<PAGE>
ATMOSPHERE NETWORKS, INC.
AND SUBSIDIARY
Condensed Consolidated Balance Sheet
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
JUNE 30,
ASSETS 2000
-------------------
<S> <C>
Current assets:
Cash and cash equivalents $ 11,543
Accounts receivable, net 226
Inventories 300
Prepaid expenses and other current assets 249
--------
Total current assets 12,319
Property and equipment, net 2,872
Other assets 96
--------
Total assets $ 15,287
========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 459
Accrued expenses 1,545
Accrued loss on purchase commitments 1,880
Deferred revenue 124
Current portion of capital lease obligations 1,021
Current portion of long-term notes payable 2,353
--------
Total current liabilities 7,382
Capital lease obligations, excluding current portion 593
Long-term notes payable, excluding current portion 906
--------
Total liabilities 8,882
--------
Commitments
Stockholders' equity:
Preferred stock:
Series A; $0.001 par value; 5,372,500 shares authorized; 5,335,000
shares issued and outstanding; liquidation preference of $5,335,000 5
Series B; $0.001 par value; 3,100,000 shares authorized; 2,884,448
shares issued and outstanding; liquidation preference of $9,500,506 3
Series C; $0.001 par value; 4,100,000 shares authorized; 3,992,497
shares issued as of June 30, 2000, liquidation preference of $26,071,005 4
Common stock; $0.001 par value; 25,000,000 shares authorized;
6,768,947 shares issued and outstanding as of June 30, 2000 7
Additional paid-in capital 41,326
Notes receivable from stockholders (13)
Accumulated deficit (34,927)
--------
Total stockholders' equity 6,405
--------
Total liabilities and stockholders' equity $ 15,287
========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
ATMOSPHERE NETWORKS, INC.
AND SUBSIDIARY
Condensed Consolidated Statements of Operations
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
2000 1999
-------- -------
<S> <C> <C>
Revenue $ 3,620 $ 257
Cost of goods sold 3,215 528
-------- -------
Gross margin 405 (271)
-------- -------
Operating expenses
Research and development 3,353 2,981
Sales and marketing 4,425 1,299
General and administrative 919 374
-------- -------
Total operating expenses 8,697 4,654
-------- -------
Operating loss (8,292) (4,925)
Other (income) expense, net (90) 298
Loss on purchase commitments 1,880 --
-------- -------
Loss before income taxes (10,082) (5,223)
Income tax expense 12 4
-------- -------
Net loss $(10,094) $(5,227)
-------- -------
-------- -------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
ATMOSPHERE NETWORKS, INC.
AND SUBSIDIARY
Condensed Statement of Stockholders' Equity
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
PREFERRED STOCK
------------------------------------------------
SERIES A SERIES B SERIES C
-------------- -------------- ---------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Balances as of December 31, 1999 5,335 $5 2,884 $3 3,992 $4
Repurchase of common stock -- -- -- -- -- --
Issuance of common stock upon exercise of stock
purchase rights for cash -- -- -- -- -- --
Issuance of common stock to consultants -- -- -- -- -- --
Net loss -- -- -- -- -- --
----- --- ----- -- ----- --
Balances as of June 30, 2000 5,335 $5 2,884 $3 3,992 $4
----- --- ----- --- ----- ---
----- --- ----- --- ----- ---
</TABLE>
<TABLE>
<CAPTION>
NOTES
COMMON STOCK ADDITIONAL RECEIVABLE
------------------- PAID-IN FROM ACCUMULATED
SHARES AMOUNT CAPITAL STOCKHOLDERS DEFICIT TOTAL
------- ------ ---------- ------------ ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Balances as of December 31, 1999 7,512 $7 $41,281 $(13) $(24,833) $16,454
Repurchase of common stock (806) -- (22) -- -- (22)
Issuance of common stock upon exercise of stock
purchase rights for cash 30 -- 20 -- -- 20
Issuance of common stock to consultants 33 -- 47 -- -- 47
Net loss -- -- -- -- (10,094) (10,094)
----- -- ------ --- ------- -------
Balances as of June 30, 2000 6,769 $7 $41,326 $(13) $(34,927) $ 6,405
----- --- ------ --- ------- -------
----- --- ------ --- ------- -------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
ATMOSPHERE NETWORKS, INC.
AND SUBSIDIARY
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
2000 1999
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(10,094) $ (5,227)
Adjustments to reconcile net loss to net cash
used in operating activities
Stock-based compensation 47 28
Depreciation and amortization 758 449
Amortization of discount on notes payable 77 66
Amortization of discount on lease obligations 15 13
Provision for accounts receivable allowance 9 5
Changes in operating assets and liabilities:
Accounts receivable 60 (109)
Inventories 729 (436)
Prepaid expenses 156 (59)
Accounts payable (271) 247
Accrued expenses (41) 245
Accrued loss on purchase commitments 1,880 --
Deferred revenue (465) (76)
---------- ----------
Net cash used in operating activities (7,139) (4,855)
---------- ----------
Cash flows from investing activities:
Purchases of property and equipment (1,092) (471)
Other assets 30 20
---------- ----------
Net cash used in investing activities (1,062) (451)
---------- ----------
Cash flows from financing activities:
Proceeds from issuance of common stock 20 38
Proceeds from notes payable -- 1,500
Proceeds from equipment financing 76 802
Payments on notes payable (704) (41)
Principal payments on capital leases (589) (171)
Repurchase of common stock (22) (20)
---------- ----------
Net cash provided by (used in) financing activities (1,219) 2,108
---------- ----------
Net decrease in cash and cash equivalents (9,420) (3,198)
Cash and cash equivalents at beginning of period 20,963 5,863
---------- ----------
Cash and cash equivalents at end of period $ 11,543 $ 2,665
---------- ----------
---------- ----------
Supplemental disclosures of cash flow information:
Cash paid for interest $ 269 $ 204
---------- ----------
---------- ----------
Cash paid for income tax $ 12 $ 4
---------- ----------
---------- ----------
Noncash investing and financing activities:
Acquisition of assets under capital lease $ 76 $ 428
---------- ----------
---------- ----------
Issuance of warrants in connection with notes payable and lease facility $ - $ 159
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
ATMOSPHERE NETWORKS, INC.
AND SUBSIDIARY
Notes to Unaudited Condensed Consolidated Financial Statements
June 30, 2000
(1) DESCRIPTION OF BUSINESS
Atmosphere Networks, Inc. (the Company) and subsidiary, was
incorporated on May 6, 1997, to develop and market a family of
network devices that will allow network service providers to
deliver fast, cost-effective access speeds to their business
customers.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
(a) BASIS OF PREPARATION
The accompanying financial statements as of June 30, 2000 and for
the six month periods ended June 30, 2000 and June 30, 1999,
together with the related notes, are unaudited but include all
adjustments which in the opinion of management, are necessary for
a fair presentation, in all material respects, of the financial
position and operating results and cash flows for the interim date
and periods presented. Certain information and footnote
disclosures, normally included in the financial statements
prepared in accordance with generally accepted accounting
principles, have been condensed or omitted pursuant to such rules
and regulations. Results for the interim period ended June 30,
2000 are not necessarily indicative of results for the entire
fiscal year or future periods. These financial statements should
be read in conjunction with the financial statements and related
notes thereto for the year ended December 31, 1999.
(b) REVENUE RECOGNITION
Revenue from product sales is recognized upon shipment provided
that a purchase order has been received or a contract has been
executed, there are no uncertainties regarding customer
acceptance, the fee is fixed and determinable and collectibility
is deemed probable. If uncertainties regarding customer acceptance
exist, revenue is recognized when such uncertainties are resolved.
The Company records a warranty liability for parts and labor on
its products. Warranty periods are generally two years from the
installation date for hardware and 90 days for software.
Deferred revenue includes amounts billed to customers for which
revenues have not been recognized which generally results from the
following: (1) product shipped to a customer still subject to
compliance with certain tests required by the customer; and (2)
nonrecurring engineering fees, for which services are yet to be
performed.
(c) CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a
purchased maturity of three months or less to be cash equivalents.
Cash and cash equivalents consist primarily of cash on deposit
with banks, money market instruments, and debt instruments.
<PAGE>
(3) INVENTORIES
Inventories, net consisted of (in thousands):
<TABLE>
<CAPTION>
June 30,
2000
---------
<S> <C>
Raw materials $ -
Finished goods 264
Consigned inventory 36
---------
Total $ 300
---------
---------
</TABLE>
(4) ACQUISITION
On July 25, 2000, the Company was acquired by Ditech Communications
Corporation (Ditech) pursuant to a Merger and Reorganization Agreement
(the Agreement) dated as of June 21, 2000, as amended, amongst Ditech,
Oxygen Acquisition Corporation, a wholly owned subsidiary of Ditech,
and the Company. Under the terms of the Agreement, approximately
841,897 shares of Ditech common stock were issued to the former
preferred stockholders of the Company, and approximately $7.91 million
was paid to the former common stockholders of the Company.
<PAGE>
ATMOSPHERE NETWORKS, INC.
AND SUBSIDIARY
Consolidated Financial Statements
December 31, 1999 and 1998
(With Independent Auditors' Report Thereon)
<PAGE>
ATMOSPHERE NETWORKS, INC.
AND SUBSIDIARY
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PAGE
<S> <C>
Independent Auditors' Report 1
Consolidated Balance Sheets 2
Consolidated Statements of Operations 3
Consolidated Statements of Stockholders' Equity 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Atmosphere Networks, Inc.:
We have audited the accompanying consolidated balance sheets of Atmosphere
Networks, Inc. and subsidiary as of December 31, 1999 and 1998, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the years then ended. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Atmosphere Networks,
Inc. and subsidiary as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for the years then ended, in conformity with
generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has suffered net losses and
negative operating cash flow since inception that raise substantial doubt about
its ability to continue as a going concern. Management's plans in regard to
these matters are described in Note 1. The consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
/s/ KPMG LLP
March 10, 2000, except as to Note 13,
which is as of June 21, 2000
<PAGE>
ATMOSPHERE NETWORKS, INC.
AND SUBSIDIARY
Consolidated Balance Sheets
December 31, 1999 and 1998
<TABLE>
<CAPTION>
ASSETS 1999 1998
------------------ -------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 20,963,419 $ 5,863,118
Accounts receivables, net of allowances of $17,007 and $10,000
for December 31, 1999 and 1998, respectively 294,766 153,970
Inventories 1,029,352 175,738
Prepaid expenses 405,380 286,257
------------------ -------------------
Total current assets 22,692,917 6,479,083
Property and equipment, net 2,538,740 1,663,235
Other assets 177,399 161,828
------------------ -------------------
$ 25,409,056 $ 8,304,146
================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 730,140 $ 545,837
Accrued expenses 1,586,099 468,670
Deferred revenue 588,280 133,021
Current portion of capital lease obligations 1,081,395 460,842
Current portion of long-term notes payable 2,262,113 316,458
------------------ -------------------
Total current liabilities 6,248,027 1,924,828
Capital lease obligations, excluding current portion 1,045,835 780,216
Long-term notes payable, excluding current portion 1,661,912 2,663,606
------------------ -------------------
Total liabilities 8,955,774 5,368,650
------------------ -------------------
Commitments (Note 7)
Stockholders' equity:
Preferred stock:
Series A; $0.001 par value; 5,372,500 shares authorized; 5,335,000
shares issued and outstanding; liquidation preference of $5,335,000 5,335 5,335
Series B; $0.001 par value; 3,100,000 shares authorized; 2,884,448
shares issued and outstanding; liquidation preference of $9,500,506 2,884 2,884
Series C; $0.001 par value; 4,100,000 shares authorized; 3,992,497
and no shares issued and outstanding as of December 31, 1999
and 1998, respectively; liquidation preference of $26,071,005 3,992 --
Common stock; $0.001 par value; 25,000,000 shares authorized;
7,511,868 and 7,304,647 shares issued and outstanding
as of December 31, 1999 and 1998, respectively 7,512 7,305
Additional paid-in capital 41,280,106 15,027,321
Notes receivable from stockholders (13,125) (13,125)
Accumulated deficit (24,833,422) (12,094,224)
------------------ -------------------
Total stockholders' equity 16,453,282 2,935,496
------------------ -------------------
$ 25,409,056 $ 8,304,146
================== ===================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
ATMOSPHERE NETWORKS, INC.
AND SUBSIDIARY
Consolidated Statements of Operations
Years ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
------------ ----------
<S> <C> <C>
Revenue $ 806,292 $ --
Cost of good sold 1,066,990 --
------------ -----------
Gross margin (260,698) --
------------ -----------
Operating expenses:
Research and development 7,789,407 5,817,528
Sales and marketing 3,565,589 1,889,809
General and administrative 844,129 795,451
------------ -----------
Total operating expenses 12,199,125 8,502,788
------------ -----------
(12,459,823) (8,502,788)
Other expense (income), net 155,963 (75,374)
Foreign exchange loss (gain) 118,992 (4,167)
------------ -----------
Net loss before income taxes (12,734,778) (8,423,247)
Income taxes 4,420 3,200
------------ -----------
Net loss $(12,739,198) $(8,426,447)
------------ -----------
------------ -----------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
ATMOSPHERE NETWORKS, INC.
AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
PREFERRED STOCK
-------------------------------------------------------
SERIES A SERIES B SERIES C
----------------- ------------------ --------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------- ------ --------- ------ --------- ------
<S> <C> <C> <C> <C> <C> <C>
Balances as of December 31, 1997 5,335,000 $5,335 -- $ -- -- $ --
Warrants issued in connection with leasing transaction -- -- -- -- -- --
Issuance of Series B preferred stock in March 1998
for cash, net of $28,551 issue cost -- -- 2,884,448 2,884 -- --
Issuance of common stock upon exercise of stock
purchase rights in February 1998 for cash -- -- -- -- -- --
Issuance of common stock upon exercise of stock
purchase rights in March 1998 for cash -- -- -- -- -- --
Warrants issued in connection with note payable -- -- -- -- -- --
Issuance of common stock upon exercise of stock
purchase rights in July 1998 for cash -- -- -- -- -- --
Issuance of common stock upon exercise of stock
options for cash -- -- -- -- -- --
Net loss -- -- -- -- -- --
--------- ------ --------- ------ ------ ------
Balances as of December 31, 1998 5,335,000 5,335 2,884,448 2,884 -- --
Warrants issued in connection with leasing transaction -- -- -- -- -- --
Repurchase of common stock -- -- -- -- -- --
Issuance of common stock upon exercise of stock
purchase rights in March 1999 for cash -- -- -- -- -- --
Issuance of common stock upon excercise of stock
purchase rights in April 1999 for cash -- -- -- -- -- --
Issuance of common stock upon exercise of stock
purchase rights in June 1999 for cash -- -- -- -- -- --
Issuance of common stock upon exercise of stock
purchase rights in July 1999 for cash -- -- -- -- -- --
Warrants issued in connection with note payable -- -- -- -- -- --
Issuance of Series C preferred stock in August 1999
for cash, net of $29,662 issue cost -- -- -- -- 3,992,497 3,992
Issuance of common stock upon exercise of stock
options for cash -- -- -- -- -- --
Issuance of common stock to consultants -- -- -- -- -- --
Net loss -- -- -- -- -- --
--------- ------ --------- ------- ------ ------
Balances as of December 31, 1999 5,335,000 $5,335 2,884,448 $2,884 3,992,497 $3,992
--------- ------ --------- ------- --------- ------
--------- ------ --------- ------- --------- ------
</TABLE>
<TABLE>
<CAPTION>
NOTES
COMMON STOCK ADDITIONAL RECEIVABLE TOTAL
------------------- PAID-IN FROM ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL STOCKHOLDERS DEFICIT EQUITY
--------- ------- ---------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balances as of December 31, 1997 6,710,804 $ 6,711 $5,343,889 $(13,125) $(3,667,777) $1,675,033
Warrants issued in connection with leasing transaction -- -- 62,968 -- -- 62,968
Issuance of Series B preferred stock in March 1998
for cash, net of $28,551 issue cost -- -- 9,469,068 -- -- 9,471,952
Issuance of common stock upon exercise of stock
purchase rights in February 1998 for cash 12,000 12 1,188 -- -- 1,200
Issuance of common stock upon exercise of stock
purchase rights in March 1998 for cash 552,500 553 54,698 -- -- 55,251
Warrants issued in connection with note payable -- -- 87,242 -- -- 87,242
Issuance of common stock upon exercise of stock
purchase rights in July 1998 for cash 3,000 3 957 -- -- 960
Issuance of common stock upon exercise of stock
options for cash 26,343 26 7,311 -- -- 7,337
Net loss -- -- -- -- (8,426,447) (8,426,447)
--------- ------- ----------- -------- ------------ -----------
Balances as of December 31, 1998 7,304,647 7,305 15,027,321 (13,125) (12,094,224) 2,935,496
Warrants issued in connection with leasing transaction -- -- 27,970 -- -- 27,970
Repurchase of common stock (203,875) (204) (21,219) -- -- (21,423)
Issuance of common stock upon exercise of stock
purchase rights in March 1999 for cash 50,000 50 8,950 -- -- 9,000
Issuance of common stock upon excercise of stock
purchase rights in April 1999 for cash 281,728 282 27,893 -- -- 28,175
Issuance of common stock upon exercise of stock
purchase rights in June 1999 for cash 10,000 10 990 -- -- 1,000
Issuance of common stock upon exercise of stock
purchase rights in July 1999 for cash 3,333 3 330 -- -- 333
Warrants issued in connection with note payable -- -- 130,539 -- -- 130,539
Issuance of Series C preferred stock in August 1999
for cash, net of $29,662 issue cost -- -- 26,037,350 -- -- 26,041,342
Issuance of common stock upon exercise of stock
options for cash 28,000 28 10,912 -- -- 10,940
Issuance of common stock to consultants 38,035 38 29,070 -- -- 29,108
Net loss -- -- -- -- (12,739,198) (12,739,198)
--------- ------- ----------- -------- ------------ -----------
Balances as of December 31, 1999 7,511,868 $ 7,512 $41,280,106 $(13,125) $(24,833,422) $16,453,282
--------- ------- ----------- -------- ------------ -----------
--------- ------- ----------- -------- ------------ -----------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
ATMOSPHERE NETWORKS, INC.
AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
------------ -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(12,739,198) $(8,426,447)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock-based compensation 29,108 --
Depreciation and amortization 1,140,785 536,336
Amortization of discount on notes payable 140,575 77,731
Amortization of discount on lease obligations 32,650 16,819
Loss on disposal of fixed assets 2,589 4,326
Provision for accounts receivable allowance 7,007 --
Changes in operating assets and liabilities:
Accounts receivable (147,803) (153,970)
Inventories (853,614) (175,738)
Prepaid expenses (119,123) (133,621)
Accounts payable 184,303 74,718
Accrued expenses 1,117,429 318,492
Deferred revenue 455,259 133,021
------------ -----------
Net cash used in operating activities (10,750,033) (7,728,333)
------------ -----------
Cash flows from investing activities:
Purchases of property and equipment (1,464,219) (890,447)
Other assets (15,570) (89,728)
------------ -----------
Net cash used in investing activities (1,479,789) (980,175)
------------ -----------
Cash flows from financing activities:
Proceeds from issuance of preferred stock 26,041,342 9,471,952
Proceeds from issuance of common stock 49,448 64,748
Proceeds from bank loan -- 350,000
Proceeds from notes payable 1,500,000 2,214,318
Proceeds from equipment financing 913,582 1,042,825
Repayment of bank loan -- (750,000)
Payments on notes payable (566,075) (32,819)
Principal payments on capital lease obligations (586,751) (80,194)
Repurchase of common stock (21,423) --
------------ -----------
Net cash provided by financing activities 27,330,123 12,280,830
------------ -----------
Net increase in cash and cash equivalents 15,100,301 3,572,322
Cash and cash equivalents at beginning of year 5,863,118 2,290,796
------------ -----------
Cash and cash equivalents at end of year $ 20,963,419 $ 5,863,118
------------ -----------
------------ -----------
Supplemental disclosures of cash flow information:
Cash paid during the year:
Interest $ 379,439 $ 134,162
------------ -----------
------------ -----------
Income taxes $ 4,420 $ 3,200
------------ -----------
------------ -----------
Noncash investing and financing activities:
Acquisition of assets under capital lease $ 1,381,436 $ 538,220
------------ -----------
------------ -----------
Issuance of warrants in connection with notes payable and lease facility $ 158,509 $ 150,210
------------ -----------
------------ -----------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
ATMOSPHERE NETWORKS, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) ORGANIZATION
Atmosphere Networks, Inc. (the Company) and subsidiary was
incorporated on May 6, 1997, to develop and market a family of
network devices that will allow network service providers to
deliver fast, cost-effective access speeds to their business
customers.
During 1998, the Company was considered to be in the development
stage, as the Company was primarily engaged in obtaining financing
and personnel and in the development of products. During 1999, the
Company began the marketing and selling activities related to the
completed product.
(b) LIQUIDITY
The Company has incurred net losses and negative operating cash
flows since inception that raise substantial doubt about its
ability to continue as a going concern. The accompanying
consolidated financial statements have been prepared contemplating
the Company continuing in existence as a going concern.
Continuation of the Company as a going concern is dependent upon
management's ability to obtain additional financing and the
successful development and marketing of its products. Management
is presently evaluating financing sources to sustain the Company
through the 2000 fiscal year. See Note 13, Subsequent Events, with
respect to management's intentions to restructure its operations.
(c) PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the
accounts of the Company and its wholly owned subsidiary. All
significant intercompany accounts and transactions have been
eliminated in consolidation.
(d) 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 liabilities
at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
(e) CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a
purchased maturity of three months or less to be cash equivalents.
Cash and cash equivalents consist primarily of cash on deposit
with banks, money market instruments, and debt instruments.
(f) INVENTORIES
Inventories are stated at the lower of cost (on a first-in,
first-out basis) or market.
<PAGE>
ATMOSPHERE NETWORKS, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(g) PROPERTY AND EQUIPMENT
Property and equipment, including leasehold improvements and
equipment acquired under capital lease, are recorded at cost.
Depreciation and amortization are provided using a straight-line
method over the shorter of the estimated useful lives of the
assets or the lease terms, generally three years.
The Company reviews property and equipment for impairment whenever
events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. Recoverability of
property and equipment is measured by comparison of its carrying
amount to future net cash flows the property and equipment are
expected to generate. If such assets are considered to be
impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the property and equipment
exceeds its fair market value. To date, the Company has made no
adjustments to the carrying values of its long-lived assets.
(h) REVENUE RECOGNITION
Revenue from product sales is recognized upon shipment provided
that a purchase order has been received or a contract has been
executed, there are no uncertainties regarding customer
acceptance, the fee is fixed and determinable and collectibility
is deemed probable. If uncertainties regarding customer acceptance
exist, revenue is recognized when such uncertainties are resolved.
The Company records a warranty liability for parts and labor on
its products. Warranty periods are generally two years from the
installation date for hardware and 90 days for software.
Deferred revenue includes amounts billed to customers for which
revenues have not been recognized which generally results from the
following: (1) product shipped to a customer still subject to
compliance with certain tests required by the customer; and (2)
nonrecurring engineering fees, for which services are yet to be
performed.
(i) ADVERTISING COSTS
Advertising costs are expensed as incurred. Advertising expense
for the years ended December 31, 1999 and 1998, was $135,436 and
$16,943, respectively.
(j) SOFTWARE DEVELOPMENT COSTS
Development costs of software to be sold or otherwise marketed are
expensed as incurred until technological feasibility is
established. For the years ended December 31, 1999 and 1998, no
costs were capitalized either because technological feasibility
was not established or because amounts incurred after achieving
technological feasibility were insignificant.
<PAGE>
ATMOSPHERE NETWORKS, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(k) INCOME TAXES
The Company uses the asset and liability method of accounting for
income taxes. Under this method, deferred tax assets and
liabilities are recognized for the future tax consequences
attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are to be
recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in
the period that includes the enactment date. The measurement of
deferred tax assets is reduced, if necessary, by a valuation
allowance for any tax benefits of which future realization is
uncertain.
(l) STOCK-BASED COMPENSATION
The Company uses the intrinsic-value-based method of Accounting
Principles Board (APB) Opinion No. 25, ACCOUNTING FOR STOCK ISSUED
TO EMPLOYEES, to account for its employee stock-based compensation
plan. Accordingly, compensation cost is recorded on the date of
the date of grant to the extent the fair value of the underlying
share of common stock exceeds the exercise price for a stock
option or the purchase price for a share of common stock. The
compensation cost is amortized as a charge against income on an
accelerated basis over the vesting terms of stock options in
accordance with Financial Accounting Standards Board (FASB)
Interpretation No. 28. Pursuant to Statement of Financial
Accounting Standards (SFAS) No. 123, the Company discloses the
pro-forma effect of using the fair-value method of accounting for
employee stock-based compensation arrangements.
Stock-based awards granted to nonemployees are measured using the
fair-value method in accordance with SFAS No. 123 at the date of
grant or the vesting date, if different than the grant date. The
associated expense is recognized by the Company over the period
the services are performed by the nonemployee.
(m) FOREIGN CURRENCY TRANSLATION
The functional currency for the Company's foreign subsidiary is
the U.S. dollar. Accordingly, this entity remeasures monetary
assets and liabilities at year-end exchange rates while
nonmonetary items are remeasured at historical rates. Income and
expense accounts are remeasured at the average rates in effect
during the year, except for depreciation which is remeasured at
historical rates. Remeasurement adjustments and transaction gains
and losses are recognized in income in the year of occurrence.
(n) FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instruments consist of cash and cash equivalents,
accounts receivable, accounts payable, and debt. The carrying
amount of the Company's cash and cash equivalents, accounts
receivable, and accounts payable approximates their respective
fair value due to the relatively short period to maturity of the
instruments.
<PAGE>
ATMOSPHERE NETWORKS, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
The Company estimates the fair value of its fixed rate debt using
discounted cash flow analysis based on the Company's current
borrowing rates for similar debt. As of December 31, 1999, the
carrying amount of the debt approximates fair value.
(o) COMPREHENSIVE INCOME
The Company has no material components of comprehensive income.
(p) RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public
Accountants (AICPA) issued Statement of Position (SOP) 98-1,
ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE DEVELOPED OR
OBTAINED FOR INTERNAL USE. SOP 98-1 requires that entities
capitalize certain costs related to internal-use software once
certain criteria have been met. The Company adopted SOP 98-1 on
January 1, 1999, with no material effect.
In June 2000, the FASB issued SFAS No. 138, ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, AN AMENDMENT OF
SFAS NO. 133. SFAS No. 133, as amended by SFAS No. 138,
establishes accounting and reporting standards for derivative
instruments and hedging activities and requires the Company to
recognize all derivatives as either assets or liabilities on the
balance sheet and measure them at fair value. Gains and losses
resulting from changes in fair value would be accounted for based
on the intended use of the derivative and whether it is designated
and qualifies for hedge accounting. The Company will adopt SFAS
No. 138 concurrently with SFAS No. 133 for its first quarter of
fiscal 2001. The Company expects adoption of SFAS Nos. 133 and 138
will not have a material effect on financial position or results
from operations.
In December 1999, the Securities and Exchange Commission
(SEC) issued Staff Accounting Bulletin (SAB) No. 101,
REVENUE RECOGNITION IN FINANCIAL STATEMENTS. SAB No. 101
provides guidance on applying generally accepted accounting
principles to revenue recognition issues in financial
statements. In June 2000, the SEC issued SAB No. 101B,
AMENDMENT; REVENUE RECOGNITION IN FINANCIAL STATEMENTS. SAB
No. 101B delays the implementation date of SAB No. 101 for
registrants with fiscal years that begin between December 16,
1999 and March 15, 2000. The Company will adopt SAB No. 101
as required in the fourth quarter of 2000, and is evaluating
the effect, if any, that such adoption might have on its
financial statements.
In March 2000, the FASB issued Interpretation No. 44 (FIN),
ACCOUNTING FOR CERTAIN TRANSACTIONS INVOLVING STOCK COMPENSATION -
AN INTERPRETATION OF APB NO. 25. FIN No. 44 clarifies (a) the
definition of an employee for purposes of applying APB No. 25; (b)
the criteria for determining whether a plan qualifies as a
noncompensatory plan; (c) the accounting consequences of various
modifications to the terms of a previously fixed stock option or
award; and (d) the accounting for an exchange of stock
compensation awards in a business combination. FIN No. 44 is
effective July 1, 2000, but certain conclusions in this
interpretation cover specific events that occur after either
December 15, 1998 or January 12, 2000. The Company is currently
evaluating FIN No. 44, but believes that it will not affect its
current accounting for stock-based compensation awards.
<PAGE>
ATMOSPHERE NETWORKS, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(2) CASH AND CASH EQUIVALENTS
Cash and cash equivalents consisted of the following as of December 31,
1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
------------------- -------------------
<S> <C> <C>
Cash $ 1,216,163 $ 478,961
Money market funds 156,823 1,384,157
Municipal bonds 18,600,000 --
Commerical paper 990,433 4,000,000
-------------- --------------
$ 20,963,419 $ 5,863,118
============== ==============
</TABLE>
(3) INVENTORIES
Inventories as of December 31, 1999 and 1998, consisted of the following:
<TABLE>
<CAPTION>
1999 1998
------------------- -------------------
<S> <C> <C>
Raw materials $ -- $ 6,982
Finished goods 833,124 168,756
Consigned inventory 196,228 --
-------------- --------------
$ 1,029,352 $ 175,738
============== ==============
</TABLE>
(4) PROPERTY AND EQUIPMENT
Property and equipment consisted of the following as of December 31, 1999
and 1998:
<TABLE>
<CAPTION>
1999 1998
------------------- -------------------
<S> <C> <C>
Computers and equipment $ 3,685,674 $ 2,057,117
Furniture and fixtures 96,472 130,245
Leasehold improvements 521,692 97,951
-------------- --------------
4,303,838 2,285,313
Less accumulated depreciation and amortization 1,765,098 622,078
-------------- --------------
$ 2,538,740 $ 1,663,235
============== ==============
</TABLE>
Equipment under capital lease aggregated $2,970,022 and $1,540,214 as of
December 31, 1999 and 1998, respectively. Accumulated amortization on the
assets under capital leases aggregated $1,139,478 and $315,013 as of
December 31, 1999 and 1998, respectively.
<PAGE>
ATMOSPHERE NETWORKS, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(5) ACCRUED EXPENSES
Accrued liabilities as of December 31, 1999 and 1998, consisted of the
following:
<TABLE>
<CAPTION>
1999 1998
------------------- -------------------
<S> <C> <C>
Refundable grant $ 385,000 $ --
Accrued vacation 257,748 135,098
Other accrued expenses 943,351 333,572
-------------- --------------
$ 1,586,099 $ 468,670
============== ==============
</TABLE>
(6) LONG-TERM DEBT
Bank borrowing and long-term debt as of December 31, 1999 and 1998,
consisted of the following:
<TABLE>
<CAPTION>
1999 1998
------------------- -------------------
<S> <C> <C>
Noninterest bearing note payable; total face value
of $825,000 $ 780,997 $ 719,354
Noninterest bearing note payable; total face value
of $175,000 165,666 152,590
Promissory note; total face value of $214,318 98,135 181,498
Subordinated note payable; total face value
of $2,000,000 1,672,199 2,000,000
Subordinated note payable; total face value
of $1,500,000 1,344,927 --
Less discount on subordinated note from issuance of
122,202 warrants (137,899) (73,378)
--------------- --------------
3,924,025 2,980,064
Less current portion 2,262,113 316,458
--------------- --------------
Long-term debt, excluding current portion $ 1,661,912 $ 2,663,606
=============== ==============
</TABLE>
The aggregate amount of required principal repayments due for long-term
debt are as follows: 2000, $2,334,708; 2001, $1,465,706; and 2002,
$261,510.
In 1997, the Company issued noninterest bearing notes in exchange for
technology purchased. These notes are due in full on July 1, 2000, or
upon a change in ownership or liquidation of the Company, whichever is
earlier. The total face value of the notes payable is $1,000,000. The
Company has discounted the notes at an effective rate of 8.25%. As of
December 31, 1999 and 1998, the unamortized discount was $53,337 and
$128,056, respectively.
<PAGE>
ATMOSPHERE NETWORKS, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
In February 1998, the Company signed a promissory note, due in full on
February 13, 2001, with the principal amount of $214,318. The note bears
8% interest per annum and is secured by certain equipment. Payments of
interest only were due monthly for the first six months, followed by
equal payments of $7,906, including interest and principal due monthly
until maturity, upon which a payment of $32,148 is due on February 1,
2001.
Additionally, in November 1998, the Company signed a subordinated note
totaling $2,000,000. This note matures on November 1, 2001, and bears
12.5% interest per annum. Interest only payments are due on the first day
of each month commencing on December 1, 1999, for six months followed by
equal payments of $85,361, including principal and accrued interest, due
monthly until maturity.
In February 1999, the Company signed a subordinated note totaling
$1,500,000. This note matures on May 1, 2002, and bears interest at a
rate 12.5% per annum. Interest only payments were due on the first day of
each month commencing July 1, 1999 for six months followed by equal
payments of $53,948, including principal and accrued interest, due
monthly until maturity.
(7) COMMITMENTS
The Company leases its facilities and equipment under operating and
capital lease agreements, expiring at various dates through 2001. Future
minimum lease payment under these agreements as of December 31, 1999, are
as follows:
<TABLE>
<CAPTION>
YEAR ENDING CAPITAL OPERATING
DECEMBER 31, LEASE LEASE
-------------------- ------------------- -------------------
<S> <C> <C>
2000 $ 1,238,429 $ 629,532
2001 871,071 559,390
2002 241,921 331,150
-------------- --------------
Total future minimum lease payments 2,351,421 $ 1,520,072
==============
Less imputed interest and discount on warrants 224,191
--------------
Present value of future minimum lease
payments under capital lease 2,127,230
Less current portion 1,081,395
--------------
Long-term portion $ 1,045,835
==============
</TABLE>
Rent expense for the year ended December 31, 1999 and 1998, was $441,000
and $412,000, respectively.
(8) STOCKHOLDERS' EQUITY
(a) PREFERRED STOCK
The Company is authorized to issue 12,572,500 shares of preferred
stock with 5,372,000 shares designated as Series A, 3,100,000
shares designated as Series B, and 4,100,000 shares designated as
Series C.
<PAGE>
ATMOSPHERE NETWORKS, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
In March 1998, the Company sold 2,884,448 shares of Series B
preferred stock at $3.2937 per share. In August 1999, the Company
sold 3,992,497 shares of Series C preferred stock at $6.53 per
share.
The rights, preferences, and privileges of the holders of Series
A, B, and C preferred stock are as follows:
- Dividends are noncumulative and payable only upon
declaration by the Board of Directors at a rate of $0.05,
$0.165, and $0.33 per share per year for Series A, B, and C,
respectively.
- Holders of Series A, B, and C preferred stock have a
liquidation preference of $1.00, $3.2937, and $6.53 per
share, respectively, plus any declared but unpaid dividends,
over holders of common stock. In the event of a merger,
consolidation, sales of all or substantially all the assets
of the Company, or similar transaction, the holders of the
Series A, B, and C preferred stock shall be entitled to
receive, in preference to the holders of common stock, an
amount equal to the liquidation preference for the series of
preferred stock held.
- Each holder of preferred stock has voting rights equal to
common stock on an "as if converted" basis.
- Each share of preferred stock is convertible at any time
into one share of common stock at the option of the holder,
subject to adjustment. Each share of preferred stock
automatically converts into shares of common stock upon the
earlier of: (a) the closing of the sale of the Company's
common stock in a public offering with gross proceeds of at
least $20,000,000 or (b) the approval of the holders of a
majority of the outstanding shares of preferred stock.
(b) COMMON STOCK
The Company is authorized to issue 25,000,000 shares of common
stock. In conjunction with the Series C preferred stock issuance
during the year, the Company increased the number of common stock
shares authorized by 5,000,000 shares to 25,000,000 shares. A
total of 4,489,690 shares have been issued pursuant to a Founders'
Restricted Stock Purchase Agreement. Such shares may be subject to
repurchase by the Company at the original purchase price upon
termination of consulting services of the purchaser. Founders'
shares issued shall be released from the repurchase option at the
rate of 12/48 on the first anniversary of the vesting commencement
date, and 1/48 for each month thereafter. As of December 31, 1999,
a total of 1,129,876 shares of common stock are subject to
repurchase.
In December 1997, the Company issued 143,675 shares of common
stock under the Company's 1997 Stock Plan (the Plan). Shares
issued under the Plan are subject to repurchase as described
below. Of the 143,675 shares issued upon the exercise of options,
131,250 shares were issued in conjunction with full recourse,
promissory notes secured by the shares. The principal, which bears
interest at 6.02%, and accrued interest are due and payable on
December 15, 2001.
During the year ended December 31, 1998, the Company issued a
total of 567,500 shares of common stock upon the exercise of
outstanding options for $57,411.
<PAGE>
ATMOSPHERE NETWORKS, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
During the year ended December 31, 1999, the Company issued a
total of 443,908 shares of common stock upon the exercise of
outstanding options for $81,396.
(c) 1997 STOCK PLAN
The Company has adopted the Plan in order to provide selected
employees, directors, and consultants of the Company an
opportunity to acquire the Company's common stock. The Plan
provides for granting of incentive stock options, nonstatutory
stock options, and restricted stock purchase rights. The Plan is
administered by the Board of Directors which sets the terms and
conditions of the options. Nonstatutory stock options and
incentive stock options are exercisable at prices not less than
85% and 100%, respectively, of the fair value on the date of
grant. The options become exercisable in increments over a 4-year
vesting period and expire at the end of 10 years from date of
grant or sooner if terminated by the Board of Directors. The
options may include a provision whereby the option holder may
elect at any time to exercise the option prior to the full vesting
of the option. Unvested shares so purchased shall be subject to a
repurchase right by the Company at the original purchase price.
Such right shall lapse at a rate equivalent to the vesting period
of the original option. The total number of shares of common stock
that were subject to repurchase as of December 31, 1999 and 1998,
were 266,504 and 383,080, respectively. During the year ended
December 31, 1999 and 1998, the total number of shares of common
stock repurchased were 203,875 and -0-. The Board of Directors has
reserved 2,722,871 shares of common stock for issuance under the
Plan.
<PAGE>
ATMOSPHERE NETWORKS, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
The stock option and purchase rights activity for 1999 and 1998,
is as follows:
<TABLE>
<CAPTION>
OPTIONS/RIGHTS OUTSTANDING
--------------------------------------
WEIGHTED-
OPTIONS AVERAGE
AVAILABLE EXERCISE
FOR GRANT NUMBER PRICE
------------------ ----------------- -----------------
<S> <C> <C> <C>
Balances as of December 31, 1997 95,352 983,844 $0.10
Shares made available for grant 500,000 -- --
Granted (442,043) 442,043 0.33
Exercised -- (593,843) 0.11
Canceled 55,000 (55,000) 0.18
----------- ----------
Balances as of December 31, 1998 208,309 777,044
Shares made available for grant 1,000,000 -- --
Granted (1,360,735) 1,360,735 1.19
Exercised -- (411,096) 0.19
Canceled 128,606 (128,606) 0.45
Unvested shares repurchased 203,875 -- --
----------- ----------
Balances as of December 31, 1999 180,055 1,598,077
=========== ==========
Options/rights exercisable at end of year 1,598,077
==========
</TABLE>
The per share weighted-average fair value of stock options granted
during 1999 and 1998 was $0.12 and $0.03, respectively, on the
date of grant using the minimum value option-pricing model with
the following weighted-average assumptions: risk free interest
rate of 5.7%; an expected life of the option of four years; and no
dividends.
As of December 31, 1999, the exercise prices and weighted-average
remaining contractual life of outstanding options was $0.51 and
8.4 years. As of December 31, 1998, the exercise prices and
weighted-average remaining contractual life of outstanding options
was $0.22 and 9.1 years.
The Company applies APB Opinion No. 25 in accounting for the Plan
and, accordingly, no compensation cost has been recognized for its
stock options in the consolidated financial statements. Had the
Company determined compensation cost based on the fair value at
the grant date for its stock options under SFAS No. 123, the
Company's pro forma net loss would have been as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1999 1998
-------- --------
<S> <C> <C>
Net loss:
As reported $(12,739,198) $(8,426,447)
Pro forma (12,823,721) (8,449,782)
</TABLE>
<PAGE>
ATMOSPHERE NETWORKS, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(d) WARRANTS
In February 1998, the Company issued a warrant in connection with
a leasing agreement to purchase 37,500 shares of Series A
preferred stock at $1.00 per share. The warrant is immediately
exercisable and expires at the earlier of 10 years from grant date
or 5 years from the effective date of the Company's initial public
offering (IPO). At the date of grant, the Company estimated the
fair value of the warrant to be $62,968.
In July 1998, the Company issued a warrant in connection with a
subordinated loan agreement to purchase 72,866 shares of Series B
preferred stock at $3.29 per share. The warrant is immediately
exercisable and expires at the earlier of 10 years from grant date
or 5 years from the effective date of the Company's IPO. At the
date of grant, the Company estimated the fair value of the warrant
to be $87,242.
In February 1999, the Company issued a warrant in connection with
a leasing agreement to purchase 10,571 shares of Series B
preferred stock at $3.29 per share. The warrant is immediately
exercisable and expires at the earlier of 10 years from grant date
or 5 years from the effective date of the Company's IPO. At the
date of grant, the Company estimated the fair value of the warrant
to be $27,970.
Also in February 1999, the Company issued a warrant to purchase
49,336 shares of Series B preferred stock at $3.29 per share. The
warrant is immediately exercisable and expires at the earlier of
10 years from the grant date or 5 years from the effective date of
the Company's IPO. At the date of grant, the Company estimated the
fair value of the warrant to be $130,539.
(9) INCOME TAXES
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets as of December 31, 1999 and 1998, are
presented below:
<TABLE>
<CAPTION>
1999 1998
------------------- -------------------
<S> <C> <C>
Deferred tax assets:
Various accruals and reserves not deductible for
tax purposes $ 388,114 $ 163,492
Property and equipment -- 6,706
Capitalized start-up expenditures 1,868,106 1,402,443
Net operating loss carryforward 7,799,832 3,156,504
Research and development credit carryforward 311,056 118,282
-------------- ---------------
Total deferred tax assets 10,367,108 4,847,427
Valuation allowance (10,258,187) (4,847,427)
-------------- ---------------
108,921 --
Deferred tax liabilities - property and equipment (108,921) --
-------------- ---------------
Net deferred tax assets $ -- $ --
============== ===============
</TABLE>
<PAGE>
ATMOSPHERE NETWORKS, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
As of December 31, 1999, the Company had net operating loss carryforwards
for federal and state income tax purposes of approximately $16,700,000.
In addition, the Company had federal and state research and development
credit carryforwards of approximately $156,000 and $126,000,
respectively. The Company's federal net operating loss and research and
development credit carryforwards expire in the years 2012 and 2019, if
not utilized. The Company's state net operating loss carryforwards expire
in the year 2005. The state research and development credit can be
carried forward indefinitely. The Company also has net operating loss
carryforwards for Australian tax purposes of approximately $1,900,000.
The Australian net operating loss carryforwards expire in the years 2004
through 2006.
Tax expense recorded in 1999 and 1998 represents the minimum state tax
liability. The difference between recorded income taxes and the
"expected" tax benefit computed by applying the federal statutory income
tax rate of 34% to pretax loss is due primarily to the valuation
allowance on deferred tax assets.
Federal and state tax laws impose substantial restrictions on the
utilization of net operating loss and tax credit carryforwards in the
event of an "ownership change" as defined in the Internal Revenue Code,
Section 382. The Company has not yet determined whether an ownership
change has occurred.
(10) OTHER EXPENSE (INCOME), NET
Other expense ( income), net for the years ended December 31, 1999 and
1998, consisted of the following:
<TABLE>
<CAPTION>
1999 1998
------------------- -------------------
<S> <C> <C>
Interest income $(517,624) $(318,865)
Interest expense 670,998 239,165
Loss on disposition of fixed assets, net 2,589 4,326
---------- ----------
$ 155,963 $ (75,374)
========== ==========
</TABLE>
(11) BUSINESS AND CREDIT CONCENTRATIONS
The Company sells primarily to third-party resellers and original
equipment manufacturers in the telecommunications industry. The
Company performs ongoing credit evaluations of its customers and
generally does not require collateral. The Company maintains reserves
for estimated credit losses. Historical losses have been within
management's expectations.
For the years ended December 31, 1999 and 1998, sales to two customers
accounted for approximately 83% and 0%, respectively. Accounts receivable
related to these customers were $88,093 and $-0- as of December 31, 1999
and 1998, respectively.
The majority of the Company's cash is held primarily with large financial
institutions. Management does not feel the risk associated with these
deposits is significant.
<PAGE>
ATMOSPHERE NETWORKS, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
The Company purchases a significant number of components from a small
number of vendors. In most cases, alternative sources of supply are
available. However, the Company may establish a working relationship with
a single vendor, even when multiple suppliers are available, if the
Company believes it is advantageous to do so due to performance, quality,
support, delivery capacity, or price considerations.
In the event that a supply of a key single source, material, process, or
component were delayed or curtailed, the Company's ability to ship the
related product in desired quantities and in a timely manner could be
adversely affected. The Company attempts to mitigate these risks by
working closely with key vendors on product plans, strategic inventories,
and coordinated product introductions.
(12) SEGMENT INFORMATION
During fiscal 1999, the Company adopted the provisions of SFAS No.
131, DISCLOSURE ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED
INFORMATION. SFAS No. 131 requires disclosure of selected
segment-related financial information about products, major
customers, and geographic areas.
The Company's chief operating decision maker (CODM) is considered to be
the Company's chief executive officer. The CODM evaluates performance,
makes operating decisions, and allocates resources based on financial
data consistent with the presentation in the accompanying consolidated
financial statements. Therefore, the Company operates in a single segment
for purpose of disclosure under SFAS No. 131.
(13) SUBSEQUENT EVENTS
On February 7, 2000, the Company announced it was intending to
restructure its operations by closing down its Australian subsidiary, and
relocating these operations to California.
On June 21, 2000, the Company signed a Merger and Reorganization
Agreement (the Agreement) with Ditech Communications Corporation (Ditech)
and Oxygen Acquisition Corporation, a wholly owned subsidiary of Ditech,
wherein the Company would be acquired by Ditech, for consideration of
approximately $88,500,000, comprised of Ditech common stock and cash,
subject to stockholder approval and other conditions set forth therein.
