306,000
1997 35,000
In the current year, $110,823 of ITCs was netted against the
capital assets acquired for research and development purposes.
(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 $2,976,723 available to be
deducted against future years' taxable income and can be carried
forward indefinitely.
<PAGE>
8. 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, 1999, are presented below:
<TABLE>
<CAPTION>
Canada United States Total
Deferred tax assets:
<S> <C> <C> <C>
Net operating loss carryforwards $ - $ 87,600 $ 87,600
Unclaimed research and
development expenditures 896,600 - 896,600
Unclaimed investment tax credits 590,500 - 590,500
--------- ------- ----------
Total gross deferred tax assets 1,487,100 87,600 1,574,700
Less valuation allowance (1,096,900) (87,600) (1,184,500)
--------- ------- ----------
Net deferred tax assets 390,200 - 390,200
Deferred tax liabilities:
Investment tax credits 390,200 - 390,200
--------- ------- ----------
Total gross deferred tax liabilities 390,200 - 390,200
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, 1998, are presented below:
Canada United States Total
Deferred tax assets:
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 $ - $ - $ -
========= ======= ==========
</TABLE>
<PAGE>
8. Income taxes (continued):
At September 30, 1999, the Company's United States subsidiary had
operating loss carryforwards for tax purposes which expire as follows:
2010 $ 56,000
2011 76,000
2013 87,000
$219,000
The effective tax rate on income is different from the statutory
income tax rate as follows:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Statutory tax rate 44.6% 44.6% 44.6%
Effect of ITC claims (15.2) (28.8) 17.4
Other (1.0) 0.7 (3.0)
SR & ED expenditures not tax effected 34.7 96.3 (89.6)
Losses utilized not tax effected (8.4) (48.1) (8.5)
54.7% 64.7% (39.1)%
</TABLE>
9. Related party transactions:
A shareholder provided consulting and management services for
fees which are included in research and development expense as
follows:
1999 $ --
1998 28,246
1997 67,757
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.
<PAGE>
10. 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:
Year ending September 30:
2000 $21,641
2001 23,768
2002 7,923
$53,332
(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 $136,000 (Cdn. $200,000).
11. 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 cannot estimate the reasonable 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.
<PAGE>
12. 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 5).
The weighted average number of common and special shares
outstanding which was used to calculate the net income (loss) per
share was:
1999 5,563,788
1998 4,742,496
1997 4,135,238
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.
<PAGE>
12. 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>
1999 1998 1997
Common and special shares outstanding,
<S> <C> <C> <C>
beginning of year 5,517,996 4,135,238 4,135,238
Weighted average shares issued 45,792 607,258 -
Weighted average shares cancelled - - -
--------- --------- ---------
Average shares outstanding - basic 5,563,788 4,742,496 4,135,238
Effect of dilutive securities:
Dilutive shares contingently
issuable upon the exercise
of stock options and warrants 850,382 487,284 325,719
Shares assumed to have been
purchased for treasury with assumed
proceeds from the exercise of stock
options and warrants (695,907) (384,782) (90,603)
--------- --------- ---------
Average shares outstanding -
assuming dilution 5,718,263 4,844,998 4,370,354
========= ========= =========
</TABLE>
<PAGE>
13. Segment information:
The Company's operations involve a single operating segment - the
design and development of integrated circuits for the embedded
computer market. 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>
1999 1998 1997
Sales
<S> <C> <C> <C>
Canada $ 6,825,302 $ 3,821,512 $ 1,951,453
United States 866,000 508,940 318,000
Corporate - United States - - -
Eliminations (866,000) (508,940) (318,000)
---------- ---------- ----------
Total sales $ 6,825,302 $ 3,821,512 $ 1,951,453
========== ========== ==========
Income (loss) before income taxes
Canada $ 443,910 $ 565,027 $ (37,158)
United States 127,965 (9,703) (15,109)
Corporate expenses - United States (62,592) (87,664) (43,904)
Eliminations (1,052) 5,533 6,607
---------- ---------- ----------
Total income (loss) before income taxes $ 508,231 $ 473,193 $ (89,564)
========== ========== ==========
Assets
Canada $ 3,169,575 $ 1,721,251 $ 1,059,756
United States 89,762 38,342 30,750
Corporate - United States 3,979,679 4,445,060 199,395
---------- ---------- ----------
Total assets $ 7,239,016 $ 6,204,653 $ 1,289,901
========== ========== ==========
</TABLE>
The corporate assets consist mainly of cash and cash equivalents.
The United States operations provide marketing services exclusively to
the Canadian subsidiary.
<PAGE>
13. 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, 1999 were
$3,777,000, $640,000, $525,000 and $416,000, respectively. 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 all customers
are conducted in United States dollars.
Export sales by the Company's Canadian subsidiary were as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
United States $ 1,903,036 $ 1,630,091 $ 526,892
Middle East 527,702 397,382 585,436
Other 516,603 209,029 175,631
--------- --------- ---------
$ 2,947,341 $ 2,236,502 $ 1,287,959
</TABLE>
The Company's largest customer is being investigated by the U.S.
Federal Bureau of Investigation relating to certain industry practices
known as "ship from stock and debit." Ship from stock and debit is a
practice where distributors purchase parts from suppliers at inflated
prices and, subsequently, receive credits or rebates when a sale is
made to a customer at a price that is below the list price for such
parts.
The customer has advised the Company that it does not believe
that it has committed any wrong doing and that such investigation will
not affect business transactions with the Company. In the event that
the customer ceases operations, the Company's business could be
materially adversely affected.
14. 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.
<PAGE>
15. 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.
16. New accounting standards not yet adopted:
FAS 133, "Accounting for Derivative Instruments and Hedging
Activities", establishes accounting and reporting standards for
derivative instruments and for hedging activities. It requires
derivative instruments to be recognized in the balance sheet at fair
value. Changes in the fair value of derivative instruments are
recognized in earnings in the period of change, unless they are
designated as hedging instruments. FAS 133 is required to be adopted
in the year ending September 30, 2001.
The American Institute of Certified Public Accountants has issued
Statements of Position entitled "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" and "Reporting the
Costs of Start-Up Activities" which the Company is required to adopt
in the year ending September 30, 2000.
Management does not believe that the adoption of these new
accounting standards will materially affect its historical results of
operations or shareholders' equity.
<PAGE>
Signatures
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized on this 27th day of December, 1999.
V3 SEMICONDUCTOR, INC.
/s/ Carl Mitchell
Carl Mitchell, General Manager,
Secretary, Treasurer and Principal
Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Exhibit 27.1 Financial Data Schedule
This schedule contains summary financial information extracted from financial
statements as at September 30, 1999 and is qualified in its entirety by
reference to such financial statements:
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> sep-30-1999
<PERIOD-END> sep-30-1999
<CASH> 4,474,174
<SECURITIES> 0
<RECEIVABLES> 1,447,455
<ALLOWANCES> 16,352
<INVENTORY> 53,873
<CURRENT-ASSETS> 6,139,410
<PP&E> 1,099,606
<DEPRECIATION> 234,745
<TOTAL-ASSETS> 7,239,016
<CURRENT-LIABILITIES> 960,023
<BONDS> 0
0
0
<COMMON> 6,681,315
<OTHER-SE> (402,322)
<TOTAL-LIABILITY-AND-EQUITY> 7,239,016
<SALES> 6,825,302
<TOTAL-REVENUES> 7,043,353
<CGS> 2,017,506
<TOTAL-COSTS> 2,017,506
<OTHER-EXPENSES> 4,517,616
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 508,231
<INCOME-TAX> 277,751
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 230,480
<EPS-BASIC> .04
<EPS-DILUTED> .04
</TABLE>
