Page 1 of 22 pages.
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): December 24, 1999
NETWORK EQUIPMENT TECHNOLOGIES, INC.
------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 0-15323 94-2904044
-------- ------- ----------
(State or Other Jurisdiction (Commission File Number) (IRS Employer
of Incorporation) Identification No.)
6500 Paseo Padre Parkway, Fremont, California 94555
---------------------------------------------------
(Address of Principal Executive Offices)
(510) 713-7300
--------------
(Registrant's Telephone Number, Including Area Code)
[Not Applicable]
----------------
(Former Name or Former Address, if Changed Since Last Report.)
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<PAGE>
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
FlowWise Networks, Inc.:
We have audited the accompanying balance sheets of FlowWise Networks, Inc. (a
California corporation in the development stage) as of December 31, 1998 and
1997 and the related statements of operations, shareholders' equity and cash
flows for the years ended December 31, 1998 and 1999 and for the period from
inception (March 6, 1996) to December 31, 1996 and 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
out 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 FlowWise networks, Inc. as of
December 31, 1998 and 1997, and the results of operations and its cash flows for
the years then ended December 31, 1998 and 1999 and for the period from
inception (March 6, 1996) to December 31, 1996 and 1998, in conformity with
generally accepted accounting principles.
/s/ Arthur Andersen
San Jose. Ca.
April 29, 1999
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<PAGE>
FlowWise Networks, Inc.
(A development stage company)
Condensed Balance Sheets
<TABLE>
<CAPTION>
December 31,
1998 1997
---- ----
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 5,505,418 $ 4,090,930
Marketable securities 2,488,584 --
Accounts Receivable 47,123 --
Inventory 157,961 --
Prepaid expenses and other current assets 67,390 9,190
------------ ------------
Total current assets 8,266,476 4,100,120
Property and equipment, net 1,124,015 614,027
Other non-current assets 20,990 20,990
------------ ------------
$ 9,411,481 $ 4,735,137
============ ============
Current liabilities
Current portion of note payable $ 148,333 $ 178,000
Current portion of capital lease obligations 8,839 --
Accounts payable 355,352 78,452
Accrued liabilities 750,577 272,743
------------ ------------
Total current liabilities 1,263,101 529,195
Note payable, net of current portion -- 148,333
Capital lease obligations, net of current portion 25,738 --
------------ ------------
Total liabilities 1,288,839 677,528
------------ ------------
Commitments (Note 5)
Shareholders' equity
Convertible preferred stock, Series A, no par value;
authorized 1,900,000 shares; issued and
outstanding 1,123,596 shares in 1998 and 1997,
liquidation preference of $3,000,001 and $3,224,720 3,000,001 3,000,001
respectively
Convertible preferred stock, Series B, no par value;
authorized, issued and outstanding
2,247,192 shares in 1998 and 1997,
liquidation preference of $6,000,002 5,314,123 5,314,123
Convertible preferred stock, Series C, no par value;
authorized 4,569,289 shares; issued and
outstanding 4,500,001 shares in 1998 and no
shares in 1997; liquidation preference of $12,015,003 11,639,323 --
Common stock, no par value; authorized 30,000,000 shares;
issued and outstanding 9,809,469 shares in 1998 and
8,259,655 shares in 1997 972,603 448,708
Warrants to purchase common and preferred stock 786,037 685,879
Notes receivable from issuance of common stock (416,696) (362,663)
Deficit accumulated during the development stage (13,172,749) (5,028,439)
------------ ------------
Total shareholders' equity 8,122,642 4,057,609
------------ ------------
$ 9,411,481 $ 4,735,137
============ ============
</TABLE>
See Notes to Financial Statements
3
<PAGE>
FlowWise Networks, Inc.
(A development stage company)
Statement of Stockholder's Equity
(thousands)
<TABLE>
<CAPTION>
Convertible Preferred Stock
--------------------------------------------------------------------
Series A Series B Series C
--------------------------------------------------------------------
Shares Amount Shares Amount Shares Amount
<S> <C> <C> <C> <C> <C> <C>
BALANCE, MARCH 6, 1996 (inception) -- $ -- -- $ -- -- $ --
Issuance of common stock to founders
at $0.0118 per share in March 1996 -- -- -- -- -- --
Common stock issued at $0.30 per share
in June 1996 -- -- -- -- -- --
Series A convertible preferred stock
issued at $2.67 per share in June
1996 1,124 3,000 -- -- -- --
Net loss -- -- -- -- -- --
-------- -------- -------- -------- -------- --------
BALANCE, DECEMBER 31, 1996 1,124 3,000 -- -- -- --
Series B convertible preferred stock
and common stock warrants issued
at $2.67 per unit in March 1997 -- -- 2,247 5,314 -- --
Stock options exercised at $0.30 per
share in October 1997 -- -- -- -- -- --
Net loss -- -- -- -- -- --
--------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 1,124 3,000 2,247 5,314 -- --
Series C convertible preferred stock
and common stock warrants issued
at $2.67 per unit in May 1998 and
August 1998 -- -- -- -- 4,500 11,639
Exercise of warrants for 918,406
shares of common stock at $0.001
per share in June 1998 -- -- -- -- -- --
Stock options exercised at $0.50 per
share in November 1998 -- -- -- -- -- --
Stock options exercised at $0.30 per
share in March - December 1998 -- -- -- -- -- --
Accrued interest on notes receivable
from issuance of common stock -- -- -- -- -- --
Net loss -- -- -- -- -- --
--------------------------------------------------------------------
BALANCE, DECEMBER 31, 1998 1,124 3,000 2,247 5,314 4,500 11,639
====================================================================
<CAPTION>
Warrant to Notes Deficit
Purchase Receivable Accumulated
Common Stock Common and from During the Total
-------------------- Preferred Issuance of Development Shareholder's
Shares Amount Stock Common Stock Stage Equity
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, MARCH 6, 1996 (inception) -- $ -- $ -- $ -- $ -- $ --
Issuance of common stock to founders
at $0.0118 per share in March 1996 7,041 83 -- (32) -- 51
Common stock issued at $0.30 per share
in June 1996 1,210 363 -- (331) -- 32
Series A convertible preferred stock
issued at $2.67 per share in June
1996 -- -- -- -- -- 3,000
Net loss -- -- -- -- (1,564) (1,564)
-----------------------------------------------------------------------
BALANCE, DECEMBER 31, 1996 8,251 446 -- (363) (1,564) 1,519
Series B convertible preferred stock
and common stock warrants issued
at $2.67 per unit in March 1997 -- -- 686 -- -- 6,000
Stock options exercised at $0.30 per
share in October 1997 9 3 -- -- -- 3
Net loss -- -- -- -- (3,464) (3,464)
-----------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 8,260 449 686 (363) (5,028) 4,058
Series C convertible preferred stock
and common stock warrants issued
at $2.67 per unit in May 1998 and
August 1998 -- -- 376 -- -- 12,015
Exercise of warrants for 918,406
shares of common stock at $0.001
per share in June 1998 918 276 (276) -- -- 1
Stock options exercised at $0.50 per
share in November 1998 20 10 -- -- -- 10
Stock options exercised at $0.30 per
share in March - December 1998 611 183 -- -- -- 183
Accrued interest on notes receivable
from issuance of common stock -- 54 -- (54) -- --
Net loss -- -- -- -- (8,144) (8,144)
-----------------------------------------------------------------------
BALANCE, DECEMBER 31, 1998 9,809 973 786 (417) (13,173) 8,123
=======================================================================
</TABLE>
4
<PAGE>
FlowWise Networks, Inc.
(A development stage company)
Statement of Operations
<TABLE>
<CAPTION>
Period from Period from
Inception Inception
(March 6, 1996) (March 6, 1996)
Year ended December 31, to December 31, to December 31,
1998 1997 1996 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Development revenue $ 148,156 $ -- $ 19,950 $ 168,106
Cost of development revenue 66,043 -- 14,937 80,980
------------ ------------ ------------ ------------
Gross profit 82,113 -- 5,013 87,126
------------ ------------ ------------ ------------
Operating expenses:
Research and development 3,866,158 2,444,379 1,111,410 7,421,947
Sales and marketing 3,225,408 441,071 160,624 3,827,103
General and administrative 1,468,760 784,005 334,140 2,586,905
------------ ------------ ------------ ------------
Total operating expenses 8,560,326 3,669,455 1,606,174 13,835,955
------------ ------------ ------------ ------------
Loss from operations (8,478,213) (3,669,455) (1,601,161) (13,748,829)
Interest and other income, net 333,903 205,230 36,947 576,080
------------ ------------ ------------ ------------
Net loss $ (8,144,310) $ (3,464,225) $ (1,564,214) $(13,172,749)
============ ============ ============ ============
</TABLE>
See Notes to Financial Statements
5
<PAGE>
FlowWise Networks, Inc.
(A development stage company)
Statements of Cash Flows
<TABLE>
<CAPTION>
Period from Period from
Inception Inception
(March 6, 1996) (March 6, 1996)
Year ended December 31, to December 31, to December 31,
1998 1997 1996 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (8,144,310) $ (3,464,225) $ (1,564,214) $(13,172,749)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation 390,444 152,735 19,676 562,855
Changes in assets and liabilities:
Accounts receivable (47,123) -- (47,123)
Inventory (157,961) -- (157,961)
Prepaid expenses and other assets (58,200) 14,173 (47,353) (67,390)
Other non-current assets -- 3,000 (20,990)
Accounts payable 276,900 33,625 48,739 355,352
Accrued liabilities 477,834 187,346 81,485 750,577
------------ ------------ ------------ ------------
Net cash used in operating activities (7,262,416) (3,073,346) (1,461,667) (11,797,429)
------------ ------------ ------------ ------------
Cash flows from investing activities:
Purchases of marketable securities (2,488,584) -- -- (2,488,584)
Purchases of property and equipment (900,432) (556,061) (230,377) (1,686,870)
------------ ------------ ------------ ------------
Net cash used in investing activities (3,389,016) (556,061) (230,377) (4,175,454)
------------ ------------ ------------ ------------
Cash flows from financing activities:
Proceeds from note payable -- 356,000 -- 356,000
Proceeds from capital leases 34,577 -- -- 34,577
Principal payments on note payable (178,000) (29,667) -- (207,667)
Proceeds from issuance of Series A convertible
preferred stock -- -- 3,000,001 3,000,001
Proceeds from issuance of Series B convertible
preferred stock and common stock warrants -- 6,000,002 -- 6,000,002
Proceeds from issuance of Series C convertible
preferred stock and common stock warrants 12,015,003 -- -- 12,015,003
Proceeds from issuance of common stock 194,340 2,625 83,420 280,385
------------ ------------ ------------ ------------
Net cash provided by financing activities 12,065,920 6,328,960 3,083,421 21,478,301
------------ ------------ ------------ ------------
Net increase in cash and cash equivalents 1,414,488 2,699,553 1,391,377 5,505,418
Cash and cash equivalents at beginning of period 4,090,930 1,391,377 -- --
------------ ------------ ------------ ------------
Cash and cash equivalents at end of period $ 5,505,418 $ 4,090,930 $ 1,391,377 $ 5,505,418
============ ============ ============ ============
Supplemental cash flow information:
Cash paid for interest $ 25,817 $ 6,334 $ -- $ 32,151
Issuance of common stock for notes receivable $ -- $ -- $ 362,663 $ 362,663
</TABLE>
See Notes to Financial Statements
6
<PAGE>
FlowWise Networks, Inc.
(A development stage company)
Notes to Financial Statements
December 31, 1998
1. Organization and Operations of the Company
FlowWise Networks, Inc. (the "Company" or "FlowWise"), formerly CellSwitch
Networks, Inc. and MediaWise Networks, Inc., a California corporation, was
incorporated in March 1996. FlowWise develops, designs, manufactures and markets
computer networking equipment products designed for use with medium to large
local area networks. In March 1996, the Company acquired property, licensed
technology, and was assigned certain agreements from Ramp Networks, Inc. ("Ramp
Networks"), formerly Trancell Systems, Inc., for approximately $83,000. Ramp
Networks is considered a related party because, in March 1996, the Company was
spun-off from Ramp Networks with each shareholder of Ramp Networks receiving one
share of the Company for each share of Ramp Networks the held.
Through December 31, 1998, the Company's principal efforts have been focused on
raising capital, developing its products and recruiting personnel.
The Company is in the development stage and subject to a number of risks
associated with companies in a similar stage of development, including
dependence on key employees for technology development and support, volatility
of the industry, potential competition from larger, more established companies,
the ability to penetrate the market with its products and the ability to obtain
adequate financing to support its growth.
2. Summary of Significant Accounting Policies
Use of estimates in the preparation of financial statements: 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 disclosures of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the period. Actual results could differ from those
estimates.
Reclassifications:
Certain prior year amounts in the financial statements have been reclassified to
conform to the 1998 presentation.
Cash and cash equivalents:
For purposes of the statements of cash flows, cash and cash equivalents consist
of investments with original maturities of less than three months. As of
December 31, 1998, the Company's cash and cash equivalents consisted of cash in
bank checking and money market accounts.
Marketable securities:
Marketable securities primarily consist of U.S. Treasury bills having maturities
of less than one year. Such investments are classified as available-for-sale and
are held by one investment bank. The difference between the cost basis and the
market value of the Company's investments and unrealized gross holding gains and
losses was not material as of December 31, 1998. Realized gains and losses are
recorded on the specific identification method.
7
<PAGE>
Inventory:
Inventory is stated at lower of cost (average) or market. As of December 31,
1998, inventory consisted of:
Raw materials $ 37,887
Work-in-process 30,064
Finished goods 77,724
Consigned inventory 12,286
--------
$157,961
========
Property and equipment:
Property and equipment are
stated at cost. Depreciation is provided using the straight-line method over the
estimated useful lives of the assets, which are three years for computers and
equipment and five years for furniture and fixtures. Property and equipment
consisted of the following as of December 31, 1998:
1998 1997
--------------------------
Computers and equipment $ 1,539,291 $ 717,634
Furniture and fixtures 147,579 68,804
--------------------------
1,686,870 786,438
Less: Accumulated depreciation (562,855) (172,411)
--------------------------
$ 1,124,015 $ 614,027
==========================
Stock compensation:
In accordance with the provisions of Statement of Financial Accounting Standards
(SFAS) No. 123, "Accounting for Stock-Based Compensation", the Company has
chosen to apply Accounting Principles Board (APB) Opinion 25 and the related
interpretations in accounting for its stock option plan. Note 6 to the financial
statements contains a summary of the disclosure provisions under SFAS No. 123.
Revenue recognition;
Revenues from product sales are generally recognized at the time of shipment to
the customer, with provisions for estimated returns and allowances. Returns and
allowances have been insignificant to date.
3. Note Payable
In April 1997, the Company entered into a note payable agreement with a bank.
The note payable was secured by specific assets and provided for borrowings of
up to $400,000 until October 17, 1997. The amount actually drawn amounted to
$356,000. The note was repaid in twenty-four equal monthly installments of
principal, plus interest, commencing on November 17, 1997. The final payment was
made in April 1999. Interest on the borrowings was payable monthly at the bank's
base rate plus 2% (9.75% at December 31, 1998). The outstanding borrowings under
this agreement were $148,333 as of December 31, 1998.
4. Capital Lease Obligations
In November 1998, the Company entered into an equipment lease line agreement
which provides up to $1.5 million for the purchase of equipment. The borrowings
are secured by the equipment purchased under the lease which consists primarily
of computers and equipment. The cost of the equipment under capital leases
included in property and equipment as of December 31, 1998 was $34,577. As of
December 31, 1998, the borrowings outstanding on this agreement were $34,577
which bear an interest rate of 8% per annum and is due in 42 equal monthly
payments of approximately $900.
8
<PAGE>
The future minimum lease payments as of December 31, 1998 were as follows:
1999 $ 10,858
2000 11,285
2001 11,285
2002 6,069
--------
Total minimum lease payments 39,497
Less: Amount representing interest (4,920)
--------
Present value of minimum lease payments 34,577
Less: Current portion of capital lease obligations (8,839)
--------
Capital lease obligations, net of current portion $ 25,738
========
In connection with the capital lease, a warrant was issued to the lender to
purchase up to 28,777 shares of Series C preferred stock at $2.085 per share
(see Note 6).
5. Commitments
The Company leases its facilities under operating lease agreements expiring
through March 31, 2000. Rent expense for all operating leases totaled
approximately $220,000 and $219,000 for the years ended December 31, 1998 and
December 31, 1997, respectively. Minimum future lease payments under all
noncancellable operating leases as of December 31, 1998 are as follows:
1999 $212,888
2000 54,511
--------
$267,399
========
6. Shareholders' Equity
Convertible preferred stock:
In May 1998, the Company amended its Articles of Incorporation to reflect the
authorization of 10,000,000 shares of preferred stock of which 1,900,000 have
been designated Series A preferred stock, 2,247,192 shares have been designated
Series B preferred stock and 4,569,289 shares have been designated Series C
preferred stock.
The rights and preferences of the outstanding Series A, B and C preferred stock
are as follows:
Dividends
The holders of Series A, B and C preferred stock are entitled to receive
noncumulative dividends at an annual rate of $.20 per share. Such
dividends shall be payable only when, as, and if declared by the Board of
Directors. No dividends shall be payable on any common stock until
dividends on Series A, B and C preferred stock have been paid or declared
by the Board of Directors. As of December 31, 1998, no dividends have been
declared.
Liquidation preference
In the event of any liquidation, dissolution or winding up of the Company,
as defined, holders of Series A, B and C preferred stock are entitled to
receive, in preference to holders of common stock, the amount of $2.67 per
share plus all declared but unpaid dividends. Such amounts will be
adjusted for any stock split, stock dividends and recapitalizations. If
9
<PAGE>
such amounts are not available to sufficiently satisfy the full
preferential amount, the entire assets of the Company will be distributed
to preferred shareholders in proportion to their aggregate liquidation
preference. Upon the completion of the initial distribution to holders of
preferred stock, the remaining assets of the Company will be distributed
among holders of the preferred stock and common stock held by each,
assuming conversion of all such preferred stock until the holders of the
preferred stock shall have received an aggregate of $8.01 per share, which
includes liquidation amounts previously mentioned above. As of December
31, 1998, the aggregate liquidation preference was $21,015,006.
Voting rights
The holders of the Series A, B and C preferred stock are entitled to the
number of votes equal to the number of shares of common stock into which
such preferred stock is convertible.
Conversion
Each share of Series A, B and C preferred stock is convertible into one
share of common stock at the option of the holder at any time after the
date of issuance of such shares, or at the consummation of the Company's
sale of common stock in an underwritten public offering which results in
net cash proceeds to the Company of at least $20,000,000 and with an
offering price to the public of at least $6.26 per share. The conversion
rate is subject to adjustment for dilution, including, but not limited to,
stock splits, stock dividends and stock combinations.
Common stock;
As of December 31, 1998, the Company had reserved the following shares of
authorized but unissued common stock for future issuance:
Conversion Series A outstanding preferred stock 1,123,596
Conversion Series B outstanding preferred stock 2,247,192
Conversion Series C outstanding preferred stock 4,500,001
Conversion of warrants outstanding 2,655,650
Stock Option Plan 4,533,297
Outside options 590,000
----------
15,649,736
==========
In May 1998, the Company amended its Articles of Incorporation to reflect the
authorization of 30,000,000 shares of common stock.
Warrants to purchase common and preferred stock:
During 1997, in connection with the Company's Series B preferred stock offering,
the Company granted warrants to purchase 2,282,128 shares of common stock at
$.001 per share. These warrants may be exercised prior to (a) March 25, 2002,
(b) an acquisition of the Company, as defined, or (c) the effective date of the
Company's initial public offering. During 1998, 918,406 warrants were exercised.
During 1998, in connection with the Company's Series C preferred stock offering,
the Company granted warrants to purchase 1,263,151 shares of common stock at
$.001 per share. These warrants may be exercised until the earlier of (a) five
years, (b) an acquisition of the Company, as defined, or (c) the effective date
of the Company's initial public offering. As of December 31, 1998, the warrants
had not been exercised.
During 1998, in conjunction with the capital lease obligations (see Note 4), the
Company issued a warrant to purchase 28,777 shares of Series C convertible
preferred stock at an exercise price of $2.085 per share. The warrant is
exercisable until the earlier of (a) October 2003, (b) the effective
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date of the Company's initial public offering or (c) an acquisition of the
Company, as defined. As of December 31, 1998, the warrant had not been
exercised.
11
<PAGE>
Notes receivable from issuance of common stock:
During 1996, the Company sold 3,792,255 shares of its common stock to officers
and employees of the Company in consideration for full recourse promissory notes
in the amount of $362,663. Should the officers and employees terminate
employment, these shares are subject to a right of repurchase by the Company.
The notes bear interest at 6% and mature at various dates through June 2006.
Stock-based compensation plan:
In March 1996, the Company adopted the 1996 Stock Option Plan (the "Plan"). The
Company accounts for this plan under APB Opinion No. 25, "Accounting for Stock
Issued to Employees", under which no compensation expense has been recognized.
Had compensation expense for the Plan been determined consistent with SFAS No.
123, "Accounting for Stock-Based Compensation", the Company's net loss would
have increased as follows:
Period from
Inception
Year Ended December 31, (March 6, 1996)
---------------------------- To December 31,
1998 1997 1998
-------------------------------------------
Net loss, as reported $ (8,144,310) $ (3,464,225) $(13,172,749)
SFAS No. 123 compensation expense (70,953) (51,271) (140,198)
-------------------------------------------
Pro forma net loss $ (8,215,263) $ (3,515,496) $(13,312,947)
===========================================
The fair value of each option grant was estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions used for grants in 1998 and 1997: risk free interest rate of 6.25
percent; expected dividend yields of 0 percent; expected lives of 4 years;
expected volatility of 0.01 percent (the Company is a private entity).
Stock option plan:
Under the Plan, the Company is authorized to issue 5,173,455 shares, as amended,
thereunder to employees, directors and consultants. Under the Plan, the Board of
Directors may grant incentive and nonqualified stock options to employees,
directors and consultants of the Company. The exercise price per share for a
non-statutory stock option cannot be less than 85% of the fair market value, as
determined by the Board of Directors, on the date of the grant. The exercise
price per share for incentive stock options cannot be less than the fair market
value, as determined by the Board of Directors, on the date of the grant.
Options generally vest over a four-year period and generally expire ten years
after the date of grant. Option activity under the Plan was as follows:
12
<PAGE>
Options Outstanding
-----------------------
Options Wtd. Avg.
Available Shares Ex. Price
--------------------------------------
Balance at March 6, 1996 -- -- $ --
Authorized 1,780,000 -- --
Granted (1,192,000) 1,192,000 0.30
Cancelled 177,000 (177,000) 0.30
--------------------------------------
Balance at December 31, 1996 765,000 1,015,000 0.30
Authorized 2,593,455 -- --
Granted (2,694,000) 2,694,000 0.30
Exercised -- (8,750) 0.30
Cancelled 600,000 (600,000) 0.30
--------------------------------------
Balance at December 31, 1997 1,264,455 3,100,250 0.30
Authorized 800,000 -- --
Granted (2,053,658) 2,053,658 0.36
Exercised -- (631,408) 0.30
Cancelled 372,500 (372,500) 0.30
--------------------------------------
Balance at December 31, 1998 383,297 4,150,000 $ 0.33
======================================
At December 31, 1998, options for 1,192,192 shares were vested under the Plan
and are exercisable at a weighted average exercise price of $0.30 per share.
During 1996, the Company issued 590,000 non-statutory stock options outside of
the Plan to certain officers and consultants. These options have an exercise
price of $0.30, generally vest over a four-year period and expire ten years
after grant. At December 31, 1998, all shares remain outstanding and
approximately 385,000 of these shares were vested. Under the provisions of SFAS
No. 123, compensation expense as calculated using the Black-Scholes model for
the fair value of the options granted to consultants was immaterial for the
period from inception to December 31, 1998.
7. Income Taxes
For income tax reporting purposes, the Company has federal and state net
operating loss carryforwards of approximately $10,966,000 and $11,049,000,
respectively, and federal and state research and development credit
carryforwards of approximately $343,000 and $187,000, respectively. The federal
credit and loss carryforwards will expire commencing in 2011. The state loss
carryforwards will expire commencing in 2004. The Internal Revenue Code contains
provisions which may limit the net operating loss and credit carryforwards
available to be used in any given year if certain events occur, including
changes in ownership.
The components of the net deferred tax asset as of December 31, 1998 and 1997
are as follows:
1998 1997
--------------------------
Cumulative net operating loss carryforwards $ 4,391,000 $ 1,233,000
Cumulative temporary differences 127,000 32,000
Capitalized start-up costs 588,000 654,000
Research and development tax credit 530,000 292,000
Less: Valuation allowance (5,636,000) (2,211,000)
--------------------------
$ -- $ --
==========================
13
<PAGE>
The Company has not yet achieved profitable operations. Accordingly, management
has recorded a valuation allowance for the entire net deferred tax asset.
8. 401(k) Plan
The Company has a 401(k) savings plan for all eligible employees and their
beneficiaries. Contributions by the Company are discretionary. There have been
no contributions by the Company (approved or payable) from inception to December
31, 1998.
9. Subsequent Event
In April 1999, the Company received a $5 million term loan from two unrelated
lenders. The loan is to be repaid over 36 months with principal payments of
$151,500 per month and interest at 12.3% per annum. In connection with this term
loan, a warrant was issued to purchase 239,808 shares of Series C preferred
stock at an exercise price of $2.085 per share. This warrant expires in the
later of 10 years or 5 years after the closing of the Company's initial public
offering of its common stock.
14
<PAGE>
FlowWise Networks, Inc.
Condensed Balance Sheets
(unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
---- ----
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 5,964,855 $ 7,994,002
Accounts Receivable 241,182 47,123
Inventory 220,686 157,961
Prepaid expenses and other current assets 37,408 67,390
------------ ------------
Total current assets 6,464,131 8,266,476
Property and equipment, net 1,016,999 1,124,015
Other non-current assets 20,990 20,990
------------ ------------
$ 7,502,120 $ 9,411,481
============ ============
Current liabilities
Current portion of note payable $ 1,363,500 $ 148,333
Current portion of capital lease obligations 143,402 8,839
Accounts payable 474,746 355,352
Accrued liabilities 929,515 750,577
------------ ------------
Total current liabilities 2,911,163 1,263,101
Note payable, net of current portion 3,484,985 --
Capital lease obligations, net of current portion 340,639 25,738
------------ ------------
Total liabilities 6,736,787 1,288,839
------------ ------------
Shareholders' equity
Convertible preferred stock, Series A 3,000,001 3,000,001
Convertible preferred stock, Series B 5,314,123 5,314,123
Convertible preferred stock, Series C 11,639,323 11,639,323
Common stock 996,529 972,603
Warrants to purchase common and preferred stock 786,037 786,037
Notes receivable from issuance of common stock (416,696) (416,696)
Deficit accumulated during the development stage (20,553,984) (13,172,749)
------------ ------------
Total shareholders' equity 765,333 8,122,642
------------ ------------
$ 7,502,120 $ 9,411,481
============ ============
</TABLE>
See Notes to Financial Statements
15
<PAGE>
FlowWise Networks, Inc.
Condensed Statement of Operations
(unaudited)
Nine months ended Sept.30,
1999 1998
---- ----
Revenue $ 607,869 $ 32,040
Cost of revenue 290,942 15,210
----------- -----------
Gross profit 316,927 16,830
----------- -----------
Operating expenses:
Operations 468,803 299,949
Research and development 2,971,020 3,108,370
Sales and marketing 3,494,958 1,954,451
General and administrative 718,678 750,528
----------- -----------
Total operating expenses 7,653,459 6,113,298
----------- -----------
Loss from operations (7,336,532) (6,096,468)
Interest and other income, net (44,703) 232,420
----------- -----------
Loss before taxes (7,381,235) (5,864,048)
Income tax provision -- 1,600
----------- -----------
Net loss $(7,381,235) $(5,865,648)
=========== ===========
See Notes to Financial Statements
16
<PAGE>
FlowWise Networks, Inc.
Condensed Statement of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Nine months ended Sept.30,
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss (7,381,235) (5,865,648)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation 393,223 239,198
Changes in assets and liabilities:
Accounts receivable (194,059) (28,811)
Inventory (62,725) (92,440)
Prepaid expenses and other assets 29,983 (32,671)
Accounts payable 119,394 530,078
Accrued liabilities 178,938 506,218
------------ ------------
Net cash used in operating activities (6,916,481) (4,744,076)
------------ ------------
Cash flows from investing activities:
Purchases of marketable securities (1,482,140) (2,449,743)
Proceeds from marketable securities 2,488,584 --
Purchases of property and equipment (286,207) (774,058)
------------ ------------
Net cash provided by (used in) investing activities 720,237 (3,223,801)
------------ ------------
Cash flows from financing activities:
Proceeds from note payable 4,848,500 --
Proceeds from equipment lease line 600,831 --
Principal payments on capital lease obligation (150,346) --
Principal payments on notes payable (148,333) (133,504)
Proceeds from issuance of preferred stock -- 12,000,761
Proceeds from issuance of common stock 22,889 161,843
------------ ------------
Net cash provided by financing activities 5,173,541 12,029,100
------------ ------------
Net increase (decrease) in cash and cash equivalents (1,022,703) 4,061,223
Cash and cash equivalents at beginning of period 5,505,418 4,090,930
------------ ------------
Cash and cash equivalents at end of period $ 4,482,715 $ 8,152,153
============ ============
</TABLE>
See Notes to Financial Statements
17
<PAGE>
FlowWise Networks, Inc.
(A development stage company)
Notes to Financial Statements
September 30, 1999
1. Basis of Presentation
The accompanying unaudited condensed financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 8-K and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and notes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the nine month period ended September 30, 1999 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1999. For further information, refer to the financial statements
and notes thereto included in the Company's 1998 Annual Report.
In fiscal year 1999, the Company exited the development stage and began normal
operations.
2. Inventories
Inventory is stated at lower of cost (average) or market. As of September 30,
1999, inventory consisted of:
Sept. 30, 1999 Dec. 31, 1998
-------------- -------------
Raw materials $ 76,371 $ 37,887
Work-in-process 77,632 30,064
Finished goods (4,729) 77,724
Consigned inventory 71,412 12,286
--------- ---------
$ 220,686 $ 157,961
========= =========
3. Subsequent Event
In December 1999, the Company was acquired by Network Equipment Technologies,
Inc. (N.E.T.) for cash of $16 million. The transaction was accounted for as a
purchase.
18
<PAGE>
NETWORK EQUIPMENT TECHNOLOGIES, INC.
Pro Forma Condensed Combining
Consolidated Statements of Operations
(in thousands, except per share amounts - unaudited)
<TABLE>
<CAPTION>
NET FlowWise
Year Ended
Mar. 31, Dec. 31 Pro Forma Pro Forma
1999 1998 Adjustments Notes Combined
---- ---- ----------- ----- --------
<S> <C> <C> <C> <C> <C>
Revenue:
Product revenue $ 157,119 $ 148 $ -- $ 157,267
Service and other revenue 106,716 -- -- 106,716
--------- --------- --------- ---------
Total revenue 263,835 148 -- 263,983
--------- --------- --------- ---------
Cost of sales:
Cost of product revenue 64,065 66 -- 64,131
Cost of service and other revenue 69,575 -- -- 69,575
--------- --------- --------- ---------
Total cost of sales 133,640 66 -- 133,706
--------- --------- --------- ---------
Gross margin 130,195 82 -- 130,277
Operating expenses:
Sales and marketing 87,025 3,225 90,250
Research and development 45,768 3,866 3,100 (2) 52,734
General and administrative 12,351 1,469 -- 13,820
Facility relocation costs 395 -- -- 395
Purchased intangible asset amortization -- -- 3,204 (4) 3,204
Restructure costs 4,695 -- -- 4,695
--------- --------- --------- ---------
Total operating expenses 150,234 8,560 6,304 165,098
--------- --------- --------- ---------
Income (loss) from operations (20,039) (8,478) (6,304) (34,821)
Other income (expense):
Interest income (expense) 4,605 334 (716) (5) 4,223
Other 738 -- -- 738
--------- --------- --------- ---------
Income (loss) before taxes (14,696) (8,144) (7,020) (29,860)
Income tax provision (benefit) (7,642) -- (1,316) (6) (8,958)
--------- --------- --------- ---------
Income (loss) before extraordinary gain (7,054) (8,144) (5,704) (20,902)
Extraordinary gain on repurchase of debentures 95 -- -- 95
--------- --------- --------- ---------
Net income (loss) $ (6,959) $ (8,144) $ (5,704) $ (20,807)
========= ========= ========= =========
Basic earnings (loss) per share
Income (loss) before extraordinary item $ (0.33) $ (0.97)
========= =========
Net income (loss) $ (0.32) $ (0.97)
========= =========
Diluted earnings (loss) per share
Income (loss) before extraordinary item $ (0.33) $ (0.97)
========= =========
Net income (loss) $ (0.32) $ (0.97)
========= =========
Shares used in per share calculation
Basic 21,508 21,508
========= =========
Diluted 21,508 21,508
========= =========
</TABLE>
See Notes to Condensed Combining Financial Statements
19
<PAGE>
NETWORK EQUIPMENT TECHNOLOGIES, INC.
Pro Forma Condensed Combining
Consolidated Statements of Operations
(in thousands, except per share amounts - unaudited)
<TABLE>
<CAPTION>
NET FlowWise
Nine Months Ended
Dec. 26, Dec. 31, Pro Forma Pro Forma
1999 1999 Adjustments Notes Combined
---- ---- ----------- ----- --------
<S> <C> <C> <C> <C> <C>
Revenue:
Product revenue $ 93,613 $ 400 $ -- $ 94,013
Service and other revenue 84,972 -- -- 84,972
--------- --------- --------- ---------
Total revenue 178,585 400 -- 178,985
--------- --------- --------- ---------
Cost of sales:
Cost of product revenue 39,692 212 -- 39,904
Cost of service and other revenue 55,811 -- -- 55,811
--------- --------- --------- ---------
Total cost of sales 95,503 212 -- 95,715
--------- --------- --------- ---------
Gross margin 83,082 188 -- 83,270
Operating expenses:
Sales and marketing 54,810 3,149 -- 57,959
Research and development 32,343 2,623 2,325 (2) 37,291
General and administrative 9,416 905 (150) (1) 10,171
In process research and development 879 -- (879) (3) --
Purchased intangible asset amortization -- -- 2,403 (4) 2,403
Restructure costs 3,383 -- 3,383
--------- --------- --------- ---------
Total operating expenses 100,831 6,677 3,699 111,207
--------- --------- --------- ---------
Income (loss) from operations (17,749) (6,489) (3,699) (27,937)
Other income (expense):
Interest income (expense) 3,817 (203) (392) (5) 3,222
Other 7,263 -- -- 7,263
--------- --------- --------- ---------
Income (loss) before taxes (6,669) (6,692) (4,091) (17,452)
Income tax provision (benefit) 12,771 -- -- 12,771
--------- --------- --------- ---------
Income (loss) before extraordinary gain (19,440) (6,692) (4,091) (30,223)
Extraordinary gain on repurchase of debentures -- -- --
--------- --------- --------- ---------
Net income (loss) $ (19,440) $ (6,692) $ (4,091) $ (30,223)
========= ========= ========= =========
Basic earnings (loss) per share
Income (loss) before extraordinary item $ (0.91) $ (1.41)
========= =========
Net income (loss) $ (0.91) $ (1.41)
========= =========
Diluted earnings (loss) per share
Income (loss) before extraordinary item $ (0.91) $ (1.41)
========= =========
Net income (loss) $ (0.91) $ (1.41)
========= =========
Shares used in per share calculation
Basic 21,375 21,375
========= =========
Diluted 21,375 21,375
========= =========
</TABLE>
See Notes to Condensed Combining Financial Statements
20
<PAGE>
NETWORK EQUIPMENT TECHNOLOGIES, INC.
Notes to Condensed Combining Financial Statements
1. Acquisition
On December 24, 1999, pursuant to an agreement and Plan of Merger dated as of
December 14, 1999 (the "Merger Agreement"), by and among Network Equipment
Technologies, Inc., a Delaware corporation ("N.E.T.), IPNow, Inc., a California
corporation and wholly-owned subsidiary of N.E.T. (`Sub"), and FlowWise Networks
Inc., a California corporation ("FlowWise"), Sub was merged with and into
FlowWise, with FlowWise being the surviving corporation and thereafter a
wholly-owned subsidiary of N.E.T. (the "Merger").
2. Pro Forma Adjustments
The accompanying pro forma financial statements are presented in accordance with
Article 11 of Regulation S-X.
To prepare the pro forma unaudited condensed combining statements of operations,
the NET statement of operations for the year ended March 31, 1999 has been
combined with the statement of operations of FlowWise for the year ended
December 31, 1998. Also the NET statement of operations for the nine months
ending December 26, 1999 has been combined with the comparable period of
FlowWise's operations. This method of combining the companies is only for the
presentation of pro forma unaudited condensed combining financial statements.
Actual statements of operations of the companies will be combined from the
effective date of the acquisition, with no retroactive restatement.
FlowWise's operations for the three months ended March 31, 1999 not included in
the condensed combining statements above are as follows:
Revenue $ 181,027
Cost of goods sold 92,381
-----------
Gross profit 273,408
Operating expenses 2,400,221
-----------
Income/(loss) from operations (2,126,813)
Net interest income 60,098
-----------
Income/(loss) before taxes (2,066,715)
Provision for income taxes --
-----------
Net income/(loss) $(2,066,715)
===========
The unaudited pro forma condensed combining financial statements should be read
in conjunction with the historical financial statements of NET and FlowWise.
The following pro forma adjustments have been made to the pro forma condensed
combining financial statements.
1. Reflects an adjustment to comply with NET's accounting policies.
2. Reflects the additional expense per year relating to the accomplishment of
certain milestones.
3. Reflects the reversing of the one time material in process research and
development charge.
21
<PAGE>
4. Reflects the amortization of the purchased intangible assets associated with
the purchase of FlowWise.
5. Reflects the interest expense and income related to the cash expended in the
transaction as well as the payment of FlowWise's long term debt.
6. Reflects the tax effect of the pro forma adjustments at NET's effective
rate.
22
<PAGE>
Independent Public Accountants Consent
We as independent public accountants, consent to the incorporation by reference
in Registration Statements No. 33-33013, No. 33-33063, No. 33-65157, No.
33-68860 and No. 333-49837 on forms S-8 and Registration Statement No. 33-45815
on form S-3 of Network Equipment Technologies, Inc. of our reports dated April
29, 1999, included in this Form 8-K of Network Equipment Technologies, Inc.
dated December 24, 1999. We have not performed any audits of any financial
statements of FlowWise Networks, Inc. subsequent to the reports as of December
31, 1998.
Arthur Andersen, LLP
San Jose, California
March 10, 2000
23
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned hereunto duly authorized.
Dated: March 10, 2000 NETWORK EQUIPMENT TECHNOLOGIES, INC.
By: /s/ HUBERT A.J. WHYTE
--------------------------------------
Name: HUBERT A.J. WHYTE
--------------------------------------
Title: PRESIDENT AND CHIEF EXECUTIVE OFFICER
24
