ITEM 7A. FINANCIAL STATEMENTS OF BUSINESS ACQUIRED
FIREFLY TECHNOLOGIES, INC.
Financial Statements
December 31, 1999, 1998 and 1997
(With Independent Auditors' Report Thereon)
<PAGE>
FIREFLY TECHNOLOGIES, INC.
TABLE OF CONTENTS
Independent Auditors' Report ............................................... 1
Balance Sheets ............................................................. 2
Statements of Operations ................................................... 4
Statements of Changes in Stockholders' Equity (Deficit) .................... 5
Statements of Cash Flows ................................................... 6
Notes to Financial Statements .............................................. 7
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders of
Firefly Technologies, Inc.:
We have audited the accompanying balance sheets of Firefly Technologies, Inc. as
of December 31, 1999, 1998 and 1997, and the related statements of operations,
stockholders' equity (deficit) and cash flows for the years ended December 31,
1999 and 1998, and for the period May 29, 1997 (date of incorporation) to
December 31, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with 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 financial statements referred to above present fairly, in
all material respects, the financial position of Firefly Technologies, Inc. as
of December 31, 1999, 1998 and 1997, and the results of its operations and its
cash flows the years ended December 31, 1999 and 1998, and for the period May
29, 1997 (date of incorporation) to December 31, 1997, in conformity with
generally accepted accounting principles.
/s/ KPMG LLP
May 5, 2000
1
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<TABLE>
FIREFLY TECHNOLOGIES, INC.
Balance Sheets
December 31, 1999, 1998 and 1997
<CAPTION>
1999 1998 1997
---------- -------- --------
ASSETS
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents ....................... $ 184,248 $ 57,173 $163,276
Accounts receivable ............................. 335,358 233,647 17,847
Due from shareholders (note 8) .................. -- -- 18,100
Prepaid expenses ................................ -- 4,367 --
Income tax receivable (note 10) ................. 3,112 -- --
Inventory ....................................... 18,259 -- --
Deferred income taxes (note 10) ................. 28,200 22,800 6,100
---------- -------- --------
Total current assets ....................... 569,177 317,987 205,323
Equipment, furniture, and fixtures, net (note 3) .. 232,681 113,490 59,138
Goodwill (note 1) ................................. 286,032 -- --
Deferred income taxes (note 10) ................... -- 4,700 35,400
Other assets ...................................... 14,026 2,626 4,816
---------- -------- --------
Total assets ............................... $1,101,916 $438,803 $304,677
========== ======== ========
</TABLE>
2
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<TABLE>
FIREFLY TECHNOLOGIES, INC.
Balance Sheets
December 31, 1999, 1998 and 1997
<CAPTION>
1999 1998 1997
----------- -------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
<S> <C> <C> <C>
Current liabilities:
Accounts payable and accrued expenses (note 6) .............. $ 384,992 $226,358 $ 89,571
Accrued taxes (note 10) ..................................... -- 544 500
Deferred revenue (note 4) ................................... -- 49,000 --
Current portion of capital lease obligations (note 5) ....... 42,141 4,002 10,128
Current portion of notes payable to banks (note 6) .......... 8,440 -- --
Due to related parties (note 7) ............................. -- 27,401 236,114
----------- -------- --------
Total current liabilities ............................... 435,573 307,305 336,313
Notes payable banks (note 6) .................................. 21,077 -- --
Capital lease obligations, net of current portion (note 5) .... 59,664 1,879 12,303
Deferred income taxes (note 10) ............................... 8,600 -- --
----------- -------- --------
Total liabilities ....................................... 524,914 309,184 348,616
----------- -------- --------
Stockholders' equity (deficit): (note 8)
Convertible preferred stock, $0.01 par value; 2,000,000
authorized shares designated as:
Series A - 200,449 shares issued and outstanding in 1999
and 1998; liquidation preference, $2.00 per share ..... 2,004 2,004 --
Series B - 75,000 shares issued and outstanding in 1999;
liquidation preference, $4.00 per share ............... 750 -- --
Common stock, $.01 par value, 7,000,000 shares authorized,
801,800, 800,000, and 751,000 shares issued and outstanding
in 1999, 1998 and 1997, respectively ...................... 8,018 8,000 7,510
Additional paid-in capital .................................. 12,490,110 165,096 10,590
Unearned compensation (note 9) .............................. (9,684,770) -- --
Accumulated deficit ......................................... (2,239,110) (45,481) (62,039)
----------- -------- --------
Total stockholders' equity (deficit) .................... 577,002 129,619 (43,939)
----------- -------- --------
Commitments and contingencies (notes 5 and 13)
Total liabilities and stockholders' equity (deficit) .... $ 1,101,916 $438,803 $304,677
=========== ======== ========
See accompanying notes to financial statements.
</TABLE>
3
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<TABLE>
FIREFLY TECHNOLOGIES, INC.
Statements of Operations
Years ended December 31, 1999 and 1998 and for the period
May 29, 1997 (date of incorporation) to December 31, 1997
<CAPTION>
1999 1998 1997
----------- ---------- ---------
<S> <C> <C> <C>
Net revenues ................................................. $ 3,140,526 $2,248,888 $ 182,000
Cost of net revenues ......................................... 1,881,962 1,603,059 205,839
----------- ---------- ---------
Gross profit (loss) ................................... 1,258,564 645,829 (23,839)
----------- ---------- ---------
Operating expenses:
Research and development ................................... 186,800 -- --
Selling, general and administrative ........................ 894,834 603,982 75,427
Compensation expense related to stock options (note 9) ..... 2,339,572 -- --
----------- ---------- ---------
Total operating expenses .............................. 3,421,206 603,982 75,427
----------- ---------- ---------
Income (loss) from operations ......................... (2,162,642) 41,847 (99,266)
----------- ---------- ---------
Other income (expense):
Interest income ............................................ 132 1,055 --
Interest expense ........................................... (5,119) (10,524) (3,773)
Other income (expense) ..................................... 35,700 (1,320) --
----------- ---------- ---------
30,713 (10,789) (3,773)
----------- ---------- ---------
Income (loss) before taxes ............................ (2,131,929) 31,058 (103,039)
Income tax expense (benefit) (note 10) ....................... 61,700 14,500 (41,000)
----------- ---------- ---------
Net income (loss) ..................................... $(2,193,629) $ 16,558 $ (62,039)
=========== ========== =========
See accompanying notes to financial statements.
</TABLE>
4
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<TABLE>
FIREFLY TECHNOLOGIES, INC.
Statements of Changes in Stockholders' Equity (Deficit)
Years ended December 31, 1999, 1998, and for the period
May 29, 1997 (date of incorporation) to December 31, 1997
<CAPTION>
UNEARNED
COMPEN-
SATION
PREFERRED STOCK ADDITIONAL RELATED ACCUMU-
------------------- COMMON PAID-IN TO STOCK LATED
SERIES A SERIES B STOCK CAPITAL OPTIONS DEFICIT TOTAL
-------- -------- ------- ----------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at May 29, 1997 ......... $ -- $-- $ -- $ -- $ -- $ -- $ --
Net loss ........................ -- -- -- -- -- (62,039) (62,039)
Issuance of common
stock (note 8) .............. -- -- 7,510 10,590 -- -- 18,100
------ ----- ------ ----------- ------------ ----------- ----------
Balance at December 31, 1997 .... -- -- 7,510 10,590 -- (62,039) (43,939)
Net income ...................... -- -- -- -- -- 16,558 16,558
Issuance of common stock (note 8) -- -- 490 1,510 -- -- 2,000
Issuance of Series A
preferred stock (note 8) ..... 2,004 -- -- 152,996 -- -- 155,000
------ ----- ------ ----------- ------------ ----------- ----------
Balance at December 31, 1998 .... 2,004 -- 8,000 165,096 -- (45,481) 129,619
Net loss ........................ -- -- -- -- -- (2,193,629) (2,193,629)
Unearned compensation
related to stock
options (note 9) ............ -- -- -- 12,024,342 (12,024,342) -- --
Amortization of unearned
compensation related to
stock options (note 9) ...... -- -- -- -- 2,339,572 -- 2,339,572
Issuance of common
stock (note 8) .............. -- -- 18 1,422 -- -- 1,440
Issuance of Series B
Preferred stock (note 8) ..... -- 750 -- 299,250 -- -- 300,000
------ ----- ------ ----------- ------------ ----------- ----------
Balance at December 31, 1999 .... $2,004 $ 750 $8,018 $12,490,110 $ (9,684,770) $(2,239,110) $ 577,002
====== ===== ====== =========== ============ =========== ==========
See accompanying notes to financial statements.
5
</TABLE>
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<TABLE>
FIREFLY TECHNOLOGIES, INC
Statements of Cash Flows
Years ended December 31, 1999, 1998 and for the period
May 29, 1997 (date of incorporation) to December 31, 1997
<CAPTION>
1999 1998 1997
----------- --------- --------
<S> <C> <C> <C>
Operating activities:
Net income (loss) ................................................ $(2,193,629) $ 16,558 $(62,039)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization ................................ 39,490 18,034 2,713
Loss on sale of fixed assets ................................. -- 1,320 --
Compensation related to stock options ........................ 2,339,572 -- --
Changes in operating assets and liabilities:
Accounts receivable ........................................ (53,463) (215,800) (17,847)
Prepaid expenses ........................................... (7,033) (2,177) --
Accounts payable and accrued expenses ...................... 110,607 136,787 89,571
Accrued interest and taxes payable ......................... (3,656) 44 500
Deferred taxes ............................................. 7,900 14,000 (41,500)
Deferred revenue ........................................... (49,000) 49,000 --
----------- --------- --------
Net cash provided by (used in) operating activities ..... 190,788 17,766 (28,602)
Investing activities:
Purchases of equipment, furniture and fixtures ................... (26,541) (73,806) (38,402)
Business acquisition ............................................. 49,893 -- --
----------- --------- --------
Net cash provided by (used in) investing activities ..... 23,352 (73,806) (38,402)
Financing activities:
Net borrowings with related parties .............................. (27,401) (35,613) 232,000
Payments on capital lease obligations ............................ (59,664) (16,450) (1,720)
Proceeds for issuance of common stock ............................ -- 2,000 --
----------- --------- --------
Net cash provided by (used in) financing activities ..... (87,065) (50,063) 230,280
Net increase (decrease) in cash and cash equivalents ................. 127,075 (106,103) 163,276
Cash and cash equivalent at beginning of year ........................ 57,173 163,276 --
----------- --------- --------
Cash and cash equivalent at end of year .............................. $ 184,248 $ 57,173 $163,276
=========== ========= ========
See accompanying notes to financial statements.
</TABLE>
6
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FIREFLY TECHNOLOGIES, INC.
Notes to Financial Statements
December 31, 1999, 1998 and 1997
(1) THE COMPANY AND CAPITALIZATION
Firefly Technologies, Inc. (the Company), a Delaware corporation
incorporated on May 29, 1997, is a manufacturer of heads and related
products for the optical storage industry as well as metrology, micro
optics, switches, and filters for the telecommunications industry. The
Company's optical storage products enable optical storage manufacturers to
build high capacity storage devices. The Company's telecommunications
components are used in wave division multiplexers to increase the capacity
of optical fibers. The Company also manufactures metrology tools designed
to measure the quality of micro-optics and related components.
(A) VOTING TRUST
On March 16, 1998, the common stockholders of the Company deposited
their shares with the Firefly Voting Trust. In accordance with the
Voting Trust agreement, the shares are voted by the two
founders/officers. See note 13.
(B) DIGITAL PAPYRUS CORPORATION, INC. (DPC)
In February 1998, the Company purchased specific assets and assumed
certain lease obligations from Digital Papyrus Corporation (DPC) in
exchange for a 5% equity interest in the Company. The value assigned
to the preferred shares issued approximated the fair value of the net
assets acquired. As of December 31, 1999, DPC owns 50,112 shares of
Series A convertible preferred stock.
On November 19, 1999, the Company issued 50,112 shares of Series A
convertible preferred stock to the sole shareholder of DPC in exchange
for certain equipment. The value assigned to the preferred shares
issued approximated the fair value of the equipment acquired.
(C) CONTRACT ENGINEERING AGREEMENT
From inception of the Company until September of 1999, the Company's
revenues were primarily derived from a contract engineering agreement
with one Company. On November 26, 1997, the Company entered into a
Secured Loan Agreement with this customer in an amount of $150,000.
The loan was secured by a security interest in all the intellectual
property, inventory, equipment and other assets of the Company. In
March 1998, the Company issued 100,225 shares of Series A Convertible
Preferred Stock to this customer primarily in exchange for the loans
owed by the Company to this customer.
7
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FIREFLY TECHNOLOGIES, INC.
Notes to Financial Statements
December 31, 1999, 1998 and 1997
(D) STS ACQUISITION
On December 1, 1999, the Company acquired all of the outstanding
common stock of Specialty Thinfilm Services (STS), a privately held
Massachusetts firm specializing in custom components for photonic and
wireless communications in exchange for 75,000 shares of the Company's
Series B Preferred Stock, for an aggregate purchase price of $300,000.
The excess of the purchase price over the fair value of the net assets
of STS was capitalized and resulted in $286,000 of goodwill.
(2) SIGNIFICANT ACCOUNTING POLICIES
(A) CASH AND CASH EQUIVALENTS
The Company considers cash and cash investments with maturities at the
date of purchase of three months or less to be cash and cash
equivalents.
(B) INVENTORY VALUATION
Inventories consist primarily of raw materials, such as metals and
chemicals, used in the manufacturing processes and are stated at the
lower of cost (determined on a first-in, first-out basis) or market.
(C) INTANGIBLE ASSETS
In accordance with APB Opinion No. 17, goodwill is amortized on a
straight-line basis over the estimated useful life of the intangible
asset. The Company has estimated the useful life as five years.
(D) REVENUE RECOGNITION
Revenue from consulting agreements is recognized upon delivery of the
service. Revenue from the sale of equipment is recognized upon
transfer of title to the buyer. Upon delivery, the Company has no
significant vendor obligations.
(E) RESEARCH AND DEVELOPMENT COSTS
Research and development costs on projects unrelated to contract
engineering agreements are expensed as incurred.
8
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FIREFLY TECHNOLOGIES, INC.
Notes to Financial Statements
December 31, 1999, 1998 and 1997
(F) CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash equivalents
and accounts receivable. Cash equivalents consist of temporary
investments in money market funds with maturity dates of three months
or less and have limited credit exposure. The risk with respect to
accounts receivable is minimized by the creditworthiness of the
Company's customers and the Company's credit and collection policies.
(G) USE OF ESTIMATES
The preparation of the Company's financial statements under generally
accepted accounting principles requires management to make significant
estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results could
differ from those estimates.
(H) EQUIPMENT, FURNITURE AND FIXTURES
Equipment, furniture and fixtures are stated at cost and depreciated
using the straight-line method over estimated useful lives of three to
five years. Capital lease assets are depreciated over the estimated
useful life or the term of the lease, whichever is shorter.
(I) STOCK-BASED COMPENSATION
The Company grants stock options for a fixed number of shares to
employees, agents and consultants. The Company accounts for stock
option grants to these parties in accordance with Accounting
Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued to
Employees," which is based on the intrinsic value method of measuring
stock-based compensation. As such, compensation expense would be
recorded on the date of grant only if the current market price of the
underlying stock exceeded the grant price. The Company has adopted the
disclosure requirements of Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation."
(J) INCOME TAXES
The Company provides for income taxes under Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS
109). Under SFAS 109, the asset and liability method is used in
accounting for income taxes. Under this method, deferred tax assets
and liabilities are recognized for the future tax consequences
attributable to differences between financial statement carrying
amounts of existing assets and liabilities and their respective tax
bases and operating
9
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FIREFLY TECHNOLOGIES, INC.
Notes to Financial Statements
December 31, 1999, 1998 and 1997
loss and tax credit carryforwards. Deferred tax assets and liabilities
are measured using the enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected
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.
(K) IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS
TO BE DISPOSED OF
The Company accounts for long-lived assets in accordance with the
provisions of SFAS No. 121, "ACCOUNTING FOR THE IMPAIRMENT OF
LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF." This
Statement requires that long-lived assets and certain identifiable
intangible assets be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability of assets to be held and used
is measured by a comparison of the carrying amount of an asset to
future net cash flows expected to be generated by the asset. If such
assets are considered impaired, the impairment recognized is measured
by the amount by which the carrying amount of the assets exceeds the
fair value of the assets. Assets to be disposed of are reported at the
lower of the carrying amount or fair value less costs to sell.
(L) IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the FASB issued Statement No. 133, "ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES." SFAS 133, as amended
by Statement of Financial Accounting Standards No. 137, "ACCOUNTING
FOR DERIVATIVE INSTRUMENTS HEDGING ACTIVITIES-DEFERRAL OF THE
EFFECTIVE DATE OF FASB STATEMENT 133," is effective for fiscal years
beginning after June 15, 2000. The Company expects to adopt the new
Statement effective January 1, 2001. The Statement will require the
Company to recognize any derivatives on the balance sheet at fair
value. The Company does not anticipate that the adoption of this
Statement will have a significant effect on its results of operations
or financial position.
10
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FIREFLY TECHNOLOGIES, INC.
Notes to Financial Statements
December 31, 1999, 1998 and 1997
(3) EQUIPMENT, FURNITURE AND FIXTURES
Equipment, furniture and fixtures consist of the following:
DECEMBER 31,
-------------------------------
1999 1998 1997
-------- -------- -------
Machines and manufacturing equipment ....... $259,595 $120,469 $ 3,700
Computer hardware and software ............. 13,664 11,683 21,007
Office equipment, furniture and fixtures.... 18,998 -- --
Construction in progress ................... -- 2,085 37,144
-------- -------- -------
292,257 134,237 61,851
Less accumulated depreciation .............. (59,576) (20,747) (2,713)
-------- -------- -------
Total ........................ $232,681 $113,490 $59,138
======== ======== =======
(4) DEFERRED REVENUE
In 1998, the Company was contracted and paid to perform future services for
a customer. As these services were not performed until 1999, the payment
received has been classified as deferred revenue at December 31, 1998.
(5) LEASES
The Company leases certain equipment and office space under non-cancelable
operating leases. The net book value of all capital leases at December 31,
1999 is $128,571.
11
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FIREFLY TECHNOLOGIES, INC.
Notes to Financial Statements
December 31, 1999, 1998 and 1997
Future minimum annual lease payments of the Company, exclusive of
additional operating costs, under non cancelable leases as of December 31,
1999 are as follows:
CAPITAL OPERATING
-------- ---------
Year ending December 31:
2000 ............................................ $ 49,059 $111,166
2001 ............................................ 41,072 111,166
2002 ............................................ 20,257 20,657
-------- --------
Total minimum lease payments ........... 110,388 $242,989
========
Less amount representing interest .................... 8,583
--------
Present value of minimum lease payments .............. 101,805
Less current portion of capital lease obligation ..... 42,141
--------
Capital lease obligation, excluding current portion .. $ 59,664
========
Rent expense under operating leases amounted to $71,893, $39,640 and $0
during the years ended December 31, 1999 and 1998 and during the period May
29, 1997 to December 31, 1997, respectively.
(6) NOTES PAYABLE BANK
In connection with the STS merger (Note 1), the Company assumed an
outstanding commercial loan and a line of credit with a commercial bank.
On June 2, 1998, STS entered into a commercial demand note with a bank for
$42,200 at a floating rate equal to 2.5% per annum above the Lending Rate
(11% at December 31, 1999) maturing June 2, 2003, and payable in monthly
installments of principal of $703, plus interest, until due. The note is
secured by the assets of STS. As of December 31, 1999 the outstanding loan
balance was $29,517.
The aggregate scheduled maturities of long-term debt are as follows: $8,440
in 2000, $8,440 in 2001, $8,440 in 2002, and $4,197 in 2003.
12
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FIREFLY TECHNOLOGIES, INC.
Notes to Financial Statements
December 31, 1999, 1998 and 1997
On June 2, 1998, STS entered into a $5,000 line of credit with a bank at a
floating rate equal to 2.0% per annum above the Lending Rate (10.5% at
December 31, 1999). The outstanding balance was $2,581 at December 31, 1999
and is included in accrued expenses. This amount was fully repaid in
February 2000.
(7) DUE TO RELATED PARTIES
After the formation of the Company in May 1997, the Company's operations
were funded partially by loans from related parties and shareholders.
Initial incorporation expenses were funded by advances from two individuals
who were both officers and shareholders of the Company. These advances
totaled $7,000 at December 31, 1997, did not bear interest and were repaid
in full in 1998.
As discussed in Note 1, the Company entered into a Secured Loan Agreement
with a customer on November 26, 1997, for $150,000. This loan, plus
interest accrued at a fair market rate at the time, was converted into
Series A Preferred Stock on March 16, 1998.
In 1997, the Company received loans totaling $59,114 from a customer for
general operating purposes and for the purchase of capital equipment. These
loans were short term in nature, interest was charged at fair market rates
at the time, and they were repaid in full in 1998.
At December 31, 1999, there were no loans with related parties.
(8) CAPITAL STOCK
The Company's authorized capital includes 9,000,000 shares, $0.01 par
value, which consist of two classes of stock as follows: 7,000,000 shares
designated as common stock and 2,000,000 shares designated as preferred
stock. At December 31, 1999, Series A and B preferred stock have been
designated and issued, and represented all of the issued convertible
preferred stock.
COMMON STOCK
In 1997, the founders and the initial employees purchased common stock of
the Company in exchange for notes payable to the Company. Notes receivable
totaling $18,100 were included in current assets at December 31, 1997 and
were repaid in full in 1998.
13
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FIREFLY TECHNOLOGIES, INC.
Notes to Financial Statements
December 31, 1999, 1998 and 1997
In December 1999, the Company announced a stock split in the form of a
dividend of 500 to 1. All common stock share amounts in the accompanying
financial statements have been restated to reflect the split.
PREFERRED STOCK
Each share of Series A and B preferred stock may be converted into shares
of common stock at an initial conversion price of $2.00 per share for
Series A preferred stock and of $4.00 per share for Series B Preferred
Stock, as so adjusted from time to time by a conversion factor (the
conversion price).
The shares will automatically convert into common stock at the then
effective conversion price upon the closing of a public offering of the
Company's common stock pursuant to an effective registration statement
under the Securities Act of 1933.
The holders of Series A and B preferred stock are entitled to receive, when
and if declared by the board of directors of the Company, dividends in the
same amount per share as would be payable on the number of shares of common
stock into which the preferred stock is then convertible, payable in
preference and priority to any payment of any cash dividend on common stock
or any other class of stock or series thereof.
Preferred shares are entitled to a number of votes on any matter submitted
to the stockholders of the Company equal to the number of shares of common
stock into which they are convertible.
In the event of any dissolution, liquidation or winding-up of the affairs
of the Company, after distribution in full of the preferential amounts, if
any, to be distributed to the holders of shares of the preferred stock,
holders of common stock are entitled, unless otherwise provided by law or
the Company Restated Certificate of Incorporation, to receive all of the
remaining assets of the Company of whatever kind available for distribution
to stockholders ratably in proportion to the number of shares of common
stock held by them, respectively.
(9) 1998 STOCK OPTION PLAN
On April 6, 1998, the Company established a Stock Option Plan (the Plan)
whereby 500 shares of common stock were reserved for issuance for the
benefit of key employees of the Company as authorized by the board of
directors. Under the Plan, incentive stock options and nonstatutory options
may be granted to employees of the Company. On November 19, 1999, the
Company's stockholders amended the Plan to increase the number of shares of
common stock reserved for issuance under the Plan from 500 shares of common
stock to 2,225,000 shares of common stock and that, in accordance with the
Plan, the number of
14
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FIREFLY TECHNOLOGIES, INC.
Notes to Financial Statements
December 31, 1999, 1998 and 1997
shares covered by each outstanding benefit (as defined in the Plan) be
adjusted to reflect the stock dividend.
Each option granted under the Plan is exercisable either in full or in
installments as set forth in each recipient's option agreement. Options may
expire at periods set forth in each recipient's option agreement, but no
longer than 10 years from the date of grant.
No stock options were granted in fiscal 1998 or 1997.
The following table presents the activity of the Plan for the year ended
December 31, 1999:
1999
---------------------
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
--------- --------
Outstanding options at beginning of year .......... -- N/A
Granted ........................................ 1,840,000 $0.80
Exercised ...................................... -- N/A
Terminated ..................................... -- N/A
--------- -----
Outstanding options at end of year ................ 1,840,000 $0.80
========= =====
Exercisable at end of year ........................ 414,050 $0.80
========= =====
Available for grant at end of year ................ 385,000 $0.80
========= =====
Weighted average fair value per share of options
granted during the year ......................... $ 0.80 $0.80
========= =====
15
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FIREFLY TECHNOLOGIES, INC.
Notes to Financial Statements
December 31, 1999, 1998 and 1997
The deemed fair market value per share of the stock options issued was
approximately $5.63 versus the exercise price of $.80 resulting in a
compensation charge of approximately $12,024,000. This unearned
compensation will be amortized into the income statement over the average
vesting period of three years. Approximately twenty-five percent of the
options were immediately vested when issued in December 1999, resulting in
the compensation charge of approximately $2,340,000 in 1999.
The following table represents weighted average price and life information
about significant option groups outstanding at December 31, 1999:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------- ----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
OPTION NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
GRANT DATE OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE
---------- ----------- ------------ --------- ----------- --------
1998 Plan 1,840,000 3 $0.80 414,050 $0.80
========= === ===== ======= =====
The pro forma effect of applying SFAS 123 would not be materially different
from the results currently shown which include the effect of recording
compensation expense for the vested options at the deemed fair market value
of $5.63 per share in 1999.
(10) INCOME TAXES
The components of income tax expense (benefit) for each year are as
follows:
1999 1998 1997
------- ------- --------
Current:
U.S. federal ............... $50,500 $ -- $ --
State ...................... 3,300 500 500
------- ------- --------
53,800 500 500
------- ------- --------
Deferred:
U.S. federal ............... 6,100 10,500 (31,700)
State ...................... 1,800 3,500 (9,800)
------- ------- --------
7,900 14,000 (41,500)
------- ------- --------
Total ........................ $61,700 $14,500 $(41,000)
======= ======= ========
16
<PAGE>
FIREFLY TECHNOLOGIES, INC.
Notes to Financial Statements
December 31, 1999, 1998 and 1997
The total income tax expense differs from the amount computed by applying
the applicable U.S. federal income tax rate of 34% in 1999, 1998 and 1997
to earnings (loss) before income taxes as follows:
<TABLE>
<CAPTION>
1999 1998 1997
--------- ------- --------
<S> <C> <C> <C>
Computed "expected" tax expense ................................. $(724,900) $10,600 $(35,100)
Increase in income taxes resulting from:
State income taxes, net of federal income tax benefit ......... 3,400 2,600 (6,100)
Compensation charges .......................................... 795,500 -- --
Research credit ............................................... (6,200) -- --
Other, net .................................................... (6,100) 1,300 200
--------- ------- --------
$ 61,700 $14,500 $(41,000)
========= ======= ========
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1999, 1998 and 1997 are presented below:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Deferred tax assets:
Vacation costs ................................................ $28,900 $23,500 $ 6,800
Net operating loss carryforwards .............................. -- 4,600 34,300
Other ......................................................... 600 800 1,100
------- ------- -------
Total gross deferred tax assets .......................... 29,500 28,900 42,200
------- ------- -------
Deferred tax liabilities:
Accrued interest .............................................. (700) (700) --
Plant and equipment, principally due to differences in
depreciation expense ....................................... (9,200) (700) (700)
------- ------- -------
Total gross deferred tax liabilities ..................... (9,900) (1,400) (700)
------- ------- -------
Net deferred tax asset ................................... $19,600 $27,500 $41,500
======= ======= =======
</TABLE>
17
<PAGE>
FIREFLY TECHNOLOGIES, INC.
Notes to Financial Statements
December 31, 1999, 1998 and 1997
The net current deferred tax assets and net non-current deferred tax assets
(liabilities) as recorded on the balance sheet as of December 31, 1999,
1998 and 1997 are as follows:
1999 1998 1997
------- ------- -------
Net current deferred tax asset ............ $28,200 $22,800 $ 6,100
Net non-current deferred tax asset
(liability) ............................. (8,600) 4,700 35,400
------- ------- -------
Net deferred tax asset ..................... $19,600 $27,500 $41,500
======= ======= =======
A valuation allowance has not been recorded because the Company believes
that the deferred tax assets will, more likely than not, be realized.
(11) RETIREMENT PLAN
The Company sponsors a defined contribution retirement plan for its
employees. Employees are eligible to participate after three months of
employment with the Company and may elect to defer up to 15% of their
salary on a pre-tax basis. The plan allows the Company to make
discretionary contributions to the plan, which are allocated to the
participants' accounts. The Company has not made any contributions to the
plan to date.
(12) SUPPLEMENTAL CASH FLOW INFORMATION
In addition to the stock transactions described in footnote 1, the
following non-cash transactions have been excluded from the statements of
cash flows:
In 1997, the Company issued common stock to the founders and certain
employees in exchange for a note receivable in the amount of $18,100. This
transaction was excluded from the 1997 statement of cash flows, and
included in the 1998 statement when it was repaid in full.
Since its incorporation, the Company has entered into a number of capital
leases for computer and manufacturing equipment. The value of the assets
purchased under capital leases and the related obligations have been
excluded from the statements of cash flows as follows: $59,226 in 1999,
$14,198 in 1998 and $27,411 in 1997.
In 1998, the Company transferred certain fixed assets under lease and the
related lease obligation to a customer. Except for the loss of $1,320 on
the sale of the equipment, this transfer has not been included in the
statement of cash flows.
18
<PAGE>
FIREFLY TECHNOLOGIES, INC.
Notes to Financial Statements
December 31, 1999, 1998 and 1997
Amounts paid for interest were $7,520 in 1999; $10,286 in 1998; and $3,773
in 1997.
Amounts paid for income taxes were $57,456 in 1999; $456 in 1998; and $0 in
1997.
(13) SUBSEQUENT EVENTS
On May 5, 2000, Firefly entered into an Agreement and Plan of Merger with
Zygo Corporation pursuant to which the Company agreed to be acquired by
Zygo Corporation. Immediately thereafter, the Acquisition was consummated
by the merger of Zygo TeraOptix (a wholly-owned subsidiary of Zygo
Corporation) with and into Firefly and Firefly became a wholly-owned
subsidiary of Zygo Corporation under the new name Zygo TeraOptix.
Under the terms of the Acquisition, Zygo Corporation exchanged an aggregate
of approximately 2,300,000 shares of its common stock for all of the then
outstanding capital stock and stock options of Firefly. The merger will be
accounted for as a "pooling of interests." The Firefly voting trusts
terminated upon the consummation of the merger.
Based on the expected vesting of certain stock options, it is expected that
the Company will record approximately $9,685,000 of additional compensation
expense in the first half of its fiscal 2000.
19
