<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported) February 18, 2000
-------------------------------
ONDISPLAY INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in charter)
Delaware 333-86889 680391052
- --------------------------------------------------------------------------------
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
12667 Alcosta Blvd., Suite 300, San Ramon, CA 94583
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 925-355-3200
- --------------------------------------------------------------------------------
NOT APPLICABLE
- --------------------------------------------------------------------------------
(Former name or former address, if changed since last report.)
<PAGE> 2
1. ITEM 5. OTHER EVENTS
On January 18, 2000, OnDisplay, Inc. ("OnDisplay") and Oberon Software
Incorporated ("Oberon") announced that they had entered into an Agreement and
Plan of Reorganization, dated as of January 17, 2000 (the "Agreement") which
sets forth the terms and conditions of the proposed merger of a subsidiary of
OnDisplay with and into Oberon (the "Merger") pursuant to which Oberon will
become a wholly owned subsidiary of OnDisplay. In connection with the
stockholder approvals required for completion of the Merger, a preliminary
proxy on Schedule 14-A was filed on February 18, 2000. The pro forma financial
statements and OnDisplay's financial statements filed as part of the
preliminary proxy have been included herein as Exhibits 99.1 and 99.2 for the
convenience of investors.
2. ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(c) EXHIBITS
23.1 Consent of PricewaterhouseCoopers LLP, Independent Auditors
99.1 Unaudited Pro Forma Combined Financial Statements
99.2 Financial Statements for OnDisplay, Inc. at December 31, 1999 and
1998 and for each of the three years in the period ended December
31, 1999
-2-
<PAGE> 3
SIGNATURE
Pursuant to the requirements of the Securities Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ONDISPLAY, INC.
Date: February 18, 2000
/s/ David F. Larson
-----------------------------------------
Name: David F. Larson
Title: Chief Financial Officer
-3-
<PAGE> 4
EXHIBIT INDEX
23.1 Consent of PricewaterhouseCoopers LLP, Independent Auditors
99.1 Unaudited Pro Forma Combined Financial Statements
99.2 Financial Statements for OnDisplay, Inc. at December 31, 1999 and
1998 and for each of the three years in the period ended December
31, 1999
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this optional report on Form 8-K of
our report dated February 16, 2000 which appears as an exhibit to such
optional report.
/s/ PricewaterhouseCoopers LLP
San Jose, California
February 18, 2000
<PAGE> 1
Exhibit 99.1
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma combined financial statements give effect
to the merger, contemplated by the Agreement and Plan of Reorganization among
OnDisplay, Inc, ObiOne Acquisition Corporation, Oberon Software Incorporated
and a Stockholder Representative pursuant to which a subsidiary of OnDisplay
would merge with and into Oberon Software Incorporated, using the purchase
method of accounting and include pro forma adjustments described in the
accompanying notes. The unaudited pro forma combined financial statements
should be read in conjunction with the historical financial statements of
OnDisplay and Oberon.
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
DECEMBER 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
ONDISPLAY OBERON ADJUSTMENTS COMBINED
--------- -------- ----------- ---------
<S> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents.................... $109,617 $ 8,053 $ -- $117,670
Trade accounts receivable, net............... 4,419 1,411 -- 5,830
Prepaid and other current assets............. 1,171 206 -- 1,377
-------- -------- -------- --------
Total current assets................. 115,207 9,670 -- 124,877
Property and equipment, net.................... 1,581 850 -- 2,431
Deposits and other assets...................... 314 25 -- 339
Goodwill and other intangible assets........... -- -- 189,320 189,320
-------- -------- -------- --------
Total assets......................... $117,102 $ 10,545 $189,320 $316,967
-------- -------- -------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable............................. $ 1,262 $ 748 $ -- $ 2,010
Accrued liabilities.......................... 2,989 742 -- 3,731
Deferred revenue............................. 2,617 1,135 (1,135) 2,617
Current portion of long term debts........... 1,199 959 -- 2,158
-------- -------- -------- --------
Total current liabilities............ 8,067 3,584 (1,135) 10,516
Long term debts, net of current portion...... 2,338 3,416 -- 5,754
Deferred credit.............................. -- 1,492 (1,492) --
-------- -------- -------- --------
Total liabilities.................... 10,405 8,492 (2,627) 16,270
Stock and additional paid in capital........... 168,882 38,903 171,097 378,882
Deferred stock-based compensation.............. (29,175) -- -- (29,175)
Notes receivable from stockholders............. (1,788) -- -- (1,788)
Accumulated deficit............................ (31,222) (36,850) 20,850 (47,222)
-------- -------- -------- --------
Total stockholders' equity........... 106,697 2,053 191,947 300,697
-------- -------- -------- --------
Total liabilities and stockholders'
equity............................. $117,102 $ 10,545 $186,947 $316,967
-------- -------- -------- --------
</TABLE>
See accompanying notes to the pro forma financial statements.
<PAGE> 2
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
ONDISPLAY OBERON ADJUSTMENT COMBINED
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
License revenue............................ $ 6,839 $ 2,814 $ -- $ 9,653
Service and other revenue.................. 4,259 2,515 -- 6,774
---------- ---------- -------- ----------
Total revenue.................... 11,098 5,329 -- 16,427
---------- ---------- -------- ----------
Cost of license revenue.................... 7 220 -- 227
Cost of service and other revenue.......... 4,251 1,720 -- 5,971
---------- ---------- -------- ----------
Total cost of revenue............ 4,258 1,940 -- 6,198
---------- ---------- -------- ----------
Gross profit............................... 6,840 3,389 -- 10,229
Operating expenses:
Sales and marketing...................... 11,917 5,531 -- 17,448
Research and development................. 4,714 4,189 -- 8,903
General and administrative............... 3,418 954 -- 4,372
In process research and development...... -- -- 16,000 16,000
Amortization of goodwill and other
intangible assets..................... -- -- 47,722 47,722
Amortization of deferred stock-based
compensation.......................... 3,697 -- -- 3,697
---------- ---------- -------- ----------
Total operating expenses......... 23,746 10,674 63,722 81,142
---------- ---------- -------- ----------
Loss from operations....................... (16,906) (7,285) (63,722) (70,913)
Other income, net.......................... 138 171 -- 309
---------- ---------- -------- ----------
Net loss................................... $ (16,768) $ (7,114) $(63,722) $ (70,604)
========== ========== ======== ==========
Net loss per share -- basic and diluted.... $ (3.70) $ (1.15) $ (10.94)
========== ========== ==========
Shares used in per share
calculation -- basic and diluted......... 4,533,282 6,211,162 6,455,653
========== ========== ==========
</TABLE>
See accompanying notes to the pro forma financial statements.
<PAGE> 3
NOTES TO UNAUDITED PRO FORMA COMBINED
FINANCIAL STATEMENTS
NOTE 1 -- PRO FORMA BASIS OF PRESENTATION:
The unaudited pro forma combined balance sheet as of December 31, 1999
reflects the combination of the financial statements of OnDisplay and Oberon as
of December 31, 1999 and the unaudited pro forma combined statement of
operations reflects the combined results of operations of OnDisplay and Oberon
or if the merger had taken place on January 1, 1999.
These unaudited pro forma combined financial statements reflect the
issuance of 1,922,371 shares of OnDisplay common stock in exchange for an
aggregate of 21,088,410 shares of Oberon common and preferred stock (estimated
outstanding as of the effective date) in connection with the merger, based on
the Exchange Ratio of 0.091 as set forth in the following table:
<TABLE>
<S> <C>
Oberon Common and preferred stock and warrants outstanding
as of December 31, 1999................................... 21,088,410
Exchange ratio.............................................. 0.091
Number of shares of OnDisplay common stock exchanged........ 1,922,371
Number of shares of OnDisplay common stock outstanding at
December 31, 1999......................................... 19,647,303
----------
Number of shares of combined company common stock
outstanding after the completion of the merger............ 21,569,674
==========
</TABLE>
The actual number of shares of OnDisplay common stock to be issued will be
determined at the Effective Time based on the number of shares of Oberon common
stock outstanding at that date. In addition, based on the number of Oberon
options estimated to be outstanding at the Effective Time, OnDisplay would
assume options to purchase 343,180 shares of OnDisplay common stock. The actual
number of options to be assumed will depend on the actual number of Oberon
options outstanding at the Effective Time.
The total estimated purchase price of Oberon has been calculated as follows
(in thousands):
<TABLE>
<S> <C>
Value of securities issued.................................. $176,041
Assumption of Oberon options................................ 28,959
--------
205,000
Estimated transaction costs and expenses.................... 5,000
--------
Total estimated purchase cost..................... $210,000
========
</TABLE>
The value of the securities issued has been based on the average of the
closing market price of OnDisplay for the period January 10th through January
14, 2000, the date on which the merger was publicly announced.
The preliminary purchase price allocation is as follows (in thousands):
<TABLE>
<CAPTION>
ANNUAL USEFUL
AMOUNT AMORTIZATION LIVES
-------- ------------ -------
<S> <C> <C> <C>
Tangible net assets.............................. $ 4,680 N/A N/A
In-process research & development................ 16,000 N/A N/A
Developed technologies........................... 4,700 $ 1,567 3 years
Goodwill......................................... 184,620 46,155 4 years
-------- -------
$210,000 $47,722
======== =======
</TABLE>
<PAGE> 4
NOTE 2 -- PRO FORMA ADJUSTMENTS:
The unaudited pro forma combined financial statements give effect to the
allocation of the total purchase price to the assets and liabilities of Oberon
based on their respective fair values and the related amortization over the
estimated useful lives of amounts allocated to intangible assets, including
goodwill. The unaudited pro forma combined balance sheet also reflect the write
off of in-process research and development at December 31, 1999. The unaudited
pro forma combined statement of operations reflects the write off of in-process
research & development as of December 31, 1999. The unaudited pro forma net loss
per share is based on the weighted average number of shares of OnDisplay common
stock outstanding during the year plus the shares issued in the merger, assumed
to have been issued on January 1, 1999.
<PAGE> 5
SELECTED COMPARATIVE HISTORICAL AND UNAUDITED PRO FORMA PER SHARE DATA
The following tabulation reflects (a) the historical net income and book
value per share of OnDisplay common stock in comparison with the pro forma net
income and book value per share after giving effect to the proposed merger,
accounted for as a "purchase", with Oberon Software Incorporated; and (b) the
historical net income and book value per share of Oberon Software Incorporated
common and preferred stock on an "as converted" basis stock in comparison with
the equivalent pro forma net income and book value per share attributable to
0.091 of a share of OnDisplay, Inc. common stock which will be received for each
share of Oberon Software Incorporated. The information presented in this
tabulation should be read in conjunction with the unaudited pro forma combined
financial statements and the separate financial statements of the respective
companies and the notes thereto appearing elsewhere herein.
<TABLE>
<CAPTION>
ONDISPLAY, INC. (YEAR ENDED DECEMBER 31, 1999) HISTORICAL PRO FORMA
---------------------------------------------- ---------- ------------
<S> <C> <C>
Net Loss per share.......................................... $(3.70) $(10.94)
Book value per share........................................ $ 5.77 $ 14.73
</TABLE>
<TABLE>
<CAPTION>
EQUIVALENT
OBERON SOFTWARE INCORPORATED (YEAR ENDED SEPTEMBER 30, 1999) HISTORICAL PRO FORMA(1)
- ------------------------------------------------------------ ---------- ------------
<S> <C> <C>
Net loss per share.......................................... $(0.33) $ (1.00)
Book value per share........................................ $ 0.23 $ 1.34
</TABLE>
- ---------------
(1) Pro forma amounts for OnDisplay, Inc. multiplied by 0.091, the exchange
ratio.
<PAGE> 1
Exhibit 99.2
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ONDISPLAY INC.
Report of Independent Accountants........................... F-2
Balance Sheet............................................... F-3
Statement of Operations..................................... F-4
Statement of Changes in Stockholders' Equity (Deficit)...... F-5
Statement of Cash Flows..................................... F-6
Notes to Financial Statements............................... F-7
</TABLE>
F-1
<PAGE> 2
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
OnDisplay, Inc.
In our opinion, the accompanying balance sheet and the related statements
of operations, changes in stockholders' equity (deficit) and cash flows present
fairly, in all material respects, the financial position of OnDisplay, Inc. at
December 31, 1999 and 1998 and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1999, in conformity
with generally accepted accounting principles 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
San Jose, California
February 16, 2000
F-2
<PAGE> 3
ONDISPLAY, INC.
BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1999
-------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 4,648 $109,617
Accounts receivable, net of allowance for doubtful
accounts of $250 in 1998 and $728 in 1999.............. 2,600 4,419
Prepaid and other current assets.......................... 96 1,171
-------- --------
Total current assets.............................. 7,344 115,207
Property and equipment, net................................. 720 1,581
Deposits and other assets................................... 189 314
-------- --------
Total assets...................................... $ 8,253 $117,102
======== ========
LIABILITIES, PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.......................................... $ 386 $ 1,262
Accrued liabilities....................................... 823 2,989
Deferred revenue.......................................... 1,402 2,617
Current portion of long term debts........................ 149 1,199
-------- --------
Total current liabilities......................... 2,760 8,067
-------- --------
Long term debts, net of current portion..................... 240 2,338
-------- --------
Total liabilities................................. 3,000 10,405
-------- --------
Commitments (Note 4)
Preferred stock, Series A, B and C, $0.001 par value:
Authorized: 11,600,000 shares issued and outstanding:
8,891,554 shares at December 31, 1998 and none at
December 31, 1999..................................... 18,982 --
-------- --------
Stockholders' equity (deficit) Common stock, $0.001 par
value:
Authorized: 25,000,000 shares; issued and outstanding:
19,647,303 and 4,133,751 at December 31, 1998 and
December 31, 1999..................................... 1 16
Additional paid-in capital.................................. 2,328 168,866
Deferred stock-based compensation........................... (1,604) (29,175)
Notes receivable from shareholders.......................... -- (1,788)
Accumulated deficit......................................... (14,454) (31,222)
-------- --------
Total stockholders' equity (deficit).............. 5,253 106,697
-------- --------
Total liabilities, preferred stock and
stockholders' equity (deficit).................. $ 8,253 $117,102
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 4
ONDISPLAY, INC.
STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
License revenues....................................... $ 265 $ 2,229 $ 6,839
Service revenue........................................ -- 1,114 4,259
---------- ---------- ----------
Total revenue................................ 265 3,343 11,098
---------- ---------- ----------
Cost of license revenue................................ -- 2 7
Cost of service revenues............................... -- 1,618 4,251
---------- ---------- ----------
Total cost of revenues....................... -- 1,620 4,258
---------- ---------- ----------
Gross profit........................................... 265 1,723 6,840
Operating expenses:
Sales and marketing.................................. 2,810 5,747 11,917
Research and development............................. 1,986 2,636 4,714
General and administrative........................... 1,158 1,201 3,418
Amortization of deferred stock-based compensation.... -- 618 3,697
---------- ---------- ----------
Total operating expenses..................... 5,954 10,202 23,746
---------- ---------- ----------
Loss from operations................................... (5,689) (8,479) (16,906)
Interest income and other.............................. 173 174 532
Interest expense....................................... (18) (43) (394)
---------- ---------- ----------
Net loss............................................... $ (5,534) $ (8,348) $ (16,768)
========== ========== ==========
Net loss per share-basic and diluted................... $ (1.62) $ (2.34) $ (3.70)
========== ========== ==========
Shares used in per share calculation-basic and
diluted.............................................. 3,410,313 3,572,353 4,533,282
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 5
ONDISPLAY, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
NOTES
COMMON STOCK ADDITIONAL DEFERRED RECEIVABLE TOTAL
------------------- PAID-IN STOCK-BASED FROM ACCUMULATED STOCKHOLDERS' EQUITY
SHARES AMOUNT CAPITAL COMPENSATION SHAREHOLDERS DEFICIT (DEFICIT)
---------- ------ ---------- ------------ ------------ ----------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, January 1, 1997... 3,400,000 $-- $ 8 $ -- $ -- $ (572) $ (564)
Issuance of common stock in
exchange for services
rendered.................. 20,000 -- -- -- -- -- --
Issuance of common stock in
connection with option
exercises................. 625 -- -- -- -- -- --
Net loss.................... -- -- -- -- -- (5,534) (5,534)
---------- --- -------- -------- ------- -------- --------
Balances, December 31,
1997...................... 3,420,625 -- 8 -- -- (6,106) (6,098)
Issuance of common stock in
connection with options
exercised................. 754,520 1 106 -- -- -- 107
Repurchase of unvested
common stock.............. (41,394) -- (8) -- -- -- (8)
Deferred compensation
related to stock options
granted................... -- -- 2,222 (2,222) -- -- --
Amortization of deferred
stock-based
compensation.............. -- -- -- 618 -- -- 618
Net loss.................... -- -- -- -- -- (8,348) (8,348)
---------- --- -------- -------- ------- -------- --------
Balances, December 31,
1998...................... 4,133,751 1 2,328 (1,604) -- (14,454) (13,729)
Conversion of Mandatorily
Redeemable Convertible
Preferred Stock to common
stock..................... 10,615,293 11 35,381 -- -- -- 35,392
Issuance of common stock in
connection with initial
public offering, net of
issuance costs............ 3,500,000 4 89,763 -- -- -- 89,767
Issuance of common stock in
connection with private
placement................. 300,000 -- 7,812 -- -- -- 7,812
Issuance of common stock in
connection with options
exercised................. 1,163,563 -- 2,170 -- (1,788) -- 382
Repurchase of unvested
common stock.............. (71,554) -- (15) -- -- -- (15)
Issuance of common stock in
connection with services
rendered.................. 6,250 -- 38 -- -- -- 38
Amortization of discount
related to warrants issued
in connection with long
term loan................. -- -- 121 -- -- -- 121
Deferred compensation
related to stock options
grants.................... -- -- 31,268 (31,268) -- -- --
Amortization of deferred
stock-based
compensation.............. -- -- -- 3,697 -- -- 3,697
Net loss.................... -- -- -- -- -- (16,768) (16,768)
---------- --- -------- -------- ------- -------- --------
Balances, December 31,
1999...................... 19,647,303 $16 $168,866 $(29,175) $(1,788) $(31,222) $106,697
========== === ======== ======== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 6
ONDISPLAY, INC.
STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1997 1998 1999
------- ------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $(5,534) $(8,348) $(16,768)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization.......................... 123 306 518
Loss from sale of property and equipment............... -- 9 --
Provision for doubtful accounts........................ -- 250 478
Amortization of deferred stock-based compensation...... -- 618 3,697
Amortization of discount related to warrants issued in
connection with long term loan....................... -- -- 121
Issuance of common stock in connection with services
rendered............................................. -- -- 38
Change in operating assets and liabilities:
Accounts receivable.................................. (187) (2,661) (2,297)
Prepaid and other current assets..................... (96) 43 (1,075)
Accounts payable..................................... 125 166 876
Accrued liabilities.................................. 163 627 2,166
Deferred revenue..................................... 11 1,391 1,215
Other long term assets............................... -- (189) (125)
------- ------- --------
Net cash used in operating activities............. (5,395) (7,788) (11,156)
------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment..................... (428) (219) (650)
Proceeds from sales of property and equipment............. -- 3 --
------- ------- --------
Net cash used in investing activities............. (428) (216) (650)
------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sales and lease back of property and
equipment.............................................. 200 -- --
Proceeds from issuance of preferred stock................. 6,800 8,782 16,410
Proceeds from issuance of common stock, net............... -- 107 97,961
Principal payment under capital lease obligations......... (28) (129) (78)
Proceeds from borrowings under long term loan received.... -- -- 3,000
Repayment of long term loan............................... -- -- (503)
Repurchases of unvested common stock...................... -- (8) (15)
------- ------- --------
Net cash provided by financing activities......... 6,972 8,752 116,775
------- ------- --------
Net increase in cash and cash equivalents................... 1,149 748 104,969
Cash and cash equivalents at beginning of year.............. 2,751 3,900 4,648
------- ------- --------
Cash and cash equivalents at end of year.................... $ 3,900 $ 4,648 $109,617
======= ======= ========
NONCASH INVESTING AND FINANCING ACTIVITIES:
Property and equipment acquired under capital lease
obligations............................................ $ 196 $ 337 $ 729
======= ======= ========
Deferred stock-based compensation......................... $ -- $ 2,222 $ 31,268
======= ======= ========
Issuance of common stock for notes receivable from
shareholders........................................... $ -- $ -- $ 1,788
======= ======= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 7
ONDISPLAY, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- BUSINESS:
OnDisplay, Inc. (the "Company") develops and markets applications for
powering e-business portals and e-marketplaces in both business-to-business and
business-to-consumer e-commerce. The Company's product suite provides an open,
scalable, adaptable solution to enable the rapid aggregation, exchange,
integration, personalization and syndication of e-business information and
services from a broad range of partners, suppliers and customers. Through the
use of the internet, customers are able to align information systems of business
allies without modification to existing applications or to migrate rapidly from
their existing systems to new enterprise applications. The Company operates in a
single business segment and does not have any separately reportable business
segments as of December 31, 1999.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES:
MANAGEMENT ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. These estimates include levels of reserves for accounts
receivable, valuation of deferred tax assets and value of the Company's capital
stock. Actual results could differ from these estimates.
CASH AND CASH EQUIVALENTS
The Company considers all investments purchased with an original or
remaining maturity of three months or less to be cash equivalents.
CONCENTRATION OF CREDIT RISK
The Company maintains its cash and cash equivalents in accounts with two
major financial institutions in the United States. The Company has not
experienced any losses on its deposits of cash and cash equivalents.
The Company performs ongoing credit evaluations of its customers, and
collateral is not required. The Company records an allowance for doubtful
accounts for credit losses at the end of each period based on an analysis of
individual aged accounts receivable balances. As a result of this analysis, the
Company believes that its allowance for doubtful accounts is adequate but no
excessive at December 31, 1998 and 1999.
At December 31, 1999 two customers accounted for 21% and 15% of accounts
receivable and at December 31, 1998 two different customers accounted for 24%
and 12% of accounts receivable.
The Company derives most of its license service and support revenues from
one suite of products.
In 1997, these customers represented 21%, 30% and 37% of total revenues and
in 1998 two customers represented 11% and 13% of total revenues. No customer
accounted for more than 10% of total revenues in 1999.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of certain of the Company's financial instruments,
including cash, cash equivalents, trade accounts receivable, accounts payable
and accrued liabilities approximate fair value due to their short maturities.
Based on borrowing rates currently available to the Company for loans with
similar terms, the carrying value of its long-term debt approximates fair value.
F-7
<PAGE> 8
ONDISPLAY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful life of the related assets of
three years. Leasehold improvements and leased assets are amortized on a
straight line basis over the lesser of their estimated useful life or the lease
term. Gains and losses from the disposal of property and equipment are taken
into income in the year of disposition. Repairs and maintenance costs are
expensed as incurred.
REVENUE RECOGNITION
Revenue consists of revenue earned under software license agreements,
service agreements, and maintenance agreements,. Revenue from software license
agreements is recognized upon shipment or upon notification to the customer of
the downloadable software location, provided that a signed contract exists, the
fee is fixed and determinable and collection of the resulting receivable is
probable and, if applicable, acceptance criteria are met. In cases where a fee
is due to a referring party under the Company's referral agreements, such fees
are recorded as sales and marketing expenses when the accompanying sales are
recorded.
For contracts with multiple obligations (e.g., deliverable and
undeliverable products, maintenance, installation and other services), revenue
is allocated to each component of the contract based on objective evidence of
its fair value, which is specific to the Company, or for products not being sold
separately, the price established by management. The Company recognizes revenue
allocated to undelivered products when the criteria for product revenue set
forth above are met. The Company recognizes revenue from maintenance fees,
including amounts allocated from product revenues for ongoing customer support
and product updates ratably over the period of the maintenance contract.
Payments for maintenance fees are generally made in advance and are
non-refundable. For revenue allocated installation and training and for such
services sold separately, the Company recognizes revenue as the related services
are performed.
Deferred revenue consists of payments received prior to delivery of
licenses, fulfillment of acceptance criteria, or performance of services.
COST OF REVENUES
Cost of license revenues includes costs associated with the electronic
transmission of software and royalties for third party embedded software which
were not material. Cost of service revenue includes salaries and related
expenses for the service organization and cost of third parties contracted to
provide services to customers.
RESEARCH AND DEVELOPMENT EXPENDITURES
Expenditures for research and development are charged to expense as
incurred. Under Statement of Financial Accounting Standards ("SFAS") No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed" certain software development costs are capitalized after technological
feasibility has been established. Development costs incurred in the period
between achievement of technological feasibility, which the Company defines as
the establishment of working model, until the general availability of such
software to customers, has been short and software development costs qualifying
for capitalization have been insignificant. Accordingly, the Company has not
capitalized any software development costs to date.
STOCK-BASED COMPENSATION
Pursuant to SFAS No. 123, "Accounting for Stock-Based Compensation," the
Company accounts for employee stock options under Accounting Principles Board
Opinion ("APB") No. 25 and follows the
F-8
<PAGE> 9
ONDISPLAY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
disclosure-only provisions of SFAS 123. Under APB No. 25, compensation expense
is based on the difference, if any, on the date of grant, between the estimated
fair value of the Company's stock and the exercise price of options to purchase
that stock.
INCOME TAXES
Deferred income tax assets and liabilities are computed for differences
between the financial statement and tax bases of assets and liabilities that
will result in taxable or deductible amounts in the future based on enacted tax
laws and rates applicable to the periods in which the differences are expected
to affect taxable income. Valuation allowances are established when necessary to
reduce deferred tax assets to the amount expected to be realized.
NET LOSS PER SHARE
Basic net loss per share is computed by dividing net loss available to
common stockholders by the weighted average number of vested common shares
outstanding for the period. Diluted net loss per share is computed giving effect
to all dilutive potential common stock, including nonvested common stock,
options, warrants and preferred stock. Options, warrants, common stock subject
to repurchase and preferred stock were not included in the computation of
diluted net loss per share in the periods reported because the effect would be
antidilutive.
Antidilutive securities not included in net loss per share calculation for
the periods:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1997 1998 1999
--------- ---------- ---------
<S> <C> <C> <C>
Common stock subject to repurchase................ -- 377,732 1,154,521
Common stock options.............................. 1,602,750 1,366,188 2,986,985
Warrants.......................................... -- -- 85,537
Preferred Stock................................... 6,690,476 8,891,554 --
--------- ---------- ---------
8,293,226 10,635,474 4,227,043
========= ========== =========
</TABLE>
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 (net assets)
during a period from non-owner sources. The Company has no comprehensive income
components other than its net loss.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards for derivative instruments and hedging activities and will be adopted
in the year 2000. It requires that an entity recognize all derivatives as either
assets or liabilities in the balance sheet and measure those instruments at fair
value. The Company is in process of evaluating the impact of this pronouncement.
In December 1998, the Accounting Standards Executive Committee issued
Statement of Position 98-9, modification of SOP 97-2, "Software Revenue
Recognition," with Respect to Certain Transactions. SOP 98-9 will be effective
for transactions that are entered into in fiscal years beginning after March 15,
1999. Retroactive application is prohibited. The Company believes the adoption
of 98-9 will not have a material impact on its results of operation.
F-9
<PAGE> 10
ONDISPLAY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 -- BALANCE SHEET ACCOUNTS:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1998 1999
------ ------
(IN THOUSANDS)
<S> <C> <C>
Property and equipment
Computer hardware......................................... $ 869 $1,510
Computer software......................................... 177 428
Furniture and fixtures.................................... 93 510
Leasehold improvements.................................... 13 83
------ ------
1,152 2,531
Less: accumulated depreciation and amortization........... (432) (950)
------ ------
$ 720 $1,581
====== ======
</TABLE>
Included in property and equipment at December 31, 1998 and 1999 is
approximately $537,000 and $1,266,000 of computer equipment purchased under
capital leases. Accumulated amortization of assets acquired under capital leases
is approximately $241,000 and $479,000 at December 31, 1998 and 1999.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1998 1999
---- ------
(IN THOUSANDS)
<S> <C> <C>
Accrued liabilities
Accrued commissions....................................... $275 $1,413
Accrued professional fees................................. 132 565
Accrued vacation.......................................... 190 372
Accrued bonuses........................................... 226 372
Other..................................................... -- 267
---- ------
$823 $2,989
==== ======
</TABLE>
NOTE 4 -- COMMITMENTS:
OPERATING LEASE
The Company leases various facilities under operating leases expiring
through 2004. Under these leases, the Company is responsible for maintenance and
insurance.
The minimum lease payments, net of sublease income, required under these
operating leases are as of December 31, 1999 are as follows (in thousands):
<TABLE>
<S> <C>
2000................................................ $1,012
2001................................................ 884
2002................................................ 559
2003................................................ 114
2004................................................ 99
------
$2,668
======
</TABLE>
Rent expense, net of sublease income, for the years ended December 31,
1999, 1998 and 1997 approximately was $740,000, $270,000 and $186,000,
respectively.
F-10
<PAGE> 11
ONDISPLAY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
CAPITAL LEASE OBLIGATIONS
In June 1997, the Company entered into a capital lease agreement which was
amended March 16, 1998 under which the Company had $550,000 available to acquire
equipment. As of December 31, 1999, the Company had a total of approximately
$537,000 under this line. In February 1999, the Company entered into another
financing agreement under which the Company has $1,350,000 available to purchase
equipment. The draw down period under this agreement expires on August 19, 2000.
As of December 31, 1999, the Company had drawn a total of approximately
$729,000 under this line.
Future minimum lease payment under capital lease agreements as of December
31, 1999 are as follows (in thousands):
<TABLE>
<S> <C>
2000........................................................ $1,048
2001........................................................ 486
------
Total minimum lease payments................................ 1,534
Less amount representing interest........................... 494
------
Present value of minimum lease payments..................... 1,040
Less: current portion....................................... (784)
------
$ 256
======
</TABLE>
NOTE 5 -- LONG TERM DEBT:
Long term debt consists of (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1998 1999
----- -------
<S> <C> <C>
Long term loan.............................................. $ -- $ 2,497
Capital lease obligations (see Note 4)...................... 389 1,040
----- -------
389 3,537
Less: current portion....................................... (149) (1,199)
----- -------
$ 240 $ 2,338
===== =======
</TABLE>
In February 1999, the Company entered into a loan agreement which allows
for borrowings of $3,000,000 bearing interest at 12.5% per annum. The Company
borrowed the full amount in May 1999 and is required to make monthly payments of
principal and interest of approximately $100,000 in 36 installments commencing
June 1, 1999 through May 1, 2002. The amounts borrowed are collateralized by
substantially all of the Company's assets. Dividends declared by the Company are
subject to the approval of the lender under this loan agreement.
Annual maturities under the loan as of December 31, 1999 are as follows (in
thousands):
<TABLE>
<CAPTION>
FISCAL YEARS ENDING DECEMBER 31,
--------------------------------
<S> <C>
2000........................................................ $ 943
2001........................................................ 1,068
2002........................................................ 486
------
Total............................................. $2,497
======
</TABLE>
NOTE 6 -- 401(K) SAVINGS PLAN:
In February 1997, the Company established a 401 (k) Savings Plan (the
"Plan") that covers substantially all employees. Under the Plan, employees are
permitted to contribute a portion of gross
F-11
<PAGE> 12
ONDISPLAY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
compensation not to exceed standard limitations provided by the Internal Revenue
Service. The Company maintains the right to match employee contributions, no
Company matching contributions have been made to date.
NOTE 7 -- PREFERRED STOCK:
As of December 31, 1998 the convertible preferred stock comprises:
<TABLE>
<CAPTION>
NUMBER
NUMBER OF SHARES ANNUAL LIQUIDATION
OF SHARES ISSUED AND DIVIDEND VALUE
AUTHORIZED OUTSTANDING PER SHARE PER SHARE
---------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Series A............................. 3,500,000 3,500,000 $0.08 $1.00
Series B............................. 3,500,000 3,202,381 $0.17 $2.10
Series C............................. 2,500,000 2,189,173 $0.32 $4.00
Series D............................. 2,100,000 1,723,739 $0.76 $9.52
---------- ----------
11,600,000 10,615,293
========== ==========
</TABLE>
DIVIDENDS
The holders of Series A, Series B, Series C and Series D preferred stock
are entitled to receive the above annual dividends, when and if declared by the
Board of Directors. After payment of any required dividends to the Series A,
Series B, Series C and Series D stockholders, declared dividends shall be
distributed among all holders of common stock and all holders of Series A,
Series B, Series C and Series D preferred stock in proportion to the number of
shares of common stock which would be held by each such holder if all shares of
Series A, Series B, Series C and Series D preferred stock were converted to
common stock. Dividends declared by the Company are contingent on approval by
the lender of the long-term loan.
LIQUIDATION
In the event of any liquidation, dissolution, or winding up of the Company,
either voluntary or involuntary, the holders of Series A, Series B, Series C and
Series D preferred stock are entitled to receive, prior and in preference to any
distribution of any of the assets of the Company to the holders of common stock
by reason of their ownership, an amount equal to the sum of $1.00, $2.10, $4.00
and $9.52 for each outstanding share of Series A, Series B, Series C and Series
D preferred stock, (as adjusted for any stock dividends, combinations or splits)
plus any declared but unpaid dividends on such shares. If upon the occurrence of
such event, the assets distributed among the holders of preferred stock are
insufficient to permit the payment to such holders of the full aforesaid
preferential amounts, then the entire assets of the Company legally available
for distribution are to be distributed first ratably among the holders of the
preferred stock in proportion to the aggregate liquidation preference of the
shares of preferred stock then held by them.
After payment has been made to the holders of preferred stock, any
remaining assets and funds are to be distributed pro rata among the holders of
the preferred stock and the common stock on a per share basis, treating all
shares of preferred stock convertible into shares of common stock as if
converted; provided, however, that after the receipt by each share of preferred
stock of distributions equal to two times the original purchase price for the
preferred stock, then all remaining assets shall be distributed equally among
the holders of the common stock on a per-share basis.
F-12
<PAGE> 13
ONDISPLAY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
CONVERSION
Each share of preferred stock, at the option of the holder thereof, shall
be convertible into such number of fully paid and nonassessable shares of common
stock which results from dividing the issuance price per share by the conversion
price per share in effect for the shares of preferred stock at the time of
conversion. The issuance price per share and initial conversion price per share
of Series A, B, Series C and Series D preferred stock are $1.00, $2.10, $4.00
and $9.52. The number of shares of common stock into which a share of a series
of preferred stock is convertible is referred to as the conversion rate of such
series. The initial conversion prices of Series A, B, C and D preferred stock
may be adjusted under circumstances described in the Company's Restated Articles
of Incorporation. At December 31, 1998 and September 30, 1999 the conversion
ratio was one to one.
Conversion is automatic at the then effective conversion price of such
series immediately prior to the closing of a qualified initial public offering
at an aggregate offering price to the public of not less than 20 million
provided that the Series A, B and C preferred stock shall not be converted
without the majority approval of such series, and the Series D preferred stock
shall not be converted without the approval by more than 2/3 of the holders of
Series D preferred stock.
VOTING
The holders of Series A, Series B, Series C and Series D preferred stock
are entitled to voting rights equal to the number of shares of common stock into
which each share of preferred stock could be converted at the record date for a
vote or consent of stockholders, except as otherwise required by law, and have
voting rights and powers equal to the voting rights and powers of the shares of
common stock.
REDEMPTION
Preferred stock shall be redeemable at the option of the holders of a
majority of the outstanding shares of preferred stock at any time after
September 30, 2001 if the Company has not completed a firm commitment
underwritten public offering pursuant to an effective registration statement
under the Securities Act of 1933, as amended, covering the offer and sale of
common stock for the account of the Corporation with an aggregate offering price
to the public of not less than $20,000,000 defined hereafter as a "Qualified
IPO." Such redemption right may be exercised by giving at least 120 day notice
prior to the date of commencement of the redemption. After receipt of such
notice of a redemption, the Company shall redeem all of the outstanding shares
of preferred stock in three equal annual installments on the last day of each
fiscal year (commencing with the first fiscal year ending after the 120 day
notice period). The redemption price of the preferred stock shall be the
original purchase price per share (as adjusted for any stock dividends,
combinations or splits) plus any accrued but unpaid dividends. Any redemption of
only a part of the outstanding preferred stock by the Company shall be pro rata
as among all holders of preferred stock in proportion to the aggregate
redemption price to be paid to such holders.
NOTE 8 -- STOCK OPTION AND STOCK PURCHASE PLANS:
STOCK OPTION PLAN
Under the Company's 1996 Stock Plan as amended, incentive options to
purchase the Company's common stock may be granted to employees at prices not
lower than the fair market value per share on the date of grant, as determined
by the Board of Directors. Nonstatutory options may be granted to key employees,
including directors and consultants, at prices not lower than 85% of the fair
market value (110% for qualified incentive stock options in certain cases) at
the date of grant, as determined by the Board of Directors. The Board also has
the authority to set the term of the options (no longer than ten years from date
of grant and no more than five years in certain instances). Options granted
generally
F-13
<PAGE> 14
ONDISPLAY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
vest over four years. Holders of options granted under the Plan may exercise
their options prior to complete vesting of shares, subject to the Company's
right of repurchase, such that, in the event of a termination of the optionee's
employment or consulting relationship, any unvested shares may be repurchased at
a price per share equal to the original exercise price per share for the option.
Unexercised vested options expire three months after termination of employment
with the Company. Shares repurchased by the Company were none, 41,394 and 71,554
in 1997, 1998 and 1999.
At December 31, 1997, 1998 and 1999, the Company's repurchase rights
applied to none, 377,732 and 1,154,521 shares of common stock outstanding.
Activity under the Plan is set forth below:
<TABLE>
<CAPTION>
NUMBER WEIGHTED
NUMBER OF SHARES AVERAGE
OF SHARES ISSUED AND EXERCISE AGGREGATE
AUTHORIZED OUTSTANDING PRICE PRICE
---------- ----------- -------- -----------
<S> <C> <C> <C> <C>
Balances, January 1, 1997........................ 933,000 767,000 $0.10 $ 76,700
Shares reserved.................................. 450,000 -- --
Options granted.................................. (1,080,000) 1,080,000 $0.12 131,540
Options exercised................................ -- (625) $0.10 (62)
Options cancelled................................ 243,625 (243,625) $0.10 (24,363)
---------- ---------- ----- -----------
Balances, December 31, 1997...................... 546,625 1,602,750 $0.11 183,815
Shares reserved.................................. 400,000 -- --
Options granted.................................. (781,750) 781,750 $0.27 213,948
Options exercised................................ -- (754,520) $0.14 (107,366)
Options repurchased.............................. 41,394 -- -- --
Options cancelled................................ 263,792 (263,792) $0.17 (45,575)
---------- ---------- ----- -----------
Balances, December 31, 1998...................... 470,061 1,366,188 $0.18 244,822
Shares reserved.................................. 2,425,000 -- -- --
Options granted.................................. (3,152,650) 3,152,650 $4.88 15,395,700
Options exercised................................ -- (1,163,563) $1.86 (2,170,000)
Options repurchased.............................. 71,554 -- -- --
Options cancelled................................ 368,260 (368,290) $0.46 (168,245)
---------- ---------- ----- -----------
Balances, December 31, 1999...................... 182,225 2,986,985 $4.45 $13,302,277
========== ========== ===== ===========
</TABLE>
For financial reporting purposes, the Company has determined that the
estimated value of common stock was in excess of the exercise price, which was
considered to be the fair market value as of the date of grant for 781,750
options issued in 1998 and 3,152,650 options issued in 1999. In connection with
the grants of such options, the Company has recognized deferred compensation of
approximately $2,220,000 in 1998 and $31,268,000 in 1999. Deferred stock-based
compensation will be amortized over the vesting period which is generally 48
months from the date of grant; approximately $618,000 was expensed in the year
ended December 31, 1998 and $3,697,000 in the year ended December 31, 1999.
Future amortization based on options granted through December 31, 1999 is
expected to be $15,441,000 and $7,987,000, $4,166,000 and $1,581,000 in the
years 2000, 2001, 2002 and 2003.
F-14
<PAGE> 15
ONDISPLAY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Options outstanding and vested by exercise price at December 31, 1999 are
as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS CURRENTLY
------------------------------------ VESTED
WEIGHTED ----------------------
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICE OUTSTANDING LIFE PRICE VESTED PRICE
-------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.10 482,500 6.86 $0.10 386,078 $0.10
$0.21 49,000 8.18 $0.21 22,659 $0.21
$0.40 254,250 9.02 $0.40 36,402 $0.40
$0.80 123,835 9.43 $0.80 -- $0.80
$1.20 51,000 9.55 $1.20 -- $1.20
$2.50 314,500 9.69 $2.50 -- $2.50
$5.00 163,000 9.72 $5.00 -- $5.00
$6.50 812,400 9.82 $6.50 -- $6.50
$8.00 736,500 9.95 $8.00 -- $8.00
--------- -------
2,986,985 445,139
========= =======
</TABLE>
At December 31, 1997 and 1998, 130,844 and 381,707 options at a weighted
average prices of $0.10 and $0.10 were vested.
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123 "Accounting for Stock-Based
Compensation." Had compensation cost for the Plan been determined based on the
fair value at grant date for all awards consistent with the provisions of SFAS
No. 123, the impact on the Company's financial statements would be (in
thousands) as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1997 1998 1999
------- ------- --------
<S> <C> <C> <C>
Net loss:
As reported............................................... $(5,534) $(8,348) $(16,768)
Pro forma................................................. $(5,542) $(8,364) $(17,039)
Basic and diluted net loss per share:
As reported............................................... $ (1.62) $ (2.34) $ (3.70)
Pro forma................................................. $ (1.62) $ (2.34) $ (3.76)
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the minimum value method with the following weighted average assumptions:
<TABLE>
<CAPTION>
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Risk-free interest rate..................................... 6.3% 5.0% 5.2%
Expected life............................................... 5 years 5 years 5 years
Expected dividends.......................................... $-- $-- $--
</TABLE>
The weighted average per share fair value of common stock options granted
during 1997, 1998 and 1999 were $0.10, $0.27 and $12.23.
EMPLOYEE STOCK PURCHASE PLAN
In September 1999, the Company adopted an employee stock purchase plan (the
"Purchase Plan"). 1,500,000 shares of common stock have been reserved for
issuance under the Purchase Plan (subject to an annual increase), none of which
had been issued at December 31, 1999.
F-15
<PAGE> 16
ONDISPLAY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 9 -- WARRANTS:
As part of a long-term borrowing agreement entered into in February 1999,
the Company issued a warrant to purchase an aggregate of 85,537 shares of common
stock at an exercise price of $6.05 per share. The warrant were exercisable upon
grant and expire in January 2009.
The Company valued the warrant using the Black-Scholes method. The fair
value of $535,000 is amortized to interest expense over the term of the
long-term loan.
NOTE 10 -- INCOME TAXES:
At December 31, 1999, the Company had net operating loss carryforwards of
approximately $23,800,000 and $18,600,000 for Federal and California purposes,
respectively, available to reduce future taxable income, if any. These
carryforwards expire through 2019 and 2004 for Federal and California purposes,
respectively, if not utilized beforehand.
At December 31, 1999, the Company had research and development credit
carryforwards of approximately $479,000 and $302,000 for Federal and California
income tax purposes, respectively. The research and development credit
carryforwards expire beginning in the year 2011.
The Tax Reform Act of 1986 limits the use of net operating loss and tax
credit carryforwards in certain situations where changes occur in the stock
ownership of a company. In the event the Company has had a change in ownership,
utilization of the carryforwards could be restricted.
Temporary differences which gave rise to significant portions of deferred
tax assets and liabilities are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1999
------- --------
<S> <C> <C>
Net operating losses........................................ $ 4,761 $ 9,181
Research and development credits............................ 548 678
Depreciation and amortization............................... (10) 9
Accrued liabilities......................................... 467 875
Other....................................................... -- 1
------- --------
5,766 10,745
Less: valuation allowance................................... (5,766) (10,745)
------- --------
$ -- $ --
======= ========
</TABLE>
Due to uncertainty of realizing the benefits of the deferred tax assets,
the Company has provided a valuation allowance against the net deferred tax
assets.
F-16
<PAGE> 17
ONDISPLAY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The difference between the Company's effective income tax rate and the
federal statutory rate is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Statutory tax benefit....................................... $(1,882) $(2,838) $(5,701)
Permanent differences -- non-deductible expenses............ 79 364 33
State taxes, net of federal tax benefit..................... (327) (510) (756)
Stock option compensation................................... -- -- 1,257
Research and development experimentation credit............. (273) (276) (266)
Change in valuation allowance............................... 2,402 3,138 4,979
Other....................................................... 1 122 454
------- ------- -------
Net tax provision........................................... $ -- $ -- $ --
======= ======= =======
</TABLE>
NOTE 11 -- SUBSEQUENT EVENT:
The Company entered into a merger agreement with Oberon Software
Incorporated ("Oberon") on January 17, 2000. The Company expects the merger,
which will be accounted for under the purchase method, to be completed by March
31, 2000.
F-17
