<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------------------
FORM 8-K/A
AMENDMENT No. 1 TO CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported) May 15, 2000
HI/FN, INC.
-----------------------------------------------------------------
(Exact name of registrant as specified in charter)
DELAWARE 0-24765 33-0732700
--------------------------------------------------------------------------------
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
750 UNIVERSITY AVENUE, LOS GATOS 95032
--------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (408) 399-3500
NOT APPLICABLE
(Former name or former address, if changed since last report.)
<PAGE> 2
The undersigned registrant hereby amends the following items, financial
statements, exhibits or other portions of its Current Report on Form 8-K filed
August 25, 2000 as set forth in the pages attached hereto.
Item 7. Financial Statements and Exhibits
(a) AUDITED FINANCIAL STATEMENTS OF BUSINESS ACQUIRED
Report of Independent Accountants
To the Board of Directors and Shareholders
of Apptitude, Inc.
In our opinion, the accompanying balance sheet and the related statements of
operations, of shareholders' deficit and of cash flows present fairly, in all
material respects, the financial position of Apptitude, Inc. at December 31,
1999 and 1998, and the results of its operations and its cash flows for the
years then ended in conformity with accounting principles generally accepted in
the United States. 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 of these
statements in accordance with auditing standards generally accepted in the
United States, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
May 5, 2000, except for Note 13
as to which the date is
August 11, 2000
<PAGE> 3
APPTITUDE, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
December 31,
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,860,000 $ 778,000
Accounts receivable, net of allowance
for doubtful accounts of $108,000
and $209,000, respectively 268,000 1,032,000
Inventories 100,000 990,000
Prepaid expenses and other current assets 303,000 312,000
------------ ------------
Total current assets 2,531,000 3,112,000
Property and equipment, net 302,000 387,000
Other assets 4,000 5,000
------------ ------------
Total assets $ 2,837,000 $ 3,504,000
============ ============
LIABILITIES, MANDATORILY REDEEMABLE CONVERTIBLE
PREFERRED STOCK AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 171,000 $ 350,000
Accrued liabilities 1,252,000 1,363,000
Bank debt 366,000 673,000
Convertible subordinated debt - 731,000
Capital lease obligation, current 68,000 38,000
Deferred revenue 216,000 736,000
------------ ------------
Total current liabilities 2,073,000 3,891,000
Convertible subordinated debt 2,000,000 -
Bank debt, less current portion - 19,000
Capital lease obligation, less current portion 64,000 57,000
------------ ------------
Total liabilities 4,137,000 3,967,000
------------ ------------
Commitments and contingencies (Note 11)
Mandatorily redeemable convertible preferred stock 14,344,000 9,550,000
------------ ------------
Shareholders' deficit:
Common Stock, no par value; 47,000,000 shares
authorized; 7,536,027 and 7,330,352 shares
issued and outstanding 3,859,000 3,841,000
Notes receivable from shareholders (65,000) (65,000)
Accumulated deficit (19,438,000) (13,789,000)
------------ ------------
Total shareholders' deficit (15,644,000) (10,013,000)
------------ ------------
Total liabilities, mandatorily redeemable
convertible preferred stock and
shareholders' deficit $ 2,837,000 $ 3,504,000
============ ============
</TABLE>
The accompanying notes are considered an integral part of
these financial statements.
<PAGE> 4
APPTITUDE, INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended
December 31,
1999 1998
----------- -----------
<S> <C> <C>
Net sales:
Hardware $ 1,209,000 $ 3,548,000
Software license 1,196,000 910,000
Royalties 709,000 548,000
Other 1,139,000 1,332,000
----------- -----------
Total net sales 4,253,000 6,338,000
----------- -----------
Cost of sales:
Hardware 728,000 1,827,000
Other 269,000 225,000
----------- -----------
Total cost of sales 997,000 2,052,000
----------- -----------
Gross profit 3,256,000 4,286,000
----------- -----------
Operating expenses:
Research and development 3,178,000 2,709,000
Selling and marketing 3,006,000 3,451,000
General and administrative 1,243,000 1,244,000
Restructuring charge 1,375,000 --
----------- -----------
Total operating expenses 8,802,000 7,404,000
----------- -----------
Loss from operations (5,546,000) (3,118,000)
Interest expense, net (103,000) (108,000)
----------- -----------
Net loss $(5,649,000) $(3,226,000)
=========== ===========
</TABLE>
The accompanying notes are considered an integral part of
these financial statements.
<PAGE> 5
APPTITUDE, INC.
STATEMENT OF SHAREHOLDERS' DEFICIT
YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
Notes
Receivable Total
Common Stock From Accumulated Shareholders'
Shares Amount Shareholder Deficit Deficit
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1997 1,937,462 $ 3,302,000 $ (48,000) $(10,563,000) $ (7,309,000)
Issuance of Common Stock 5,188,800 519,000 (20,000) -- 499,000
Issuance of Common Stock
upon exercise of options 237,424 21,000 -- -- 21,000
Cancellation of Common Stock
under restricted stock agreement (33,334) (1,000) 1,000 -- --
Payment of note receivable from
shareholder under restricted
stock agreement -- -- 2,000 -- 2,000
Net loss -- -- -- (3,226,000) (3,226,000)
------------ ------------ ------------ ------------ ------------
Balance at December 31, 1998 7,330,352 3,841,000 (65,000) (13,789,000) (10,013,000)
Issuance of Common Stock
upon exercise of options 205,675 13,000 -- -- 13,000
Stock options granted
for services -- 5,000 -- -- 5,000
Net loss -- -- -- (5,649,000) (5,649,000)
------------ ------------ ------------ ------------ ------------
Balance at December 31, 1999 7,536,027 $ 3,859,000 $ (65,000) $(19,438,000) $(15,644,000)
============ ============ ============ ============ ============
</TABLE>
The accompanying notes are considered an integral part of
these financial statements.
<PAGE> 6
APPTITUDE, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended
December 31,
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(5,649,000) $(3,226,000)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 217,000 399,000
Loss on disposal of fixed assets 5,000 --
Stock options granted to non-employees 5,000 --
Changes in operating assets and liabilities:
Accounts receivable 764,000 977,000
Inventories 890,000 (656,000)
Prepaid expenses and other current assets 9,000 (221,000)
Other assets 1,000 7,000
Accounts payable (179,000) (27,000)
Accrued liabilities (48,000) 499,000
Deferred revenue (520,000) 334,000
----------- -----------
Net cash used in operating activities (4,505,000) (1,914,000)
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (38,000) (96,000)
----------- -----------
Net cash used in investing activities (38,000) (96,000)
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of Preferred Stock 4,000,000 --
Net proceeds from issuance of
convertible subordinated debt 2,000,000 731,000
Proceeds from bank debt -- 528,000
Repayment of bank debt (326,000) (567,000)
Repayment of capital leases (62,000) (101,000)
Proceeds from issuance of Common Stock -- 499,000
Proceeds from exercise of stock options and warrants 13,000 35,000
----------- -----------
Net cash provided by financing activities 5,625,000 1,125,000
----------- -----------
Net increase (decrease) in cash and cash equivalents 1,082,000 (885,000)
Cash and cash equivalents at beginning of period 778,000 1,663,000
----------- -----------
Cash and cash equivalents at end of period $ 1,860,000 $ 778,000
=========== ===========
Supplemental cash flow information:
Interest paid $ 97,000 $ 115,000
Interest received $ 122,000 $ 38,000
Supplemental schedule of noncash financing activities:
Financing of equipment through capital leases $ 99,000 $ 100,000
Conversion of convertible subordinated debt and
accrued interest to Preferred Stock $ 794,000 $ --
</TABLE>
The accompanying notes are considered an integral part of
these financial statements.
<PAGE> 7
APPTITUDE, INC.
NOTES TO FINANCIAL STATEMENTS
1. THE COMPANY
Apptitude, Inc. (the "Company") was incorporated to develop, manufacture
and market network management hardware and software solutions for
optimizing network productivity. The Company was initially incorporated as
Network Application Technology in California on September 14, 1988 and was
reincorporated as Technically Elite, Inc. in California on March 31, 1996
subsequent to the acquisition of Technically Elite Concepts, Inc. in
October 1995. The Company changed its name to Apptitude, Inc. on March 26,
1999.
The Company sells its products through resellers and directly to end users
as well as through international and domestic distributors. In addition,
the Company licenses certain technology to original equipment
manufacturers for incorporation into their products. North American sales,
comprising sales to Canada and the U.S., accounted for approximately 82%
and 86% of net sales in 1999 and 1998, respectively. The balance of sales
were derived from Europe, Far East, Middle East, Africa and South America.
Sales to one customer accounted for 11% of sales in 1999. Sales to one
different customer accounted for 10% of sales in 1998. Gross receivables
of four customers accounted for 31%, 27%, 13% and 12%, respectively, of
total gross receivables at December 31, 1999. Gross receivables of three
customers accounted for 26%, 22% and 10%, respectively, of total gross
receivables at December 31, 1998.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
The Company considers all investments with an original maturity of 90 days
or less to be cash equivalents.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or
market.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation and amortization
are computed using the straight-line method over the shorter of the
estimated useful lives of three to seven years, or the lease term of the
respective assets.
REVENUE RECOGNITION
The Company derives revenues from the license of software products under
software license agreements, from hardware product sales and from the
delivery of maintenance and support services.
<PAGE> 8
The Company recognizes software license revenue under Statement of
Position ("SOP") 97-2, Software Revenue Recognition, and SOP 98-9,
Modification of SOP 97-2, Software Revenue Recognition, with Respect to
Certain Transactions. When contracts contain multiple elements and
vendor-specific objective evidence exists for all undelivered elements,
the Company accounts for delivered elements in accordance with the
"Residual Method" prescribed by SOP 98-9. Software licenses are generally
recognized as revenue upon shipment of the software product. In the event
the Company grants customers the right to specified upgrades, license
revenue is deferred until delivery of the specific upgrade. If
vendor-specific objective evidence of fair value does not exist, then the
entire license fee is deferred until the delivery of the specified
upgrade. The Company recognizes revenues from maintenance and support
services provided to licensees ratably over the term of the agreement,
generally one year, and recognizes revenues from design services provided
to customers as the services are performed.
In instances where significant customization and modification are made to
software delivered to customers, the Company accounts for such
arrangements in accordance with Statement of Position 81-1 "Accounting for
Performance of Construction Type Contracts."
Revenues from hardware product sales are recognized upon shipment of the
product, provided no significant obligations remain and collectibility is
probable. Provisions for estimated warranty repairs, returns and
allowances are provided at the time hardware products are shipped.
INCOME TAXES
The Company accounts for income taxes under the asset and liability
method, which recognizes deferred tax assets and liabilities for the
expected future tax consequences of temporary differences between the tax
bases of assets and liabilities and their financial statement reported
amounts. The Company records a valuation allowance against deferred tax
assets when it is more likely than not that such assets will not be
realized.
STOCK-BASED COMPENSATION
The Company accounts for stock-based employee compensation arrangements in
accordance with provisions of Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees," and complies with the
disclosure provisions of Statement of Financial Accounting Standards
("SFAS") No. 123, "Accounting for Stock-Based Compensation."
The Company accounts for equity instruments issued to non-employees in
accordance with the provisions of SFAS No. 123 and Emerging Issues Task
Force ("EITF") 96-18.
USE OF ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expenses
during the reported period. Actual results could differ from those
estimates.
<PAGE> 9
CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash equivalents and
accounts receivable. The Company places its cash primarily in checking and
money market accounts of high quality financial institutions. The
Company's accounts receivable are derived from sales to distributors,
resellers and end-users, serving a variety of industries located primarily
in the United States, Europe and the Far East.
NEW ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." SFAS No. 133 established methods of accounting for derivative
financial instruments and hedging activities related to those instruments
as well as other hedging activities. In July 1999, the FASB issued SFAS
No. 137, "Accounting for Derivative Instruments and Hedging Activities
Deferral of the effective date of FASB Statement No. 133." SFAS No. 137
deferred the effective date of SFAS No. 133 until fiscal years beginning
after June 15, 2000. Because the Company currently holds no derivative
instruments and does not engage in hedging activities, the Company expects
that the adoption of SFAS No. 133 will not have a material impact on its
financial position, results of operations or cash flows. The Company will
be required to implement SFAS No. 133 for the year ending December 31,
2001.
3. BALANCE SHEET COMPONENTS
<TABLE>
<CAPTION>
December 31,
1999 1998
----------- -----------
<S> <C> <C>
Inventories:
Raw materials $ -- $ 429,000
Work-in-process -- 105,000
Finished goods 100,000 456,000
----------- -----------
$ 100,000 $ 990,000
=========== ===========
Property and equipment:
Furniture and fixtures $ 198,000 $ 198,000
Machinery and equipment 1,571,000 1,518,000
Software 485,000 448,000
Leasehold improvements 77,000 77,000
----------- -----------
2,331,000 2,241,000
Less: accumulated depreciation (2,029,000) (1,854,000)
----------- -----------
$ 302,000 $ 387,000
=========== ===========
Accrued liabilities:
Accrued interest payable $ 129,000 $ 40,000
Accrued compensation 85,000 183,000
Restructuring reserve 365,000 --
Accrued warranty 101,000 73,000
Advances from customers 67,000 76,000
Allowance for estimated sales returns 53,000 62,000
Other liabilities 452,000 929,000
----------- -----------
$ 1,252,000 $ 1,363,000
=========== ===========
</TABLE>
<PAGE> 10
4. RELATED PARTY TRANSACTIONS
The convertible subordinated debt of $2,000,000 (see Note 6) issued in
January 1999 was obtained from a company whose officer sits on the Board
of Directors of the Company.
5. BANK DEBT
At December 31, 1999, the Company had a line of credit and a lease term
loan which allowed for borrowings bearing interest at the bank's prime
rate (9.0% at December 31, 1999) plus 1.25% and 1.50% per annum,
respectively. The line of credit is secured by all of the Company's
accounts receivable. At December 31, 1999, borrowings outstanding under
the line of credit and lease term loan were $347,000 and $19,000,
respectively. The lease term loan requires principal plus interest
payments over 36 months, matures in February 2000 and is secured by the
financed capital equipment. The line of credit expired on December 31,
1999. In January 2000, the Company obtained from the bank a forbearance
agreement (the "Agreement") which was further amended in February 2000.
The Agreement precludes the Company from drawing down on the line of
credit and requires periodic monthly payments on the outstanding balance.
The agreement terminates on August 15, 2000, or earlier upon the merger of
the Company, provided that such a merger be completed by May 31, 2000.
6. CONVERTIBLE SUBORDINATED DEBT
In January 1999, the Company issued convertible subordinated debt for
$2,000,000 in conjunction with the Series F Preferred Stock equity
financing. The debt bears interest at 7% per annum and matures in January
2004. The principal on the debt, together with any unpaid and accrued
interest, is convertible into shares of Series G Preferred Stock upon (i)
the closing of an underwritten public offering in which the aggregate
offering price is not less than $15,000,000 and the per share price is not
less than $3.00, subject to adjustment for dilution, (ii) a change in
control resulting from the merger of the Company with a third party, the
sale by the Company of all or substantially all of its assets, or the sale
of 50% or more of the Company's voting securities, (iii) liquidation or
dissolution, or (iv) event of default or (v) maturity of the debt at a
conversion price of $1.44 per share. The holders of the debt also may,
upon maturity, demand payment of the note and all unpaid and accrued
interest related thereto. Terms of the agreement stipulate that the
Company not borrow, incur, guarantee or suffer indebtedness greater than
$1,000,000 except with unanimous consent of the Board of Directors.
In June 1998, the Company received proceeds of $731,000, net of issuance
costs of $17,000, for the issuance of convertible subordinated promissory
notes ("promissory notes"). The promissory notes bore interest at prime
rate plus 1% per annum. In conjunction with the Series F Preferred Stock
financing in January 1999, the principal amount of $748,000 of such
promissory notes, together with unpaid and accrued interest of $46,000,
was converted into shares of Series F Preferred Stock, at a per-share
price of $1.25.
<PAGE> 11
7. MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK
The Articles of Incorporation of the Company, as amended, authorize the
Company to issue 25,016,993 shares of Mandatorily Redeemable Convertible
Preferred Stock "Preferred Stock" which comprise the following:
<TABLE>
<CAPTION>
Shares Shares
Liquidation Order Authorized Issued Amount
<S> <C> <C> <C>
Series F 5,000,000 3,834,477 $ 4,794,000
Series G 2,000,000 -- --
Series E 3,333,333 2,140,617 3,211,000
Series C 2,600,000 2,500,000 2,000,000
Series B 5,000,000 3,200,004 1,200,000
Series A 3,000,000 3,000,000 2,445,000
Series D 4,083,660 4,083,660 694,000
---------- ---------- -----------
25,016,993 18,758,758 $14,344,000
========== ========== ===========
</TABLE>
In January 1999, the Company received proceeds of $6,000,000 from
additional equity and debt financing. The financing consisted of the
issuance of 3,200,000 shares of Series F Preferred Stock for cash
consideration of $4,000,000 and a convertible subordinated debt of
$2,000,000. Additionally, the principal amount of $748,000 of the
convertible subordinated promissory notes, together with unpaid accrued
interest of $46,000, were converted into 634,477 shares of Series F
Preferred Stock.
The Preferred Stock has certain rights with respect to redemption, voting,
dividends, liquidation and conversion, as follows:
REDEMPTION
At any time after October 31, 2003, and upon the election of the holders
of shares of the series to be redeemed constituting at least a majority of
the voting power of such series and holders of Series F and G Preferred
Stock constituting at least a majority of the voting power of the then
outstanding Series F and G voting together as a single class, the Company
shall redeem all the outstanding shares of all series of Preferred Stock.
The redemption price is payable in three annual installments after such
election is made. The redemption price per share is equal to all declared
but unpaid dividends plus $0.815 for each Series A share, $0.375 for each
Series B share, $0.80 for each Series C share, $0.17 for each Series D
share, $1.50 for each Series E share and $1.25 for each Series F share.
VOTING
Holders of Series A, B, C, D and E Preferred Stock have voting rights
equal to common stock on an as-if converted basis. The holder of the
convertible subordinated debt also has voting rights equal to common on an
as-if converted basis so long as the debt is outstanding. The holders of
Series F and G Preferred Stock, together with holders of the debt on an
as-if converted basis, voting as a class, is entitled to elect one member
of the Board of Directors (the "Board") as long as at least 30% of the
shares originally issued remain outstanding.
<PAGE> 12
DIVIDENDS
When and if declared by the Board, the holders of Series G, F, C and E
Preferred Stock are entitled to receive, prior to and in preference to
holders of Series A, B and D Preferred Stock and Common Stock,
noncumulative dividends at the annual rate of $0.144, $0.125, $0.08 and
$0.15 per share, respectively. Holders of Series A, B and D Preferred
Stock are entitled to receive noncumulative dividends at the annual rate
of $0.08 per share for Series A, $0.04 per share for Series B and $0.02
per share for Series D, prior to and in preference to any declaration or
payment of any dividend on Common Stock.
LIQUIDATION PREFERENCE
In the event of liquidation, the holders of Series G and F Preferred Stock
are entitled to receive an amount of $1.44 and $1.25 per share,
respectively, plus any declared but unpaid dividends. After payment to the
holders of Series G and F Preferred Stock, the holders of Series E and C
Preferred Stock are entitled to receive an amount of $1.50 and $0.80 per
share, respectively, plus any declared but unpaid dividends. After payment
to the holders of Series C and E Preferred Stock, the holders of Series A
and B Preferred Stock are entitled to receive an amount per share of
$0.815 and $0.375, respectively, plus any declared but unpaid dividends.
After payment to the holders of Series A and B Preferred Stock, the
holders of Series D Preferred Stock are entitled to receive an amount per
share of $0.17, plus any declared but unpaid dividends. After completion
of this distribution, any remaining assets shall be distributed ratably
among the holders of common and Preferred Stock, with the Preferred Stock
treated as if converted.
CONVERSION
Each share of the Preferred Stock is convertible into shares of common
stock on a one-for-one basis, with automatic conversion (i) upon the
closing of an underwritten public offering in which the aggregate offering
price is not less than $15,000,000 and the per share price is not less
than $3.00 per share, subject to adjustment for dilution or, (ii) the
written consent of at least a majority of the holders of Preferred Stock
voting as a single class and a majority of the outstanding shares Series F
and G Preferred Stock, voting as a single class. At December 31, 1999,
25,016,993 shares of Common Stock were reserved for conversion of the
Preferred Stock.
WARRANTS
In connection with a capital lease agreement for certain equipment
totaling $403,000, the Company issued warrants to purchase 20,833 shares
of Series E Preferred Stock at $1.50 per share and 100,000 shares of
Series C Preferred Stock at $0.90 per share in April 1996 and August 1995,
respectively. The warrants expire in August 2000 and April 2001,
respectively.
In connection with the Series B Preferred Stock financing in June 1995,
the Company issued warrants to purchase 1,583,344 shares of Series B
Preferred Stock at $0.375 per share. The warrants expire in June 2000. At
December 31, 1999, warrants to purchase 1,550,010 shares of Series B
Preferred Stock remained outstanding.
The value of these warrants at their date of issuance was not significant.
<PAGE> 13
8. COMMON STOCK
STOCK OPTION PLAN
Under the Company's 1995 Stock Option Plan (the "Plan"), stock options may
be granted to consultants and employees to purchase up to an aggregate of
10,985,762 shares of Common Stock at exercise prices determined by the
Board of Directors. The exercise price of a nonstatutory stock option and
incentive stock options cannot be less than 85% and 100%, respectively, of
the fair market value of Common Stock on the date of grant. The options
can generally be granted for periods up to ten years and are subject to
vesting schedules as determined by the Board of Directors. To date,
options granted generally vest over two to five years.
The following table summarizes option activity under the Plan:
<TABLE>
<CAPTION>
Weighted
Average
Options Options Exercise
Available Outstanding Price
<S> <C> <C> <C>
Balance at December 31, 1997 490,111 3,264,306 $ 0.103
Authorized 5,285,762
Granted (4,946,562) 4,946,562 $ 0.100
Exercised -- (237,424) $ 0.087
Canceled 1,299,028 (1,299,028) $ 0.174
---------- ----------
Balance at December 31, 1998 2,128,339 6,674,416 $ 0.086
Authorized 1,500,000
Granted (2,996,781) 2,996,781 $ 0.247
Exercised -- (205,675) $ 0.107
Canceled 2,634,995 (2,634,995) $ 0.158
---------- ----------
Balance at December 31, 1999 3,266,553 6,830,527 $ 0.086
========== ==========
</TABLE>
As of December 31, 1999, 3,400,203 of the outstanding options are
exercisable. The weighted average exercise price of exercisable options
was $0.08 at December 31, 1999.
The following table summarizes information about stock options outstanding
at December 31, 1999:
<TABLE>
<CAPTION>
Weighted
Average
Range of Number of Remaining
Exercise Options Contractual
Prices Outstanding Life (Years)
<S> <C> <C>
$ 0.035 1,133,000 5.5
$ 0.080 322,433 6.8
$ 0.100 3,508,634 8.4
$ 0.250 1,866,460 9.6
----------
6,830,527
==========
</TABLE>
<PAGE> 14
The Company applies APB Opinion No. 25 and related Interpretations in
accounting for its stock option plan. To date, all stock options have been
granted with exercise prices equal to the estimated fair value of the
Company's Common Stock on the date of grant. Accordingly, no compensation
cost has been recognized for its fixed stock option plan. Had compensation
cost for the Company's stock-based compensation plan been determined based
on the fair value at the grant dates as prescribed by SFAS No. 123, the
Company's net income and pro forma net income per share would not have
been materially different.
The fair value of each option grant is estimated on the date of grant
using the minimum value method with the following assumptions used for
grants during the applicable period: dividend yield of 0% for both
periods; risk-free interest rate of 6.00% for options granted during 1999
and 4.71% to 5.69% for options granted during 1998; and a weighted average
expected option term of four and five years for 1999 and 1998,
respectively. The weighted average fair value of options granted during
1999 and 1998 was $0.03 and $0.02, respectively.
RESTRICTED STOCK PURCHASE AGREEMENTS
During 1995, the Company issued to certain executives and Board members of
the Company 1,548,826 restricted shares of Common Stock at $0.035 per
share. The restricted shares are subject to repurchase at the original
issue price. The Company received promissory notes of $66,000 in exchange
for these shares. The notes bear interest at 4.92% per annum, and
principal and accrued interest are due in August 2000 and September 2000.
As of December 31, 1996, a total of 983,501 shares have been released from
the repurchase option. The remaining shares are released ratably through
July 15, 2000. The Company also has a right of first refusal to the shares
sold under these agreements. This right ceases to have effect upon the
earlier of (i) the first date on which the Company's stock is held by more
than 500 persons, (ii) the Board of Directors decides that a public market
for the Company's Common Stock exists, or (iii) the initial public
offering of the Company's Common Stock resulting in aggregate proceeds to
the Company of at least $7,500,000.
During 1996, the Company repurchased 72,043 shares of Common Stock in
exchange for cancellation of promissory notes of $3,000, respectively.
During 1998, the Company issued to certain Board members of the Company
200,000 shares of Common Stock at $0.10 per share, in exchange for
promissory notes due October 20, 2002. The Company also repurchased 33,334
shares of Common Stock in exchange for cancellation of promissory notes of
$1,000.
RIGHT OF FIRST REFUSAL
In January 1999, the Company and certain shareholders (the "Shareholders")
representing a portion of outstanding Common Stock and Preferred Stock,
signed a Shareholders Agreement (the "Agreement"). The Agreement provides
the Company with a right of first refusal to purchase shares offered by
the Shareholders. The right of first refusal expires upon an initial
public offering of the Company's Common Stock and, for certain of the
Shareholders, when such Shareholders hold less than 100,000 shares of
Common Stock or Preferred Stock.
<PAGE> 15
9. INCOME TAXES
Deferred tax assets totaling $6,277,000 and $5,050,000 at December 31,
1999 and 1998, respectively, are fully reserved due to the uncertainty of
realization, and consist primarily of net operating loss and research and
development credit carryforwards.
At December 31, 1999, the Company had net operating losses available for
carryforward to future periods of approximately $15,282,000 and $6,357,000
for federal and state income tax purposes, respectively. The loss
carryforwards are available to reduce future taxable income and expire at
various dates through 2019. The amount of net operating loss carryforward
available to reduce taxable income may be impaired or limited in certain
circumstances. Events which cause such an impairment include, but are not
limited to, a cumulative change in the Company's stock ownership of more
than 50% over a three year period.
10. COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted the provisions of SFAS No.
130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards
for reporting comprehensive income and its components in financial
statements. Comprehensive income, as defined, includes all changes in
equity during a period from non-owner sources. To date, the Company has
not had any transactions that are required to be reported in comprehensive
income.
11. COMMITMENTS AND CONTINGENCIES
OPERATING AND CAPITAL LEASES
The Company leases its facility and certain equipment under operating
leases which expire at various dates through 2002.
Future minimum rental payments as of December 31, 1999 under these leases
are as follows:
<TABLE>
<CAPTION>
Year Ending Operating Capital
December 31, Leases Leases
<S> <C> <C>
2000 $ 305,000 $ 91,000
2001 77,000 62,000
2002 -- 11,000
--------- ---------
Total minimum lease payments $ 382,000 164,000
=========
Less: Amount representing interest (32,000)
---------
Present value of minimum lease payments 132,000
Less: Current portion 68,000
---------
Long term portion of capital lease obligations $ 64,000
=========
</TABLE>
Rent expense for the years ended December 31, 1999 and 1998 was $360,000
and $316,000, respectively.
<PAGE> 16
12. RESTRUCTURING CHARGE
In August 1999, the Company exited the end-user hardware solutions portion
of its business resulting in a reduction in work force in the direct
sales, marketing and product customer service departments. As a result of
this restructuring, the Company recorded a charge of $1,375,000 for the
write-down of inventory, fixed assets and other assets as well as
severance and other labor-related costs.
The following table lists the components of the restructuring accrual for
the year ended December 31, 1999:
<TABLE>
<CAPTION>
Employee Assets
Costs Write down Total
<S> <C> <C> <C>
Reserve provided as
at August 31, 1999 $ 510,000 $ 865,000 $ 1,375,000
Reserve utilized (145,000) (865,000) (1,010,000)
---------- ---------- -----------
Balance at December 31, 1999 $ 365,000 $ -- $ 365,000
========== ========== ===========
</TABLE>
13. SUBSEQUENT EVENT
On May 12, 2000, the Company signed a definitive agreement to merge with
hi/fn, Inc. ("hi/fn"), a company engaged in the manufacture and design of
integrated circuits and software for manufacturers of computer networking
products. The merger was consummated on August 11, 2000.
Under the terms of the merger agreement, all outstanding warrants were
exercised and then all of the Company's outstanding common shares were
exchanged for approximately $16,700,000 in cash and 939,363 hi/fn common
shares. The hi/fn shares had a market value on the effective date of
approximately $43,000,000 (or $46.125 per share.)
Vested options for 4,813,121 common shares were exchanged for
approximately $2,700,000 in cash and new options for 153,393 hi/fn common
shares with exercise prices equivalent to the replaced options. Unvested
options of 1,770,684 were exchanged for new options for 77,145 hi/fn
common shares with exercise prices equivalent to the replaced options.
<PAGE> 17
(b) UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The following unaudited pro forma condensed combined financial statements give
effect to the merger of hi/fn, inc. (hi/fn) and Apptitude, Inc. (Apptitude)
using the purchase method of accounting in accordance with generally accepted
accounting principles. Hi/fn is considered the accounting acquirer. The
unaudited pro forma condensed combined financial statements are based upon the
historical financial statements of the respective companies. The unaudited pro
forma condensed combined balance sheet assumes that the merger took place on
June 30, 2000 and combines hi/fn's June 30, 2000 unaudited historical balance
sheet with Apptitude's June 30, 2000 historical unaudited balance sheet. The
unaudited pro forma condensed combined statements of operations for the twelve
months ended September 30, 1999 and the nine months ended June 30, 2000 assume
the merger took place as of October 1, 1998 and combine hi/fn's statement of
operations for the twelve months ended September 30, 1999 with Apptitude's
statements of operations for the twelve months ended December 31, 1999. The
unaudited pro forma condensed combined statement of operations for the nine
months ended June 30, 2000 combine hi/fn's condensed statement of operations for
the nine months ended June 30, 2000 (unaudited) with Apptitude's condensed
statement of operations for the six months ended June 30, 2000 (unaudited)and
the three months ended December 31, 1999 (unaudited). The unaudited pro forma
condensed combined financial statements are based on the estimates and
assumptions set forth in the notes to such statements. The pro forma adjustments
are based on an independent valuation of Apptitude. The unaudited pro forma
condensed combined financial statements do not purport to be indicative of the
results of operations for future periods or the combined financial position or
results that would have been realized had the companies been a single entity
during these periods. These unaudited pro forma condensed combined financial
statements should be read in conjunction with the historical financial
statements and related notes thereto of Apptitude, which are included elsewhere
herein, and the historical financial statements of hi/fn included in hi/fn's
September 30, 1999 Annual Report on Form 10-K and June 30, 2000 Quarterly Report
on Form 10-Q previously filed with the Securities and Exchange Commission.
<PAGE> 18
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
JUNE 30, 2000
(in thousands, except per share data)
<TABLE>
<CAPTION>
HIFN, APPTITUDE, PRO FORMA
INC. INC. ADJUSTMENTS COMBINED
--------- --------- ----------- --------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 77,382 $ 1,102 $ (20,000) (a)
581 (b) $59,065
Accounts receivable, net 3,980 124 -- 4,104
Inventories 1,802 75 -- 1,877
Deferred income taxes 1,559 -- 677 (d) 2,236
Prepaid expenses and
other current assets 1,604 279 -- 1,883
-------- -------- --------- ---------
Total current assets 86,327 1,580 (18,742) 69,165
Property and equipment, net 2,790 223 -- 3,013
Intangible assets -- -- 51,583 (c) 51,583
Deferred income taxes 218 -- 3,228 (d) 3,446
Other assets 223 4 -- 227
-------- -------- --------- ---------
$ 89,558 $ 1,807 $ 36,069 $ 127,434
======== ======== ========= =========
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 1,464 $ 162 $ -- $ 1,626
Accrued expenses and
other current liabilities 2,593 1,642 1,002 (e)
(199)(f) 5,038
-------- -------- --------- ---------
Total current liabilities 4,057 1,804 803 6,664
Convertible subordinated debt -- 2,000 (2,000)(f) -
Capital lease obligation,
less current portion -- 40 -- 40
-------- -------- --------- ---------
Total liabilities 4,057 3,844 (1,197) 6,704
(20,000)(a)
581 (b)
51,583 (c)
3,905 (d)
(1,002)(e)
2,199 (f)
4,085 (g)
(4,085)(g)
(8,317)(h)
8,317 (h)
-------- -------- --------- ---------
Stockholders' equity (deficit) 85,501 (2,037) 37,266 120,730
-------- -------- --------- ---------
$ 89,558 $ 1,807 $ 36,069 $ 127,434
======== ======== ========= =========
</TABLE>
See accompanying notes to unaudited pro forma
condensed combined financial information.
<PAGE> 19
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
12-MONTHS ENDED
9/30/99 12/31/99
--------- ---------
HIFN, APPTITUDE, PRO FORMA
INC. INC. ADJUSTMENTS COMBINED
--------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Net sales $ 42,351 $ 4,253 $ -- $ 46,604
Cost of sales 10,498 997 -- 11,495
--------- --------- --------- ---------
Gross profit 31,853 3,256 -- 35,109
--------- --------- --------- ---------
Operating expenses:
Amortization of goodwill -- -- 9,424 (a) 9,424
Research & development 8,135 3,178 1,272 (b)
1,750 (c) 14,335
Sales & marketing 5,963 3,006 36 (b)
383 (c) 9,388
General & administrative 2,993 1,243 132 (b)
1,638 (c) 6,006
Restructuring charge -- 1,375 -- 1,375
--------- --------- --------- ---------
Total operating expenses 17,091 8,802 14,635 40,528
--------- --------- --------- ---------
Income (loss) from operations 14,762 (5,546) (14,635) (5,419)
Interest and other
income (expense), net 1,706 (103) (1,000)(d) 603
--------- --------- --------- ---------
Income (loss) before income taxes 16,468 (5,649) (15,635) (4,816)
Provision for (benefit from)
income taxes 6,587 -- (3,235)(e) 3,352
--------- --------- --------- ---------
Net income (loss) $ 9,881 $ (5,649) $ (12,400) $ (8,168)
========= ========= ========= =========
Net income (loss) per share:
Basic $ 1.22 $(0.90)
========= =========
Diluted $ 1.06 $(0.90)
========= =========
Weighted average shares outstanding:
Basic 8,115 9,087(f)
========= =========
Diluted 9,295 9,087(f)
========= =========
</TABLE>
See accompanying notes to unaudited pro forma
condensed combined financial information.
<PAGE> 20
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
NINE MONTHS ENDED JUNE 30, 2000
(in thousands, except per share data)
<TABLE>
<CAPTION>
HIFN, APPTITUDE, PRO FORMA
INC. INC. ADJUSTMENTS COMBINED
--------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Net sales $ 30,503 $ 1,866 $ - $ 32,369
Cost of sales 6,862 102 - 6,964
--------- --------- --------- ---------
Gross profit 23,641 1,764 - 25,405
--------- --------- --------- ---------
Operating expenses:
Amortization of goodwill - - 7,068 (a) 7,068
Research & development 10,834 2,415 954 (b)
1,312 (c) 15,515
Sales & marketing 5,932 614 27 (b)
288 (c) 6,861
General & administrative 2,978 657 99 (b)
1,228 (c) 4,962
--------- --------- --------- ---------
Total operating expenses 19,744 3,686 10,976 34,406
--------- --------- --------- ---------
Income (loss) from operations 3,897 (1,922) (10,976) (9,001)
Interest and other
income (expense), net 3,091 (84) (750)(d) 2,257
--------- --------- --------- ---------
Income (loss) before income taxes 6,988 (2,006) (11,726) (6,744)
Provision for (benefit from)
income taxes 2,795 - (1,534)(e) 1,261
--------- --------- --------- ---------
Net income (loss) $ 4,193 $ (2,006) $ (10,192) $ (8,005)
========= ========= ========= =========
Net income (loss) per share:
Basic $ 0.47 $ (0.81)
========= =========
Diluted $ 0.43 $ (0.81)
========= =========
Weighted average shares outstanding:
Basic 8,865 9,837 (f)
========= =========
Diluted 9,843 9,837 (f)
========= =========
</TABLE>
See accompanying notes to unaudited pro forma
condensed combined financial information.
<PAGE> 21
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
1. The Acquisition
The pro forma condensed combined financial information reflects the
acquisition of Apptitude, Inc. on August 11, 2000 for $20 million in cash and
1.2 million shares of hi/fn, inc. Common Stock. The purchase price of the
acquisition of $58.5 million, which includes $127,000 of estimated acquisition
related costs, was used to acquire the net assets of Apptitude. The purchase
price for pro forma purposes was allocated to assets acquired and liabilities
assumed based on the book value of Apptitude's current assets, liabilities and
property and equipment, which management believes approximates their fair value,
and an independent appraisal for all other identifiable assets. The excess of
the purchase price over the net tangible and intangible assets acquired and
liabilities assumed has been allocated to goodwill. The allocation of the
purchase price is as follows (in thousands):
<TABLE>
<S> <C>
Property and equipment $ 205
Current and other assets 1,081
Deferred tax asset 3,905
Liabilities assumed (2,404)
Goodwill 47,121
Acquired in-process research and development 4,085
Acquired developed technology, workforce and patents 4,462
--------
$ 58,455
========
</TABLE>
In addition to the purchase price shown above, the agreement for the acquisition
of Apptitude also provided for the issuance of additional hi/fn shares relating
to stock options granted to all Apptitude employees for retention purposes.
2. Unaudited Pro forma Condensed Combined Statement of Operations
The following adjustments were applied to the historical statements of
operations for hi/fn and Apptitude for the years ended September 30, 1999 and
December 31, 1999, respectively, and the nine months ended June 30, 2000 to
arrive at the pro forma unaudited condensed combined statement of operations of
the respective periods as though the acquisition took place on October 1, 1998:
(a) Adjustment to recognize amortization of goodwill arising from the
merger over 5 years.
(b) To reflect amortization of the fair values of the developed
technology, workforce and patents over periods ranging from 2 to 5 years.
(c) To reflect amortization of deferred compensation cost relating to
Apptitude stock options assumed by hi/fn.
(d) To adjust interest income for the effect of the $20 million cash
consideration. The effect of a 1/8th percentage change in the interest rate used
to determine the interest income adjustment would result in a variance of
$25,000 and $19,000 in the proforma net loss for the twelve and nine month
periods ended June 30,2000, respectively.
(e) To adjust the provision for income taxes to the estimated required
income tax provision on a pro forma combined basis.
<PAGE> 22
(f) Shares used in the per share calculation reflect 972,362 shares
issued to shareholders as if they were outstanding from the beginning of each
period presented. Basic and diluted weighted average shares outstanding are the
same in each period because of the pro forma combined net loss.
The one time charge to expense for the fair value of the
in-process research and development and certain estimated acquisition costs have
been excluded from the unaudited pro forma condensed combined statement of
operations since it is a non-recurring charge.
3. Unaudited Pro Forma Condensed Combined Balance Sheet
The following adjustments were applied to the historical balance sheet of
hi/fn and Apptitude at June 30, 2000 to arrive at the pro forma condensed
combined balance sheet:
(a) To record the cash portion of the purchase consideration for the
merger.
(b) To reflect cash proceeds from the exercise of outstanding Apptitude
warrants.
(c) To record intangible assets acquired at their fair values, as follows
(in thousands):
<TABLE>
<S> <C>
Developed and core technology $ 3,263
Work force 599
Patents 600
Goodwill 47,121
---------
$ 51,583
=========
</TABLE>
(d) To record deferred tax asset recognized as a result of the merger.
(e) Adjustment to record estimated transaction costs related to the
merger of $127,000 and $875,000 for hi/fn and Apptitude, respectively. Estimated
costs include all costs directly incurred as a result of the agreement
including, but not limited to, accounting and attorney fees, consultants and
other miscellaneous items.
(f) To reflect the conversion of convertible subordinated debt and
related interest thereto into preferred stock and, in conformance with the terms
of the merger agreement, further into common stock.
(g) To reflect the one time charge for the acquired in-process research
and development charges of $4,085,000.
(h) To record deferred compensation cost relating to outstanding
Apptitude stock options assumed by hi/fn.
<PAGE> 23
APPTITUDE, INC.
CONDENSED BALANCE SHEET
(unaudited)
<TABLE>
<CAPTION>
June 30,
2000
-----------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,102,000
Accounts receivable, net 124,000
Inventories 75,000
Prepaid expenses and other current assets 279,000
-----------
Total current assets 1,580,000
Property and equipment, net 223,000
Other assets 4,000
-----------
Total assets $ 1,807,000
===========
LIABILITIES, MANDATORILY REDEEMABLE CONVERTIBLE
PREFERRED STOCK AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 162,000
Accrued expenses and other current liabilities 1,642,000
-----------
Total current liabilities 1,804,000
Convertible subordinated debt 2,000,000
Capital lease obligation, less current portion 40,000
-----------
Total liabilities 3,844,000
-----------
Mandatorily redeemable convertible preferred stock 14,925,000
-----------
Shareholders' deficit:
Common Stock 3,912,000
Accumulated deficit (20,874,000)
-----------
Total shareholders' deficit (16,962,000)
-----------
Total liabilities, mandatorily redeemable
convertible preferred stock and
shareholders' deficit $ 1,807,000
===========
</TABLE>
The accompanying notes are considered an integral part of these financial
statements.
<PAGE> 24
APPTITUDE, INC.
CONDENSED STATEMENT OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
----------------------------
2000 1999
----------- -----------
<S> <C> <C>
Net sales:
Hardware $ 96,000 $ 847,000
Software license 561,000 484,000
Royalties 436,000 437,000
Other 125,000 738,000
----------- -----------
Total net sales 1,218,000 2,506,000
----------- -----------
Cost of sales:
Hardware 36,000 497,000
Other 17,000 223,000
----------- -----------
Total cost of sales 53,000 720,000
----------- -----------
Gross profit 1,165,000 1,786,000
----------- -----------
Operating expenses:
Research and development 1,626,000 1,617,000
Selling and marketing 362,000 2,066,000
General and administrative 557,000 766,000
----------- -----------
Total operating expenses 2,545,000 4,449,000
----------- -----------
Loss from operations (1,380,000) (2,663,000)
Interest expense, net (56,000) (44,000)
----------- -----------
Net loss $(1,436,000) $(2,707,000)
=========== ===========
</TABLE>
The accompanying notes are considered an integral part of these financial
statements.
<PAGE> 25
APPTITUDE, INC.
CONDENSED STATEMENT OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-----------------------------
2000 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (1,436,000) $(2,707,000)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 88,000 122,000
Stock options granted to non-employees 50,000 -
Changes in operating assets and liabilities:
Accounts receivable 144,000 (58,000)
Inventories 25,000 32,000
Prepaid expenses and other current assets 24,000 (64,000)
Accounts payable (9,000) (46,000)
Accrued liabilities (69,000) 86,000
Deferred revenue 24,000 (298,000)
----------- -----------
Net cash used in operating activities (1,159,000) (2,933,000)
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment - (98,000)
----------- -----------
Net cash used in investing activities - (98,000)
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of Preferred Stock - 3,933,000
Proceeds from issuance of Common Stock 68,000 -
Net proceeds from issuance of convertible
subordinated debt - 2,000,000
Repayment of bank debt (216,000) (57,000)
Repayment of capital leases (32,000) (24,000)
Proceeds from exercise of warrants 581,000 -
----------- -----------
Net cash provided by financing activities 401,000 5,852,000
----------- -----------
Net increase (decrease) in cash and cash equivalents (758,000) 2,821,000
Cash and cash equivalents at beginning of period 1,860,000 778,000
----------- -----------
Cash and cash equivalents at end of period $ 1,102,000 $ 3,599,000
=========== ===========
</TABLE>
The accompanying notes are considered an integral part of these financial
statements.
<PAGE> 26
APPTITUDE, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2000
(unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and Regulation S-X. Accordingly, they do not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring adjustments) considered necessary
for a fair presentation have been included.
The financial statements should be read in conjunction with the audited
financial statements for the year ended December 31, 1999.
2. BALANCE SHEET DETAIL:
<TABLE>
<CAPTION>
June 30, 2000
-------------
Inventories:
<S> <C>
Finished goods $ 75,000
---------
$ 75,000
=========
Accrued expenses and other current liabilities:
Bank debt $ 150,000
Deferred revenue 240,000
Accrued interest payable 199,000
Restructuring reserve 402,000
Accrued warranty 102,000
Other liabilities 549,000
-----------
$ 1,642,000
===========
</TABLE>
3. Mandatorily Redeemable Convertible Preferred Stock
Warrants
In connection with the Series B Preferred Stock financing in June 1995,
the Company issued warrants to purchase 1,583,344 shares of Series B
Preferred Stock at $0.375 per share. The warrants expire in June 2000. At
December 31, 1999, warrants to purchase 1,550,010 shares of Series B
Preferred Stock remained outstanding. As of June 30, 2000, all
outstanding warrants were exercised resulting in cash proceeds to
Apptitude of $581,000.
4. Subsequent Events
On August 11, 2000, the Company was acquired by hi/fn, inc.
<PAGE> 27
Under the terms of the merger agreement, all outstanding warrants were
exercised and then all of the Company's outstanding common shares were
exchanged for approximately $16,700,000 in cash and 939,363 hi/fn common
shares. The hi/fn shares had a market value on the effective date of
approximately $43,000,000 (or $46.125 per share.)
Vested options for 4,813,121 common shares were exchanged for
approximately $2,700,000 in cash and new options for 153,393 hi/fn common
shares with exercise prices equivalent to the replaced options. Unvested
options of 1,770,684 were exchanged for new options for 77,145 hi/fn
common shares with exercise prices equivalent to the replaced options.
<PAGE> 28
(c) Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description
------------ -----------
<S> <C>
23.1 Consent of Independent Accountants
</TABLE>
<PAGE> 29
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this Amendment No. 1 to Current Report
to be signed on its behalf by the undersigned hereunto duly authorized.
hi/fn, inc.
Date: October 25, 2000 By: /s/ William Walker
-------------------------------------
William Walker
Vice President, Finance and Chief
Financial Officer (Principal
Financial and Accounting Officer)
<PAGE> 30
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
23.1 Consent of Independent Accountants
</TABLE>
