UNITED STATES
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) November 15, 2001
------------------------------
Microtune, Inc.
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(Exact name of registrant as specified in charter)
Delaware 000-31029-40 75-2883117
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(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
2201 Tenth Street, Plano, Texas 75074
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (972) 673-1600
----------------------------
(Former name or former address, if changed since last report)
Item 2. Acquisition or Disposition of Assets.
On October 28, 2001, we entered into an Agreement and Plan of Merger
and Reorganization (the "Merger Agreement") with Transilica Inc., a California
corporation ("Transilica"). The acquisition of Transilica has not yet closed but
we expect consummation of the acquisition to occur in the last half of November
2001. The acquisition of Transilica is subject to certain closing conditions.
Upon closing, Transilica will continue its business as a wholly owned subsidiary
of Microtune. Under the terms of the Merger Agreement, Microtune expects to
acquire all of the outstanding capital stock of Transilica. The acquisition was
structured to be a tax-free reorganization under Section 368 of the Internal
Revenue Code. Upon closing, under the terms of the Merger Agreement, shares
equivalent to 19.99% of Microtune's outstanding shares of common stock at
closing, excluding certain shares of our common stock issued for other
acquisitions subsequent to September 30, 2001 and prior to closing, plus a cash
amount that is based on the cash on the balance sheet of Transilica less certain
liabilities at closing (the "Merger Consideration"), will be issued and
exchanged for all of the outstanding capital stock of Transilica (the
"Transilica Acquisition"). The Merger Agreement also provides that approximately
fifteen percent (15%) of the total Merger Consideration in the form of Microtune
shares of common stock will be placed in escrow for the purpose of securing the
indemnification obligations of Transilica under the Merger Agreement. The escrow
shares are to be released periodically, subject to any escrow claims, at the end
of each of the three years following the closing. The shares to be issued by us
pursuant to the Merger Agreement will be issued pursuant to an exemption from
registration under the Securities Act. The Merger Agreement provides the
Transilica shareholders with the right to require us to register their Microtune
shares within twenty (20) days after the closing. Despite this registration
obligation, certain former Transilica shareholders who receive shares of
Microtune common stock will not be able to sell their shares of Microtune common
stock until the earlier to occur of Transilica's achievement of certain product
revenue-based milestones or the date that is three (3) months following closing.
In addition, the shares of Microtune common stock received by former Transilica
shareholders as a result of the Transilica Acquisition will be subject to lock-
up agreements which restrict their ability to sell the shares of Microtune
common stock that they received as a result of the Transilica Acquisition. The
lock-up agreements provide that each month, ten percent (10%) of the shares
subject to the lock-up agreements will be released from the lock-up
restrictions.
Concurrent with the signing of the Merger Agreement, Transilica and
Microtune entered into a Credit Agreement whereby Microtune has agreed to make
unsecured loans to Transilica in an aggregate amount not exceeding five million
dollars ($5,000,000.00). Under the Credit Agreement, if Transilica's cash
balance is less than five hundred thousand dollars ($500,000.00) and subject to
certain other conditions more fully described in the Credit Agreement, Microtune
shall make advances to Transilica upon Transilica's request. In connection with
the execution of the Credit Agreement, Transilica executed a convertible
promissory note for five million dollars ($5,000,000.00) in favor of Microtune,
which provides that all outstanding amounts under the credit facility will bear
interest at the rate of 8% per annum. In the event that the Merger Agreement is
terminated, all outstanding amounts under the credit facility automatically
convert into Transilica Series B Preferred Stock at a price of $1.6026 per
share.
The Credit Agreement also provides that Microtune will have the right to
participate in future equity financings of Transilica.
Transilica was founded in 1998 and designs, system-on-chip silicon products
for next-generation short-range wireless applications. The products Transilica
is developing consist of highly integrated solutions incorporating radio
transceivers, digital baseband and software on a single chip, which offer
customers low-power consumption and small form factors. Transilica's initial
products will be targeted at the Bluetooth and 802.11a standards, which are
communication protocols for short-range wireless applications. To date,
Transilica's activities have consisted primarily of product research and
development and no significant revenues have been earned from the sale of these
products. Additional research and development efforts will be required before
these products will be available for commercial use. Transilica is also capable
of designing customized system-on-chip solutions to meet a customer's specific
application.
Item 7. Financial Statements and Exhibits.
(a) Financial statements of Transilica Inc., business acquired.
(i) Independent auditors report.
(ii) Balance Sheets as of September 30, 2001 (unaudited), December
31, 2001 and 1999.
(iii) Statements of Operations for Nine Months Ended September 30,
2001 and 2000 (Unaudited), for the Years Ended December 31, 2000
and 1999 and for the Period from Inception (December 21, 1998)
through December 31, 2000.
(iv) Statements of Stockholders' Equity as of September 30, 2001
(Unaudited), December 31, 2000 and 1999.
(v) Statements of Cash Flows for the Nine Months Ended September 30,
2001 and 2000 (Unaudited), for the Years Ended December 31, 2000
and 1999 and for the Period from Inception (December 21, 1998)
through December 31, 2000.
(vi) Notes to Consolidated Financial Statements.
(b) Pro forma financial information. The Unaudited Pro Forma Consolidated
Financial Statements of Microtune giving effect to the acquisition of
Transilica Inc.
(i) Unaudited Pro Forma Consolidated Balance Sheet as of
September 30, 2001.
(ii) Unaudited Pro Forma Consolidated Statement of Operations for the
Year Ended December 31, 2000.
(iii) Unaudited Pro Forma Consolidated Statement of Operations for the
Nine Months Ended September 30, 2001.
(iv) Notes to Unaudited Pro Forma Consolidated Financial Statements.
(c) Exhibits
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Exhibit No. Description
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2.1 Agreement and Plan of Merger and
Reorganization
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10.1 Credit Agreement
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10.2 Promissory Note
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23.1 Consent of Auditors
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Microtune, Inc.
Date: November 15, 2001 By: /s/ Everett Rogers
----------------------------------------
Everett "Buddy" Rogers
Chief Financial Officer
INDEX TO FINANCIAL STATEMENTS
Combined Condensed Pro Forma Financial Statements (Unaudited):
Combined Condensed Pro Forma Balance Sheet as of
September 30, 2001 (Unaudited)............................................................................................ F-3
Combined Condensed Pro Forma Statement of Operations for the Year Ended
December 31, 2000 (Unaudited)............................................................................................. F-4
Combined Condensed Pro Forma Statement of Operations for the Nine
Months Ended September 30, 2001 (Unaudited)............................................................................... F-5
Notes to Combined Condensed Balance Sheet and Combined Condensed Pro Forma Statements
of Operations (Unaudited)................................................................................................. F-6
Consolidated Financial Statements of Transilica Inc.:
Report of Arthur Andersen LLP, Independent Public Accountants............................................................... F-9
Consolidated Balance Sheets as of September 30, 2001 (Unaudited) and
December 31, 2000 and 1999................................................................................................ F-10
Consolidated Statements of Operations for the Nine Months Ended September 30, 2001
and 2000 (Unaudited), the Years Ended December 31, 2000 and 1999, and the Period From
Inception (December 21, 1998) through December 31, 2000................................................................... F-11
Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1999 and 2000,
and the Nine Months Ended September 30, 2001 (Unaudited).................................................................. F-12
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2001 and
2000 (Unaudited), the Years Ended December 31, 2000 and 1999, and the Period From Inception
(December 21, 1998) through December 31, 2000............................................................................. F-13
Notes to Consolidated Financial Statements (Unaudited)...................................................................... F-15
F-1
MICROTUNE, INC.
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION
On October 28, 2001, Microtune, Inc. (the Company), entered into an Agreement
and Plan of Merger and Reorganization (the "Merger Agreement") with Transilica
Inc. (Transilica), a California Corporation. Under the terms of the Merger
Agreement, the Company expects to acquire all of the outstanding capital stock
of Transilica in exchange for shares of the Company's common stock representing
19.99% of the Company's outstanding shares on the merger closing date, excluding
certain shares of the Company's common stock issued for other acquisitions
subsequent to September 30, 2001 and prior to closing, and cash consideration
that is based on the cash on the balance sheet of Transilica at closing less
certain liabilities. Transilica was founded in 1998 and designs system-on-chip
silicon products for next-generation short-range wireless applications. The
products Transilica is developing consist of highly integrated solutions
incorporating radio transceivers, digital baseband and software on a single
chip, which offer customers low-power consumption and small form factors. This
acquisition is expected to close in November 2001.
The combination with Transilica will be accounted for as a purchase business
combination by the Company. The unaudited pro forma combined condensed statement
of operations for the twelve months ended December 31, 2000 and nine months
ended September 30, 2001 are based on the historical financial statements of the
Company and Transilica and assumes the combination had been completed on
January 1, 2000. The unaudited pro forma combined condensed balance sheet as of
September 30, 2001 gives effect to the acquisition as if it had occurred on
September 30, 2001.
The unaudited pro forma information is presented for illustrative purposes only
and is not necessarily indicative of the results of operations or financial
position that would have been reported if such transactions had been completed
as presented in the accompanying unaudited pro forma combined condensed balance
sheet and unaudited pro forma combined condensed statements of operations nor is
it necessarily indicative of the Company's future results of operations or
financial position. The pro forma adjustments and the assumptions on which they
are based are described in the accompanying notes to unaudited pro forma
combined condensed balance sheet and unaudited pro forma combined condensed
statements of operations.
The unaudited pro forma combined condensed balance sheet and unaudited pro forma
combined condensed statement of operations is based on, and should be read in
conjunction with the historical consolidated financial statements and the
related notes thereto of the Company for the year ended December 31, 2000
included in the Company's Annual Report on Form 10-K/A (Amendment No. 1) filed
with the Securities and Exchange Commission (SEC), the historical consolidated
financial statements and the related notes thereto of the Company for the nine
months ended September 30, 2001 included in the Company's Form 10-Q filed with
the SEC, and the consolidated financial statements and the related notes
thereto of Transilica for the year ended December 31, 2000 and nine months ended
September 30, 2001 included in this filing.
F-2
MICROTUNE, INC.
PRO FORMA COMBINED CONDENSED BALANCE SHEET
September 30, 2001
(Unaudited)
(In thousands)
Pro Forma
Microtune Historical Transilica Historical Adjustments Pro Forma
Assets September 30, 2001 September 30, 2001 (Note 2) Combined
-------------------- --------------------- ----------- ---------
Current assets:
Cash and cash equivalents............ $ 71,264 $ 9,627 $ (5,062) (a) $ 75,329
(500) (b)
Accounts receivable.................. 10,297 1 - 10,298
Inventories.......................... 9,855 - - 9,855
Deferred income taxes................ 620 - - 620
Other current assets................. 1,704 585 - 2,289
-------------------- --------------------- ----------- ---------
Total current assets............... 93,740 10,213 (5,562) 98,391
Property and equipment, net........... 17,813 2,363 - 20,176
Developed technology and other
intangible assets, net............... 4,918 - 60,510 (d) 65,428
Goodwill.............................. 18,476 - 26,504 (d) 44,980
Deferred income taxes................. 199 - - 199
Other assets and deferred charges..... 1,521 - - 1,521
Investment in Transilica.............. - - 153,700 (b) -
(3,386) (c) -
(150,314) (d) -
-------------------- --------------------- ----------- ---------
Total assets....................... $136,667 $ 12,576 $ 81,452 $230,695
==================== ===================== =========== =========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable..................... $ 3,128 $ 1,670 $ - $ 4,798
Accrued expenses..................... 8,662 535 1,600 (b) 10,797
Accrued compensation................. 1,991 360 - 2,351
Customer deposits.................... - 1,500 - 1,500
-------------------- --------------------- ----------- ---------
Total current liabilities.......... 13,781 4,065 1,600 19,446
Deferred income taxes................. 982 - - 982
Other noncurrent liabilities.......... 1,155 118 - 1,273
Commitments and contingencies.........
Stockholders' equity:
Preferred stock...................... - 29,351 (29,351) (c) -
Common stock......................... 40 63 7 (b) 47
(63) (c)
Additional paid-in capital........... 194,436 - 151,593 (b) 346,029
Due from stockholders................ (35) (55) - (90)
Deferred stock compensation.......... (8,700) - (30,900) (d) (39,600)
Accumulated other comprehensive loss. (988) - - (988)
Accumulated deficit.................. (64,004) (20,966) (5,062) (a) (96,404)
26,028 (c)
(32,400) (d)
-------------------- --------------------- ----------- ---------
Total stockholders' equity......... 120,749 8,393 79,852 208,994
-------------------- --------------------- ----------- ---------
Total liabilities and
stockholders' equity........... $136,667 $ 12,576 $ 81,452 $230,695
==================== ===================== =========== =========
Shares issued and outstanding......... 39,967 7,154 47,121
==================== =========== =========
See accompanying notes.
F-3
MICROTUNE, INC.
PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
Year Ended December 31, 2000
(Unaudited)
(In thousands, except per share data)
Microtune Transilica
Historical Year Historical Year Pro Forma
Ended December 31, Ended December 31, Adjustments Pro Forma
2000 2000 (Note 3) Combined
------------------ ------------------ ----------- ------------
Net revenue......................................... $ 70,829 $ 140 $ 70,969
Cost of revenues.................................... 46,369 73 46,442
------------------ ------------------ ------------
Gross margin........................................ 24,460 67 24,527
Operating expenses:
Research and development:
Stock option compensation......................... 1,360 - $ 10,600 (a) 11,960
Other............................................. 13,472 5,388 - 18,860
------------------ ------------------ ----------- ------------
14,832 5,388 10,600 30,820
Acquired in-process research and development....... 12,692 - - 12,692
Selling, general and administration:
Stock option compensation......................... 2,838 - 4,400 (a) 7,238
Other............................................. 16,443 271 - 16,714
------------------ ------------------ ----------- ------------
19,281 271 4,400 23,952
Amortization of intangible assets and goodwill..... 8,414 52 9,181 (b) 17,647
------------------ ------------------ ----------- ------------
Total operating expenses.......................... 55,219 5,711 24,181 85,111
------------------ ------------------ ----------- ------------
Loss from operations................................ (30,759) (5,644) (24,181) (60,584)
Other income (expense):
Interest income.................................... 2,727 89 - 2,816
Interest expense................................... - (51) - (51)
Foreign currency translation and transaction gains (2,451) - - (2,451)
(losses), net.....................................
Other.............................................. 723 (34) - 689
------------------ ------------------ ----------- ------------
Loss before provision for income taxes.............. (29,760) (5,640) (24,181) (59,581)
Provision for income taxes.......................... 2,034 - - 2,034
------------------ ------------------ ----------- ------------
Net loss............................................ $(31,794) $(5,640) $(24,181) $(61,615)
================== ================== =========== ============
Basic and diluted loss per common share............. $ (1.57) $ (2.31)
================== ============
Shares used to compute per share data (Note 4)...... 20,299 6,390 26,689
================== =========== ============
See accompanying notes.
F-4
MICROTUNE, INC.
PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
Nine Months Ended September 30, 2001
(Unaudited)
(In thousands, except per share data)
Microtune Transilica
Historical Nine Historical Nine Pro Forma
Months Ended Months Ended Adjustments Pro Forma
September 30, 2001 September 30, 2001 (Note 3) Combined
------------------ ------------------ ------------- ------------
Net revenue......................................... $ 47,129 $ 157 $ 47,286
Cost of revenues.................................... 34,170 76 34,246
------------------ ------------------ ------------
Gross margin........................................ 12,959 81 13,040
Operating expenses:
Research and development:
Stock option compensation......................... 1,014 - $ 7,400 (a) 8,414
Other............................................. 11,916 10,279 - 22,195
------------------ ------------------ ------------- ------------
12,930 10,279 7,400 30,609
Selling, general and administration:
Stock option compensation......................... 1,397 - 3,100 (a) 4,497
Other............................................. 11,298 4,923 - 16,221
------------------ ------------------ ------------- ------------
12,695 4,923 3,100 20,718
Amortization of intangible assets and goodwill..... 5,410 278 6,886 (b) 12,574
------------------ ------------------ ------------- ------------
Total operating expenses.......................... 31,035 15,480 17,386 63,901
------------------ ------------------ ------------- ------------
Loss from operations................................ (18,076) (15,399) (17,386) (50,861)
Other income (expense):
Interest income.................................... 2,565 230 - 2,795
Interest expense................................... - (42) - (42)
Foreign currency translation and transaction gains
(losses), net..................................... (1,245) - - (1,245)
Other.............................................. (910) (29) - (939)
------------------ ------------------ ------------- ------------
Loss before provision (benefit) for income taxes.... (17,666) (15,240) (17,386) (50,292)
Provision (benefit) for income taxes................ (478) - - (478)
------------------ ------------------ ------------- ------------
Net loss............................................ $(17,188) $(15,240) $(17,386) $(49,814)
================== ================== ============= ============
Basic and diluted loss per common share............. $(0.44) $ (1.08)
================== ============
Shares used to compute per share data (Note 4)...... 39,293 6,836 46,129
================== ============= ============
See accompanying notes.
F-5
MICROTUNE, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED CONSENSED BALANCE SHEET AND
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS
Year Ended December 31, 2000 and Nine Months Ended September 30, 2001
(Unaudited)
1. General
The combination with Transilica will be accounted for as a purchase
business combination by the Company. The accompanying unaudited pro forma
combined condensed balance sheet and unaudited pro forma combined condensed
statements of operations reflects the estimated aggregate cost of the
combination of approximately $153.7 million, consisting of cash and the fair
market value of the Company's securities to be issued to the shareholders of
Transilica, plus costs directly related to the combination as follows (in
thousands, except share data):
Estimated cash to be paid to Transilica shareholders.................................. $ 500
Fair market value of 7,154,000 shares of common stock, including restricted common
stock, to be issued to Transilica shareholders....................................... 135,900
Fair market value of Transilica stock options to be assumed........................... 15,700
Estimated transaction costs........................................................... 1,600
--------
Total estimated combination cost...................................................... $153,700
========
The cash to be paid to Transilica shareholders was estimated using
Transilica's expected closing balance sheet provided by management of
Transilica. The shares used in computing the pro forma purchase price were
based on the Company's outstanding shares on October 31, 2001. The actual number
of shares which will be issued in the combination will be based on the Company's
outstanding shares on the merger closing date, excluding certain shares of the
Company's common stock issued for other acquisitions subsequent to September 30,
2001 and prior to closing. The value of shares and stock options were based on a
price of $19.00 per share, which is the closing price of Microtune's common
stock on October 29, 2001, the date that the significant terms of the Merger
Agreement were agreed to and announced. The share price which will be used in
computing the actual combination cost will be the price on the day the number
shares to be issued is fixed. Accordingly, the actual combination cost will be
different than the total estimated combination cost included in the table above.
The fair value of the stock options assumed was estimated using the Black
Scholes option valuation model.
The aggregate purchase price has been allocated to the net assets acquired
on the basis of preliminary estimates of fair values as follows (in thousands):
Working capital.......................................................................... $ 1,086
Developed technology and other intangible assets......................................... 60,510
Goodwill................................................................................. 26,504
Acquired in-process research and development costs charged to expense.................... 32,400
Noncurrent assets and liabilities, net................................................... 2,300
Deferred stock compensation.............................................................. 30,900
--------
$153,700
========
F-6
MICROTUNE, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET AND
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS (Continued)
(Unaudited)
1. General (continued)
Microtune's management is primarily responsible for estimating the fair values
of intangible assets and acquired in-process research and development. The
estimates of fair values were determined based on preliminary information
provided by management of Transilica. The amount of deferred stock compensation
represents the estimated intrinsic value of unvested restricted stock grants and
the estimated intrinsic value of unvested stock options assumed which will be
charged to expense over the respective future vesting periods. The final
allocation of the purchase price, which is expected to be completed in the first
quarter of 2002, will be based on the complete evaluation by the Company of the
assets and liabilities of Transilica acquired. Although management does not
expect the final valuation of the assets and liabilities acquired to result in
values that are significantly different from the estimates included in the table
above, there can be no assurance that such differences will not occur.
Amounts allocated to acquired in-process research and development will be
expensed at the date of acquisition because the purchased research and
development does not have alternative future uses, and has not reached
technological feasibility based on the status of design and development
activities that required further refinement and testing. The estimates used in
valuing the research and development were based upon assumptions regarding
future events and circumstances management believes to be reasonable, but that
are inherently uncertain and unpredictable. The relative stage of completion and
projected operating cash flows of the underlying in-process projects acquired
were the most significant and uncertain assumptions utilized in the valuation
analysis of the acquired in-process research and development. Such uncertainties
could give rise to unforeseen budget overruns and revenue shortfalls in the
event that the Company is unable to successfully complete and commercialize the
projects.
2. Unaudited Pro Forma Combined Condensed Balance Sheet
The accompanying unaudited pro forma combined condensed balance sheet gives
effect to the combination as if it had occurred on September 30, 2001 and
reflects the following pro forma adjustments:
(a) To record estimated use of cash during the period from October 1,
2001 through the estimated date of closing that will not be
available for distribution to Transilica shareholders.
(b) To record the aggregate cost of the acquisition as described in
Note 1 above.
(c) To eliminate Transilica's historical equity balances.
(d) To record the preliminary allocation of the purchase price to
goodwill, purchased intangibles, in-process research and
development costs charged to expense, deferred stock
compensation, and other assets and liabilities acquired as
described in Note 1 above.
F-7
MICROTUNE, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET AND
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS (Continued)
(Unaudited)
3. Unaudited Pro Forma Combined Condensed Statements of Operations
The accompanying unaudited pro forma combined condensed statements of
operations have been prepared as if the combination was completed as of
January 1, 2000. These statements exclude the write-off of in-process research
and development costs as described in Note 1 above as this write-off was
considered a non-recurring charge. These statements reflect the following pro
forma adjustments:
(a) To record the amortization of deferred stock compensation which
resulted from the assumption of unvested Transilica restricted
stock grants and stock options in connection with the
acquisition. Deferred stock compensation is being amortized over
the remaining vesting periods of the related restricted stock
grants and stock options, which averaged two years at September
30, 2001.
(b) To record the amortization of developed technology and intangible
assets resulting from the allocation of the aggregate cost of the
combination. The allocation of the cost is preliminary and
amounts are subject to adjustment. The acquired developed
technology and intangible assets are being amortized over periods
of four to seven years. Goodwill resulting from this combination
is not subject to amortization.
4. Unaudited Pro Forma Combined Earnings Per Common Share Data
The unaudited pro forma combined basic and diluted loss per common share
data is computed by dividing pro forma combined loss per share by the weighted
average number of common shares assumed to be outstanding during each period.
Because the combined pro forma results of operations are a loss for the period,
the effects of the assumed exercise of stock options, warrants and restricted
common stock subject to repurchase rights does not have a dilutive effect.
F-8
Report of Independent Public Accountants
To Transilica Inc.:
We have audited the accompanying balance sheets of Transilica Inc. (a California
corporation in the development stage) as of December 31, 2000 and 1999, and the
related statements of operations, stockholders' equity and cash flows for the
years then ended and for the period from inception (December 21, 1998) to
December 31, 2000. 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 auditing standards generally accepted
in the United States. 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 Transilica Inc. as of December
31, 2000 and 1999, and the results of its operations and its cash flows for the
period from inception (December 21, 1998) to December 31, 2000, in conformity
with accounting principles generally accepted in the United States.
/s/ARTHUR ANDERSEN LLP
San Diego, California
June 18, 2001
F-9
Transilica Inc.
(a development stage company)
Balance Sheets
September 30, December 31,
2001 2000 1999
-------------------------------------------
(unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 9,626,758 $11,262,315 $ 1,448
Accounts receivable 950 28,108 -
Other current assets 584,798 190,666 15
------------ ----------- --------
Total current assets 10,212,506 11,481,089 1,463
Fixed assets, net of accumulated depreciation of $791,625,
$150,913 and $2,181, respectively 2,363,434 1,545,774 13,635
Other assets - 8,256 -
------------ ----------- --------
Total assets $ 12,575,940 $13,035,119 $ 15,098
============ =========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 1,670,321 $ 771,593 $ 720
Short term lease obligation 234,723 272,913 -
Accrued liabilities and other payables 659,715 372,026 100,273
Customer deposits 1,500,000 - -
------------ ----------- --------
Total current liabilities 4,064,759 1,416,532 100,993
Long term lease obligation 118,347 150,937 -
------------ ----------- --------
Total liabilities 4,183,106 1,567,469 100,993
Stockholders' equity:
Series A convertible preferred stock, 11,250,000 shares
authorized, issued and outstanding 2,203,177 2,203,177 -
Series B convertible preferred stock, 23,884,960 shares
authorized; 17,052,314, 10,812,454 and 0 issued and
outstanding 27,147,502 17,179,591 -
Common stock, no par value, 100,000,000 shares
authorized; 19,657,125, 20,160,000 and 150,000 shares
issued and outstanding 61,877 71,069 15
Warrants to purchase common stock 1,563 6,250
Series B stock subscription notes receivable - (2,200,000) -
Common stock subscription notes receivable (54,913) (66,400) -
Deficit accumulated during the development stage (20,966,372) (5,726,037) (85,910)
------------ ----------- --------
Total stockholders' equity 8,392,834 11,467,650 (85,895)
------------ ----------- --------
Total liabilities and stockholders' equity $ 12,575,940 $13,035,119 $ 15,098
============ =========== ========
The accompanying notes are an integral part of these financial statements.
F-10
Transilica Inc.
(a development stage company)
Statements of Operations
Period from
Inception
Nine Months Ended Year Ended (December 21, 1998)
September 30, December 31, through
2001 2000 2000 1999 December 31, 2000
--------------------------------------------------------------------------
(unaudited)
Revenues $ 156,995 $ - $ 140,767 $147,396 $ 288,163
Cost of revenues 75,975 - 73,392 116,041 189,433
------------ ----------- ----------- -------- -----------
Gross profit 81,020 - 67,375 31,355 98,730
------------ ----------- ----------- -------- -----------
Operating expenses:
Selling, general and administrative 4,864,364 89,876 252,917 105,743 358,660
Research and development 9,973,592 2,749,802 5,309,452 8,541 5,317,993
Depreciation and amortization 642,166 48,486 148,933 2,181 151,114
------------ ----------- ----------- -------- -----------
Total operating expenses 15,480,122 2,888,164 5,711,302 116,465 5,827,767
------------ ----------- ----------- -------- -----------
Loss from operations (15,399,102) (2,888,164) (5,643,927) (85,110) (5,729,037)
Interest income 229,691 29,076 89,128 - 89,128
Interest expense (42,194) (9,282) (50,617) - (50,617)
Other expenses (28,730) (13,720) (34,711) (800) (35,511)
------------ ----------- ----------- -------- -----------
Net loss $(15,240,335) $(2,882,090) $(5,640,127) $(85,910) $(5,726,037)
============ =========== =========== ======== ===========
The accompanying notes are an integral part of these financial statements.
F-11
TRANSILICA INC.
(a development stage company)
Statements of Stockholders' Equity
Series A Convertible Series B Convertible
Preferred Stock Preferred Stock Common Stock
------------------------- --------------------- ------------------
Shares Amount Shares Amount Shares Amount
---------- -------- -------- --------- --------- --------
Balance, at inception (December 21, 1998) - $ - - $ - - $ -
Issuance of common stock - - - - 150,000 15
Net loss - - - - - -
------------------------------------------------------------------------
Balance, December 31, 1999 - - - - 150,000 15
Issuance of common stock - - - - 16,540,000 1,654
Exercise of stock options in exchange for stock
subscription note receivable - - - - 3,320,000 66,400
Early exercise of stock options at $0.02 per share - - - - 150,000 3,000
Issuance of Series A Preferred Stock at $0.20 per
share, net of issuance costs of $46,823 11,250,000 2,203,177 - - - -
Issuance of Series B Preferred Stock at $1.6026 per
share, net of issuance costs of $148,447 - - 6,169,998 9,739,591 - -
Issuance of Series B Preferred Stock at $1.6026 per
share for conversion of debt - - 3,269,686 5,240,000 - -
Series B stock subscription receivable - - 1,372,770 2,200,000 - -
Issuance of warrants for legal services - - - - - -
Net loss - - - - - -
------------------------------------------------------------------------
Balance, December 31, 2000 11,250,000 2,203,177 10,812,454 17,179,591 20,160,000 71,069
Repurchase of options and founders' stock (unaudited) - - - - (502,875) (9,192)
Payment of stock subscription notes receivable
(unaudited) - - - - - -
Issuance of Series B Preferred Stock at $1.6026 per
share, net of issuance costs of $32,089 (unaudited) - - 6,239,860 9,967,911 - - -
Cancellation of certain warrants for legal services
(unaudited) - - - - - - -
Net loss (unaudited) - - - - - - -
------------------------------------------------------------------------
Balance, September 30, 2001 (unaudited) 11,250,000 $2,203,177 17,052,314 $27,147,502 19,657,125 $61,877
========================================================================
Deficit
Warrants to Accumulated
Purchase Subscription During the Total
Common Notes Development Stockholders'
Stock Receivable Stage Equity
----------- -------------- ------------- ---------------
Balance, at inception (December 21, 1998) $ - $ - $ - $ -
Issuance of common stock - - - 15
Net loss - - (85,910) (85,910)
------------------------------------------------------------------
Balance, December 31, 1999 - - (85,910) (85,895)
Issuance of common stock - - - 1,654
Exercise of stock options in exchange for stock
subscription note receivable - (66,400) - -
Early exercise of stock options at $0.02 per share - - - 3,000
Issuance of Series A Preferred Stock at $0.20 per
share, net of issuance costs of $46,823 - - - 2,203,177
Issuance of Series B Preferred Stock at $1.6026 per
share, net of issuance costs of $148,447 - - - 9,739,591
Issuance of Series B Preferred Stock at $1.6026 per
share for conversion of debt - - - 5,240,000
Series B stock subscription receivable - (2,200,000) - -
Issuance of warrants for legal services 6,250 - - 6,250
Net loss - - (5,640,127) (5,640,127)
------------------------------------------------------------------
Balance, December 31, 2000 6,250 (2,266,400) (5,726,037) 11,467,650
Repurchase of options and founders' stock (unaudited) - - - (9,192)
Payment of stock subscription notes receivable
(unaudited) - 2,211,487 - 2,211,487
Issuance of Series B Preferred Stock at $1.6026 per
share, net of issuance costs of $32,089 (unaudited) - - - 9,967,911
Cancellation of certain warrants for legal services
(unaudited) (4,687) - - (4,687)
Net loss (unaudited) - - (15,240,335) (15,240,335)
------------------------------------------------------------------
Balance, September 30, 2001 (unaudited) $ 1,563 $ (54,913) $ (20,966,372) $ 8,392,834
==================================================================
The accompanying notes are an integral part of these financial statements.
F-12
TRANSILICA INC.
(a development stage company)
Statements of Cash Flows
Period from
Inception
Nine Months Ended Year Ended (December 21, 1998)
September 30, December 31, through
2001 2000 2000 1999 December 31, 2000
-------------------------------------------------------------------------
(unaudited)
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net loss $(15,240,335) $(2,882,090) $(5,640,127) $(85,910) $(5,726,037)
Adjustment to reconcile net loss to
net cash used in operating
activities:
Depreciation and amortization 640,511 48,486 148,732 2,181 150,913
Warrants issued for legal services (4,687) - 6,250 - 6,250
Changes in operating assets and
liabilities:
Accounts receivable 27,158 - (28,108) - (28,108)
Other current assets (394,134) (146,202) (189,980) - (189,980)
Long term assets 6,058 (6,376) (8,256) - (8,256)
Accounts payable 898,728 467,780 770,873 720 771,593
Accrued liabilities and other
payables 1,787,690 764 271,753 100,273 372,026
------------ ----------- ----------- -------- -----------
Net cash (used in)
provided by operating
activities (12,279,011) (2,517,638) (4,668,863) 17,264 (4,651,599)
------------ ----------- ----------- -------- -----------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Purchase of fixed assets (1,445,972) (939,289) (1,143,743) (15,816) (1,159,559)
------------ ----------- ----------- -------- -----------
Net cash used in
investing activities (1,445,972) (939,289) (1,143,743) (15,816) (1,159,559)
------------ ----------- ----------- -------- -----------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Issuance of common stock for cash (9,192) 1,654 3,983 - 3,983
Principal payments on capital lease
obligations (70,780) 290,852 (113,278) - (113,278)
Collections on notes receivable
from shareholders 2,211,487 - - - -
Issuance of Series A Preferred
Stock for cash, net of offering
costs - 2,250,000 2,203,177 - 2,203,177
Proceeds from bridge loans
subsequently converted to Series
B Preferred Stock - 5,339,627 5,240,000 - 5,240,000
Issuance of Series B Preferred
Stock for cash, net of offering
costs 9,967,911 - 9,739,591 - 9,739,591
------------ ----------- ----------- -------- -----------
Net cash provided by
financing activities 12,099,426 7,882,133 17,073,473 - 17,073,473
------------ ----------- ----------- -------- -----------
(continued)
F-13
TRANSILICA INC.
(a development stage company)
Statements of Cash Flows
(continued)
Period from
Inception
Nine Months Ended Year Ended (December 21, 1998)
September 30, December 31, through
2001 2000 2000 1999 December 31, 2000
-------------------------------------------------------------------
(unaudited)
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS $(1,635,557) $4,425,206 $11,260,867 $1,448 $11,262,315
CASH AND CASH EQUIVALENTS:
Beginning of period 11,262,315 1,448 1,448 - -
----------- ---------- ----------- ------- ------------------
End of period $ 9,626,758 $4,426,654 $11,262,315 $1,448 $11,262,315
=========== ========== =========== ======= ==================
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
Cash paid for interest $ 37,439 $ 2,111 $ 15,186 $ - $ 15,186
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
During 2000, the Company entered into twelve capital lease agreements to
finance the acquisition of certain office equipment and software totaling
$539,350.
The accompanying notes are an integral part of these financial statements.
F-14
TRANSILICA INC.
(a development stage company)
Notes to Financial Statements
December 31, 2000 and the nine months ended September 30, 2001 (unaudited)
1. Basis of Presentation and Organization
--------------------------------------
The accompanying financial statements and related footnotes at December 31,
2000 and 1999 and for the years then ended are audited, while the
information at September 30, 2001 and for the nine-month periods ended
September 30, 2001 and 2000 is unaudited. The consolidated financial
statements for the September 30, 2001 and 2000 and for the nine-month
periods then ended reflect all adjustments, consisting of only normal
recurring accruals, which are, in the opinion of management, necessary for a
fair statement of the results of the interim periods presented. The results
of operations for the interim periods are not necessarily indicative of
results to be expected for any other interim period or for the year as a
whole.
Transilica Inc. (the "Company"), a California corporation formerly known as
Domain Knowledge, Inc., was founded in 1998 as a designer of system-on-chip
silicon products for next-generation short-range wireless applications. The
Company's products are highly integrated solutions incorporating radio
transceivers, digital baseband and software on a single chip, which offer
customers low-power consumption and small form factors. The Company's
initial products will be targeted at the Bluetooth standard, which is
emerging as a dominant worldwide communications protocol for short-range
wireless applications. Future products will address other standards such as
higher speed wireless LAN protocols. The Company is also capable of creating
customized system-on-chip solutions to meet a customer's specific
application.
The Company is based in San Diego, California and has subsidiaries in Taiwan
and Japan, which operate as regional sales offices, and another subsidiary
in Singapore, which operates as a design center for advanced silicon
modeling and simulations. As of December 31, 2000 all revenues were from
product development service contracts and there have been no significant
revenues from products that the Company intends to offer in the future.
Accordingly, the Company's activities have been accounted for as those of a
development stage enterprise as set forth by Statement of Financial
Accounting Standards No. 7.
2. Risk Factors and Uncertainties
------------------------------
The Company is subject to a number of risks associated with companies at a
similar stage of development. Certain of these risks are discussed in the
following paragraphs.
Nature of Wireless Communications Industry
------------------------------------------
The Company operates in the wireless communication industry which is
diverse, complex and rapidly changing. By its very nature, the business
risks associated therewith are numerous and significant. The effects of
competition, substitute products, market acceptance, and customer
satisfaction preclude the Company from forecasting revenues or income with
any degree of certainty.
Unproven Products
-----------------
The Company's products are in the research and development stage, and will
require significant additional research and development efforts prior to
commercial use. There can be no assurance that the Company's research and
development efforts will be successful or that the Company's products will
be successfully introduced and marketed at prices that would permit the
Company to operate profitably. If successfully introduced and marketed,
there can be no assurance that the Company will successfully mass produce
the products.
Reliance on Key Personnel
-------------------------
The Company relies heavily on the expertise of its officers and advisors,
and it is key to the Company's future success that such persons remain
employed by the Company or that the Company obtains suitable replacements in
the event that any key individuals leave their positions with the Company.
3. Summary of Significant Accounting Policies
------------------------------------------
Consolidation
-------------
The consolidated financial statements include the accounts of Transilica
Inc. and its wholly owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated.
F-15
Use of Estimates
----------------
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States 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 revenue and expenses
during the reporting period. Actual results could differ from those
estimates.
Cash and Cash Equivalents
-------------------------
The Company considers all highly liquid investments with an original maturity
of three months or less to be cash equivalents. Cash and cash equivalents
include cash in readily available checking and money market accounts.
Fixed Assets
------------
Equipment, which consists primarily of computer equipment and software, is
stated at cost and depreciated using the straight-line method over the
estimated useful lives of the assets (2 to 5 years). When assets are sold or
otherwise disposed of, the cost and related accumulated depreciation will be
removed from the accounts and any gain or loss included in results from
operations.
Capitalized Software Development Costs
--------------------------------------
The Company accounts for software development costs in accordance with SFAS
No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed," whereby costs for the development of new software
products and substantial enhancements to existing software are expensed until
technological feasibility is attained using the working model method. To date,
the Company has not capitalized any software development costs.
Research and Development Costs
------------------------------
All research and development costs are charged to expense as incurred.
Revenue Recognition
-------------------
The Company's only source of revenue currently is from product development
service contracts. The Company has not yet generated any revenues from the
sale of products, and does not project that it will generate product revenues
until sometime during late 2001 or early 2002.
Income Taxes
------------
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 ("SFAS No. 109"), "Accounting for
Income Taxes." Under SFAS No. 109, deferred tax assets and liabilities
reflect the future tax consequences of the differences between the financial
reporting and tax basis of assets and liabilities using current enacted tax
rates. Valuation allowances are recorded when the realizability of such
deferred tax assets is questionable.
Long-Lived Assets
-----------------
In accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed of," the Company periodically re-evaluates the original
assumptions and rationale utilized in the establishment of the carrying value
and estimated lives of all of its long-lived assets including computer and
software equipment. The determinants used for this evaluation include
management's estimate of the asset's ability to generate positive income from
operations and positive cash flow in future periods as well as the strategic
significance of the asset to the Company's business objective.
Recent Accounting Pronouncements
--------------------------------
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations." SFAS No. 141 addresses financial accounting and reporting for
business combinations, and supersedes APB Opinion No. 16, "Business
Combinations" and SFAS No. 38, "Accounting for Preacquisition Contingencies of
Purchased Enterprises." All business combinations in the scope of SFAS No. 141
are to be accounted for using one method, the purchase method. The Company
adopted the provisions of SFAS No. 141 for business combinations initiated
after June 30, 2001.
In July 2001, FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 142 addresses financial accounting and reporting for
acquired goodwill and other intangible assets, and supersedes APB Opinion No.
17, "Intangible Assets." SFAS No. 142 addresses how intangible assets acquired
individually or with a group of other assets (but not those acquired in a
business combination) should be accounted for in financial statements upon
their
F-16
acquisition. This statement also addresses how goodwill and other intangible
assets should be accounted for after they have been initially recognized in
the financial statements. Upon adoption of SFAS No. 142, goodwill is no
longer subject to amortization over its estimated useful life. Rather,
goodwill will be subject to at least an annual assessment for impairment by
applying a fair value test.
In August 2001, FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS No. 144 addresses financial accounting
and reporting for the impairment or disposal of long-lived assets. SFAS No.
144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of," and the accounting and
reporting provisions of APB Opinion No. 30, "Reporting the Results of
Operations - Reporting the Effects of Disposal of a Segment of a Business,
and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions," for the disposal of a segment of a business (as previously
defined in that Opinion). The provisions of SFAS No. 144 are effective for
financial statements issued for fiscal years beginning after December 15,
2001, with early application encouraged and generally are to be applied
prospectively. The Company has not yet determined the impact of the adoption
of SFAS No. 144 on its financial position and results of operations.
4. Industry and Geographic Information
-----------------------------------
The company operates in one reportable segment as defined by Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information," ("SFAS No. 131"). SFAS No. 131 requires
disclosure of segment information in a manner consistent with the
"management approach."
A summary of operations by geographic area is as follows:
North Southeast
America Asia Consolidated
---------------------------------------------- ---------------------------
Nine month period ended September 30,
2001 (unaudited)
Revenues $ 155,700 $ 1,295 $ 156,995
Fixed Assets $1,676,094 $687,340 $2,363,434
Year ended December 31, 2000
Revenues $ - $140,767 $ 140,767
Fixed Assets $1,407,520 $138,254 $1,545,774
Year ended December 31, 1999
Revenues $ 147,396 $ - $ 147,396
Fixed Assets $ 13,635 $ - $ 13,635
5. Fixed Assets
------------
Fixed assets consist of the following:
September 30, December 31,
2001 2000 1999
-----------------------------------------------------
(unaudited)
Furniture and fixtures $1,625,629 $ 281,737 $ -
Computers and equipment 635,729 908,157 11,417
Software 850,429 480,071 4,399
Leasehold improvements 43,272 26,722 -
------------- ------------- -----------
3,155,059 1,696,687 15,816
Less accumulated depreciation (791,625) (150,913) (2,181)
------------- ------------- -----------
$2,363,434 $1,545,774 $13,635
============= ============= ===========
F-17
6. Commitments and Contingencies
-----------------------------
Leases
------
The Company leases its office facilities and certain other equipment
including software. Future minimum payments required under the
noncancellable leases as of December 31, 2000 are summarized as follows:
Operating Capital
Leases Leases
---------- ----------
Year ending December 31,
2001 $1,492,201 $ 301,157
2002 619,620 130,698
2003 63,210 27,074
2004 - 2,154
2005 and thereafter - 1,616
---------- ---------
Total minimum lease payments $2,175,031 462,698
========== ---------
Less - amount representing interest (38,849)
---------
Present value of capital lease payments 423,850
Less - current portion (272,913)
---------
Long-term obligations under capital leases $ 150,937
=========
The Company did not enter into any new material operating or capital leases
for the nine month period ending September 30, 2001 (unaudited).
7. Bridge Loan
-----------
During 2000, the Company borrowed $5,240,000 from a venture capital
firm and a consortium of individuals. In accordance with the loan agreement
the principal balance of the promissory note together with accrued interest
automatically converted into Series B Preferred Stock in connection with the
sale of Series B Preferred Stock to other investors.
8. Stockholders' Equity
--------------------
The Company's original articles of incorporation authorized the issuance of
up to 200,000 common shares. A subsequent amendment to the articles of
incorporation, dated July 19, 1999, increased this authorization to
10,000,000 common shares. At December 31, 1999, 150,000 shares of common
stock were outstanding.
On May 9, 2000, the articles of incorporation were amended, increasing the
number of authorized shares of common stock to 31,250,000, creating a new
class of stock designated Preferred Stock, and authorizing 11,250,000 shares
of Preferred Stock to be designated as Series A Stock at an original issue
price of $0.20 per share. In May 2000, the Company completed a private sale
of 16,540,000 shares of common stock at $.0001 per share, to certain key
employees, subject to vesting over a 3 year period. Also in May 2000, the
Company completed a Series A financing, issuing 11,250,000 shares of Series
A Preferred Stock for an aggregate purchase price of $2,250,000 in cash.
On December 7, 2000, the articles of incorporation were amended, increasing
the number of authorized shares of common stock to 100,000,000 and
increasing the number of authorized shares of Preferred Stock to 22,655,240,
of which 11,250,000 were designated as Series A Stock and 11,405,240 were
designated as Series B Stock. The original issue price of Series B Stock was
$1.6026 per share. Also in December 2000, the Company completed a Series B
financing, issuing 10,812,454 shares of Series B Preferred Stock for an
aggregate purchase price of $9,888,038 in cash, $5,240,000 in debt
conversion and $2,200,000 in a subscription receivable, less applicable
expenses of $148,447. The stock subscription receivable was received in
January 2001.
On September 6, 2001, the articles of incorporation were amended, increasing
the number of authorized Series B Preferred Stock to 23,884,960. Also,
September 2001, the Company completed a second Series B financing, issuing
6,239,860 shares of Series B Preferred Stock for an aggregate purchase price
of $10,000,000 in cash.
Dividends, if declared, accrue at 9% per annum on Series A and 8% per annum
on Series B, shall not be cumulative, and no right accrues by reason of the
fact that dividends on such shares are not declared or paid in any prior
year. Upon any liquidation, dissolution or winding up of the Company, either
voluntary or involuntary, the holders of the Series A Stock and Series B
Stock would be entitled to receive pari passu with each other and
F-18
prior and in preference to any distribution of any of the assets or surplus
funds of the Company to the holders of the Common Stock, $0.50 for each
share of Series A Stock then held by them and $1.6026 for each share of
Series B Stock then held by them as adjusted for stock dividends,
combinations or splits and, in addition, an amount equal to all declared but
unpaid dividends on the Series A Stock and Series B Stock then held by them.
After those amounts have been paid, the remaining assets of the Company
shall be distributed among holders of Common Stock and Preferred Stock on an
as-if-converted to Common Stock basis, provided that no holder of Series A
Stock shall receive a distribution of more than ten (10) times the its
Original Issue Price, and no holder of Series B shall receive a distribution
of more than four (4) times its Original Issue Price. Thereafter, all
remaining assets of the Company shall be distributed ratably among the
holders of Common Stock.
Series A and Series B Preferred Stock, may, at the option of the holder, be
converted into such number of fully paid and nonassessable shares of Common
Stock as is determined with respect to the stock by dividing the original
issue price by the conversion price in effect at the time of conversion. As
of December 31, 2000, the Conversion Price of the Series A Stock is $0.20
per share of Common Stock and for the Series B Stock is $1.6026 per share of
Common Stock.
Each share of Series A and Series B Preferred Stock will automatically
convert to Common Stock immediately upon the closing of a firm commitment
underwritten public offering pursuant to an effective registration statement
under the Securities Act of 1933, subject to certain provisions for share
price and gross cash proceeds.
Shares of Common Stock are also subject to certain restrictions, including
provisions for repurchase by the Company, under certain conditions.
9. Stock Option, Deferred Stock and Restricted Stock Plan
------------------------------------------------------
The Company adopted the Domain Knowledge, Inc. 2000 Stock Option, Deferred
Stock and Restricted Stock Plan ("the Plan") under which 9,500,000 common
shares are reserved and available for issuance to officers and other key
employees, directors and consultants and advisors of the Company, and any
future subsidiary or any future parent corporation responsible for or
contributing to the management, growth and/or profitability of the business
of the Company. Anyone eligible may be granted non-qualified stock options,
deferred stock or restricted stock awards, while only officers and other key
employees shall be eligible to be granted incentive stock options.
Recipients of incentive stock options shall be eligible to purchase shares
of the Company's Common Stock at an exercise price equal to no less than the
estimated fair market value of such stock on the date of grant. Recipients
of stock purchasable under a non-qualified stock option may be less than
fair market value but in no event less than 85% of fair market value. The
maximum term of options granted under the plan is ten years. Vesting is
determined by the Administrator at the time of grant but is generally
monthly over a four-year period. Common Stock issued pursuant to the Plan's
early exercise provision is subject to repurchase by the Company for the
unvested portion of the stock option grant. The majority of the Common Stock
issued pursuant to such exercise was paid for by executing full-recourse
subscription notes payable.
The aforementioned plan was revised and replaced by the 2001 Amended and
Restated Equity Incentive Plan (the "2001 Plan"). Under the revised terms of
the Plan, upon change of control of the Company there is no accelerated
vesting of options or forgiveness debt.
F-19
The following table summarizes stock option transactions for the Plan for
the years ending December 31, 1999 and 2000 and for the nine months ended
September 20, 2001 (unaudited):
Weighted
Average
Shares Exercise
-----------------------
Inception (December 28, 1998)
Granted - $ -
Exercised - -
Forfeited - -
----------- ----------
Outstanding, December 31, 1999 -
Granted 4,312,000 0.02
Exercised (3,470,000) 0.02
Forfeited (40,000) 0.02
----------- ----------
Outstanding, December 31, 2000 802,000 0.02
Granted (unaudited) 4,759,000 0.16
Exercised (unaudited) -
Forfeited (unaudited) (45,605) 0.02
----------- ----------
Outstanding, September 30, 2001 (unaudited) 5,515,395 $0.14
==========
The Company has adopted the disclosure only provisions of Statement of
Financial Accounting Standards 123 "Accounting For Stock-Based Compensation"
("SFAS 123") and has elected to continue to account for stock options
granted under Accounting Principles Board Opinion No. 25 "Accounting for
Stock Issued to Employees" (APB 25), which recognizes compensation cost
based upon the intrinsic value of the equity award. No compensation expense
has been recognized in the accompanying consolidated statements of
operations for any equity awards.
Had compensation cost for the Company's stock-based compensation plans been
determined based on the fair value at the grant dates for awards under those
plans consistent with the method of SFAS 123, the Company's net loss would
have been increased by approximately $0 in 1999 and $2,112 in 2000.
The fair value of each option grant is estimated on the date of grant using
the present value pricing method as described in SFAS 123. The underlying
assumptions used to estimate the fair values for the fiscal 2000 grants are
weighted average risk-free interest rates ranging between 4.91% and 5.47%,
with an expected life of 10 years. No dividend yield or stock price
volatility was used in these calculations.
10. Employee 401(k) Profit Sharing Plan
-----------------------------------
The Company established a retirement plan effective September 1, 2000.
Substantially all employees of the Company who have completed three months
of eligible service and attained the age of 21 may participate in the "DKI
Employee 401(k) Plan". Employees may defer up to 25% of their compensation,
subject to certain statutory limits. The Company does not match
contributions.
11. Income Taxes
------------
As of December 31, 2000, the Company has available net operating loss
carryforwards of approximately $5.5 million to reduce future federal income
taxes, if any. This carryforward will begin to expire in 2019. The Company
has California net operating loss carryforwards of approximately $5.5
million. This carryforward will begin to expire in 2009.
F-20
The Company's deferred tax assets and liabilities consist of the following at
December 31, 2000:
Long-term deferred taxes:
Accrued expenses $ 34,000
Net operating loss and credit carryforwards 2,602,000
----------
Net deferred taxes 2,636,000
Valuation allowance (2,636,000)
----------
Net deferred taxes $ -
==========
The Company also has federal and California tax research credit
carryforwards of approximately $210,000 and $180,000 respectively. The
federal research credit carryforwards will begin expiring in 2020 unless
previously utilized.
12. Subsequent Events (unaudited)
-----------------------------
In 2001, the Company entered into memoranda of understanding with two
customers. The first memorandum is an indefinite delivery, indefinite
quantity order for 1,000,000 pieces of the Company's product. In connection
with this agreement, the Company received a $1.5 million advance payment,
which will be recognized in revenue when products are shipped. This payment
is recorded in customer deposits in the September 30, 2001 balance sheet.
The second memorandum is an indefinite delivery, indefinite quantity order
for development and production of up to approximately 5 million pieces of an
integrated product. In consideration for the development of this product,
the Company will receive a $250,000 non-refundable development fee, of which
$150,000 was received and recognized as revenue in the nine-month period
ending September 30, 2001. In the event that orders are placed under these
memoranda of understanding, the Company expects to emerge out of the
development stage in the fourth quarter of 2001 or early in 2002.
On October 28, 2001, the Company entered into an Agreement and Plan of
Merger and Reorganization (the "Merger Agreement") with Microtune, Inc., a
Delware corporation ("Microtune"). Under the terms of the Merger Agreement,
Microtune expects to acquire all of the outstanding capital stock of the
Company. The consummation of the acquisition of the Company, which is
expected to occur in November 2001, and which is structured to be a tax-free
reorganization under Section 368 of the Internal Revenue Code, is subject to
certain closing conditions. Upon closing, under the terms of the Merger
Agreement shares equivalent to 19.99% of Microtune's outstanding shares of
common stock at closing, plus a cash amount that is based on the cash on the
balance sheet of the Company less certain liabilities at closing (the
"Merger Consideration"), will be issued and exchanged for all of the
outstanding capital stock of the Company (the "Acquisition"). The Merger
Agreement also provides that approximately fifteen percent (15%) of the
total Merger Consideration in the form of Microtune shares of common stock
will be placed in escrow for the purpose of securing the indemnification
obligations of the Company under the Merger Agreement. The escrow shares are
to be released periodically, subject to any escrow claims, at the end of
each of the full three years following the closing. The shares to be issued
by Microtune pursuant to the Merger Agreement will be issued pursuant to an
exemption from registration under the Securities Act. The Merger Agreement
provides the Company's shareholders with the right to require Microtune to
register their shares within twenty (20) days after the closing. Despite
this registration obligation, the Company's former shareholders who receive
shares of Microtune common stock will not be able to sell their shares of
Microtune common stock until the earlier to occur of the Company's
achievement of certain product revenue-based milestones or the date that is
three (3) months following closing as part of the lock-up agreement.. In
addition, most of the shares of Microtune common stock received by the
Company's former shareholders as a result of the Acquisition are also
subject to lock-up agreements which restrict their ability to sell the
shares of Microtune common stock that they received as a result of the
Acquisition. The lock-up agreements provide that each month, ten percent
(10%) of the shares subject to the lock-up agreements will be released from
the lock-up restrictions.
Concurrent with the signing of the Merger Agreement, the Company and
Microtune entered into a Credit Agreement whereby Microtune has agreed to
make unsecured loans to the Company in an aggregate amount not exceeding
five million dollars ($5,000,000.00). Under the Credit Agreement, if the
Company's cash balance is less than five hundred thousand dollars
($500,000.00) and subject to certain other conditions more fully described
in the Credit Agreement, Microtune shall make advances to the Company upon
the Company's request. In connection with the execution of the Credit
Agreement, the Company executed a convertible promissory note for five
million dollars ($5,000,000.00) in favor of Microtune, which provides that
all outstanding amounts under the credit facility will bear interest at the
rate of 8% per annum. In the event that the Merger Agreement is terminated,
all outstanding amounts under the credit facility automatically convert into
the Company's Series B Preferred Stock at a price of $1.6026 per share. The
Credit Agreement also provides that Microtune will have the right to
participate on a pro rata basis in all future rounds of financing undertaken
by the Company.
F-21
In October 2001, the Company granted options under the option plan discussed
in Note 9 for the purchase of 1,451,500 shares of the Company's stock at an
exercise price of $1.16. Of those options, 150,000 were granted to a member
of the Board of Directors of the Company and $150,000 was paid in cash to the
Company's Chief Executive Officer in conjunction with their assistance in
consummating the agreement with Microtune.
F-22
Exhibit Index
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Exhibit No. Description
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2.1 Agreement and Plan of Merger and
Reorganization
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10.1 Credit Agreement
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10.2 Promissory Note
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23.1 Consent of Auditors
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